Funding in a circular economy
Whilst the term ‘ESG’ only joined the lexicon in the mid-2000s, socially responsible investing is by no means a new phenomenon. In fact, the first instances of backing (or perhaps more accurately, not backing) certain companies based on more than their financial profile was in the 1960s, when investors removed tobacco companies from their portfolios.
Since its inception, ESG investing has grown with inflows into sustainable funds jumping significantly around 2013, until it soared again in the run up to 2019/20. Unsurprisingly, much of the commentary around this has focused at the larger end of the market and specifically with listed stocks, where detailed annual reports give both companies and commentators the opportunity to gain insight into the various ESG initiatives undertaken.
There is plenty commentary available on large cap arena which I won’t add to, instead my focus is on the new wave of companies emerging across the UK and some emerging trends that excite us.
A greater awareness of our impact
It is probably both a truism and a sweeping generalisation to say that each new generation has a greater awareness of our impact on both the environment and on one another. More than ever before has awareness converted to action and the choices we make as consumer, commuters and communities. COVID-19 has generated lots of speculation on the long term impacts on consumer habits, but the pervasive trends have been emerging steadily over time. COVID represents a foot on the accelerator rather than a hand on the steering wheel.
So, what does this mean for businesses, consumers and those investors who seek to back the success stories of tomorrow?
“Take, make, use, dispose” – this was the way of the world for decades, but is that now coming to an end?
Whether it was driven by the concept of ownership, by convenience, by awareness (or lack thereof) or by the availability of alternatives, the standard way of operating has caused well documented issues ranging from seas full of plastic, landfill sites the size of small cities and a general overabundance of low quality items that fill our homes.
Indeed, 2020/21 feels portentous in our shift away from this to a new mantra of “Take, make, use, reuse”.
The new business models
Let’s look at what that might translate to in terms of businesses model. Perhaps most obviously we have “Waste to Product”, an example being BioBean, using coffee grounds to power London buses, or at the more extreme end of the scale there are companies like Chip[s] Board who take McCain’s peelings and turn them into bio-plastics for buttons and eyewear.
We have also seen a number of businesses aiming to enable communities to collectively reduce waste and unnecessary product purchases for one off/limited use. Prime examples of this include Olio and Fat Llama, both of whom have received funding from some of Europe’s top venture capitalists, providing funds to help drive awareness and engagement.
Thinking more laterally, given the uptick of ecommerce as a percentage of our total shopping, businesses that facilitate more efficient delivery and returns, both in terms of the transport and packaging, will take on greater significance in reducing the impact of the convenience that comes from online shopping.
Less obvious but perhaps more interesting is the “Product as a Service” trend. Product as a service moves us away from the dictum of ownership is best, to acknowledging that we can, as a society, massively increase the utilisation of our assets by consuming them only as we need them, structurally addressing the issue of waste whilst providing an improved customer service.
A prime example of this is the electronics market and specifically phones/tablets. They are enormously powerful pieces of technology that often are discarded after we upgrade to the newer model, possibly sold second hand but more likely thrown into the cupboard alongside miscellaneous USB cables and the charger for your long forgotten FitBit. Companies like Raylo are addressing that by designing their business model around the philosophy of recycling your phone, not just removing the friction that exists for consumers looking to move on old devices but doing so with a high-quality customer experience.
In a similar vein, The Bike Club recognised the systemically inefficient market of children’s bikes, addressing both the issue of both the challenge of ensuring your child has access to a bike that they actually fit during their formative years as well as the ability to effortlessly replace bikes that no longer fit. As a consumer your experience is undeniably better from this versus the typical purchasing experience, whether choosing a new bike or a refurbished model. The same could be said of Whirli and their approach to children’s toys.
In the past, if consumers were looking to make changes that positively impacted on their wider environment there was often a sacrifice such as durability, quality, cost, convenience. These new models don’t just remove that compromise, it could be argued that it is simply a better outcome for all involved.
Product as a service is a hugely exciting area and one that we think will grow significantly in years to come. As an advisor it is also an area that offers an interesting challenge from a funding perspective, with the companies requiring both the funding to grow the brand as per any other B2C growth capital investment, but also requiring potentially significant capital to grow their base of assets (bikes, phones, tablets etc…) which is more suited to debt. Getting this balanced funding right is crucial in enabling the company to grow without restrictions.
In order for these companies to make the transition from being an emerging trend to a leading player in their sector they will need to raise significant funds. Specialist funds such as Bridges, Palatine Impact, Nesta and Circularity Capital are increasing in number but remain somewhat thin on the ground. One possible explanation for this may be from a historical perception that Impact Investing was synonymous with poorer financial returns, despite there being empirical evidence that isn’t accurate.
As we move forward, we expect more of funds to emerge that explicitly seek companies in the wider ESG/Impact space as newer generations look to invest their money in funds that align with their values. We also anticipate a shift from generalist investors to look for these types of opportunities.
The big question for those generalist funds is whether specialists have stolen a march and can provide the “smart money” that entrepreneurs desire, or if the experience they all have in helping companies to scale evens the playing field. Our experience would suggest that the terms, the personalities and the ability to help deliver the business plan carry similar weight when an entrepreneur chooses a backer, so even if an investor has a head start by virtue of a well aligned mandate, it’s no guarantee of success in a competitive process.
At finnCap Group we are always looking to help entrepreneurs achieve their ambitions and this is one area where see a huge amount of growth in coming years and hope to work with some of these game changing businesses.