The (non)sense and purpose of venture capital: Why we need venture capital more than ever, but please no longer for the next delivery service.

Venture Capital has been blind on one eye for way too long. Here is why and how to change it.  

Venture Capital is booming. In the first half of 2021, global venture funding reached an all-time record of $288 billion invested. Venture capital funds close in on $100 billion in fundraising this year alone and new mega deals jump from record to record, driving valuations and attracting both money and new players. And its becoming more and more global, which is good: a larger pool of capital funding a bigger spectrum of ideas will boost competition, and is likely to bring about innovation. 

Blinded by the light

Here is the thing: most of the billions have been invested half blind. Basically leaning on two criteria: team and business model. Usually assessed in that order. What has been neglected for way too long by way too many is the impact a start-up has on our planet. Only about nine percent of the $300 billions invested in 2020 came from impact VCs.

In a world that currently consumes just under 1.7 earths and an economy that is not pricing in the true cost of (economic) action, that’s a problem. It actually reveals a gigantic misallocation. Due to the sometimes wasteful use of money and the most capable developers, much needed innovation is hampered while marketing wars for delivery services or ride-haling are kept spinning. 

A powerful tool

To be honest, only few financial player have been keen on including impact metrics in their investment decisions until recently. But venture capital has a special responsibility stemming from the fact that it shapes our economy like few other forms of capital. It drives (breakthrough) innovation and produces tomorrow’s winners. While only less than 0,5% of US companies created each year have been funded by venture capital, they make up nearly 76% of total public-market cap of companies started since 1995.

 That also means: venture capital has the potential to change our economy. It is one of the most powerful tools to drive and scale innovation and the reason Planet A exists. To us, venture capital is a tool to bring the much needed innovations and positive impact we need to advance to an economy that works within the planetary boundaries. Assuming that you keep one eye on the team and business model, and open the other one to look at the science. 

Open both eyes, trust the science

Venture capital must put itself in a position to be able to assess the environmental impact of its investment decisions. It’s the only way we get actual innovation and not just incremental innovations on how to better order a taxi. To do so, we at Planet A use life-cycle assessments because they are a proven method in academia and not only cover GHG-emissions, but also waste, resource consumption and the impact on biodiversity (which is often overlooked). For us, life-cycle assessments are the gold standard of impact measuring, but we are open to learn about other methods and actually seeking a common standard for impact measuring in venture capital and beyond. That is why we make our methodology transparent and publish all our life-cycle assessments on our website. 

But just measuring impact is not enough. It becomes window dressing if we don’t give science a voice and a vote in the actual investment decision. It should be assessed and valued the same way a team and business model of a venture is considered. It’s not that hard: invest in an in-house science team, give them veto power on any investment and link the partner’s carry to the achieved impact. This is exactly what we do at Planet A and we invite any other investor to do the same. Because it’s our responsibility as venture funds. And because it pays off: Bill Gates says climate tech will produce 8 to 10 Teslas, a Google, an Amazon and a Microsoft. Impact measuring (done right) helps us to pick tomorrow’s winners that will succeed in a shifting economy. 

A shift is underway

The responsibility to operate in a climate-neutral manner and the corresponding regulatory pressure are shifting competition and creating advantages for green tech startups. CO2 prices are rising to all-time highs and are being extended to more and more sectors, while at the same time bans and minimum standards are increasing (plastics, e-fuels, etc.). On top of that, one of the biggest shifts of capital has already begun: out of CO2-intensive industries and into climate-neutral or climate-positive companies. 

But it is not only regulation and capital that shifts. We see a tremendous shift in ventures, too. The mindset and motivation of founders are changing. While previously successful founders increasingly move in the green tech space, we also see a lot of traction coming from universities spin-offs. What they both have in common, is what drives us too: build an economy within the planetary boundaries and get their as fast as possible. Having both eyes open usually helps.