Editor’s Note: This article has been contributed by guest poster, Alina Klarner.
Inflation, higher interest rates, public market volatility, bank failures – the last 12 months sure haven’t been the smoothest of times. This has also been reflected in the early-stage investment market, which has seen valuations come down and investment raises slow. Investors are being more risk-averse in how they deploy their capital. But not everyone is in preservation mode – if you listen to the people who have been in the startup space long enough to remember the last recession, they will also tell you that they are looking for “the next Airbnb”. A downturn can also be the moment for fresh innovation to soar.
Here are 5 reasons why impact companies might just have the right profile to be more resilient and do better in these adverse conditions:
- Impact businesses are solving urgent problems in billion-dollar markets
According to the UN, we will need to invest $4.5 trillion annually to reach the UN SDGs, with Healthcare alone requiring annual spend of $370 billion annually according to the WHO. This may still be on the low side considering the estimated between $2.5 and 3.5 trillion incremental annual spend being required by the US and Europe respectively to reach the 1.5° climate target.
None of these solutions are nice to have – extreme weather events are impacting businesses, public health threats are becoming more frequent and regulation and legislation is finally coming into force. At the same time governments, corporates and investors alike are waking up to the opportunity that becoming a leader in this field presents. It is no surprise then, that ClimateTech was one of the few industries where valuations held up throughout 2022 despite market turmoil with VC investments in Europe increasing from $15 billion in 2021 to $17 billion in 2022.
Equally, if you look at industries like FemTech or SilverTech, you will find enormous markets, which serve previously overlooked parts of our society with significant spending power and significant pain points. The perfect mix for a high-growth startup, really.
- Better product-market fit
84% of consumers say sustainability is important to them when making purchasing decisions, but 68% of consumers expect corporates to take the lead in shaping a sustainable future. On the one hand, this presents an opportunity to establish a USP with consumers. Think of companies like Apple realising that 96% of their emissions come from their product supply chain and committing to making their supply chain carbon neutral by 2030. On the other hand, consumer trends like reduced meat consumption are providing an opportunity to open up new markets for those who can move quickly. Large corporates, in most cases, won’t be able to get there alone, at least not quickly enough. They will need to accelerate innovation by acquiring startups who can move fast and fix things (yep, the times for breaking them are over!).
- Better employee engagement & retention
Ask any Millenial or Gen Z – they no longer work just for the money – according to a 2022 Deloitte survey, almost half (46%) of Millennials and Gen Z in senior positions have turned down a job opportunity that didn’t match their ethics. So with employees who increasingly want their work to have a positive impact, fast-growing impact businesses can offer purpose – as well as career development and financial security. In addition, most impact businesses are younger and still have more of a startup culture and so are more flexible and nimble in reacting to employee requirements compared to large multinational corporates that move more like large tankers. In 2023, recruitment company Hyer published their second Impact 50 Awards, highlighting the 50 most impactful companies to work for – from well-known companies like Patagonia and Allbirds, to fast-growing startups like The Joy Club. What these companies have in common is that they make a positive difference – for their customers AND their employees.
- Businesses with impact in their DNA face lower risks from incoming regulation and reporting requirements
Regulation, targets and reporting requirements for environmental and social impact are coming into force at increasing speeds – the EU taxonomy, IFRS non-financial disclosures, net-zero commitments and single plastic bans are just a few examples. We are starting to see a whole range of changes being made that range from obvious impact-washing to truly transformational business models, as businesses start to feel the regulatory pressure. As anti-greenwashing regulations and higher supply chain transparency requirements come into place, there is nowhere to hide – customers will vote with their wallets and regulators will start to issue fines and other reprisals for non-compliance.
In addition to managing ESG risks, most impact businesses have impactful solutions and transparency at their core – they set impact targets, measure progress and provide transparent reporting. This means they won’t be caught having to painfully reverse-engineer impact into their reporting or make costly changes to their business practices, Instead, they can provide clear answers to difficult impact questions.
- Impact businesses solve crises – by design
Impact businesses solve stress and distress situations by design – their whole set up is to solve complex and urgent problems, be resilient and innovate in times of hardship – against all odds. Their products and services are not based on trends, nor do they rely on consumers endlessly increasing their consumption. Impact business models address fundamental life needs, provide scientific innovation and deliver meaningful products. What is more, a lot of impact founders who are in the market today have been working on impact since before it became cool and know how to build a sustainable, resilient business model because they have had to survive without external funding.
- Bonus reason – impact businesses, anecdotally, have more diverse founders
Whilst there is no comprehensive dataset of diverse founders in impact as of yet, what we see day to day is that diverse founders are more likely to start and scale impact businesses based on their deep understanding of the needs of their communities, lived experience and expertise in beating the odds. Not only does this provide a great opportunity to invest in more diverse founders, it is also proven by study after study that diverse businesses deliver more innovation at higher profitability, outperform their non-diverse peers, and generate better returns for their investors.
So, if you are looking for innovative and resilient business models, companies that deeply understand their customers and founders who are used to not having plentiful funding available at any point and don’t have legacy issues (like having to avoid a down round or having overleveraged the business) – consider investing in impact.
As Deborah Meaden put it at the 2022 Climate Innovation Summit in London last year: “If sustainability is not part of your business model today, you are already a failed business”. And who wants to invest in failing businesses?