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Come on in, the Water’s Fine: The Next Wave of Innovation – Corporate Impact Investing (Part 3/3)

This is the 3rd post in a 3-part blog series to highlight the business case (Part 1), actual examples (Part 2), and future opportunities and challenges (Part 3) for corporate leaders to invest in seed stage social entrepreneurs.

If it were easy, everyone would do it. While I’m not sure who coined that phrase, it’s certainly true for many things, including corporate venture capital and impact investing.  Despite record increases in corporate venture capital and impact investing activity last year, a relatively small number of global corporations are active investors.  While we have seen an increase in corporate involvement in impact investing with sponsorships of industry-aligned accelerators and incubation spaces, research and case studies, and executives and employees serving as mentors, the time is now for corporate leaders to match this interest with investment.  Our assumption is that until recently the risks and challenges did not offset the potential benefit.  Below I highlight 3 challenges we’ve observed in corporate impact investing and the complementary opportunities they provide.

 

Challenge: Social innovation occurs in nascent sectors with limited market proof

Opportunity: Macro-economic trends and technological advances are driving convergence across sectors

Until recently, emergent sectors such as renewable energy and sustainable food lived separately from the legacy sectors of fossil fuel and agriculture. Simply put, without the constraints of natural resource depletion, corporations, despite their values, could not make the case to shareholders as to why investment in social innovation was good for business. Today, things are different. Massive advances in technology coupled with macro-economic trends such as climate change, population expansion, and shifting consumer tastes are driving convergence among previously (and oftentimes intentionally) disparate sectors.

A landmark 2014 report by Volans, Global Corporate Venturing, the MacArthur Foundation, and Social Investment Business identified 6 sectors in which impact investing and corporate venture capital have a high likelihood to converge: clean-tech, education, health, urban infrastructure, transportation, financial inclusion, and agriculture and food.  In my earlier post, I shared that corporate venture capital reached an all-time high last year (The 2017 Global CVC report), representing approximately 20% of the $164 Billion transacted last year.  While this record increase is impressive, what most caught our attention was the growth in healthcare investment, clean transportation, mobile technologies, and sustainable food and agriculture, in line with the Volans report projections.

Impact Alpha also recently reported on two examples of this convergence.  In 2017, Tyson Ventures (the venture fund of the chicken producer) participated in a $55 million fundraising round in Beyond Meat, a plant-based meat substitute company.  Another strong indicator reported in the same article is that, for the first time, oil and gas venture firms make up a dominant share of investors in cleantech startups.

 

Challenge: Big ships (corporations) are hard to turn

Opportunity: Streamlining business activities to work with early stage ventures will have positive implications across the organization

During our panel discussion at the SEED Gathering in April, Dr. Oliver Keown from GE Ventures shared that one of the biggest learnings from their partnership with Santa Clara University’s Miller Center for Social Entrepreneurship was insight into their corporate policies and practices that made it incredibly difficult to work with early stage ventures.  For example, the volume of product required to run a pilot or produce a sample for a GE product manager could equal a start-up’s production for an entire year. Not surprisingly, there are varying definitions of what constitutes a “pilot” among early stage startups and billion dollar global companies.  Procurement protocols such as lengthy executive approvals, high insurance minimums, and cyber security requirements also prohibit many start-ups from making it past the first page of vendor prerequisites.  This challenge is not unique to GE, and was shared by our co-panelists from PwC, Autodesk, and Twilio.  However, in navigating this challenge, Dr. Keown reflected that by adapting certain processes to be more startup-friendly, such as fast tracking approvals for smaller initiatives and offering procurement coaching for startups in the Santa Clara program, GE is now better equipped to work with startups across and outside of the healthcare sector in the future.

Challenge: Balancing stakeholders can be a near-impossible juggling act

Opportunity: A unifying shared value strategy can provide clarity and purpose for all

As we wrapped up our conversation at the SEED Gathering, I asked Dr. Keown and Charlotte Coker Gibson from the PwC Charitable Foundation to list their organization’s top challenges in corporate impact investing.  Almost in unison, both citied balancing the needs and priorities of their various stakeholders.  For public and private firms alike, shareholders, partners, customers, executives, staff and venture founders often have competing commitments and priorities.  For example, those responsible for quarterly earnings may be less inclined to support a new, perhaps disruptive investment with a longer return horizon.  Investees may operate with a higher risk tolerance than their corporate investors, and shareholders may question if an investment with goals of profit AND purpose was made with their best interests in mind.  Both panelists agreed that strong, shared values and good communication were key to navigating disparate stakeholder needs.  In the case of PwC, there is a shared value around employee engagement through the Foundation: engaged employees are often higher performers and stay with the firm longer, and the Foundation’s grantees benefit from their skills and expertise.  For GE Ventures, Oliver reflected that GE leadership is an active proponent of investing in innovation.  This value trickles down throughout the company and encourages corporate employees and investors to think creatively.

While these three challenges remain today, and there are certainly more we did not address, the Civic Accelerator remains bullish with our prediction that corporations will play a significant role in shaping the impact capital market.  As social entrepreneurs continue to trail-blaze in new sectors and validate previously untapped markets, forward-thinking corporations will come alongside to leverage their capital, talent, and supply chains to scale impact and value for all.  The early adopters have tested the water and it is exciting to welcome others now dipping, and in some cases, diving in.