Sustainability-focused startups are getting back on the radar of many VCs. A quick look at recent CrunchBase data clearly underlines this trend, with total funding volume for sustainability-related companies showing significant growth especially in the last 18 months. And while some investors might painfully recall the capital-intensity of the (how it was then called) first clean-tech-wave, we strongly believe that there are very good reasons for the renewed interest of founders and investors in sustainability.
For the very first time a cascade of regulatory, financial, market and social drivers is pushing businesses toward sustainable practices. Recent milestones have included the US re-joining the Paris agreement for climate change, the European Commission committing to the 2030 agenda and up to 4,000 global investors signing the UN Principles for Responsible Investing.
Consumers are the most powerful agents for change. Around 95% of respondents of a recent BCG-consumer survey believe that their personal actions could help reduce unsustainable waste, tackle climate change and protect biodiversity. And consumers not only talk the talk, but also walk the walk. According to Harvard Business Review, consumer packaged goods marketed as sustainable grew 5.6x faster than their status quo counterparts in the US in 2019. While starting a business with a focus on sustainability has always been the “right thing to do” from a social and environmental perspective, socio-economic circumstances are finally providing the much-deserved and long-required tailwind for start-ups in this segment. At Cusp Capital we are convinced that founders will define this new era, for they have many advantages over incumbent corporates.
- The ‘Day One’ Advantage
We all know the revolution that started approximately 25 years ago with the foundation of companies such as Amazon and Ebay. A quarter century later, many companies are still struggling to digitize. Legions of consultants are still selling billions of dollars in digital transformation projects. We wonder: Why should corporates struggling with digitization after all these years suddenly succeed in transforming their entire organizations, global supply chains, corporate culture and existing brands to become truly sustainable organizations?
Established corporations know that it will take them a long time to turn sustainable. Volkswagen aims to become carbon neutral by 2050. Amazon aims for 2040. Contrast this with newly established mobility or digital commerce startups, which can design their own sustainability-DNA in order to be carbon neutral – not in 20 or 30 years – but on day one! While many established companies talk about their long-term plans for carbon neutrality, young companies have already achieved this goal. Take renewable energy startup Bulb as one example. Bulb takes every single corporate activity, small and large, and measures and then minimizes its carbon footprint. Bulb also makes this an integral part of its corporate sustainability-DNA by allowing Bulb-employees to vote on its large portfolio of global carbon-offsetting projects.
And just like digital-first pioneers redesigned product- and tech-centric organizations with far superior creativity and agility, sustainable-first pioneers can start with the massive advantage of a “blank sheet of paper” to create successful organizations which fulfil their sustainability-promise from day one.
- The Credibility Advantage
Actions speak louder than words – especially when it comes to purpose. Who do you trust as a customer? Those who have always been part of the problem (even if they try to fix it now), or those who have always been part of the solution? To appear truly sustainable, companies will need to be – not pretend to be – sustainable.
For sustainability to shine through in a company’s image, it will have to sit at the heart of all products, services and processes. How truth outcompetes big marketing budgets is already evident in customer choice today. Customers perceive Oatly as far more sustainable than Nestle – despite the latter having spent hundreds of billions of euros on marketing since its foundation in 1866. The evidence extends beyond the anecdotal. We encourage founders to take a look at the “Sustainable Brand Index” which shows how brands are perceived by consumers in various European countries. According to the Sustainable Brand Index the top three “most sustainable Dutch consumer brands” were all established in recent years. And in Norway and Sweden several young companies rank well ahead of brands with much older traditions and deeper marketing budgets. So, the good news is: in the era of sustainability brand perception is no longer just measured by the amount of money spent and years of tradition.
3. The Holistic Advantage
In our view “sustainability” is far more than “just the E in ESG”. A truly sustainable company will encompass all ESG-aspects from equal-pay-policies to flexible working hours, from continuous education to inclusion and from transparent corporate governance to employee engagement. As venture capital investors, we strongly advise startups to view sustainability holistically. For a young company it may at times be demanding to take this path, but it will definitely be worth the effort.
Talent is already prioritizing sustainable companies today. According to the Stanford Social Innovation Review, 88% of business school students believe that learning about social and environmental issues in business is a top priority and that they will consider sustainability when choosing their employer. So after the pandemic, when large corporations such as Goldman Sachs and Apple start calling their employees back into the office, keeping an employee- and carbon emission-friendly home-office-policy in place can become yet another competitive advantage in your fight for the best global talent.
At the intersection of sustainability and digitalization, there are opportunities abound: software that enables companies to cope with the growing number of sustainability-related taxonomies, solutions that help capital markets evaluate financial products against ESG criteria, tools that let corporations – large and small – quantify the carbon footprint of their entire global operation, and startups that bring transparency to complex supply chains to enable compliance with the upcoming Supply Chain Act, are but some examples.
At Cusp Capital we look forward to supporting the new pioneers of the digital sustainability era. And we truly believe that Europe, with its tradition of being a responsible front-runner in sustainability, will be the epicentre of many of these new and exciting developments. Surely it will be worth the effort. For the payoff is no longer merely monetary. It is about the future of our world. We have literally overtaken an amazing and fragile planet – with all our cars, roads, houses, clothing and plastic. And if the current trend continues, we will have created as much artificial mass in the next 20 years as we have produced in the last 110 years combined.
The opportunity is now – and we have got no time to waste.