When evaluating early-stage funds, the value of the most common performance metrics (e.g. TVPI, MOIC, IRR) is low in the first years of the life cycle of a fund.  

Given that for most emerging managers the track record is either inexistent or too early to assess, if we used only these metrics to assess new opportunities, we would have a very limited view.  

For this reason, we think about which other quantitative aspects we can add in our assessment.  

If we did not do this, we would certainly miss the overall picture as well as great investment opportunities.  

Explanation of the Paradox

Among the metrics that we look at in a track record, we think that there are two that have a quite interesting relationship: 

• The Seed to Series A Graduation rate 

• The Write Off Rate 

In some public resources, we found out that both seem to be positively correlated with performance (i.e. TVPI). If this was completely true, we would expect the relationship between performance, graduation rate and write off rate to be as shown in the chart below:  

Apparently, this positive correlation for both variables does not make sense, as: 

• On one side, the more the portfolio raises follow on rounds, the better the performance 

• On the other side, the performance also improves when more companies fail 

How is this possible? 

The case for the Seed to Series A Graduation Rate

This metric is calculated as the ratio between the number of Seed investments that raise a subsequent Series A round and the number of total Seed investments. 

Basically, the concept is that when a company converts to Series A, then the value of the investment increases. Consequently, the more companies convert to Series A, the higher the value of the entire fund should be. This is why managers focus on this metric in their pitches as well as in their portfolio activity (i.e. helping their companies to raise a new round).  

But is the Seed to Series A graduation rate actually a good proxy of performance or is it just a myth? A complete assessment of this question would require a statistical analysis (which is not the purpose of this article), but here we just want to challenge this thinking and share some of our insights.  

Our internal discussion was driven by two central arguments, each supporting a different side of the paradox.   

The supporting argument we found was actually based on some interesting data from Dealroom. 

This chart shows the median conversion rates from Seed to Series A by investor quartiles.  

According to this report, the better an investor is, the higher the median conversion rate will be.  

Indeed, the top quartile funds shown in the slide are well established brands in the European ecosystem and some of them (Seedcamp, Kima) even published their performance, which is objectively very strong. Even Creandum, one of the most prolific investors in Europe, shared an article stating its Seed to Series A graduation rate.   

Based on this, the graduation rate appears to be a good proxy for performance.  

The Case for the Write-Off Rate

On the other side, when discussing internally about graduation rates, we stumbled upon a completely different metric: the write-off rate.  

This metric is calculated as the ratio between the number of write-offs (i.e. companies that are closed / shut down) and the number of total investments.  

Also in this case, managers pitch this number quite often as they believe that the lower the write off-rate is, the higher will be the performance. The curious reality of venture capital is actually quite different from what many managers assume: As Andrew Chen (a16z) explains in this outstanding article, “good” 2-3x fund and a fantastic >5x fund lose money about the same % of the time”. Looking at the data from the article and shown below,  >5x funds have a higher write off rate than >3x-5x funds and >2x-3x funds.  

Why is this strange? Because it seems that the more startups in a portfolio fail, the better that portfolio will perform. How can this make sense? 

Benedict Evans provides an answer here mentioning “the 'Babe Ruth effect' - you take more risks to get the best returns (..) Venture funds invest in a particular type of startup, one that is much more likely to go to zero, but which has the potential, if it does succeed, to produce something very big”

Basically, funds with a lower write-off rate do not perform outstandingly because they do not take enough risk, as “a fund gets better returns by having more really big hits, not by having fewer failures”. The more risk you take, the more startups in your portfolio will fail, but the more the winner will outperform.  

The Resolution of the Paradox

To summarize, when discussing the quality of the Seed to Series A conversion rate as a proxy of performance, we had two opposite arguments:  

• On one side, some high performing European Seed funds have a very strong Seed to Series A conversion rate 

• On the other side, top performing funds have a high write-off rate, which is basically the opposite of the graduation rate 

It seems that performance is correlated with both the share of startups in a portfolio that raise a new round as well as with the share of startups that fail.  

Our take is that, as curious as it sounds, this is not a paradox as the two arguments are not necessarily mutually exclusive.  

Good funds could have both high conversion rates as well as high write-off rates.  

To check this, we had a look at some insights from our portfolio.  

We collected data from 7 mature funds from the 2015 vintage, ranked them based on Net TVPI from 1-7 (top-bottom) and gathered information on their graduation and write-off rates.  

The chart below shows the data we collected: 

Curiously, the two curves are completely different from what we would expect, but, we still can extract some relevant insights: 

• On the graduation rate, there is no clear correlation with performance, but there are signs that top performing funds could show a higher graduation rate 

• The write-off rate is more interesting as its pattern is not linear: 

• The top performing fund has the same write-off rate as the bottom one, which is also the same as the average  

• However, for the funds which are between the average and either the top or the bottom, the write off rate is the same and higher than average 

• Based on this, it is difficult to predict the performance based on the write-off rate 

Basically, the main point is that the correlation between TVPI, graduation and rate and write-off rate is not that clear. What could be the reasons? 

Our take is that other factors also impact significantly the TVPI as well as its relationship with the two metrics, and therefore the correlations described above can not be considered in absolute terms. Some of these factors are: 

• Fund size 

• Reserve strategy 

• Ownership stakes 

• Portfolio concentration  

• Exact stage of initial investment (e.g. Pre-Seed vs Series A) 

• Value concentration in one, few or more companies 

• Absolute value of the main drivers 

• Deployment pace 

• Sector focus (e.g. deeptech/hardware vs consumer software) 

• Value add approach (hands on vs hands off) 

Conclusion

In conclusion, we can say that the write-off rate is difficult to interpret, but a very, very strong graduation rate actually signals high performance.  

Clearly, such insights would need further investigation with a broader data set, but we think it is useful for the VC community to foster a discussion around the topic and share some perspectives from the LP side.  

We would be glad to continue the conversation and hear anyone interested in sharing thoughts or comments. 

I’ve been in the impact investing domain for almost two decades now. I was very lucky to be in the right place at the right time, because the field of impact investing didn’t really exist when I started to work on it. I was managing an internet company during the dot-com era and when the bubble burst, I spoke a lot to our team and investors about the underlying reasons for the crash. The more we spoke, the more we saw that a disconnect between capital and values had brought about these unreasonable valuations.  

Since we were all part of the high-tech business, working with great entrepreneurs and new technologies, we decided that it was time to bring values and capital back together. In the early 2000s, we started to experiment on many different business models at the intersection of capital, values and tech. It was a really exciting time without any limitations, because nobody knew anything about impact investing yet. Today, you have official terms that you can google, but back then we could invent everything ourselves. 

Even before that, I always felt strongly that the worlds of capital and value needed to converge. When I look at myself, I think of myself as one holistic person. I’m a human, but I’m also a business person, a student, an environmentalist and a parent – so why should I live in silos? 

“…without the help of ground-breaking technologies, we will never reach the UN Sustainable Development Goals…”

I am really happy to see that this holistic view is growing and is already very engrained in the younger generations. The main reason I see for this is that we do everything on our phones today. Whatever we do – going out, scheduling meetings, talking to our children – we do it on our phones. Everything is converging today. This is the compelling message that I’ve transported for 20 years and where my passion lies.  

I’m really excited about the power of technology to make disruptive change happen. If you look at the impact investing world, you will find that 98% is in technology that is not high-tech. This is a big problem, because without the help of ground-breaking technologies, we will never reach the UN Sustainable Development Goals by 2030. We will not solve the climate crisis, we won’t create true social equity and we will not fix social disparities without high-tech. 


How do you shape Pitango’s strategy as its Head of Investment and Sustainability?

At Pitango I created a strategy that looks at two sides of the impact investing equilibrium. The first is the question of how we can better support “impact natives” in need of capital, meaning startups that intentionally focus on impact. We added an impact and sustainability layer to our due diligence that is presented to the investment committee, and we work closely with the companies on impact once they join us.

“We added an impact and sustainability layer to our due diligence that is presented to the investment committee…”

At the same time, I didn’t just want to wait until our early-stage startups matured, because this can take many years. Pitango already has about 70 portfolio companies, so what about them? Why not migrate them too, helping them to identify the impact they are having and achieving their goals in this area? If this process is successful, they will bring their impact methodologies into their mainstream activities and won’t even have to call it impact. It will simply be a better way for them to do business! 

Both parts of the equilibrium are really important to us. We need to bring more impact startups into our investment process, but we also have to migrate our existing companies. We see this as the best way to bring impact into the mainstream without turning into a pure impact fund. 

Our reason for not wanting to turn into an impact-only fund is that such funds focus purely on companies who outcomes relate to the Sustainable Development Goals. However, there are many business models who do good for society that are not considered classic impact investments. With Pitango, we also want to support those types of companies and help them create a strong ESG infrastructure. This is an important distinction, because many people in VC funds think that they cannot do ESG because that would mean that they only do impact.


You have your own impact framework called the ESG to Sustainable Development Continuum. Can you explain more about this framework and how you integrate it into Pitango’s processes? 

For us, impact is all about the convergence between ESG and SDG. The continuum starts on the ESG level and goes all the way to SDG compliance, meaning that it is a scale. First of all, it is important to note that we don’t invest in companies that create any harm. If we do see an intention to do good and a business model that is aligned with positive impact, then we can work with the company to transition them from intention to compliance. 

On one side of the spectrum, we have companies who have a “do-no-harm approach”, but don’t actively integrate ESG into their business activities yet. Next, there are businesses who actively pursue ESG activities and have an understanding of their impact, but don’t measure it. The next step of the continuum are companies that apply ESG and have an understanding of the SDGs, but don’t measure it. Then we take them to the last level, which is real compliance – meaning that they apply the Social Development Goals to their business practices and really understand how their product relates to those goals. 


How do you help founders adopt ESG practices and be accountable when they are in the grind of running their company?

It very much depends on the phase and size of the company. At the start, I will usually work with one of the founders on designing an impact strategy, making sure it blends into their business plan and working together on implementing the strategy.  

As they grow further, we work with the founders to identify the environmental and social effects of their product and help them recruit an internal impact taskforce, where every person on the taskforce is in charge of a different part of the organisation. The first thing we usually do with them is to review how their company lines up with the SDGs and find the areas that need improvement. In established companies, this is gradual and not an overnight change. If you want to have a better-balanced management team, you will not fire half of your managers just to have gender equality. 

At the beginning, I usually get together with the taskforce on a weekly basis. We work on several impact frameworks like the Five Dimensions of Impact and the Theory of Change, and also make sure that the companies collect a lot of data that we analyse together. We typically move the meetings to once every two weeks as the work starts becoming more internal. Eventually, we create a report that tells the story of the company through the social, environmental, ESG or SDG lens, which also helps define the KPIs that need to be improved in the future. 


How can impact contribute to a company’s valuation? How do you see the connection between impact or ESG and valuation evolving over time?

I think over time, there will not be any companies that don’t have ESG embedded in their business model. More and more research will show that better-managed companies provide better results. Eventually, investors will be drawn towards these companies both because they want to do good, but also because of better results. 

“Whatever business you are in, you can always include impact parameters into your investment decisions…”

 Impact is becoming a cross-border and cross-sector phenomenon. Whatever business you are in, you can always include impact parameters into your investment decisions and business model. And if you do so, you will be more profitable. You don’t have to invest in agriculture or health care to make an impact – you can also invest in smart cities, mobility, cyber security or prop-tech. Whatever you invest in, you can choose to be accountable – and this is how impact will move from the niche to the mainstream. 

I have a few friends who are all internet entrepreneurs and investors from Berlin and more or less ambitious surfers. On a surfing trip one and a half years ago in Tenerife, there was a day with little waves.

We got into a long discussion around climate change, our role in this crisis and if we are doing enough as entrepreneurs and investors. At the time, most of us were offsetting our carbon footprint, but that was mostly it. Nobody was politically active or really leveraging her or his assets.

This conversation was the starting point and over the next couple of months, we as a group committed to taking action by starting Leaders for Climate Action. Since then, over 400 companies with 100,000 represented employees have joined; we´ve expanded to other European countries and achieved more than a quarter million tons of carbon reduction and offsets in a little over a year.

What are your main initiatives with Leaders for Climate Action?

Our primary objective is to help entrepreneurs run their companies in a much more eco-sustainable way than they did before. This includes their entire up — and downstream supply chain, their office environments, and travel policy.

We empower them by providing scientifically-verified frameworks to measure and offset their carbon footprint on an annual basis, so essentially, it’s a reinforcement cycle. The measuring is done together with third-party climate auditors, where different measures –depending on the industry– come into play for the reduction.

For example, a software company where most of the footprint comes from server electricity is a completely different game than let´s say Zalando, which ships physical fashion products across the world. When it comes to offsetting, we cooperate with Gold Standard certified partners to really yield the results that are promised.

“Our political agenda is very narrowly focused on implementing a Germany- and European-wide price per emitted carbon ton north of 80 to 100 Euros.”

The secondary objective of Leaders for Climate Action is lobbying work. We coordinate efforts to publish papers, speak on panels, meet politicians on a national level and increasingly European level, and harness the power of our member brands like Zalando, Flixbus, Celonis, and Delivery Hero to gain attention from political decision-makers.

Our political agenda is very narrowly focused on implementing a Germany- and European-wide price per emitted carbon ton north of 80 to 100 Euros. Today, politicians are talking about 20 Euros per ton, but only at the level of 80–100 Euros will it really have an impact on changing consumer and enterprise behavior. At 20 Euros a ton, it simply goes unnoticed.

How do you see the approach to ESG changing in tech companies, independently from investors?

Especially in the past six months, alongside Covid, Black Live Matters, and climate change becoming so obvious that you can´t ignore it, there has been a strong uptick in the ESG momentum across tech companies. You can see with the pledges by Apple, Amazon and Google that the giants are making serious efforts to become carbon neutral in the next 10–15 years.

“In the end, it is all about accepting entrepreneurial responsibility for the people and the planet and not seeing yourself as a pure financial profit generator.”

Here too, different business models require different measures. For some, it is easier to get there, for some it is harder and will take longer. But generally, there is a very strong momentum towards accepting responsibility. In the end, it is all about accepting entrepreneurial responsibility for the people and the planet and not seeing yourself as a pure financial profit generator who doesn’t care about the damages one creates while generating profits.

What are the main costs and benefits of implementing ESG policies?

That is a complex question, because you can think of costs in purely financial terms, but also in terms of cultural costs, brand costs, and so on. If we first stick to the economic costs and benefits, using fully renewable electricity in most countries usually comes in 10 –20 % more costly than using fossil energy. But this is one of the few cases where you get higher costs if you choose to be sustainable. The majority of measures will actually save you costs. For example, if you choose LED lights to run your office, it is more sustainable and saves energy. The same is true for moving meetings online and travelling less.

By and large, most sustainability measures help to save costs. The only add-on that is really an incremental additional cost layer is the offsetting. If you don’t do it, it costs zero. If you do it, depending on the magnitude of your emissions, you will get high-quality offsetting at around 10–20 Euros per ton. Paying one or two Euros per ton is simply not enough, but also you don’t have to pay 100 Euros.

But to put things into perspective: At an investment company like Earlybird, with a couple of millions of OPEX a year, we emit a few hundred tons of CO2. That means we are talking about 4.000–8.000 Euros to compensate all emissions. Compared to millions of operating costs annually, that is not even 1%. It does depend on the business model, but most businesses should be able to absorb this incremental cost of offsetting.

“If you want to attract talents from generations X, Y and Z, you cannot ignore your ESG policies and your multidimensional ESG footprint.”

When it comes to the benefits, many measures automatically result in savings because they consume less resources. That can be energy, but it can also be other natural resources. On top of that, you can also think about ESG in a broader sense. We need to be mindful of the studies by the likes of McKinsey showing that smarter and more balanced decision-making originates in teams with high academic, cultural and gender diversity.

Last but not least, if you want to attract talents from generations X, Y and Z, who are much more mindful of the impact and role of a company in the ecosystem, you cannot ignore your ESG policies and your multidimensional ESG footprint. Otherwise, you will simply not be attractive to the best talent of the younger generations.

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Let us imagine a situation, if you may — You are ambitious, visionary, and like to live life on the edge. You decide to quit your high-paying cushy corporate job to build a start-up that is going to change the world and become the next unicorn, may be even a decacorn. You build a successful tech product and raise several rounds of funding. However, a few years later you realize that your start-up even with a superior product and a decent customer base is no longer growing as it was before. One of your investors introduced you to a firm that would buy your company for some tens of millions. It’s not what you expected, but you agree to sell, nonetheless. Dust settles, your key employees, you, and your co-founder find that the equity stake that you all hold is essentially worthless. Investors, on the other hand, did much better, recouped their money, and even pocketed a positive return.

Shocked!? Well, such situations, can and do happen to some founders.

Through this article, I will try to demystify the returns to different stakeholders when a startup exits and through that, I will touch upon some key term sheet clauses.

I will be using a relatively simple and hypothetical problem statement to explain various aspects that lead to exit modeling. The final output will allow you to simulate different exit scenarios and understand how much financial returns different stakeholders will make.

You can download the problem statement and the solution by clicking here.

This article is not a tutorial to build a financial model from scratch, but I have attached the completed and unlocked version excel model for you to learn from. The objective of the article is to introduce key term sheet clauses that impacts startup exits.

I. Preferred vs. Common Shares

When institutional VC investors invest in a startup, they demand Preferred shares. Founders and key employees do not get Preferred shares, they get Common shares. Angels, incubators, accelerators, and likes may or may not demand preferred shares.

Preferred shares holders, unlike Common shares holders, receive preferential treatment. They have special rights. These rights are negotiable and are included in the term sheet. The most common and important right is the liquidation preference. Liquidation preferences mitigate the risk investors take by ensuring they get paid first over common shareholders. The term sheet fine prints determine how much, if any, remains for you, key employees, and other common shareholders.

In the problem statement shared above, the founders, key employees, angels, and the incubator own common shares. The later investments by the angels, VC1, VC2, and VC3 are allocated with preferred shares.

II. Liquidation Waterfall and Seniority

With multiple financing rounds into a start-up, a new clause enters the term sheet called “Seniority”. Seniority determines the preference order in which investors get their money back at the exit. Seniority ranking is usually allotted to share classes and not individual investors.

For instance, in the problem statement shared, Series B shares have the highest seniority for getting paid, Series A is next in seniority, Seed after that, and Common shareholders have the lowest seniority.

In most cases, the later investors get higher preferences. So, Series B holders are paid back first before Series A, and so on.

Therefore, the returns at exit flow in as a waterfall or rather rapids (if you are one of those people who use to top in geography classes in high school). Such an arrangement is shown below (note it simply shows preference initially without any complicated clauses like participation, which we will discuss next).

III. Liquidation Preferences and Participation

As stated above, institutional investors demand preferred shares with liquidation preferences. It means that preferred shareholders are guaranteed proceeds over the common shareholders. The amount of return guaranteed is stated in the term sheet (after negotiation) as a multiple of amount invested in the start-up. Basis the negotiation done, it can go as high as it can be, but usually restricted to 1x of the amount invested. This clause was initially created to safeguard investors in case of the start-up was exited for a value less than expected. A 1x liquidation preference ensures investors in the start-up recover at least the initial investments.

Such liquidation preferences could either be non-participating or participating.

Non- Participating Liquidation preference:

If certain investors have preferred shares with non-participating preference, then they have a choice to convert to common shares, if payout from common shares is more than that obtained from liquidation preference. Let’s understand this through a simple example:

VC investor, Marc made a seed investment of € 2M for 40% stake in a start-up, X.

Assumption: there is no other investor in X apart from Marc who has preferred shares with non-participating preference.

In the table above, we observe that Marc as a preferred shareholder with non-participating preference is:

1. Entitled to exit proceeds first over founders of X (holder of common shares).
2. Has a choice to use liquidation preference (1x or 2x) or convert to common shares, determined by the highest amount of payout received through either of the processes.
3. We observed that Marc receives equal to or more than his % shareholding (which 40% in this case) upon exit depending on the terms agreed upon the exit value.

Participating Liquidation preference:

In contrast, participating liquidation preference, also commonly known as double-dipping, allows investors to receive payouts in the remaining proceeds on a pro-rata basis in addition to the liquidation preference.

Using the same example above, Marc will get 40% of the remaining proceeds in addition to the payout through liquidation preference.

Participating preferred holders never convert to common shares as they are adding their participation on top of the liquidation preference, something which common shareholders do not get. Such a clause is not at all founder friendly.

In the problem statement shared, Series B shareholders have participating preferred shares and also have a special right to obtain accrued dividends at the exit. Series A and Seed shareholders have non-participating preferred shares.

To protect the founders from participating preferred shareholders, a clause called Participation Cap was introduced. They are also stated as a multiple of invested amount and provides a conversion threshold for participating preferred shareholders. For instance, a 2x cap indicates that the investor can only receive up to 2 times the invested amount and would have to convert to common shares to receive a higher payout.

Let’s use the same example as above in which Marc has a liquidation preference of 1x.

Many other clauses form the part of a term sheet. In case you are interested and want me to author a follow-on article covering certain other clauses, please send me your suggestions to as@bfp.vc or put them below in the comment section. Moreover, if you are an emerging VC fund with fund size less than $200M and investing in early-stage rounds (pre-seed, seed, late seed and Series A) and want to know more about our work and investments, please feel free to drop in an email and I will connect with you.

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About Abhisekh Shah
Abhisekh is part of the investment team at Blue Future Partners, a venture capital fund of funds investing globally in early-stage VC firms and in growth stage start-ups. He is an engineer by training and holds an MBA, specialized in Finance, from HEC Paris. Prior to joining Blue Future Partners, Abhisekh had six years of work experience, which is mainly entrepreneurial. He worked for a multi-national pharmaceutical company in their Industrial Automation division and then went on start his own startup in the luxury clothing rental space. Following that, he joined another startup (that provided SaaS based solution and advisory services to large corporate to manage their ESG objectives) in their core team to grow and build the startup, scaling it from single digit team to triple digits team across multiple offices and catered to 200+ corporate clients (including Fortune 500 companies). They raised funding from the likes of Nexus Venture Partners, Saif Partners, and Omidiyar Network.
LinkedIn – Twitter.

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Provided below are snippets of the solution to the problem statement mentioned above. A detailed solution is there in the excel sheet that can be downloaded through the link provided at the beginning of this article.

Cap Table before later stage investments were made:

Cap Table after all the investments are made until exit:

Final Proceeds charts:

We think of ESG responsibility as our most important job at a personal and company level. The reason for this is that technology is in and of itself amoral, meaning it is not good or bad. It´s just powerful. And if you don’t immediately bring optimism or an attitude that technology will be oriented only towards the good, then it won´t happen automatically. So when we think about how to invest, we think about ESG first. 

Besides the fact that technology is amoral, there are two other reasons for thinking about ESG first. One is that we want to do this for a long time. We think that one of the best ways to drive returns in any asset class is to have a structure where you can stick around longer than everybody else.  

“The only way that we can do this for a long time is to be proud of what we are doing”

Warren Buffet is an amazing investor, but if you gave him $1 Million fifty years ago, he only became a billionaire in the last 20% of that, which speaks to the fact that longevity has a very big impact. For us as partners, the only way to do this for a long time is to be proud of what we are doing. And if you are not making the world a place that you are proud to live in, then you will churn out. You can´t do it long-term. 

The second reason for why we prioritize ESG is that we believe the world is moving towards rewarding value-centric businesses at a higher rate. Values can be a competitive weapon in the marketplace as more and more consumers want to be stakeholders in a company, they don’t just want to be shareholders or consumers. The information era has brought about a really sophisticated buyer who can look at something from all sides before spending their cash and their time. And they are thinking about it from all vectors as a human being and a participant in the market place. That’s why we think values can be a competitive weapon that will build longer-lasting businesses. 

How do you collaborate with founders on ESG?

There are a couple of things that we can do and that we think are important to do. One is at the hiring level, because one of the most important things in building a great company is of course to hire extremely well.  

When we help companies think about the criteria that they should be using and when we help them evaluate job requirements, one of the things we often put to them is this: “how do you make sure that the way that you’ve described this job requirement is not going to dissuade people from different demographics? How do you ensure that you can get enough women engineering candidates and how do you ensure that you get enough racial diversity in your talent pool?” So that is one of the standards that we want them to push you to adhere to. 

“How do you make sure that the way that you’ve described this job requirement is not going to dissuade people from different demographics?”

At the founder level we spend a lot of time thinking about that. We actually do less on the environmental and the sustainability front directly with the founder, but only because the types of founder that we optimise for are already founders that don´t just want to build a massive business, but also intuitively care about this issue.  

In our portfolio, we have some fashion ecommerce that leans towards rental and sustainability. We have some supply chain and logistic companies that lean towards the circular economy and reusable materials. We have hardware that leans towards consumption of less fossil fuel. Each time we make an investment in a given area, there is always a natural proclivity on the part of the founder towards ESG.  

From the perspective of a GP, how can LPs contribute more to the topic?

I think the two most important things that LPs can do is to show conviction and commitment. That means to be willing to be an early commitment to a manager, because when I am really invested in a founder, the relationship is much stronger. We are both mutually much more aligned, because if we both care about something a lot, then we are going to have a really great relationship. Conviction is number one. 

“If you can frame ESG in the context of conviction and commitment, then you will be effective and persuasive.”

And then commitment is number two, which is following through on your promises and sticking around through good times and bad. A lot of investors will promise to be supportive, but there will always be a bad quarter or a challenging investment or a market condition. And suddenly that investor has a lot of reasons for why they can´t commit anymore. That is a mild, but true breach of trust. And what that implies is thinking about ESG. If you can frame ESG in the context of conviction and commitment, then you will be effective and persuasive.  

If you can say: “I am explicitly trying to invest with managers that value ESG, can you put it in your diligence book?” If they put it in their diligence book and you commit early, you changed the industry. Now it is in their book and you impacted the trajectory of that firm by showing commitment. I think conviction and commitment is always the way to impact VCs the most and if you introduce ESG in the middle of that, then you will get your desired end. 

The extract below is from the interview with Ariana Thacker, Founding Partner at Conscience VC.

Previous interviews include: Kinga Stanislawska (Experior VC, European Women in VC),Miki Yokoyama (Tech Founders), Fabian Heilemann (Earlybird, Leaders For Climate Action), Kanyi Maqubela (Kindred Ventures), David Teten (Versatile VC)

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What has motivated you to take a more impact-driven approach to investing?

Here’s the stigma a lot of VCs face – the words “venture capitalism” don’t exactly scream empathy to the general public. I’d like to change that, or, at least be a big part of that change.  

Investors who want to be seen as more than a human instrument enabling financial gain through an infusion of capital, can choose to diversify their portfolio among a plethora of emerging startups that really matter to them – companies that contribute to the greater good in their own unique ways, as well as provide real financial ROI.  

Most investors I know have causes they care deeply about and visions of a more sustainable, equitable, and socially conscious future. Personally, I think that comes naturally from those of us who have experienced first-hand the challenges presented by some form of a non-idyllic socio-economic background. A lot of people I meet today don’t realize how hard I fought to get to where I am. My parents (superheroes in their own way) worked hard…really hard to put their family’s needs above their own. We grew up humble, but happy. 

Education was always very important to me, and I’ve always had a deep passion for the sciences. To that end, I self-funded my Chemical Engineering degree from UCLA and became the first member of my family to graduate from college. Paying for a college education by myself and still graduating in 4 years was hard; studying for the entrance exams, doing the research about college choices, figuring out the application process, writing the essays, acquiring references, and getting on the Dean’s List each year – that was harder.  

Bringing an empathetic lens to investing is what has led Conscience to some of the most exciting, impact-driven, socially responsible, and financially promising companies in the marketplace. These companies are not only pioneering their industries into uncharted territories, they’re also perfectly reflective of Environmental, Social, and Governance (ESG) investing. 

How are you advancing diversity in venture capital?

I’ve carried a passion with me for supporting the self-starters and underdogs throughout my career as an engineer and investor. That drive to advocate for talented, but often-overlooked people have remained present in my most recent endeavor, which is the building of “Conscience,” an early-stage VC firm pioneering the intersection of consumer and science. 

I built Conscience as a one-woman-show from the ground up during the COVID-19 pandemic, which has been the most challenging but rewarding undertaking to date. Besides Conscience, among the spectrum of roles I’m most proud of is serving as the President of the Society of Women Engineers and the founding of a non-profit group—recognized by Congress—whose mission it was to advance women in STEM. 

Initiatives to advance underrepresented groups remain close to my heart and are reflected in my investments. In fact, over 50% of my personal and fund portfolio companies are led by female and diverse founders. This wasn’t a social initiative – the investments made were into the best-in-class founders, which naturally lent itself to a diverse portfolio.

Walk us through one of your portfolio companies aligned with ESG investing.

Nimbus is an outstanding example of ESG investing in the portfolio. They have produced a narrow-tilting vehicle that has the form factor of a motorcycle, but the safety features of a car. The company’s proprietary and patent-pending tilt technology has positioned itself as an urban transportation solution to congestion, parking, fuel consumption, and pollution.  

Nimbus has the ability to unlock expanded productivity gains from a segment of the population that could not previously afford reliable and efficient transportation. At a price point of $99/month to rent and $6,420 to buy for their base model, Nimbus will enable affordable transportation for the masses, as the cost of renting one of their vehicles is below or at the cost of monthly bus fare in several major cities, including New York, Seattle, Chicago, Los Angeles, and Miami. 

From a climate impact perspective, automobiles are one of the largest contributors to transportation-related carbon emissions, with trends showing greater emissions despite the increased presence of alternative fuel vehicles. Nimbus is estimated to be 3x as green as standard electric vehicles at 370 MPGe and requires less materials and batteries than traditional EVs. 

Nimbus vehicles are also 4x smaller than traditional cars, leading to tangible benefits in navigating through traffic and finding parking. They’re designed for city dwellers with a sleek and compact two-seat cabin, at half the width of a Smart Car, with plenty of room for storage. 

Nimbus is truly the future of urban mobility with powerful and impactful ripple effects in sustainability and accessibility. 

—

#ESGinVC

About Ariana Thacker
Ariana Thacker is the Founding Partner of Conscience VC, an early-stage fund pioneering the intersection of consumer and science. Ariana is a technical investor with a portfolio of 30+ companies alongside leading investors. She graduated with honors from UCLA in chemical engineering, with technical expertise spanning Fortune 500 companies to early-stage start-ups. She is a community leader for diversity, with tenure as President of Society of Women Engineers, Founder of congressionally-recognized philanthropic organization, and 50% of her portfolio allocated to diverse and female founders. 

About Marco Cesare Solinas
Marco is an Analyst at Blue Future Partners, where he is responsible for sourcing and analysing new investment opportunities. He is passionate about Technology and Venture Capital and making an impact with investments. He focuses on both direct and indirect investments.
Previously, he has built an international and multicultural background across Italy, US, Germany, Turkey and Malaysia. Marco holds a CEMS Master’s in International Management and a Bachelor´s in Economics and Finance from Bocconi University.
Linkedin — Twitter — Medium

About Blue Future Partners
Blue Future Partners is a Fund of Funds with decades worth of experience in investing in Venture Capital. We specialize in backing Emerging Managers focused on early-stage technology investments. We are people-centric and relationship-driven. We have a global mandate and existing relationships with Emerging Managers in the US, Europe, Israel, China and South East Asia.
Website — Linkedin — Twitter — Medium

The extract below is from the interview with Jake Gibson, Founding Partner at Better Tomorrow Ventures

Previous interviews include: Kinga Stanislawska (Experior VC, European Women in VC),Miki Yokoyama (Tech Founders), Fabian Heilemann (Earlybird, Leaders For Climate Action), Kanyi Maqubela (Kindred Ventures), David Teten (Versatile VC)

—

How do you address ESG responsibility at Better Tomorrow Ventures?

We have at least one LP with an impact focus, and so we fill out the B Impact Assessment each year and have our portfolio companies do it as well. However, as a new, small fund that invests primarily in new, small companies, there’s only so much we can do. So the real answer is that we believe financial services provide some of the biggest levers possible for improving human outcomes, and that’s where we focus. The companies we get the most excited about backing are ones where we can see a clear path to better access to financial products, and growing the global pie for everyone.

Do you have any conversations around ESG and positive impact with your portfolio companies?

We use the B Impact Assessment as a bit of a motivator to get companies thinking about their own impact, diversity of their teams, how well they take care of their employees and customers, etc. Beyond that, we don’t specifically talk about ESG initiatives, but we are always talking about impact.

“…we believe financial services provide some of the biggest levers possible for improving human outcomes, and that’s where we focus.”

Some examples of companies that we’ve invested in include bringing better financial services to audiences like truckers or farmers in the US, or small business owners in emerging markets. Similarly, we’ve backed companies bringing better, cheaper insurance products to underinsured markets like LatAm. So impact is always at the forefront. 

Have you talked about ESG with your LPs? What are their perspectives and how are they different from yours?

We’re pretty aligned. We have a number of LPs who invested in us because of the impact angle from financial services that I described. Even though we never market ourselves as an impact fund or ESG-focused, it’s clear from our portfolio that it’s something we pay attention to, and we have LPs who really appreciate that.

What needs to change for the VC industry to become more diverse and what are the most important actions each VC can implement here?

The industry is going to go wherever the money goes. VCs absolutely need to do a better job of investing in underrepresented founders, but at the same time, those founders are often building solutions for audiences that your average VC doesn’t understand. So we also need more underrepresented VCs.

“…ultimately a lot of the responsibility falls with LPs, who need to do a better job of backing underrepresented investors…”

This can mean that the VC industry needs to do a better job of hiring and training underrepresented investors, but that process can take a while and there’s not a lot of attrition at the partnership level of most VC firms that would free up decision-making seats for those new investors.

So ultimately a lot of the responsibility falls with LPs, who need to do a better job of backing underrepresented investors, who can back those founders and create whole new generations of great founders and great investors. 

—

#ESGinVC


About Jake Gibson
Jake is one of two founding partners of Better Tomorrow Ventures. Before BTV, Jake co-founded Nerdwallet, one of the original consumer Fintech companies. Without any outside funding, Jake helped Nerdwallet grow from 2 people into a world-class, mission-driven team, working to build the future of personal finance. Jake stepped down in early 2014 and since then, has used his experiences to help other entrepreneurs and small businesses in any way he can. 

About Better Tomorrow Ventures
BTV is a $75m fund that leads rounds in pre-seed and seed-stage fintech companies globally. They take a broad view on fintech, and many vertical SaaS and marketplace businesses fit in their purview too. BTV´s initial ticket is usually between $500k and $1.5M as a lead or co-lead investor in a pre-seed or seed round. 

About Marco Cesare Solinas
Marco is an Analyst at Blue Future Partners, where he is responsible for sourcing and analysing new investment opportunities. He is passionate about Technology and Venture Capital and making an impact with investments. He focuses on both direct and indirect investments. 
Previously, he has built an international and multicultural background across Italy, US, Germany, Turkey and Malaysia. Marco holds a CEMS Master’s in International Management and a Bachelor´s in Economics and Finance from Bocconi University. 
Linkedin — Twitter — Medium 

About Blue Future Partners
Blue Future Partners is a Fund of Funds with decades worth of experience in investing in Venture Capital. We specialize in backing Emerging Managers focused on early-stage technology investments. We are people-centric and relationship-driven. We have a global mandate and existing relationships with Emerging Managers in the US, Europe, Israel, China and South East Asia. 
Website — Linkedin — Twitter — Medium

While keeping an eye on the early stage VC stalwarts, we also closely track the fringes of the industry.

Here, we are seeing a new cohort of managers eagerly wading into this void, armed with contrarian investment philosophies and strategies looking fairly different, if not entirely at odds, with your household names of early VC.

Here, we are seeing a new cohort of managers eagerly wading into this void, armed with contrarian investment philosophies and strategies looking fairly different, if not entirely at odds, with your household names of early VC.

Our research takes a first principles approach to discuss the rise of challenger VCs and how they may fulfil the risk return profiles sought by LPs. Specifically, we ask ourselves:

· What are challenger VCs?
· How do the economics work for challenger VCs?
· How do we due diligence challenger VCs?
· How should LPs compare challenger VCs vs traditional VCs?
· What does the future hold for early stage VC?

—

Spotting challenger VCs

We note that challenger VCs usually differentiate from traditional VCs in two ways.

LPs can expect sooner distributions from challenger VCs, instead of decade-long lock-ups prevalent in early stage VC whilst delivering the typical return multiple as expected.

(How this is done is best illustrated through a sample portfolio construction walkthrough, which we cover in detail below.)

Challenger VCs are also attracting a new class of successful founders running capital efficient businesses whose upside LPs have yet to be able to access. Armed with sustainably high growth, if not already profitable businesses, founders prefer less restrictive forms of funding given the increasingly well publicised drawbacks of venture.

Whether the slogan of ‘greater founder optionality’ can gather a stable of high growth companies that bears out the challenger VC thesis is yet to be seen. However, our deep dive into the challenger VC fund economics shows signs of promise.

The Economics of Challenger VCs

Generally, from the perspective of challenger VCs, proceeds can be obtained from a combination of two components:

1. Equity (sale or IPO)

2. Revenue (or Profit) sharing (which we call the Liquidity Component)

Proceeds consisting purely of the first is no different from traditional VC. Proceeds consisting purely or partially of the second is what distinguishes challenger VCs.

After investing, the fund will receive over a certain period of time (usually few years) a share of the Revenues (or the Profits) up to a limit (a cap), which is usually around 2–4x.

For instance, if the fund invests US100k with a 4x cap, the company will repay its Revenues (or Profits) to the fund over time until a cumulative amount of US400k is reached.

The precise design mechanism of the economics depends on the specific fund model. One aspect we noticed in our research is that there is no standard framework and each firm has its own.

For instance, the Equity component is integral to some models, but missing in others. For certain challenger VCs, the Liquidity component is generated from Revenues, while others from Profit sharing.

The different types of models in the market are summarized in the chart below together with their main strength and weakness:

The Due Diligence for Challenger VCs

Each model poses different questions and it is quite difficult to generalize, but, taking the hybrid models as an example, we believe there are several crucial aspects to understand when diligencing the economics of RBF funds.

1. Are the returns coming mostly from the Equity or Liquidity component? Does the Liquidity component return at least entirely the capital, and in what time frame?

The composition of the total expected return is a key aspect of how challenger VCs succeed. In hybrid models, these two return components serve different functions:

·  The Liquidity component serves as a mechanism of risk reduction by providing early liquidity. Basically, the more total returns are dependent on repayments, the less the downside risk.

·  The Equity component provides the model with upside potential or additional residual value after the Revenue Share.

The dependency of the model on equity proceeds is fundamental to understand because challenger VCs are targeting companies with a different risk profile than traditional VC.

The more the model is dependent on equity, the more the fund is similar to a traditional VC, and the more its risk profile will be similar to a normal VC fund.

2. Can you elaborate on key assumptions behind return expectations of the Liquidity Component alone? What are key assumptions behind revenue or profit repayments?

This aspect is especially relevant for Profit sharing models.

Let’s take an example: a challenger VC invests $250k in a company that has to return 2.5x such amount with a profit share of 20% in 4 years.

This means that the company has to give back to the investor a total amount of $625k ($250×2.5x), which means $156k per year ($625/4).

It follows that the company has to produce yearly profits of $780k ($156/20%). If the company has a 10% profit margin, then the yearly revenues necessary for the model to work are $7.8m ($780/10%).

A company that needs $250k of financing today (equivalent of a pre-Seed round at pre-Revenue stage) needs to grow in 4 years to $8m in Revenues. This is fairly ambitious and impractical (almost comparable to a Series B — Series C profile), especially when challenger VCs should be targeting less risky and therefore less high startups. Hence a word of caution:

Always assess the underlying financial targets that portfolio companies are expected to hit. Sometimes, it exposes unrealistic growth expectations that are antithetical to fundamental ways challenger VCs seek to differentiate in the first place.

3. How about from the Equity component alone? How does this compare with traditional VC benchmarks?

Comparison with traditional VC benchmarks is interesting if a challenger VC depends heavily on the Equity component to make up its total returns.

Generally, we find that challenger VCs aim to construct portfolios that do not follow power law distributions, which expand the universe of potential investments and lowers the overall risk profile.

4. What are other key portfolio construction assumptions underlying your strategy?

This is where challenger VC and traditional VC due diligence converges. Deployment pace, entry valuations, and return expectations, among others, are important to consider.

As an exercise for our readers, we created a very simple model on Google Sheets that readers can download to test assumptions by inserting inputs in the yellow cells.

The model is just a simplified example, does not cover important aspects of the economics of RBF funds and it is not suitable for assessment, evaluation, or analysis, but only for learning purposes.

Comparing Challenger VCs with Traditional VCs

Challenger VCs offer a lower risk product for potential LPs to enter early stage VC, due to three main elements:

1. Faster Liquidity. From an LP perspective, an investment in traditional VC funds poses great problems of long term liquidity planning. Challenger VCs receive cash from their portfolio, which can be distributed early. Moreover, earlier liquidity also implies a better performance at IRR level, if compared to a traditional VC reaching the same money multiple but with later liquidity.

2. Diversification from power law. Traditional VCs usually need to invest in the top 1% of the companies to achieve meaningful returns. Given that only 1% of the VCs manage to do that, VC returns partly follow power law as well (only few VCs are successful, most are not). This leads to a high variance in VC performance (higher than other asset classes), which is of course a risk. In contrast, challenger VCs do not necessarily target rocket ships and hence return variance should be theoretically be lower than traditional VC.

3. Exposure to the camels and zebras of early stage VC. The focus on “sustainable”, capital efficient, and downturn resilient playbooks makes the underlying assets of challenger VCs less risky, which consequently provides a new angle of downside protection for LPs.

The biggest question is this: Is it the right time to invest in challenger VCs? Or is it still too early?

Here are three hurdles for potential LPs to begin their manager selection journey:

1. Lack of track record. In practice, challenger VCs still number few and far between, and no successful track record has been widely publicised to put traditional VCs on notice. It is still a relatively unproven concept with no key leaders to back.

2. Deal sourcing and access. Without a track record to point to, will challenger VCs actually be able to secure allocation in the unconventional profile of cashflow positive, EBITDA positive, or otherwise perfectly self sustaining startups?

3. Manager value add. Suppose challenger VCs do secure a spot. While eschewing the path to become a unicorn creates more options, challenger VCs still have their work cut out for them to groom their portfolios and grow from 100k in Revenues to 500k or 1m without resorting to blitzscaling and other capital-inefficient means.

Future of Challenger VCs

The early stage VC space will be interesting to monitor with the arrival of challenger VCs. It will likely become bigger and more dynamic in the future.

We expect the number of challenger VCs to increase from now on. We also expect increasing competition due to a set of new incumbents with similar models and offerings, ranging from banks to startups.

Over time, successful transactions and knowledge spillover may also lead to a greater standardization of the models towards similar economic mechanisms and investment frameworks.

Don’t be surprised to find even traditional VCs getting in on the act. Investing in challenger VCs, carving out allocations for startups that used to only interest challenger VCs, or launching new vehicles with a challenger VC model under their established brand are all within the realm of possibility.

To potential LPs, the big question is whether to enter the market early to secure an allocation in the top funds or to wait until more information is available and the market matures as brands establish themselves.

Meanwhile, start grilling existing managers how they plan to solve for faster LP liquidity and greater founder optionality. At the first sign of dithering, make them read this article!

At BFP we are currently investigating fund recycling and the perspective of GPs on this topic.

We analysed data from approximately 60 US funds with a vintage from 2010 to 2015 to examine how many of them have managed to reinvest some of their fees and to what extent.

“There is really not much downside on recycling” (Michael Jackson)

The three main takeaways are:

1. Only 49% of the funds managed to reinvest any of their fees and thus increased the chance of higher gains.

2. Of this 49%, 68% recycle less than 15%, which is an amount lower than the fees

3. Beyond this, during our research we also found out that in Europe recycling is a much less common practice

For the funds that recycle, the chart below displays the amount of capital recycled as a share of the total fund size.

The Advantage of Recycling

“Recycling is giving good investors more shots to make money” (Michael Jackson)

The main reason why GPs should recycle is that recycling improves the performance of a fund. Without it, a Manager needs a significantly stronger capital efficiency in order to achieve the same results.

Let´s take an example. A fund has a size of $100M, 2% management fees and a target Net TVPI of 4x:

• Without Recycling: If the manager does not recycle, the invested capital would be     $80M ($100 * 2% * 10years). In order to return a 4x Net TVPI from a $100m fund, the manager has to return to its LPs $400m. Given that the manager will receive a carried interest equal to 20% of the gain of the fund, then he/she will have to generate a total value of 475 = 100 + 300 / 80%. Therefore, to return 4x Net, a Manager needs to achieve a Multiple of Invested Capital of 5.93x = 475 / 80.

• With Recycling: If the manager recycles the fees [1], the invested capital would be $100M, which means that to generate the same value (475) and the same return (4x Net), he/she will have to achieve a Multiple of Invested Capital of 4.75x, which is significantly lower than the 5.93x without recycling.

The challenge of executing

However, if recycling improves performance, why do only 49% of the Managers reinvest capital, and why so conservatively? The problem is that recycling in practice is not so simple. There are basically two ways to do it:

• Reinvesting proceeds from early exits

• Delaying management fees and pay the GPs with proceeds later on in the cycle

On an execution level, the following problems arise:

• Proceeds from early exits can not be forecasted in advance

• In case of reinvesting management fees, the GP might lack capital to fund operations, which becomes especially challenging for first time funds

• With recycling, LPs receive distributions at a later point in time, meaning that GPs would show lower DPIs when raising their new fund

Recycling in Europe

In order to obtain further information about recycling, BFP had the chance to discuss the topic with Michael Jackson [2], who recently published an interesting post about fund recycling.  

“Recycling is more common in the US compared to Europe. VC firms in North America often have agreements with their LPs allowing them to recycle up to 115-120% of the fund. 

Certain LPs in Europe all too frequently seem more concerned with minimising their downside exposure than in maximising their upside, but as an LP you should believe in the GPs you invest in, particularly in an asset class like venture.

Another issue is that some European LPs don’t necessarily prioritise returns – it could be question of tax benefits for example. In addition, venture in Europe has historically been seen as an economic development tool rather than as an asset class”.

The changing climate is arguably the most significant challenge facing humanity today. We at Blue Future Partners believe that the resulting problems can only be solved through technology and are very interested in the long-term change the investment world will have to go through arising from this.

As part of our Landscape Overviews, we are kicking off a new series dedicated specifically to Climate Tech. In this intro article, we explore the history, main verticals and investment opportunities of Climate Tech and will want to dive deeper into specific sectors and exciting companies in the future.

Tech as a solution to the dilemma of growth

The five warmest years on record were in the past five years and climate disasters cost the world over 650 billion USD in the last three years. These two numbers alone illustrate the extreme urgency of taking climate action to guarantee a livable future for humanity.

The main dilemma of climate change is :

i) The global population is expected to increase exponentially by around 25% to 9.7bn by 2050; however, consumption growth is an unfortunate causality of population growth with the two positively correlated. Nevertheless, all the planet’s inhabitants have the right to a decent standard of living, meaning a continuation of this undesirable pattern. 

ii) Consumption reduction is currently the only plausible solution; however, with our current economic growth model, an increase in consumption will continue to be a symptom of greater global prosperity. A fundamental shift in our economic growth model is required; however, it is unclear what form this will be in, whether it will hold any resemblance to the status quo or be entirely new. *

As a result, we at Blue Future Partners see technology as the only real solution to the dilemma of growth. We need to rethink the way we eat, move, live and consume through technology to build a society in harmony with the planet. Thankfully some changes are already underway. This brings huge opportunities for investors and entrepreneurs who work on solving the problems arising from climate change.

Genesis  — From Clean Tech to Climate Tech

Many tech investors still have a bad aftertaste from investing into startups trying to tackle climate change. In the early 2000s, investors poured billions into Clean Tech startups with the dream of solving the climate crisis. But fluctuating silicon prices, falling gas prices, the Chinese solar industry and the 2008 financial crisis caused many high-profile startups to fail. Leading up to 2011, American VC firms alone lost over 100 billion USD investing into Clean Tech, which doesn’t include all the tax credits and public loans.

But despite this initial failure, climate technologies are looking bright again. The global solar industry is five times bigger today than in 2010 thanks to lower module and networking costs. Energy companies like Tesla are disrupting decade-old and highly polluting industries and have made for one of the best tech investments in recent times. These trends suggest that this time it should be different for climate technologies. Much like many internet business models that failed because of the 2000 crisis made a comeback years later.

PWCs Definition of “Climate Tech”

This brings us to today. Now we are in the age of “Climate Tech”. While Clean Tech was all about energy startups with hardware products, Climate Tech is used in a broader term. It refers to any technology that decarbonates our economy, including not just energy, but also food, construction and even infrastructure. Climate Tech encompasses not just “direct” climate technology, but also indirect measures like farming software that reduces water consumption.

PWC in their report ”The State of Climate Tech 2020” put forth 5 main Climate Tech verticals with several sub-verticals each: 
Infrastructure, Food, Energy, Mobility and Heavy industry.

This categorization raises two important questions. First, all of them are established investment verticals –  so is mobility for example still a separate vertical or does it make more sense to understand it as part of Climate Tech now?

We are seeing an interesting phenomenon where different verticals are converging now and can no longer be regarded independently. If an industry significantly contributes to global warming, any efforts to decarbonate it with technology will make it fall under Climate Tech. Two specific examples of this are PropTech and AgriTech, which are both independent verticals but play a huge role in reducing carbon emissions. Even though it makes sense to talk about PropTech independently, it needs to play a significant role in today’s climate conversations.

A second question that arises for investors : to what extent are these verticals actually growing as a result of solving climate challenges? As we will see in the next two paragraphs, there is a massive investment opportunity in Climate Tech and each of the 5 verticals is already seeing significant influx of capital as a result.

The Opportunity in Climate Tech

Declining cost curves, increasing computing power, more consumer demand for sustainable businesses and government regulations are unlocking entirely new business models for the next generation of entrepreneurs tackling climate change. A report by the Global Commission on the Economy and Climate found that climate action could deliver 26 trillion USD in economic benefits through 2030 in emerging markets alone. At the same time, many existing assets face the risk of becoming “stranded” and losing value, withThe Economist estimating that 4.2 trillion USD of value in global financial assets is at risk from climate change.

Climate Tech Investments

Here is an overview of investments into each of the five Climate Tech verticals since 2013.

Wrap up

To sum up, it is inevitable that global energy and resource consumption will continue to rise in the future. At least for the next decades, the world’s population will keep growing and living standards will keep rising. Technology can play a role in slowing the problems arising from the dilemma of growth. We need to rethink our ways of living through technology and drastically transform all areas of our economy to minimize their impact on the planet. This transformation will bring massive opportunities for investors who allocate their capital to help solve this challenge.

In the coming months, we will continue to expand this Climate Tech series. We will explore investment opportunities in the sub sectors of Climate Tech, highlight game changing companies and hopefully foster an ongoing discussion on how we as an investment community can play our part in solving the climate crisis.

If you want to collaborate with us on research, articles and interviews, please dm us on twitter @bluefutureteam!

*Thanks to Munashe Demawatema for the contribution!

Sources:

1. Bloomberg — Is Climate Tech Different Enough From the Cleantech of Old?

2. CNBC — Climate disasters cost the world $650 billion over 3 years

3. Columbia University — How Climate Change Impacts the Economy

4. Economist Intelligence Unit — The cost of inaction

5. EY — Climate Change — The Investment Perspective

6. National Geographic — The last five years were the hottest ever recorded

7. The New Climate Economy — 2018 Report of the Global Commission on the Economy and Climate

8. real asset insight — PropTech: technology, climate crisis and tenant demands are changing real estate sector business models

9. PWC — The State of Climate Tech 2020