Today, for an investment to be a long term success, corporate responsibility must be part of its foundations. VC has been notoriously tarnished for focusing on outrageous growth only. We explore why this version of Venture Capital is shifting to one with societal benefit.
Some VC investors are no longer solely concerned about potential returns. The ethical behaviour of the underlying investments is playing an increasing role in where they choose to deploy their cash, and the degree of transparency expected is now significant.
The focus on ethics and environmental behaviours has been building for a number of years, so much so that it is now no longer a choice for a company to embed social impact into their business. For some venture capitalists, corporate responsibility must form part of its foundations for an investment to be a long term success.
VC & the impact investing market
The Global Impact Investing Network (GIIN) estimates the current size of the global impact investing market to be $502 billion as both companies and consumers shift their attitudes on how capital could, or should, benefit society.
GIIN’s research also suggests that a large portion of impact investing organisations are relatively small, with each managing less than $29 million on average. Co-founder and CEO of GIIN, Amit Bouri, states in the “Sizing the impact investing market” report that there is a great potential for those investors who have aligned their capital with their values to further use their investments to fuel progress.
He says: “The growing consideration of social and environmental factors in investing is also a signal of a larger shift in the global financial markets — an increasing number of people are recognising that their money should do more than just make more money. Their investments can — and should — also seek to fuel meaningful, sustainable social and environmental impact.”
Whilst this may sound easy enough to achieve, a significant hurdle for venture capitalists to overcome is in aligning the interests of all parties involved.
‘Somers says the main thing is not to aim for ethics, but to target clarity and understanding from all stakeholders, including the investors in the VC itself.’
“Ethics are subjective and can range from decent behaviour to zero carbon to employees setting their own pay and conditions,” explains Dan Somers, managing partner at Boundary Capital. “There’s always an argument for and against all of these things either as being the right thing to do, or why they are best for shareholders. However, in the majority of cases they are confused and blurred by the spectrum and often contradictory ethical minefield.”
Somers says that the main thing is not to aim for ethics, but to target clarity and understanding from all stakeholders, including the investors in the VC itself. “This is the most likely way to align stakeholders which ultimately is the best recipe for success,” he says.
VC & IMPACT INVESTMENT
Elio Leoni Sceti, CEO and founder of $375M global investment fund The Craftory, says that these difficulties exist because while behaviour is aligned on impact, incentives are often based on financials. He explains: “As the founder of a company, you are the owner of the brand and you are the driving force. If you are motivated by impact, you know you can deliver on impact and you can pull all of your organisation behind it. The moment you open your capital to receive investment from VC companies that are aligned on your financials, rather than the impact; which is uniquely driven by your own personal beliefs, then you create long-term problem.”
Mr Sceti argues that for a brand to deliver on their principles, it is vital that they partner with investors that are also driven by impact in their choices. Venture capitalists have a significant role to play in holding the company board to account for their commitments to corporate responsibility and ensure that this is communicated to shareholders. Problems arise when the investors themselves are more concerned with maximising shareholders’ returns than upholding the values or purpose that the company was built on.
New commitments for VC
In August 2019, the Business Roundtable published an updated Statement on the Purpose of a Corporation that moves away from shareholders primacy and includes a commitment to all stakeholders.
‘Businesses need to remember their entire range of purposes in society.’
The organisation outlined that while the free-market system is the best means of generating good jobs, a strong and sustainable economy, and economic opportunity, businesses need to remember their entire range of purposes in society.
“Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products, manufacture equipment and vehicles, support the national defense, grow and produce food, provide health care, generate and deliver energy and offer financial, communications and other services that underpin economic growth.”
Those in agreement with the Statement also commit to delivering value to consumers, investing in employees, dealing fairly and ethically with suppliers, supporting local communities and delivering value to shareholders.
Mr Sceti explains that the changes to the rules of engagement have redefined what stakeholders mean and the loyalty from both consumers and employees – all of which, in turn, have a distinct impact on venture capitalism.
“What has changed is the environment in which we’re living and the society that we’re promoting plays an equal part in the decision making of the profits that we are committing to,” he explains. “To talk about business and not include impact in any form into the definition of business is now both short term and frankly, idiotic.”
Mr Sceti argues that for at least 30% of consumers their impact on environment and society is directly linked to their preferred brands and choices. As a result, a new generation of companies are emerging that are aligned to this approach; whilst larger businesses, currently not taking it as seriously, are losing market share.
It is this new generation of companies that look to the VC market for investment and advice on how to succeed in the long term. Above all else, however, they focus on the VC players who believe in and prioritise purpose; leaving the VCs that don’t play fair to join the larger businesses in losing their share of success.