Impact investment: How technology can make a difference

In this series so far, I have focused on what impact investment looks like, and how it is making a difference and evolving. In my final installment I concentrate on the importance of technology as an investment sub-sector / category and how it is enabling greater social, environmental and cultural change.

Why we must act?

The average global temperature has increased by about 1 degree since the Industrial Revolution. The Paris Climate Agreement signed in 2016 was designed to limit this to 2 degrees. The potential consequences of greater warming, although disputed by some, are disastrous. Climate scientist James Hansen has called the two-degree warming “a prescription for long-term disaster”; while three-degree warming is a “prescription for short-term disaster”, with the melting of polar ice caps, rising of sea-levels, loss of coastal cities, and forests in the arctic just some of the effects.[1]

The potential consequences are stark and changes enabled via investment are necessary to avert disaster and also make a general improvement to society. This is part of a wider rethink in corporate mentality and behaviour across areas such as governance, environmental sustainability, ethnic and gender diversity, business culture and ethics, all designed to make the world a better and more productive place. There is a wider debate about the benefits of long-term private capital vs. public markets:

  • short-termism is a drag on performance
  • activist investors focus on short-term results vs. longer term benefits
  • diversity leads to improved performance
  • workers with a sense of purpose and within a better environment perform better
  • the importance of mental and physical health and well-being

At the time of writing London is the scene of unprecedented climate change protests, which presents an interesting overarching question: how can we make a difference?

While Extinction Rebellion have taken to the streets to voice their concerns on climate change, others have taken to the (broad)sheets.

Former Vice President, Al Gore has famously highlighted the issues of climate change and through his documentary ‘An Inconvenient Truth’ sought to urge investors and politicians to back technology and projects to address such issues. There has been a wave of investment in energy-efficient and renewable technologies. However, a wave of billion-dollar energy-efficiency related companies has come and gone (some more than successful than others), which didn’t materialise into anything as quickly as had been hoped for. The change to consumer and business behaviour could not happen overnight; the overall demand and take-up was not there to meet this newly spawned supply. There was also entrenched interest to protect the status-quo.[2]

Larry Fink, CEO of Blackrock, the world’s largest asset manager with a balance sheet of $6.5trn, recently urged investors and managers to do more. In a potentially dangerous but natural next step in the direction of this wider ESG movement, Fink said the recent surge of nationalism and xenophobia, as seen in election of Trump and Brexit referendum, was a direct response to Governments not fulfilling their roles. Therefore, corporations need to do more.

It would seem investors are not just under a fiduciary duty to invest but also a moral one. Merryn Somerset Webb, the highly respected FT Money commentator, recently captured this in the ‘Drawbacks of doing good’.[3] Jane Sydenham of Rathbone Investment Management said we are entering a ‘next phase in shareholder activism’.

Such investment won’t happen overnight. Questions around doing good and investing with a moral conscience will continue. However, as a first step, technology investment is making a difference, while at the same time, providing good returns.

Tech : enabling greater impact

Ideally, many would like to make sure investments follow strict ESG criteria that are 100% impact compliant. However, to get to that, one must take incremental steps and make a difference where possible. In my previous installment, Harry Catchpole, Founding Partner of Tribe Impact Capital, a new generation impact wealth manager, assesses investments on a ‘net-positive impact’ basis.

Investment in next generation technology is part of this longer impact journey. Technology and the disruption caused to industries is fostering greater ties between investment and social and environmental impact. Sir Ronald Cohen points to this: “The ongoing tech revolution has laid the foundation to bring about a seismic shift.”[4]

As larger companies and larger fund managers become more interested in technology, society will continue its evolution to become more efficient and greener. This is happening from both a defensive standpoint, where emerging companies are challenging their position at the top, and from an offensive standpoint, looking at how technology can improve their businesses.

A new category to call such technology is ‘tech-for-social-good’; start-up companies that are tackling some of the biggest issues across areas such as education, health and sustainability. A recent report from TechNation defined tech-for-social-good as ‘digital technology [tackling] some of the world’s toughest challenges’. Within the UK alone, there are an estimated 490 tech-for-social-good companies (0.2% of all start-ups), valued at £2.3bn, with a joint turnover of £732m.[5] Gerard Grech, CEO of TechNation, remarked, “There is little doubt that the notion of the purpose-and-profit economy will increasingly become common parlance in business in ten years’ time, as harnessing tech for scaleable change becomes the expected norm.”[6]

Companies cited as examples of this include ‘Bulb’, which I referenced in my last article. Harry at Tribe invested in Bulb to meet his client’s impact goals. It is now the UK’s biggest green energy company, providing 100% of its energy from renewable sources, and meets one of the UN’s Sustainable Development Goals, ‘Affordable and Clean Energy’, amongst others.

Other ‘ones to watch’ include:

  • Cycle.land – a community of bike shares to foster greater mobility (Mobility)
  • Nexus Labs/ Surgical Teaching – helps medical students and junior doctors better grasp key concepts that allow them to pass exams and provide safer care to patients (EdTech / Healthtech)
  • UpEffect – a crowdfunding platform for social enterprises dedicated to improving lives and the planet (Fintech)

Frog’s technology impact

We have the privilege of working with Mike Urwin of Clermont Trust, a supporter and investor in technology making social/environmental differences, who commented “Frog’s companies are making a broader, positive impact on the world.”

There are a number of ways to measure whether managers are investing in companies that are making an impact, through the UN Sustainable Development Goals (UNSDG) for example. At Frog, we invest in leading technology companies across several sectors that are ripe for disruption and where there is a large addressable market. Technology is a critical enabler behind this revolution. We have invested across a number of key sectors such as mobility, education, greater mobile connectivity, digital money remittance and business payment solutions. All are helping to make real, tangible improvements to how consumers and businesses perform.

We are invest in scaleable, capital efficient businesses with good unit-economics, led by impressive management teams, who have already proven product-market fit. A key part of that is the underlying aim to solve a problem or disrupt an industry with a more efficient and better proposition than is already available.

Sector focus

There are many areas where technology is making a real difference and contributing to a better society, such as health-tech and agri-tech. There have been interesting examples of mental health and wellbeing apps raising considerable investment, including ‘Calm’, ‘Breathe’ and ‘Unmind’ to help people. The likes of ‘Memphis Meats’ are helping to cultivate synthetic protein and meat, to meet the growing demand of the rising middle-class and at the same time reduce pollution involved in traditional meat cultivation.

Here I will take a deeper look into the areas of mobility, fintech and edtech, where we have also made investments.

Mobility: Vulog

Investment in the mobility space is well documented. According to Mckinsey research, investors have poured $220bn into new mobility start-ups.[7] Investors are attracted by the significant growth and potential of such companies as car-sharing companies Uber and Lyft, as well as the impact of reducing the number of cars and therefore car pollution. Lyft recently listed at an initial market capitalisation of $24bn, representing a 11x revenue multiple, despite losses of $911.3m in 2018. Uber, meanwhile, is believed to be pricing an IPO at $100bn.

Frog has invested in Vulog, a company that provides the underlying technology to enable car-sharing. This is exposure to the same movement, a company making a real difference. As Vulog themselves recently tweeted, ‘With 30% of people who use shared mobility services giving up their personal vehicles, more shared cars mean less pollution and more room to breathe.’

However, Vulog is a  far more capital-efficient company with better unit-economics. Vulog serves over 5 continents, powering over 15m trips per year, with 25 established partners and with a rising fleet close to 11,000.

Fintech: Azimo

European fintech is also booming with €1.4bn invested across 101 companies so far in 2019, which is easily on track to surpass the €2.9bn in 2018 and the highest ever total of €3.2bn in 2017. There is a clear opportunity to improve and make personal and business banking more efficient. Noteable recent investments include OakNorth, a UK SME loan platform, raising $440m at a whopping $2.8bn valuation from notable investors such as Softbank, GIC and Clermont. This follows other large investment in the likes of digital bank N26, raising $300m at a valuation of $2.7bn, and financial marketplace Raisin, raising $114m.

There is a significant opportunity to help people and businesses bank, invest and send money abroad more effectively and efficiently. We have invested in a company called Azimo, one of Europe’s leading fintech businesses that helps consumers (and now businesses) transfer money abroad at a fraction of the cost of traditional players. Azimo transacts over 80 currencies across over 200 countries, reaching over 5bn people. They provide a more efficient and cheaper way for people to send money, and help people who wouldn’t otherwise have access to finance, in migrant communities for example.

Edtech: Softatutor

The internet has brought unprecedented opportunity to learn and provided information to everyone. However, until recently education and learning has been quite traditional, with technology gradually improving existing ways of teaching. More recently, there has been greater development in EdTech. Smartphones, greater connectivity, enhanced software, and artificial intelligence have led to greater development. In 2011 Sebastian Thrun developed Udacity, a single massive online open course on AI, with some 160k learners enrolled.[8] The likes of Udacity and others, like Duolingo, have quickly become household names, connecting people with teachers to provide greater learning.

In 2010 Edtech saw just $351m invested across 92 deals in the US. In 2018, this had increased to $1.2bn.[9] This is now a significant focus of investment for VCs. A company called Newsela recently raised $50m in a Series C round led by TCV, who have invested over $500m in this sector in the last decade.

This is a clear example of technology making a difference, helping to educate people and improve opportunities for all, across the social spectrum. We have invested in an ed-tech platform called Sofatutor, Germany’s leading digital content provider for children, with some 70k customers. It provides online and downloadable worksheets, video content and messaging tools. Some of the benefits and impact it is making includes:

  • Helping children thrive in school;
  • 80% of users improve grades;
  • 8 out of 10 users have more fun;
  • Users report improved confidence.

Conclusion

What was clear is that we can’t make an impact overnight. With the actions of advocates such as Richard Azarnia and Mike Urwin, managers like Harry at Tribe, who are championing investment into social and environmental causes, and regulators also holding large custodians of managers to account with various frameworks, society is starting to change. Technology is certainly a catalyst to this and it’s exciting to be a part of the general movement.

*

References

[1] ‘Losing Earth: the decade we almost stopped climate change’, by Nathaniel Rich, The NY Times, Aug 2018

[2] ‘Corporations and private investors are backing new ‘green’ deals as climate worries mount’, Jonathan Shieber, Techcrunch, Apr 2019

[3] Drawbacks of doing good’, Merryn Somerset Webb, The Financial Times, Apr 2019

[4] ‘Impact investing: a multitrillion-dollar market in the making, Eric Burg, Pitchbook, November 2018

[5] ‘Tech for social good in the UK’, TechNation, Apr 2019

[6] ’20 Tech-For-Social-Good Startups To Watch As TechNation Tackles Signs of The Sector Stalling’, John Welsh, Forbes, Apr 2019

[7] https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/start-me-up-where-mobility-investments-are-going

[8] ‘How edtech is getting smarter’, Adam Putz, Pitchbook, Mar 2019

[9] ‘How edtech is getting smarter’, Adam Putz, Pitchbook, Mar 2019

Alexander House

Article by Alexander House, Investor Relations

Alex comes from an investor relations background within private equity and early-stage venture capital, specialising in fundraising and advising investors across early-stage VC and private debt investment.