Global Impact Venturing: helping portfolio companies towards impact and ESG
At Pitango, we believe that profits and purpose can reinforce one another in a mutually beneficial relationship whereby a company’s impact potential increases with its profitability. That is why we are pioneering a new approach to mainstream impact methodologies and metrics in the venture capital world, an approach we have dubbed “The ESG-SDG continuum strategy”. Over the past few years, impact and ESG practices have gained momentum in the private equity world through dedicated impact funds within mainstream asset managers. So far, no mainstream venture fund has taken similar steps.
While it is true that venture funds dedicated to Impact Native startups have recently sprung up in the VC world, this approach has paradoxically bolstered the separation line between impact and traditional assets. Rather than simply waiting for Impact Native companies to approach us, we are taking it a step further by leveraging the many millions of dollars that have already been invested in tech companies within our existing portfolio and helping these companies migrate towards impact and ESG measurement and management. There is no time to lose. Moreover, there is no reason to wait for “Impact Native” companies to mature, when existing companies can already create positive impact through the intentional integration of ESG concepts. We believe that this new “blended impact” paradigm will empower VCs to maximise existing, as well as new, investments in order to solve the world’s most pressing social and environmental challenges, while generating superior profits. Eventually, we aim to eliminate the line that separates impact and mainstream VC investing altogether.
A few weeks ago, we sat down with impact-investing luminary and author of the new book Impact, Sir Ronald Cohen, to discuss how the VC world can hone the power of impact-tech to drive a more sustainable and equitable world for future generations. Stepping into mainstream VC funds is the greatest challenge and opportunity that impact has known. In the first half of 2020, VCs controlled $46bn in funding globally, only a small fraction of which went to impact-tech investments. In addition to being the fastest growing sector, technology presents the most effective investment opportunity for impact potential per dollar.
While the covid-19 pandemic has emboldened the conversation surrounding our collective responsibility for society and the environment in the age of globalisation, the question remains as to how we can convince general and limited partners that tech can and should be a force for good. To this, Sir Ronald Cohen aptly explained that the “Impact Revolution,” fuelled by changing preferences and attitudes of consumers and talent alike, will be ushered in by necessity, rather than by choice. New investment themes emerge every few decades. Similar to the way risk-thinking opened the door to VC and PE in the 1950s, impact-thinking is going to transform our portfolios and business models yet again. Post covid-19, we will no longer have the “luxury of ignorance” when it comes to social and environmental injustices propagated by big industry and political interests. Capital is changing hands to a new generation that thinks, functions, and invests according to a strong impact orientation.
The concept of “financial reporting”, which seems commonsensical nowadays, did not exist 100 years ago. It is not much of a stretch to imagine “impact reporting” as common wisdom in the not-so-far-future, particularly if we use the covid-19 crisis as a launching pad for a fair and sustainable recovery. The VC world is undergoing a transformation under our very noses, and the quicker we adapt, the better off we will be. Entrepreneurs are setting out to solve social and environmental issues as defined by the Sustainable Development Goals (SDGs), and to grow profits as they deliver impact. New business models which situate impact at the centre are increasingly becoming the norm. While governments are responsible for heralding this transformation through mandating impact-weighted accounts and tax breaks for impact companies, great responsibility also rests on the shoulders of entrepreneurs, chief executives and global enterprises.
As Sir Ronald Cohen put it, “the world is shifting to optimising risk-return impact”. If you put on an impact lens and ask yourself, “How can my technology help the maximum number of people in the world?” you attract the best talent, most loyal consumers, and most committed investors. In other words. optimising risk-return through an impact lens will not only deliver higher social and environmental returns but will also significantly increase market opportunities and company resilience, and, thus, financial returns. The tipping point, Sir Ronal Cohen explained, will happen when we reach “the magic 10%” — when 10% of companies are actively measuring and managing their impact, and when 10% of VCs are investing through an impact lens.
But is it even possible to measure something as abstruse as “impact”? At Pitango, we are privy to the notion of “impact washing”, and believe that it is crucial to achieve the same accuracy and transparency on the impact a company is creating as their generated profit. While there is a grievous misconception that doing good and doing well entail concessional returns, we have identified the exact opposite — impact net-positive companies create opportunities for increased financial returns. As such, all Impact Migrants in our portfolio are thoroughly screened for their intention to address the SDGs and measured through impact measurement tools.
In Israel there exists the perfect Impact Migrant potential from a technological perspective, as the world’s “Startup nation,” as well as from a moral perspective that strives towards the Jewish notion of tikkun olam [repair of the world]. According to research conducted by Social Finance Israel, 35% of the 6,600 Israeli startups fall under at least one SDG and are, thus, potentially impact-aligned. In order for these startups to migrate into the SDG market, they must blend an impact framework and measurement system within their core business.
At this turning point in history, many VCs see themselves at the crossroads of whether to migrate their entire portfolio to impact or whether they should raise a separate impact fund. To this, Sir Ronald Cohen pointed out the basic fact that the best talent goes to best investors. Today’s top talent is looking for backers who understand impact, to those investors whose DNA has evolved with the times to include impact alongside profit. At Pitango, we consider ourselves incredibly fortunate to be driving this change in mainstream VC and building a world that will make the next generation proud.