Why we need more venture capital funding for impact-led start-ups now

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Allison Voss, Innovation Ecosystem Lead – Nature, World Economic Forum, Christin ter Braak-Forstinger, Chief Executive Officer and Co-founder, Chi Impact Capital

• Slowing economic activity is coinciding with some of the worst climate impacts of our time, but rather than slow investing, now is the time to accelerate impact venture capital.
• Tech and innovation will help solve burning climate-related problems if the investment is there.
• Currently, less than 5% of impact investment goes to early-stage companies and only 2% supports ventures are focused on nature and biodiversity.

During 2022, the decade-long tech bull market halted due to the turmoil in the global economy with soaring inflation and interest rates. This downturn resulted in a low investor risk appetite with fears of a looming recession. Many startups have struggled to raise funding or were forced to shut down. Valuations have tumbled and cash has become king for most companies. The banking crisis of March 2023 and UBS’s swallowing of Credit Suisse did not help.

PitchBook has revealed that European venture capital (VC) fundraising is currently on pace for its lowest annual figure since 2015. In Q1 2023, VC deal value and count fell amid a challenging European dealmaking environment.

And all this is happening against a backdrop of a climate collapse, where no region has been left unscathed. Europe has seen the most dramatic temperature increases, reaching nearly twice the global average. The United States has even seen insurance providers pull back coverage due to catastrophic weather incidents. The world has just experienced its warmest early June on record.

However, pumping the breaks on financing will only maintain our business-as-usual and worsen climate impacts. What we desperately need are new ideas, new businesses and multi-stakeholder collaborations. Such new regenerative and usually tech-enabled businesses help solve the most burning issues of our time. The good news is there are uncountable, transformative, scalable and deeply impactful solutions to spark the global sectoral transitions needed.

From food systems transformation to a circular economy and reforestation, wilding and biodiversity to help make our cities smarter. Given innovation’s promise in solving key global issues, such as climate change, there is a growing need for early-stage capital, particularly impact VC. Now is the time to accelerate impact VC investing, not pull back.

We don’t yet have the technologies needed to get to a net-zero, nature-positive world and still need many more people with ideas, technology and capital to support their product development and testing and scale ones with growth potential. According to a Global Impact Investing Network (GIIN) report, less than 5% of impact investment currently goes to early-stage companies and only 2% supports ventures focused on nature and biodiversity.

The climate investment model

Meanwhile, the size of the Sustainable Development Goal (“SDG”) investing market is estimated at around $1.16 trillion – a drop in the ocean compared to the $100+ trillion of total global assets under management. With only 50% of the technology needed to achieve the world’s net-zero ambitions currently ready for deployment, it’s clear that investment-as-usual won’t help us get there.

So, we need new innovative funds with the creativity and capital to back new ideas that put into action what a net-zero, nature-positive world can look like.

On a positive note, climate technology investments are still increasing, defying the headwinds affecting most capital markets over the last few months. The momentum seems poised to continue in 2023 as private investors, corporations and governments accelerate capital flows into climate-related investments, which help reach energy security, affordability and the sustainable development goals (SDGs).

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A recent McKinsey paper underpins this by saying climate-focused investing suggests this sector is “breaking out – not breaking down.” McKinsey has identified several factors for deploying capital in this resilient space.

Further, as the world is undergoing multiple complex transitions simultaneously, human well-being cannot be achieved without protecting and conserving our Earth’s ecosystem. Even the 17 SDGs, as a connected whole, work towards impact VC’s advantage. The SDGs are strongly interlinked and similar to climate tech and green innovation; impact VC gives interesting buying opportunities to companies solving urgent issues.

Platform upcoming innovators

The SDGs define growth markets for young companies that deliver transformative change. Companies with deeply transformative business models have been less affected by the market turmoil over the last few months than companies in traditional sectors. Despite the challenging macroeconomic environment, groundbreaking and much-needed innovations are being developed to tackle the most burning issues of our time. New scalable technologies include:

• Alternative proteins.
• Fermentation techniques.
• Cultured meat and cultured foods.
• Energy storage solutions.
• Circular packaging solution.
• Faster reforestation solutions with drones.
• Re-wilding smart cities with pocket forests.
• Recycling solutions for e-car batteries.
• Solutions to detect wildfires early.
• Farm-to-fork.
• Local circular production that reduces food miles and food waste.

There are many more but they all need capital to grow and scale and create exciting opportunities for investors. For example, through the World Economic Forum’s open platform for innovation, UpLink, over 150+ solutions are typically identified during each global innovation challenge run on topics from sustainable forest economies to climate-smart agriculture.

Given our current economic backdrop and need for smarter, flexible and creative capital, the Forum’s UpLink platform has recently launched the Investor Portal to source innovative, early-stage investment, philanthropic and corporate venture funds to unlock an entrepreneur revolution that supports positive systemic change for people and planet.

With this call for applications, UpLink seeks to bring further visibility to the work of early-stage SDG-focused investors, connect these investors with relevant innovation ecosystems and innovators in the space and create new functionalities that support the mobilization of more capital to the SDGs. Applications are now open and will close on 4 August to allow for selection and potential participation in fall Forum events, including the Sustainable Development Impact Meetings in New York.

Ultimately, the macro environment has led to smarter, more focused and agile start-ups. Now is one of the best times to invest in venture companies that are solving the most significant issues of our time. Impact VC investing doesn’t just help people and the planet; it makes good financial sense as well.

To find out more about the Investor Portal, including how to submit your fund, visit UpLink.