UPS Longitudes | Sustainable Startups Should Consider Corporate Venture Capital
Urgent issues like the climate crisis, environmental degradation, social inequality and other challenges mean the global economy needs to immediately transform itself to become sustainable.
Sustainable startups with smart business models have economic, social and environmental value.
Toronto’s Ripple Farms is an example, demonstrating the power of aquaponics to sustainably produce organic greens and seafood throughout the year. To connect urbanites with the land, the company’s business model combines product offerings with education on urban agriculture.
Similarly, Waterloo Energy Products sells a full range of residential and commercial renewable energy designs, including geothermal, solar, LED lighting equipment, water treatment solutions and much more. By offering a one-stop shop, they make renewable energy choices much easier for consumers.
Both firms bundle products and services in different ways with a potential to expand internationally.
Many companies in Canada’s sustainable sector have similar potential to export Canadian products and expertise around the world.
Finding the right investor
But Canada needs these firms to grow rapidly and substantially so they can create jobs. Investors are key to accelerating this urgently needed startup growth in Canada’s sustainable sector.
According to the United Nations’ seminal Brundtland Report, sustainable development should meet the needs of current generations without compromising the capacity of future generations, ensuring a balance between economic growth, care for the environment and social wellbeing.
We consider these three main components of sustainable development together, not as separate goals. Good governance is required to ensure and oversee all three of them.
“Sustainable startups with smart business models have economic, social and environmental value.”
In this complex business environment, finding investors to scale up new companies and, even more importantly, finding the right investors, is challenging. Startup ventures burn through cash rapidly as they aim for a sale of the company — usually to other larger firms or on the stock market through an initial public offering.
Raising funds to grow startup companies is an ongoing challenge that pulls management away from running the business. By finding knowledgeable, committed investors who understand the business, a firm can ease the constant stress of raising capital while legitimizing the company to consumers, clients and stock markets.
Unfortunately, sustainable ventures face additional challenges when it comes to investors compared to purely for-profit firms because they appear to have multiple competing goals.
Sustainable firms often face powerful well-established competitors, and people are hesitant about new technology even if it improves their lives.
The choice between fossil fuels and renewables is not unlike trading a typewriter in for a laptop. This fear of uncertainty gives traditional firms market advantages that new companies must overcome.
Many sustainable industries still in technological development stages are also capital intensive, meaning they need a lot of capital upfront before they can demonstrate viability.
In addition to their unfamiliarity to potential stakeholders, some have experienced highly publicized failures along the way to technological maturity, which can scare off investors.
“By finding knowledgeable, committed investors who understand the business, a firm can ease the constant stress of raising capital while legitimizing the company to consumers and clients.”
Advice for sustainable companies
We recently tested a quantitative model using data on 184 entrepreneurial ventures. The analysis found that sustainable startups are better off choosing a different type of investor, one with aligned interests who can lend it legitimacy so others will have confidence in it.
Perhaps surprisingly, it’s not so much angel investors as corporate venture capital that can help these firms grow. In this model, the corporation usually sets up a separate division that looks for investments of interest.
The problem for most investors is that the quality of a new venture is uncertain until after it has grown to a point where it is steadily increasing revenues and generating healthy profits.
A new venture needs to be novel enough to have a competitive advantage while familiar enough for understanding and acceptance. As a result, many investors look for signs of the hidden potential of a venture.
An example could be the quality of existing stakeholders in the venture such as successful, high-profile members on the board of directors or the presence of professional investors.
“The problem for most investors is that the quality of a new venture is uncertain until after it has grown to a point where it is steadily increasing revenues and generating healthy profits.”
Try a different strategy
Usually, new ventures begin with angel investors and move on to venture capital and other types of more sophisticated financiers who can further develop and market the firm. Instead, we advise sustainable firms to use a different strategy and seek out corporate venture capital as it is uniquely more helpful to sustainable ventures.
The usual investment life cycle progression of a new venture — moving from angels to venture capital and then to more sophisticated types of investors — may not always hold.
A venture attracts additional capital by meeting an investor’s screening criteria, but the most recent investors matter, too. Current investors can lend legitimacy to attract other investors. According to our findings, the sustainable sector gains that legitimacy with corporate venture capital over other types of investors.
The result suggests the credibility of corporate venture capital plays an important role in the development of sustainable businesses.
“The result suggests the credibility of corporate venture capital plays an important role in the development of sustainable businesses.”
Overall, a corporate venture capital endorsement of a new venture and its potential acquisition suggests to the market the company is poised to be a disruptive winner in the industry.
Corporate venture capital cuts through the noise that often accompanies sustainability goals. Change is in the wind for an industry, and others want to jump on the upward trajectory.
Sustainable ventures can markedly contribute to Canada’s economy and employment with the right investor strategies to help them grow to medium and large size. Some of these startups are exciting in many ways.
Most significantly, they will improve Canadians’ lives and ensure we have a healthier environment.
Republished with permission, this article first appeared on The Conversation.