By Max Middleton
This article originally appeared in ESG Clarity
We need to make sure every VC has a mandate to deploy capital in a way that funds a sustainable transition.
In 2011, Marc Andreessen – a Silicon Valley entrepreneur turned VC – famously proclaimed, “software is eating the world”. Back then, six of the 10 largest listed companies in the world by market capitalisation were fossil fuel giants. The top spot was held by Exxon Mobil, while only two tech companies made the cut (Apple and Microsoft). Today, the top five largest traded companies in the world are all tech businesses – Exxon Mobil, meanwhile, doesn’t even make the top 40.
Nearly a decade later, Andreessen’s remark seems almost obvious and it’s easy to underappreciate the prescience of his assertion. However, it’s also easy to imagine investors in another decade feeling similarly about the dominance of ESG and sustainability-driven investing.
As with the software revolution foreseen by Andreessen, startups will play a critical role in the sustainability transition ahead of us. With rising pressure from both customers and investors to build sustainability into business theses, new market entrants offering consumers or enterprises sustainable choices have tremendous advantages.
There are numerous surveys showing that the public increasingly want to buy brands that align with their own values. Facing pressure from their own investors and customers, enterprise clients are also increasingly seeking sustainable products and services to improve their own ESG and sustainability profiles. In a recent survey, 99% of CEOs agreed that “sustainability is important to future success”.
Sustainable businesses also have an edge in attracting top talent. According to another recent PwC survey around 90% of 22-37-year-olds want purpose-led employers, with many willing to take a pay cut to work for businesses aligned with their values. The approaching ubiquity of ESG investing means sustainability-aligned businesses may benefit from cheaper access to capital at mature stages. It also makes them more attractive to earlier-stage investors anticipating these investments may enjoy a premium when looking to sell.
But while there are opportunities for startups, there are also challenges.
The range of business models and sectors grouped under the umbrella of ‘sustainability’ – from businesses engineering new earth-friendly packaging to startups using AI to improve mental health – means some set of challenges will inevitably be unique to each business. On the other hand, it also means many of the challenges faced by sustainable startups are the same as those faced by any early-stage business. Product iteration, scaling great teams, setting and managing budgets – these are universal tests, which any founding team needs to handle.
A distinct challenge facing sustainability-driven startups is how to build mission into the DNA of the business – and how to communicate this to stakeholders. This is an area where sustainability-focused investors can help investee companies substantially, by sharing learnings and best practices across their portfolios, and driving sustainability outcomes to the forefront of reporting and investor engagement.
Traditional ESG reporting frameworks can be difficult to navigate even for large well-resourced corporations, but for startups the administrative burden of conforming with, say, the Sustainability Accounting Standards Board or the Global Reporting Initiative, can be overwhelming. However, startup founders risk losing sight of the mission (not to mention the interest of sustainability-focused investors) by not attempting to measure sustainability or impact at all.
Helping portfolio companies take stock of their sustainability profiles at the outset and set sustainability goals can be broken into two tracks: measuring business model sustainability outcomes (such as C02 emissions abated, or waste diverted to landfill); and measuring operational sustainability (such as resources used in supply chain, fair treatment of employees).
It is important the frameworks applied are appropriate for the size and stage of a company’s journey. For very early-stage businesses one or a few key metrics that are core to their sustainability mission can be identified – this should serve as a north star and be reported alongside revenue and EBITDA as KPIs. As the business matures, more comprehensive standards can be incorporated, in line with the reporting requirements of later-stage investors.
Building sustainability metric tracking into businesses practices early can pay big dividends down the line – but attempting too much too soon can be counterproductive if it distracts from management focusing on building great products and driving growth.
It has only been in recent years that many investors have been investing more with ‘head and heart’. We now need to ensure there are ‘caps and collars’ around how capital is deployed in startups – making sure every VC has a mandate to deploy capital in a way that funds a sustainable transition. Capital with a voice will fuel a transition and can be a significant driver of change.