Infamously condemned as the year of the pandemic, 2020 will more positively be remembered as the year investors finally started to take responsibility beyond just financial returns. Responsible founders, those who actively consider the environmental and social impact of their business decisions, are being favored by investors, and thus sustainable investments have accelerated, nearly doubling between Q3 and Q4 of last year. If specifically looking at venture capital and the Nordic region, investments into impact startups skyrocketed to €1.5B and €1.6B respectively in 2019 and 2020, relative to €498m in 2018.
The recent exponential increase in sustainable investments is not a coincidence. In times of uncertainty, investors are naturally drawn to more resilient investments, and multiple studies suggest that responsible companies with a strong ESG presence deliver better returns in the long-run, and during uncertain times.
The COVID-19 crisis also acted as a chilling, albeit important, reminder to many investors that one unpredictable event can have an extreme impact - whether positive or negative - on a company. The pandemic managed to destroy some industries, like aerospace and retail, overnight, while other sectors, like digital health and online communication, thrived. The eye-opening situation of the pandemic made us seriously evaluate other potential catastrophes that will hit us in the future - both social and environmental - unless we take precautionary actions.
Yet, the pandemic isn’t the only reason investors have started to take on more responsibility. We have an underlying driver by the new generation of millennials and Generation Z, demanding accountability. As customers, but also as founders, managers, and employees.
It’s not a new phenomenon, but one that COVID-19 heightened. People stayed home and reassessed their needs, choices, priorities, and, yes, their responsibilities. For example, the online grocery market skyrocketed in 2020, but it also needed to answer to the increased pressure of providing sustainable packaging, organic ingredients, and locally produced products. I guess it took a critical health event to make us reflect on how fragile we, our neighbors, and the world, really are.
Thankfully, it’s this generation that is knocking on our door: starting companies with responsibility at its core and looking for investment to fund it. To them, success is defined as making a positive impact on people and the world while simultaneously building a highly-valued business and, as an investor, I believe we have a moral obligation to support them.
In Denmark, we’re in a unique position to become one of the largest impact startup hubs in Europe, with companies like Vestas and Novo Nordisk already solving some of the world's most pressing challenges, and a thriving ecosystem of impact accelerators, impact-aware investors, and purpose-driven founders, following suit.
On top of that, we’re starting to see Nordic impact startups reaching unicorn status (valued at over $1b), like Kry/Livi and Northvolt, and many up and coming ones emerging from Denmark, like for example Corti who’s saving lives through the use of AI.
I want to invest in early-stage technology companies that are truly transforming industries: those that are coming up with solutions to some of the largest global issues we’re facing today, like the aging population and the climate crisis, but also less talked about issues such as online bullying and unfair real-estate markets. And even though the product may not solve a societal challenge, the way founders run their businesses may actually do so, for example, continuously working on building a positive company culture: where diversity & inclusion are not buzzwords and governance policies aren’t simply a checkmark.
It’s this combination of a mission-driven young generation and the world-shaking events of 2020 that acted as a catalyst for the responsibility movement among investors. Following more than 20 years of data pointing us in the right direction, many investors, unfortunately, needed a pandemic to take it seriously and start acting.
I expect that investment evaluation criteria such as ESG will soon be mandatory for all funds and the majority of newly established funds will be dedicated impact funds.
Moreover, the majority of all startups built in the Nordics in the coming years will be very thoughtful about their impact on society and will be selective about what investors they will allow onto their cap table. Founders today have a great amount of power and I want to encourage you, as a founder, to put pressure on your investors and ensure that you properly evaluate if their values are aligned with yours before entering into a partnership.
As for the investors, I want us, in the next meeting with a fund or a company you’re contemplating investing in, to ask: “how does your focus on positive impact support your financial success?” rather than “what’s the trade-off between positive impact and financial success?”.
Who knows, you might get an unexpected answer and win a deal you otherwise would have lost.