Why sustainable startups should consider corporate venture capital first
Finding the right investor
But Canada needs thesefirms to grow rapidly and substantiallyso they can create jobs that other unsustainable businesses are shedding as they become obsolete.Investors are keyto acceleratingthis urgently needed startup growth in Canada’s sustainable sector.
According to the United Nations’ seminalBrundtland Report, sustainable development should meet the needs of current generations without compromising the capacity of future generations, ensuring a balance between economic growth, care for the environment and social well-being.
Thesethree main components of sustainable developmentare considered together, not as separate goals.Good governanceis required to ensure and oversee all three of them.
In this complex business environment, finding investors to scale up new companies and, even more importantly, finding theright investors, is challenging. Startup ventures burn through cash rapidly as they aim for a sale of the company — usually to other larger firms or on the stock market through an initial public offering.
Raising funds to grow startup companies is anongoing challengethat pulls management away from running the business. By findingknowledgeable, committed investors who understand the business, a firm can ease the constant stress of raising capital while legitimizing the company to consumers, clients and stock markets.
Unfortunately,sustainable ventures face additional challengeswhen it comes to investors compared to purely for-profit firms because they appear to have multiple competing goals.
Stiff competition
Sustainable firms often face powerful well-established competitors — renewable energy firms, for example, must overcome obstacles ina world entrenched in oil and gas.
People are hesitant about new technologyeven if it improves their lives. The choice between fossil fuels and renewables is not unlike trading a typewriter in for a laptop. Thisfear of uncertaintygives traditional firms market advantages thatnew companies must overcome.
Many sustainable industries still in technological development stages are alsocapital-intensive, meaning that they need a lot of capital upfront before they can demonstrate viability.
In addition to their unfamiliarity to potential stakeholders, some have experienced highly publicized failures, such asSolyndra, along the way to technological maturity.This can scare off investors.
Advice for sustainable companies
My colleague Dave Valliere and I recentlytested a quantitative modelusing data on 184 entrepreneurial ventures. The analysis found that sustainable startups are better off choosing a different type of investor, one with aligned interestswho can lend it legitimacyso that others will have confidence in it.
Perhaps surprisingly, it’s not so muchangel investorsascorporate venture capitalthat can help these firms grow. In this model, the corporation usually sets up a separate division that looks for investments of interest to it.
The problem for most investors is that thequality of a new venture is uncertainuntil after it has grown to a point where it is steadily increasing revenues and generating healthy profits.
A new ventureneeds to be novel enough to have a competitive advantage while familiar enough to be understood and accepted. As a result, many investors look for signs of the hidden potential of a venture. An example could be thequality of existing stakeholders in the venture, such as successful, high-profile members on the board of directorsor the presence of professional investors.
Our study indicates that angel investors, venture capitalists and investment banks do not create confidence in sustainable ventures. It found that investment banks can even have adverse consequences for businesses in the sustainable sector that are seeking legitimacy.
Try a different strategy
A lack of confidence in bankers since the 2008 financial crisiscould be playing a part. Usually, new ventures begin with angel investors and move on to venture capital and other types of more sophisticated financiers who can further develop and market the firm. Instead, we advise sustainable firms to use a different strategy and seek out corporate venture capital as it is uniquely more helpful to sustainable ventures.
The usual investmentlife cycle progression of a new venture— moving from angels to venture capital and then to more sophisticated types of investors — may not always hold.
A venture attracts additional capital by meeting an investor’s screening criteria, but the most recent investors matter too. Current investorscan lend legitimacyto attract other investors. According to our findings, the sustainable sector gains that legitimacy with corporate venture capital over other types of investors.
This result suggests that the credibility of corporate venture capital plays an important role in the development of sustainable businesses.
A corporate venture capital firm may choose to invest in a venture with promising technology, even if the company has weak management or an unlikely strategy; sometimes, they just want tolearn from another’s technologyto help them make strategic choices about future technological options.
Positive reputation
If they’re interested in the venture as a whole, a corporate venture capital firm can replace the management and/or the strategy of the new venture after acquisition. While the corporation offers its target more resources and strategic guidance, it alsogains due tothepositive reputationof the new venture.
Overall, a corporate venture capital endorsement of a new venture and its potential acquisition suggests to the market that the company is poised to be adisruptive winner in the industry. Corporate venture capital cuts through the noise that often accompanies sustainability goals. Change is in the wind for an industry, and others want to jump on the upward trajectory.
Sustainable ventures can markedly contribute to Canada’s economyand employmentwith the right investor strategies to help them grow to medium and large size. Some of these startups are exciting in many ways. Most significantly, they willimprove Canadians’ livesand ensure we have a healthier environment.
This article is republished fromThe ConversationbyDeborah de Lange, Associate Professor, Global Management Studies,Ryerson UniversityandDave Valliere, Professor, Entrepreneurship and Strategy,Ryerson Universityunder a Creative Commons license. Read theoriginal article.
Story byThe Conversation
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