Start-ups and ESG
Updated: Oct 8, 2022
Analysis of the article “What do start-ups expect from venture capital funds when it comes to ESG?”
The World Economic Forum conducted a poll and interviewed start-ups from the Forum's Global Innovators and Technology Pioneers groups over the last six months. Respondents were asked to give their perspectives on ESG as well as their expectations of venture capital (VC) funds in the context of ESG.
Here are the three crucial takeaways for VCs mentioned in the article:
1. Successful case studies must be used by investors to demonstrate their commitment to ESG
Before inviting them into their cap table, startup entrepreneurs are increasingly beginning to search for ESG-related value evidence from their investors. According to the poll, 64% of start-ups consider investors' sustainability expertise when considering funding.
Charles Bark, the Founder and Chief Executive Officer of HiNounou, a home healthcare solution, said, “We are looking for investors with deep expertise and a demonstrable track record in investing and prioritizing ESG factors in their portfolio companies.”
2. Investors may differentiate themselves by meeting portfolio businesses where they are on their path and offering sustainability as a service
VCs may leverage their networks to identify crucial insights that might assist portfolio businesses in effectively embedding and deploying ESG practices. The Forum's 45 survey answers, workshops, and interviews all had one thing in common: education and capacity building.
Furthermore, it is critical for VCs to meet start-ups at their stage of development. Starting small, for example, by agreeing on one important ESG problem on which the start-up has the ability to have a disproportionate effect and developing from there with the services that investors have to provide, may bring significant value to both parties.
3. Investors should be adaptable and concentrate on customized Key Performance Indicators (KPIs) for their portfolio company
While ESG measures may assist start-ups in assessing and mitigating possible risks, investors must acknowledge that there is a huge gap in the supporting ecosystem of ESG benchmarks, relevant indicators, and measurement tools. In this case, imposing onerous reporting requirements on start-ups may cause more harm than good since small businesses have limited resources to balance growth and environmental sustainability.
Overall, start-ups emphasized the need for investors to be flexible and work with the firms to create a limited but meaningful set of ESG indicators that align with the company's strategic objective during the forum. Furthermore, these measures must be chosen in such a way that the next generation of investors may see value in ESG reporting. Many respondents also noted the value of venture capital firms publishing success stories about their portfolio businesses in order to highlight qualitative insights regarding the evolution of these start-ups.