Tips and advice from impact-focused deep tech investors.
Some of you must be familiar with our Investors Insights concept by now. But for all the newbies, let us just quickly do an intro. “Investors Insights” is not a trick title. It’s indeed where you can get great insights from investors. But a very special brand of Investors: the deep tech kind!
Those sessions are built to bring knowledge to founders on how to deal with potential investors or on providing an overview of the trends within a specific field. They’re also built to allow investors to share with their peers, knowledge, wisdom, frameworks etc.
This session was focused on impact investing.
The first part focuses on the definition of impact, how do you measure and why it matters. The second is more an overview of the field of Impact Investing, the new trends that they see emerging in that sector, how is their relationship with LPs and other traditional VCs. At the end of the chat, we’ve asked them what part of Deep Tech excites them most!
Who’s who?
Tove Larsson
- General Partner at Norrsken. Joined after working with several impact entrepreneurs.
- Norrsken is a fund focused on impact tech and early-stage companies. It was founded five years ago by Niklas Adalberth (Klarna’s co-founder) with the ambition to help entrepreneurs who are addressing some of the critical challenges the world is facing.
- They have a very transparent approach regarding how they operate, publicly sharing a lot about their internal processes and KPIs.
- They just closed their 2nd fund and are now running a 125 million euros fund (seed, series A and impact tech across Europe)
Christian Hernandez
- Partner and co-founder at 2150, a recent 200 million euros fund; based in Europe, focused on urban tech
- Why urban tech? Because cities are bad for the planet, but they’re big and growing so the urban environment could be more sustainable and green.
- 2150 believes that technologies could be deployed today that could solve some of those issues, while also backing long-term projects.
- They are primarily active in Europe (both also involved in North America and Asia). They invest from seed to series B with 1 to 10 millions first checks.
Seth Bannon
- Founding Partner at Fifty Years, which is a seed fund for broad impact with a Deep Tech focus. Funded in 2016.
- He noticed a challenge for Deep Tech Entrepreneurs. They were faced with two sets of investors: Some who loved the impact focus but couldn’t help them building a deep tech company and some that were more traditional, silicon-valley style.
- That’s why he co-founded Fifty Years. He’s backing Deep Tech founders who have a path to both a billion dollars revenue and massive social and environmental impact.
Let’s set the scene a little here. What do you define as impact investment, and what role is deep tech playing in your strategy?
Tove: Norkssen has a broad definition of “impact” compared to many climate-focused funds. When looking at a startup, we see if there’s a match with a Sustainable Development Goal (SDG) and then, we go a bit deeper into the impact assessment.
We initially thought we would only invest in software. However, we realised that to tackle complex challenges, we need to be brave enough to invest in complex solutions. So we moved into Deep Tech and worked with investors that knew the space. A large part of our portfolio is now in Deep Tech.
For us, Deep Tech is the result of looking for the solution that has the most impact rather than just the initial research focus.
Christian: When we started the fund, we never used the word “impact” in our marketing materials! Maybe we thought that Impact = philanthropy. We wanted to be seen as a VC looking for VC return by backing technologies that would make the world more sustainable.
Today, when I define myself, I say I want to do the world some good through technology. So I guess I am an impact investor!
2150 is focused on urban tech. It’s the world’s largest vertical after all: half of the world population, largest resources consumption, largest energy consumption, waste generation, CO2 emissions… So we map out the big problems of the urban environment, from building sustainably all the way to keeping people safe and secure. Air pollution is expected to be linked to 1 in 8 deaths worldwide. It’s worse in cities, so how do we tackle that?
Deep Tech is a key element of impact investing. To change the environment, you have to accept that you will invest in a physical asset.
Seth, what about you? You’re very much science-focused. Is your first motivation the technology or the impact it can have?
Seth: Both! We focused on Deep Tech because grand tough problems require grand tough technology to solve them. That was our sole focus at first.
Let’s see it this way. Software entrepreneurship and its building blocks have been largely commoditised. It means that all the easy wins in software have already been won! And even if you happen to find a niche problem, then you have a lot of competitors very fast.
On the other hand, Deep Tech companies are using core IP which can be protected. Same with talents; if you’re working on a particular topic, then maybe there are only 40-50 people in the world that really understand what you are doing. I would recommend you hire 30-40 of them, and you’ve sucked all the talent oxygen in the room! That’s another great defensive barrier. So the impact that Deep Tech can have is now greater, more groundbreaking, so to speak.
Is your due diligence process different from a traditional one? Do you have an impact framework or metrics you’re looking at?
Seth: Like most investors at the pre-seed and seed stage, it’s still predominantly about the founders. We are not just looking for a founder/market/technology fit, but we are also looking for founders with a deep, passionate connection to the problem they’re solving. It makes them more resilient when things get tough, and things will get tough.
Then the big thing for us is technical diligence. We will bring a PHD in our network to do proper technical diligence.
We are unique because we believe that the role of Deep Tech investors is to give founders money to cross off technical risks. We are comfortable with a lot of technical risks, i.e. if there’s only a 20% chance that it works. If it works, the outcome is fantastic for the planet and the financial bottom line. If we see that 20% path and all the other boxes are checked, we’re happy to partner with the founder. That’s why ventures are made for.
Tove: On our side, we typically start with the impact assessment, and then it’s definitely about the team. We’re looking for impact unicorns, where the business can become a financial unicorn and impact 1 billion people. We aim for unicorn status on both of those dimensions.
We also see that these impact-driven companies have a superior competitive advantage in attracting talents, attracting customers.
Seth: We figured out, after five years, a great way of saying what Tove was mentioning! Everyone thinks if you go for the social mission, then you have to sacrifice financial return. That’s not the case.
Suppose you have two companies, equal in almost every way, teams equally intelligent, the pay equally good, etc. Except for one thing. One of the companies is doing something neutral, and the other company is solving the climate crisis. All things being equal, which company do you think can out recruit, get more press coverage, and raise more money?
Christian, are you also considering different revenue streams? And since one of your focus is lowering carbon emission, how are you considering the carbon market as a potential revenue stream?
Christian: I came up with a term a couple of months ago: Gigacorn. A Gigacorn is a company whose technology can impact global CO2 emissions by one gigaton of CO2 per year while being commercially viable. Bear in mind that a gigaton of CO2 is a lot!
The measurement of impact is crucial here. I can’t ask a team of 10 people to implement reporting just for my LPs and me. So we hire environmental scientists to go work with the entrepreneurs to integrate that tracking and recording, which is essential for the company (hiring-wise, etc.) and important for us, investors who want to track progress numerically.
Talking about revenue streams, the challenge is that there are not many frameworks that help VCs forward project when it comes to CO2 reduction. New revenue streams could come online: Carbon pricing is one. But it’s very volatile. We see IP as good defensibility, but it’s not the only thing we would overwrite.
It is indeed difficult to assess the impact for certain types of startups, and the lack of framework is not helping. Tove, I think that Norssken has developed some framework and tools?
Tove: We haven’t invented them but rather synthesised bits and pieces. We use a combination of the “Theory of change” framework, aka breaking down the impact between the input/outcome and the longer-term impact, and the impact management project and their different dimensions.
Early on in our process, we work with founders to define what this longer-term impact entails. We then set targets for the KPIs that we have identified to track how they are doing vs what we are hoping to see when we exit.
Together with our LPs and the European Investment fund, we link the financial incentive of the team to reaching those impact targets. This way, the motivation for the teams is twofold: the financial objective and the impact objective.
Indeed, we shared our framework synthesis to get input from others. We would love to see even more transparency and collaboration in this industry!
Christian: It’s impressive to see how this impact investment world is super collaborative. Fifty years did a crazy video series about science; Norssken runs a YC for climate science. Everyone is sharing frameworks and models a lot more openly. It’s because we know our missions align and that we need DOZENS more of us.
Many funds were created with impact in mind in the last 2-3 years, even more so perhaps in the last year, both in Europe and the US. What’s your take on this situation? Is it a long-lasting trend? Is it linked to the period, or did Investors finally realised what you knew all along, meaning that we can have financial return with impact?
Christian: I see three trends.
Sense of Urgency:
People realise that we need to act soon. VC stars are launching in the space, pivoting towards impact.
Growing interest from LPs:
Many of them now want to source and back sustainable technologies.
Increase in deal flow:
Some fantastic repeat entrepreneurs are turning their attention to addressing big problems, and that’s great.
What was your experience raising your fund?
Christian: It was crazy! We closed our first round in under 12 months, and when we unveiled, large institutional investors and family offices, who thought that urban tech was lacking in their portfolio, called us and said, “Hey, why didn’t you call us? We’d like to give you money, please”. That has never happened before.
You also recently raised your last fund, Tove, was it the same experience?
Tove: Yes. We raised a much smaller fund in 2017, and back then, the interest from institutions to invest in this space was really low. It was a completely different climate in Europe. And now, in 2021, we see a lot of interest from life and pension funds, other institutional investors and family offices.
And from the other side of the Atlantic, Seth, what’s the mindset of LPs in the US?
Seth: Our first fund was a prototype fund (a 5 million dollar funds). It took us almost a year and a half to raise. There wasn’t a lot of receptivity, either to deep tech or to impact. A lot has changed since then. Our most recent fund is over 80 million, and we raised it in a fraction of that time!
Many people are now aligning their values with their investing process, and I think it’s a long-term trend because once you do that, you never go back.
Before working with us, our startups were raising from purely financial investors for their Series A, but those investor’s vision was not quite the same as the founders’. It’s more cash-return focused. But still, founders are going to those funds. Why? Simple, because there aren’t enough impact funds!
By the way, you folks in Europe are way ahead than the US. 90% of the institutional investors in Europe have at least one “impact” filter that they care about, and it’s probably only 10% in the US.
What type of LPs are investing in impact-focus funds? Why are they investing in this field?
Seth: Many savvy LPs are starting to buy the arguments that you can drive better performance with impact because there’s more and more data about it. Same as the internet in the ’90s. You don’t have to love the internet, but maybe invest in internet companies if you want to make money! And we love those exclusively financial-focused LPs who see that you can drive financial performance with impact. We are always telling our companies to align their impact model with a market model.
Regarding our own LP base, we were very fortunate in the sense that we could be picky and decline offers from institutional investors that we felt weren’t too aligned with our values. We decided to raise prominently from unicorn founders such as Dropbox, Unity, GitHub etc.
20% of them are backing us because they think it’s the best way of doing good with their money.
20% are backing us because it’s where they expect the best return on their money
The rest are just thrilled that they can get both!
Christian: In Europe, we don’t have as many endowments funds investing in venture. That hole gets filed by government entities. However, decisions with those players take a long time. They know today what they will invest in, a year from now.
We, at 2150, also have similar entrepreneurs to Seth and Norssken (aka, successful Startups founders), they happen to sit on a significant amount of cash, and our job is to hunt for the best companies for them. They can also be extremely helpful to the founders because of their expertise.
Tove: We do have a majority of institutional investors. We were delighted to see the life and pensions funds joining us. The impact was the door opener with them, but then the next question was, what’s the return going to be? So they’re not really ready to compromise on this space.
In Europe, the institutional funds are a bit more impact focused and even more in the Nordics. Hopefully, the trend will grow. How do other more traditional investors view you? When you invest, how is it seen by potential co-investors?
Tove: 4 years ago, some financially driven investors would shy away from a deal if we were in it. But today, it’s completely different. We co-invest with solid financial VCs, and we collaborate very well with the usual suspects from the VC scene.
Christian: Their only concern is that they don’t want us to impose obligations on a small team to do all the work to satisfy our sustainability requirements. Again, those are tiny teams!
Seth: Thanks to our reputation in the Valley, two things are on top of other investors’ mind when they’re sitting next to us around a table.
Fifty Years has done a deep tech diligence so we don’t have to be worried about it.
The founders will have a VC firm that rolls up their sleeves when times are tough and helps accelerate when times are good.
What do you see as the greatest challenge for the development of the impact space going forward?
Seth: Overall, across the system, the biggest impediment is that the vast majority of money in the impact investing space is still not comfortable with any real risks. Impact investing has been around for a while, but it’s always focused on incremental, low-risk, slow improvements. But now, the problems require incredibly ambitious and risky investments.
Tove: We need to see even more success stories and roles models. In addition, we can’t underestimate the impact measurement part, so I’d love to see more streamlined processes on this, going forward.
Christian: Time, we’re running out of time to deploy the technologies that need to be deployed! So we need ten times more people like us trying to change the world.
What technology solution are you most excited about?
Tove: The Next Generation food systems as well as the transitioning into electrification.
Seth: Synthetic Biology for sure! It looks like the 90’s all over again. This is awesome.
Christian: The same even though I’m not investing in it yet!
You can watch the replay of our conversation with Tove, Christian and Seth here.
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