Introduction
The last few years have brought significant changes to the venture capital (VC) industry and the world.
Globally, VC investments for 2021 have hit a record of US$440 billion and are on track to double the 2020 figure. As many as 170 cities around the world have one or more unicorns - up from just 22 cities in 2010. Technological advancements, giving broader access to tools and services to scale companies, have been the driving force in decentralising innovation.
Environmental, social and governance (ESG) within the public markets is mainstream. ESG mutual funds and ETFs have seen a huge increase in assets and it is estimated that sustainable investments represent over a third of all assets globally. 2020 may be a time we remember as the year the pandemic struck, but it is also the year that accelerated a trend of interest and demand for ESG capabilities and strategies in both public and private markets.
Why has this change happened?
1. Regulation: Reporting and policy change is particularly notable in the EU to reorientate capital towards a more sustainable economy. An example is the Sustainable Finance Disclosure Regulation (SFDR) which requires asset owners across Europe to provide specific disclosures relating to the impact of investment decisions on ESG factors. US policy under the Biden administration is likely to bring further ESG-related regulatory developments and we can expect this to gather pace across all regions. There will be increased pressure on both VC firms and their portfolio companies going forward.
2. Risk management: The industry is broadly accepting that ESG considerations can be critical to the success of companies and there is increasing evidence that this leads to stronger investment returns.
3. Industry demand: We have seen a shift in investor sentiment becoming more purpose, people, and planet-driven. The same trend is clear in the next generation of entrepreneurs, looking to build businesses that solve real-world problems and align with their values. We can expect greater scrutiny from both LPs and founders going forward.
The need for transparency across the industry is clear, and we believe it is critical that firms articulate their approach to both ESG and impact to attract and retain investors, employees, and other stakeholders. It is no longer simply about seeking the highest return; the "Decade of Action" has arrived.
While public equity markets have rating systems and well-established ESG frameworks in place; the broader VC industry does not. Successful VC-backed companies have strong potential; they can create a large number of jobs, and deliver impactful services and strong returns. The VC industry has funded the launch of tech giants like Amazon, Microsoft, Uber, Spotify, Airbnb, Facebook, and Twitter, Stanford suggests that three-quarters of the largest US VC-backed companies would not have existed or achieved their current scale without an active VC industry. The startups of today will turn into the Big Tech of tomorrow, and they will be fundamental to the success of the VC ecosystem through R&D spending and/or tech acquisitions. The VC industry can ensure that the next Big Tech companies of tomorrow have sound ESG practices, policies, and values from the outset.
ESG shouldn't be seen as an add-on but rather part of the conversation for how the VC industry as a whole engages with founders.
— MAGNUS GRIMELAND, CO-FOUNDER AND CEO OF ANTLER
Antler is an early-stage global VC firm enabling and investing in the world's most exceptional people building the defining companies of tomorrow. To date, Antler has helped build and invest in over 350+ startups from pre-seed to series C, and we believe that the power of entrepreneurship and innovation will inevitably address and help solve the world's biggest challenges facing our society today. We also recognise that we have an opportunity to help shape the future of our portfolio companies' sustainable growth, based on strong ESG principles.
There is currently little guidance for how best to adopt ESG practices for the VC industry, so what can we do?
We can:
• Set firm-level values to better demonstrate our intentions and goals
• Integrate ESG in our investment decision-making processes; and
• Improve our engagement with portfolio companies on the topic.
Antler has prepared a report that looks at industry data, academic research, and learnings from our work with founders and portfolio companies. We set out to answer the following questions:
• What are the implications of the changing sentiment across LPs and founders for the VC industry?
• What can the VC industry do to address the key challenges for the application and implementation of ESG?
• How can we make a clear distinction between impact and ESG within the VC industry?
• How does our firm compare to the industry (where we have comparable data); and can we do better?
The report looks at how a VC firm might approach the application and implementation of these points, using Antler as a case study.
It does not have all the answers, and we recognise this is just the start of a journey, but by sharing our approach, intentions, and goals we hope to collectively raise the bar across the industry.
"The global VC ecosystem has grown rapidly over the last few years, as has the role of the VC firm, its influence in early-stage company formation and growth; and the subsequent responsibility that comes with it," says Magnus Grimeland, co-founder and CEO of Antler.
"As we look to the future, where the world's most crucial problems will likely be solved by exceptional people innovating with technology in new ways; firms must take an active part in ensuring the sustainable development of these companies, their goals, and, of course, their own impact
"ESG shouldn't be seen as an add-on but rather part of the conversation for how the VC industry as a whole engages with founders."
To read the full report, download it here.
