Deep technologies present defensible competitive and economic advantage; and successful teams and ventures are problem-oriented, often working on solving outsized problems that impact the world in the most fundamental ways. Despite the pandemic, investor interest in deep tech has never been stronger – investments have quadrupled from $15B in 2016 to >$62B in 2020.
Over a dialogue with our panelists, we explored how start-ups should be leveraging this better-late-than-never shift in investor and corporate priorities towards impact and sustainability. Here are some highlights from the session that we hope you’ll find useful!
The Deep-Tech Investment Landscape
Largest deployments in this transition have come from corporates and family offices, while younger deep-tech VCs have often had to contend with LPs seeking only GPs with investment track records in the space (significantly rarer due to the longer gestation periods characteristic of deep-tech ventures).
Strong deep-tech start-ups have been resilient in the face of the pandemic, continuing to grow and raise capital because their solutions continue to address our most pressing needs.
Bringing deep-tech solutions to market is hard and requires patient capital, but there’s growing appetite here.
The Impact/ Sustainability Movement
The cornerstone of business has evolved from that of maximising shareholders’ interests to maximising stakeholders’ interests.
Not enough governments are leading on the regulatory and policy front. Instead, consumers and activist shareholders (case in point: three board seats at Exxon secured by activist hedge fund) are demanding these necessary changes.
This shift is still too slow, and will benefit from more activist stakeholders rising up to hold industries and governments accountable.
Corporates have demonstrated interest in and readiness to adopt sustainability efforts but are unsure of how to undertake these tasks.
Is Impact/ Tech “Enough”?
Solutions have to be all-rounded – people, planet, and prosperity. While we all yearn to support start-ups that address the world's most pressing problems, there needs to be a large addressable market in order to gain buy-in, whether from investors or governments. This often translates into return on investments, cost reductions, etc.
Start-ups shouldn’t sell on impact alone because investors must be sold on the business as well.
Social enterprises have struggled to sustain themselves, but a shift towards impact ventures is underway – one where impact is supported and elevated by strong commercial sensibilities.
Impact targets must form the basis, and must be measurable and continually managed. Impact outcomes matter more than the effort/ input.
Move from compliance to impact-targeting. Beyond just contributing to Sustainable Development Goals (SDGs), for instance, seek impactful solutions that are systemic and transformative.
Over the longer term, impact ventures built upon defensible deep technologies have scaled better and proven more resilient than their counterparts that have relied on simpler or more “basic” technologies.
Instead of technological verticals, propose:
reframing our perspective to consider Maslow’s hierarchy of needs. How do we address our fundamental needs such as sustenance and shelter, but in actually sustainable ways?
considering the challenges to be addressed (e.g. sustainable agriculture/ energy, versus blockchain/ IoT), and encouraging the intersection of technologies.
Impact Metrics
Metrics are part of a start-up’s storytelling journey. How do you get people to engage with you, to invest in you, to buy your product, to use it? Beyond vanity metrics, think about who your audience is and with a large set of metrics, then customise the conversation with them about impact metrics. Start with “what’s the impact I want to have?”
With government/ industry, instead of communicating your proposed impact, consider the impact of them not adopting your solution. What are the long-term costs (e.g. environmental, social, brand/ reputation) they’re having to incur?
Look beyond your immediate business case to consider the case for your community, and how they might (directly or indirectly) benefit. For instance, if your solution helps minimise hospitalisation of those who are wheelchair-bound, the cost savings to the government allows for funds to be redirected to other areas of need.
Environmental full cost accounting (aka true-cost accounting or total impact accounting) brings together non-market goods, such as environmental and social assets, into the development equation, for analysis of the costs and benefits of business. Aspects such as ecosystem services or health must be given a monetary value. The ultimate purpose is not to monetise nature or people, but rather to translate invisible resources (such as intellectual, human, social and natural assets that are not captured in historic financial accounts) into a common currency for strategic decision-making on impact and dependencies that affect overall value creation.
The impact investment community proposed 600-700 indicators to cater for a whole spectrum of industries (from agriculture to healthcare); these were amended and reconciled with UN-proposed SDGs. It’s helpful to consider (a) who your beneficiaries are, (b) how you could scale not just your business, but also your beneficiaries and the value of the benefit per beneficiary, and (c) the longevity of such benefit (i.e. if the impact would diminish after you cease your activity. PET bottles were once hailed as a resource-efficient alternative to glass, but now the true effects are being felt).
Best practices have been suggested for impact measurement and management (IMM) by Impact Measurement Project, with the five dimensions of impact being:
The United Nations Development Programme (UNDP) has issued special standards for the integration of impact (in the context of SDGs) into businesses and investments for different asset classes. Start-ups may consider the standards issued for private equity funds and enterprises.
Start-Ups Assessing Their Own Impact
Often there are larger corporates or advisory firms that are happy to help in this area on a pro-bono basis as part of their Corporate Social Responsibility (CSR). Building a strategic partnership with an Non-Governmental Organisation (NGO) in the area or other industry bodies is a way of both receiving advice and support but building credibility. Research projects with universities is also another way to seek support and assistance. If you enable them to publish it can be a win-win opportunity.
For early-stage (pre-Series A) ventures, investors seldom require (especially paid) independent third-party impact assessments. Likely more interested instead in knowing how the impact is assessed, and the accompanying narrative. Start-ups should be reasonably equipped to self-assess and story-tell if IMM and impact metrices are learnt.
In some cases, investors seek validation of data used for IMM – this can typically be carried out by the same entity that audits the start-up’s financial statements. Often the challenge here is validating externally obtained data.
UNDP’s Impact Venture Accelerators and its impact advisory to other accelerators equips ventures with the required skills and instruments to conduct self-assessments. Their toolkit comprises 8 different tools to be applied depending on the level of sophistication and depth of impact assessment.
Funding Impact for Scale
Sometimes it’ll be the luxury brands (as opposed to mass market brands) that’ll be willing to invest significant capital early on and be your first customers. Don’t be discouraged – with those funds you can then scale and gain traction, later driving your costs down enough towards making wider, mass-consumer scale impact. Be pragmatic and commercially minded at the beginning, and consider that with the initial resources you can later make greater impact.
Special thanks to our panelists:
Lee Han Shih, Founder, Potato Group; Director, Lee Foundation
Artak Melkonyan, COO, UNDP SDG Innovative Finance
Whether you managed to attend this session or not, let us know how we fared and the changes you'll like to see around here. Give us some candid feedback here.