Starting a business isn’t easy even for the best entrepreneurs. And given the complexity of operating a company these days, it’s become that much more difficult to find funding for new ideas particularly for those startups with Environmental, Social and Governance (ESG) considerations.
Venture capital (VC) has long been one of the most reliable ways to fund startups and take them from concept to market as explained in this article.
If you want your (sustainable) startup to get noticed, then raising capital through an investment from ESG venture capital funds is probably your best bet. But just because raising capital from an ESG VC is such a crucial part of starting a business does not mean it’s always an easy process for startups and investors alike.
In this post we outline some key factors any entrepreneur looking to raise capital should consider before taking the plunge.
How ESG Venture Capital Funds Work
ESG venture capital funds are essentially pools of investors, with Environmental, Social and Governance considerations, who pool money together to make investments in startups with a social mission.
ESG venture capitals indeed have a unique possibility to invest in and develop the solutions required to tackle the world’s biggest problems such as the gender gap and economic inequality.
You can think of them like a collection of angel investors all working together to make investments that, ideally, add up to a whole lot more than what any single investor could make on their own of course within the ESG themes at the forefront of investment conversations include net zero, climate change, and diversity and inclusion (source).
Top ESG venture capital funds’ investment criteria are usually some combination of the following factors:
- The impact of the business’s work
- How can the proposed idea improve the world?
- The quality of the teamin terms of experience, skills and trustworthiness
- The attractiveness of the idea and whether there there is a market for it, and is it likely to be successful
How ESG Ventures Invest in Startups
Every ESG VC fund has its own investment philosophy and criteria. But in general, they look for investments that help impact investors reach specific financial goals.
Some of the goals that impact investors hope to achieve with their investments:
– Increasing their portfolio’s long-term return: funds are often looking for investments that have the potential to increase their return over the length of time that they hold them, hence the interest in investments that achieve groundbreaking scientific or business breakthroughs.
– Maximizing the amount of money they put into the world: Many impact investors are also working toward specific philanthropic or social goals with their investments, so it makes sense that they’d like to see returns that help them achieve these ends.
– Creating synergy within their investment portfolio: Since these investors have a track record of investing in a specific area of ESG, they seek relevant startups to invest in order to increase synergy in their portfolio.
– Affinity for entrepreneurial diversity: ESG investors have a natural liking for women- or minority-led new venture to invest in order to bring further equal opportunities to the startup ecosystem.
What Makes a Good ESG Investment?
The most important factor in deciding how to raise capital is the impact it will have on your startup.
By looking at the ESG impact of each potential investor, you can make sure that they are committed to the same goals as you are. If a certain investor doesn’t have the same goals or interests as your startup, you’ll have to find another investor who fits.
ESG VCs can help companies incorporate ESG factors throughout the company’s early phases, embedding these performance into the culture and operating procedures as the business grows. By doing so, VCs can help companies avoid a future crisis by helping them prepare for it.
Many VC-backed companies rely on innovative, disruptive technology and business models, which often play in an unregulated sector. New regulation is likely to be introduced to control the dangers and consequences associated with these new technologies and innovations, so preparing for it is crucial. There is, therefore, value in being able to ESG properly.
ESG-oriented investors can play a pivotal role in the vision creation for startups and sharpening their missions and strategies to embrace proactively environmental and social initiatives.
Do research on prospective ESG investors
Before you reach out to investors for their offers, it’s important to clarify your objectives and do your due diligence.
Think carefully about your startup mission and what you would like to see in the mission and vision of prospective VC investors. Write down and evaluate your goals and discuss them with your co-founders or other stakeholders.
Start by researching the types of investments that each investor offers. You can find detailed information about each fund’s investment criteria, portfolio companies, and previous investments on their websites. You can also find information about each fund’s environmental impact.
Once you have conducted a comprehensive desk research, it makes sense to have a few conversations within the ecosystem for instance with ESG startups and/or incubators to collect additional insights.
We suggest you develop criteria and rank ESG investors based on these criteria. Then you can approach them one-by-one and first have an informal talk to see if there is a click or not.
Know the pitfalls to avoid when raising capital from ESG investors
While investing in startups is an important part of the venture capital process, it’s not the only way that impact investors get involved.
Some investors may simply want to get involved with social entrepreneurship, while others may simply want to get involved with impact investing as an investment strategy.
These types of investors often have very different goals and priorities than those of traditional VC funds. This means the way you run your business will have to change to accommodate these differences.
Your company’s strategy and goals should be adjusted to make the most of these new investors. Ask yourself if you are ready to make such changes to your startup or not. You could also openly inquire and discuss needed changes before you sign any deal with these impact investors.
The main thing is to be aware of changes and adjustments that prospective ESG investors may seek in your startup strategy and offerings.
Conclusion
Raising capital is never easy. It can be especially challenging when raising funds from environmental investors, who may have different goals and priorities than traditional investors.
That’s why it’s important to do your research before reaching out to investors. By looking at the environmental impact of each potential investor, you can make sure that they are committed to the same goals as you are.
