2023-07-25
Return on investment, myth or reality for impact startups?
by Startup Montréal
7 July 2023
7 July 2023
“When we talk about return on investment (ROI), we still too often hear the myth that investors who choose Impact companies do so out of charity!” points out Meir Rabkin, founder of Blue Vision Capital, an investor and entrepreneur with 18 years’ experience in institutional asset management, international investment and venture capital. However, this false belief no longer holds true, given the trends observed in today’s market.
“What we do at Alvéole is beekeeping. We look after several hives. Often, after presenting my organization, the question people ask me often goes something like: “is this a full-time job or not?” When I counter by saying that I have a thriving 200-employee business with significant revenues, I create surprise,” says Alex Mclean, co-founder of Alvéole, an impact startup that works from urban beekeeping to help companies achieve their engagement and sustainability goals.
The ways of measuring impact are still very disparate in Quebec. The biggest myth that persists in relation to ROI for impact startups is that it’s lower than for other businesses. Even though a large number of investors already include ESG indicators in their decision-making. So they look for profitable companies that generate a positive impact. One doesn’t really go without the other anymore.
“Impact is an element that transcends many organizational spheres. It is felt at the heart of today’s start-up organizations. So it’s wrong to say that a company that wants to go down the traditional route isn’t obliged to have some positive social, environmental and governance (ESG) impact. Even if they don’t care about it themselves, it will still be a criterion used in their evaluation by investors and current or future customers. From now on, all companies must be transparent about their ESG indicators,” explains Alex McLean.
As this entrepreneur sees it, today’s businesses face a double challenge: on one side, growth and profit margins must follow impact, and on the other side, impact must be quantifiable and real.
To ensure that they have a fair and clear view of the projects they support, the Blue Vision Capital team systematically sends a questionnaire for impact analysis, including, for example, questions on carbon footprint (environment), to the companies they select. “That’s how we arrive at an exact mathematical formula on the impact of that company today and in the future. By standardizing this practice, it’s the best way to confirm that the impact is real,” explains Meir Rabkin. It’s the way this firm has found to avoid endorsing companies that are greenwashing.
The impact report is read in conjunction with the financial projections. It is with this approach that investors know where the company will be in the next 2 to 5 years. In the light of ESG data, they are able to say what the impact is on reducing the carbon footprint, for example, for every dollar of growth.
If we look today at the number of “unicorns” – companies with a valuation of over a billion dollars worldwide – around a third of them come from the cleantech sector, points out Meir Rabkin.
By 2022, the market has seen a 40% drop in venture capital dedicated to so-called traditional companies, across all sectors. If we look at the cleantech sector, however, we see an increase in investment of around 89%.
Impact startups are therefore taking a major place in investors’ portfolios. In other words, they are able to demonstrate that their return on investment is as good as or better than that of traditional companies, and that they also have a positive impact on society.
This article was developed as part of the Startups, le réflexe impact campaign, presented by Startup Montréal in collaboration with the Quebec government.