Venture capital financing has helped innumerable small businesses grow. Most startups are hard pressed for investment when they embark on their journey.
A viable way to get funds is through organized events where investors assess and provide funding to small-scale businesses and start-ups they expect will grow.. These events are called early and seed rounds for funding. V Invariably, VC firms will demand equity in return for the funding they provide to these companies: usually in the form of proportional ownership. Sometimes, venture capitalists will also offer technical and advisory support to the small-scale companies and start-ups they wish to partner with. After all, these are high-risk investments which have tremendous growth potential, and substantial downfall. Sometimes, venture capital investments might not be rewarding, as businesses – can fail. In the past few years, these firms have begun to seek VC support to find more viable and sustainable start-ups and small-scale businesses to fund. Sustainable investment has taken off and more VC firms are looking to find and invest in sustainable businesses with the right support. Read on to understand the growth of sustainable investment through venture capital.
Understanding the concept of sustainable investment
In the past few years, investors have been concerned about ESG (Environmental, Social, and Governance) factors. Corporate entities have responsibilities towards society and the environment. Companies that are concerned for the environment, society, and employees are considered sustainable.
ESG measures aren’t only essential for the reputation of a company. But several compliance norms require companies to do their bit for the environment. Similarly, labor laws decide an organization’s governance policy to prevent employee exploitation. Companies might penalized after ignoring the labor laws in their respective jurisdictions.
This is why more and more VC firms are now concerned about the ESG status of a company.. Today, more consumers interact with sustainable brands, and do not hesitate to boycott companies r that create carbon emissions or any other form of pollution for that matter. Every company has an ESG rating, given by independent rating organizations. Investors and the people alike can access the ESG rating of a company. It’s important to note that any serious ESG offense by a company will make the headlines, and adversely impact the brand’s image.
Since ESG ratings are essential, VC firms focus on them during investments. They don’t want to invest in companies that aren’t sustainable or might cease to exist in the future. VC firms are in a great position to find sustainable businesses using the right VC support from knowledge partners and consultants.
ESG factors considered by venture capitalists
VC firms consider several ESG factors for investments. A few of them are as follows:
- Greenhouse gas emissions
- Water pollutant emissions
- Inorganic pollutant emissions
- Carbon footprint
- Energy consumption intensity
- Use of renewable energy
- Fossil fuel usage
- Water consumption intensity
- Hazardous waste production
Besides the aforementioned environmental factors, they also look for social and governance factors. Some key social factors VC firms consider are:
- Forced labor
- Child labor
- Equal remuneration
- Human capital management
- Customer protection
- Personal data security
- Customer relations
- And workplace health.
A few governance factors considered by VC firms for investment are:
- The integrity of conduct
- Internal controls
- Strategy implementation
- And observance of disclosures.
Why do VC firms require external support to find sustainable investment opportunities?
Since there are many ESG factors, VC firms may well require third-party support. These ESG factors are used to determine the sustainability of a business. ESG ratings of start-ups and small-scale businesses might not be available on public forums. As the demand for green financing is increasing, venture capitalists require VC support from specialists.
Venture capitalists need access to verified databases to identify start-ups with high-growth potential. Deal sourcing might be easy for a local market but gets complex on a global scale. For the same reason, venture capitalists look for outsourcing partners for verified data sets.
Finding the right start-ups for investment is only the start for venture capitalists. After finding the right investment opportunities, VC firms have to close deals successfully. Deal compliance is another challenge for VC firms.
After investing in multiple start-ups, firms also have to invest in portfolio monitoring. Usually, firms use new-age software solutions for target evaluation and portfolio monitoring. All these processes cannot be performed by a VC firm alone. A firm can identify sustainable investment opportunities with the right VC support in this competitive era. Start using new-age solutions for deal sourcing and portfolio monitoring in 2023!