Making impact and big returns: Insights from Tim He, Partner at Summa Equity

“Instead of taking existing business ideas and trying to extract sustainability from it, focus on reframing the business model on areas where you can have the greatest material impact, both commercially and in relation to society and the environment.”

Can solving global challenges and making great returns in the process, go hand in hand? What about sustainability and technology? 

Summa Equity, a thematic investment firm that invests in companies that address some of our global challenges, says yes to these questions. Founded in 2016 and based out of Stockholm, Summa Equity invests in companies that have leading solutions to global challenges and that create positive Environmental, Social, and Governance (ESG) outcomes for society, while also making superior returns.

We caught up with Tim He, Partner at Summa Equity, and he shared with us his and Summa Equity’s views and experiences in building sustainability as an operating model and driver of value, moving beyond impact and sustainability as a compliance, risk management or marketing objective. He also talked about Summa Equity’s Private Equity 4.0 and how it is driving their investment mandate.

Can you tell us about your investor journey? How did you come to work at Summa Equity?

After a few short stints in banking, I moved into the world of startups as a founding member of Groupon in China. After that stint, I wanted to start my own business, but without an idea that stuck, I started supporting founders as an investor. First with Stockholm-based Northzone, and later Kinnevik. I joined Summa Equity (“Summa”) last November, to build out our growth investment strategy, focusing on companies in the growth scale-up phase (Series B+). 

I was drawn to Summa’s clear focus on investing to solve global challenges, and we share the belief that technology can play a huge part in this mission, while also making superior returns. My role includes all aspects of developing new investment ideas, assessing, and executing new investments, but more importantly, working with our founders and CEOs to support them in value creation and building their companies for the next stage of their journey.

What sets Summa Equity apart from other VC’s?

Summa started in 2016 and has since raised three funds, the latest being a dedicated Article 9 impact fund with a strong commercial foundation. We find this really resonates with founders. In the past, they have usually faced the choice of either a non-impact fund, which might put on a sustainability ‘hat’ for certain investments, or a more traditional impact fund, which tended to be a different type of investor. We give equal weight to both elements, while always utilising our expertise, experience and networks to help our portfolio companies high-grade themselves to make even more impact.

Within our focus of solving global challenges, we apply a thematic approach, with three core themes that span both our buyout and growth investment strategies. These are Resource Efficiency, Changing Demographics (precision medicine),  and Tech-Enabled Transformation. Some examples of sector expertise within those are Sustainable Food, Energy Transition, Waste and Recycling, Aquaculture, and Industry 4.0 (i.e. the automation and digitisation of industry).

How can startups consider sustainability and ESG in their operations?

Thinking about impact is important and valuable for any startup, whatever the product or service, and we believe it is the key to driving value, performance and resilience in an increasingly uncertain world. But instead of taking their existing business idea and trying to extract sustainability from it, startups should focus on reframing their business model to focus on the areas where they can have the greatest material impact, both commercially and in relation to society and the environment. Ask yourself, what needs to be in place for your company to last 100 years? That means taking care of your customers, employees and the society you operate in. 

mpact and sustainability are often seen through the lenses of compliance, risk management and marketing. How can companies – including startups and investors, and society by extension – move beyond this thinking and build sustainability as an operating model and a driver of value?

Companies need to look at the core areas where they have the largest opportunity to make an impact, rather than falling back on default ESG measures. One way to do this is to look at the UN Sustainable Development Goals (SDGs), which are the 17 biggest global challenges we currently face as a planet. The SDGs are a great place to start to discover how your business can solve the biggest problems, and drive value at the same time. 

Impact targets should be material, linked to the core purpose of the business, and correlate and be co-linear with financial targets. They should thread through every aspect of the business, rather than being seen as a separate project or department. All leaders should be held accountable for reaching sustainability goals, and incentive structures should also reflect these priorities, in the same way as financial goals. 

What is Private Equity 4.0 and how is it driving Summa Equity’s investment mandate?

Private equity has been through a variety of incarnations over the years, where investors have harnessed different strategies to create superior risk-adjusted returns. In the 80s, Private Equity 1.0 created value through financial engineering, moving to Private Equity 2.0 and operational improvements in the 90s. Then Private Equity 3.0 in the 2000s, saw firms become institutionalized and start to add value, expanding into different asset classes and new areas of expertise.

In recent years, we have seen externalities – that is the positive and negative impacts created by a business – start to matter more. Firms are realising that companies that create a negative impact, or which are at higher risk of being impacted, will see their profitability and market values fall accordingly – and vice versa with those that are positively correlated with externalities. Consequently, the future lies in transitioning to Private Equity 4.0, where value is created through having a positive influence, environmentally or socially, while reducing risk through management of impact factors. 

Do you think that startups – perhaps owing to their agile nature, ability to pivot and scale, etc. – are in a unique position to make a genuine impact?

Summa has historically focused on the buyout space, however, we have expanded into growth investments because we believe this is where a lot of the exciting developments are happening, and growth companies have a unique opportunity to make an impact. 

Firstly, we believe that a lot of impact can be made through the application of technology, and the growth equity stages are home to some of the biggest opportunities in technology companies. Furthermore, growth companies are able to approach things in a different way to more established businesses, through being smaller, nimbler, and faster growing, which means they can deliver significant impact over time, while often forcing incumbents to rethink and change, thereby creating much more impact. 

The classic example is Tesla – Tesla doesn’t produce many cars in comparison with incumbents, but it has forced all existing car manufacturers to rethink and transition to EVs much earlier than otherwise, extending significant impact as an industry. 

Beyond funding ESG-focused start-ups and ventures, what else or more do VC’s (investors in general) need to do to move/change the landscape of impact-driven innovation?

There is a tendency to overemphasise E in ESG for investors, especially in earlier investment rounds. E is arguably easier to measure and communicate, however, we need to recognise that E, S and G are correlated, and that we can’t fix one without addressing the others. By having a more 360-degree view, more positive impact startups can be funded.

Funding volume typically drives more entrepreneurs to start businesses. By having a broader view on impact and by funding more businesses that are ESG positive, VCs will inspire and attract more entrepreneurs to build companies that are net positive. It’s not what the investors can do themselves, but rather, what we can do to build momentum for the next generation of companies being built. If they are predominantly ESG positive, that’s a great win for us all.