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Aug. 17, 2022

Ep 11 - Inês Rocha – Market Opportunity in Impact Investing and ESG

Ep 11 - Inês Rocha – Market Opportunity in Impact Investing and ESG

Welcome to the latest episode of the ESG in VC podcast where I’m joined by Inês Rocha.

Inês is an Investment Manager at Norrsken, an impact VC fund. Prior to Norrsken VC, Inês worked in private equity at Hellman & Friedman in London and as a management consultant at Bain & Company in Iberia and the Middle East, focusing on software investments.

Together with Inês, we talk about a selection process at the impact venture fund and if it is possible to measure materiality and impact of startups thar are tackling various SDGs. We also discuss how the market opportunity is increasing for impact investing and this will continue even if experience an economic downturn.

Guests: Inês Rocha

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Transcript

Introduction

Hello and welcome to ESG in VC, a podcast where I continue with my quest on raising awareness around ESG, and interview top players in the ESG space, and where we dive into ESG-related topics, exploring how investors, regulators, and founders try to build a more sustainable and inclusive society. I'm your Oksana Stowe, and today we have Inês Rocha joining us. 

Inês is an investment manager at Norrsken, an impact VC fund. Prior to Norrsken, Inês worked in private equity at Hellman and Friedman, and as a management consultant at Bain and Company in Iberia and the Middle East, focusing on software investments. Let's tune in. 

Oksana:

Hi Inês, Really good to have you with us today. Thank you for joining. I thought it would be good to start with Norsken’s investment focus, and what was the motivation to start or rather to choose an impact as a core focus for the fund?

Inês:

Yeah, absolutely. And firstly, Oksana, thank you so much for inviting me. I'm really, really happy to be here and to be speaking with you. 

Yeah, so actually I think it's good to take a step back and talk a little bit about the history or the story of Norrsken. So we were started by a man called Niklas Adalberth, and he was one of the co-founders of Klarna, which is a FinTech startup that got quite big. And after staying many years with Klarna, Niklas decided that he wanted to do good for the world, and he spent some time thinking how he could achieve that, especially with the money that he made with Klarna.

And he came to the conclusion that backing entrepreneurs to solve the biggest challenges of today was the best way to do so to help the world. And so he started in 2016 with a foundation called the Norrsken Foundation where we have a co-working space for impact companies and we do a bunch of events. We try to build an ecosystem to help impact entrepreneurs, and there's also an accelerator, there's kind of a bunch of resources for impact companies. 

But through the Norrsken Foundation there was an opportunity also to directly fund impact companies and therefore really kind of help founders to make a difference. And so Niklas, also and the foundation, started at Norrsken VC, which is the fund I work for.

And so it's kind of from the very beginning, it comes from Niklas's vision of entrepreneurs as kind of the driving force of change or one of the biggest driving forces of change to solve the world's problems. So that's kind of why we decided to choose to focus on impact and we are impact agnostic so we can invest in kind of all sorts of problems that are faced today by the world.  

So we can invest in climate, healthcare, education, that's all part of our core focus. And we focus on early stage to series A because it's one of the critical, I'm not sure if I'm allowed to say the most critical, but it's definitely one of the critical parts of the lifecycle of the startup and where you can really make a difference. So we focus there on early stage. That's a little bit about Norrksen. 

Oksana:

Great, thanks for the context. So when you do due diligence, have you developed a special system for how you assess that the company is solving ESG issues? We can call them ESG issues or there are all sorts of different definitions out there or impact issues.

Is there a specific formula you follow? A structure? Would be really interesting to dive a little bit deeper into that. 

Inês:

Yeah, absolutely. And Norrsken has an impact focus, and impact is slightly different from ESG, but ESG is kind of a core focus of ours too because you cannot have impact without good governance and good processes for sure. 

And so the first thing we try to see is, does the company’s core activity tie to a UN SDG, so sustainable development goal. And when we say the core activity, it means that for every kind of dollar the company makes, there should be a proportional impact made in the world. So it really has to be their business model. So we wouldn't make investments where the business model is not impactful, but maybe there's an initiative that has some impact. 

No, the business model must be the driver of impact and after kind of screening for what is the area that the company is impacting, we try to define, so we have several kind of categories to define what is this impact.

And so we would look at the intensity, well first, what is the challenge? Is it a challenge that's very hard for humanity or is kind of, uh, nice to have? And usually we have preference for things that are kind of really affecting the world. 

Second, what is kind of the intensity of the effect of the solution that we're evaluating? Is it marginal or is it a very high volume. How many people will this impact? Many or few? And again, here would have preference for many people who will benefit from it. Is it the well-off, the less well-off? How long would it last? How long would it take? 

And what's the risk? Because many times a company might have a super impactful solution, but it's so risky that they would actually get to implement the solution that sometimes is better to look at something that's a bit more realistic. So these are some of the things we discuss with the team and also with the entrepreneur. 

So we usually do a workshop with the entrepreneur where we try to understand, you know, what is really the challenge they're tackling and what would the world look like if they succeeded. And sometimes I think with impact and ESG, measuring it is super important, but it's kind of impossible sometimes to get away from how subjective it can be. 

So we've looked at cases, for instance, in the space industry where the impact potential is very, very high, but it can be utilised for military, for instance. And so far we have not invested in space most likely because of that. So you sometimes have to balance pros and cons. 

The same thing with the fish industry. We've looked at some solutions that were trying to make it more sustainable. But to that question of what would the world look like if this solution was adopted mainstream? That would mean that people would still eat fish. And for our fund, we kind of feel that a better solution would be to replace fish with plant-based options. 

So again, I think other impact funds might have invested. It doesn't mean that we'll never invest. It’s a little bit of your own vision of impact that's personal to the fund.

Oksana:

Great. Very comprehensive answer. Thank you so much for this and actually you answered a question I had, how much subjectivity and objectivity is in your process because it's always impact issues are very, very complex and there are so many interdependencies and sometimes it's just very difficult and challenging to untangle all of it.

So great, thank you for this.  

My next question is a little bit more to current days and how have you seen a change in deal flow over last few years? Are you seeing more quantity or more quality or both? A little bit around that would be quite interesting. 

Inês:

So I think when Norrsken started, we were kind of pioneers in this impact early stage investing, but the ecosystem changed very rapidly. And I think regulation and EU was a big part of it because it really made it kind of mission-critical for business to take some action. And also kind of public perception. 

But things have changed very, very quickly, and I would say it's both quantity and quality of deal flow in impact. Both climate and healthcare, but a lot of climate really because of the current situation. But we've seen more and more startups and the quality increased too.

So right now I don't think we ever kind of struggle with filling our pipeline with great impact cases. And we’re also seeing that other generalist funds are now seeing this opportunity too. And it’s great for the ecosystem because now people can start something meaningful and they know that there's funding out there and there's a market opportunity. 

So it doesn't have to be a not-for-profit. It can really be a very large unicorn company. So I think it's a great time for impact and the climate sector. 

Oksana

And you think that the funding will not dry up and people will still want to continue to solve those problems despite all the market volatility and everything we are going through at the moment?

Inês:

Yeah, I think it will continue rising because of kind of fundamental shifts in the market. And those have to do a lot again with regulation and how we have now carbon taxes that are going to be expanded. You have so many initiatives for the European Union to deliver on the Green Deal, and so I think there's like a structural shift, and all these solutions will be needed. 

And so there is a market opportunity for it. I think that market opportunity will increase as kind of the climate, and now I'm focused a bit more on climate because there's a lot of opportunity there, but as we go in time and approach key milestone years, like 2030 and 2050, the pressure to really go to net zero as for countries and regions is going to be very, very intense.

And so the opportunity for this business is going to just increase in my view. 

Oksana:

Yeah, agree. Another question maybe going a level deeper is that within venture it tends to be, and I know that there are some venture funds who very much believe in sematic investing, big proponents of not following themes, but to be very opportunistic.

If you had to summarise, in terms of what other interesting subcategories within impact that you are seeing now, because like it does come in waves in venture a little bit. We have seen a wave of IoT a couple of years ago now. Last year it was all around web3. And I'm generalising because a lot is happening out there all the time, and there are amazing companies being launched. But what are you seeing within impact specifically around specific themes? 

Inês:

I think a very strong theme since the beginning of this year has been kind of the carbon removal and carbon offsetting within ClimateTech. And you've seen kind of the whole value chain from tools to measure and tracking corporate emission to kind of marketplaces where corporates can offset them, and then kind of the supply side where you have nature-based offsets, but also kind of direct air capture or carbon capture directly at various point. And so that ecosystem, we've seen a lot of solutions, some of them tied to other of the trends you mentioned.

So there's a lot of web3 and how can you track the offsets using web3. We've seen a lot of deal flow on that and we actually made an investment in a company called BeZero who does ratings for offsets, which is kind of a big challenge. You know, offsets can have an amazing potential, but so far has been tough to kind of really evaluate how good they are and how efficient they are at removing carbon.

And so we believe in the ecosystem where we admit and we think that we need companies that will help with monitoring and kind of check the quality of those offsets. But definitely this area has been growing extremely fast this year. 

Oksana:

And anything else that is bubbling up? 

Inês:

Yeah, I mean it connects to what I said, but I would say carbon capture. It's very strong at the moment, carbon capture technologies. 

We've seen also a lot, with all of these regulations coming, there is a need to produce data. So one of the challenges we have within ESG is one, some of it is subjective and you need to weigh environmental versus social versus governance. 

But the other thing that makes this quite hard is the data sometimes is hard to obtain. Even things that should not be subjective, like carbon accounting. There are decisions here to make, there are sources to go after, and then you have water, you have waste. And all these companies that are trying to understand this data, aggregate, organise, and then give this data to investors, for instance, right? So people who do the decision making. That's growing. 

And I believe that one is already growing quite a lot but will continue growing because that's one of the biggest challenges really, is data quality to support our decisions. 

Oksana:

Yeah, and it's interesting because there have been quite a few alerts around AI and biases, which I have seen first-hand in some of the scraping signalling software specifically for deal flow. You end up with the same type of profiles that get picked up and there is very little deviation from that profile, which is a little bit alerting because if you rely on something like that, you will miss out on a whole bunch of very interesting people out there that this scraper just doesn't pick up. 

But my other question is, maybe a little bit going even more specific is what is the most audacious startup you have seen that is trying to solve a very big problem that made you think wow, how can this be pulled off?

Inês:

Well, I think startups in the fusion fields are very audacious. It is still, there's a lot of breakthroughs we need in this space, but solving kind of low carbon electricity sources, that's one of the biggest challenges. And if we are successful at tackling that, then everything gets a little bit easier, right? 

And so I think that people that are investing in this field and founders that are trying to solve these breakthroughs, and that takes a lot of courage, and I think the price can be very, very big if they actually are successful. 

Oksana:

Yeah, I think it will be an amazing breakthrough actually for all of us. And just going back to ESG more specifically, you have highlighted the difference between ESG and impact. Actually, there was an article this week, I think, or maybe last week in Sifted, where they said, many people feel ESG is dead. And they quoted one venture investor who said that when you choose between switching to renewable energy or keeping staff, you put aside renewable energy transition and you choose your staff, and that given the current climate, choices of this nature will come up more and more often.

How do you think about those challenges in your portfolio companies in particular as well? 

Inês:

That's a great question, and it goes a little bit to something I've kind of said, which is how complex it is. So I think you also said that, or you actually might have been the one saying that. ESG is really complex and I think anyone that says that ESG is easier is not doing ESG right most likely. 

But ESG is really complex and I think we can take two options. One is to say, oh, this is too hard, I'm just going to do whatever can I want and ignore all the risk. Or just say, okay, this is complex. We need to take kind of all of the E, the S and the G into consideration, and there's going to be trade-offs. But I cannot ignore any of them. 

And so I think people need in the end of the day to take the decisions, they feel it's right within their priorities and moral compass and so on, but they need to strive to improve on the others and not just say, I will pick this instead of that, but say, I'll pick this, I know I'm behind here, but I also need to somehow improve on that other. 

And it's not going to be night to day, one day to another. But I do think that people need at least to make plans to over some time to make that shift. And I think that's what we see with impact companies, especially in early stage. Sometimes we invest in companies that have less than 10 employees and they're very ambitious with their impact, but they might not have a sustainable policy in place yet, or they might not have really thought through how am I going make sure that I use renewable energy, or I use the best materials for this? 

And for a startup that doesn't have a lot of resources, there needs to be prioritisation. But what we try to do with our portfolio companies is saying, look, maybe today, right now, it's other things that matter for the survival of the startup. But within the next year, we need to go from A to B, and we need to replace these by something else. 

And so I think people cannot ignore ESG. Yes. It's hard. Yes. There are trade-offs. Yes. Sometimes you need to keep your staff and you can't switch right now to renewable, but you have to have a plan on how to switch because you know you have to.

So I do think that the answer, I'm not sure if it's right or wrong, of course, but I think the answer is to strive to plan and strive for getting there over time, even if you can do it just today, all of a sudden. 

Oksana:

Yeah, once again, very good summary. I agree, if you take a very static decision, that's not how businesses operate because there are always small improvements you can do going forward. So definitely agree on that. 

And just your view on the future and the market overall, what are you sort of advising your founders in current climate? Because people take very different views. Some say you have to be extremely cash flow cautious. But then I don't think VCs yet are willing to accept that the growth rates have to reduce. And just in general, on a business side aside, not only around impact or ESG, what are you telling founders? 

Inês:

Yeah, I think definitely the environment has changed, but I do think advice remains the same, which is deploy money for growth if you feel like you have the right metrics. If you feel like the CAC is right, your unit economics are right, and I do think you probably can still raise money for growth.

But if the metrics are not there, to be cash flow conscious while you are still working on your product market fit. So I think we've been through a phase where people just cared about a number of users and it's really about the other metrics. But I do think that's over. I think now is the time for founders to focus on operational excellence and how to get the metrics in place to really scale.

Oksana:

Yeah, agree. Well, thank you so much for taking part in the podcast and thank you for your time. 

Inês:

No, thank you and it was a real pleasure to be here.

Oksana:

You have reached the end of another episode at ESG in VC podcast. Thank you for listening. Please connect on LinkedIn, Twitter, or on our website. It's always good to know if you like what I'm doing. And do not forget to sign up to the ESG in VC Newsletter for insights and updates. See you at the next episode. Be well.