Jennifer Schwalbenberg
Strategy, Governance, Sustainability, Trustee, Advisor, Consultant Giants’ Shoulders Capital
I have had the privilege recently to work with several start-ups and scale-ups, each exploring what it means to operate responsibly and sustainably in their home markets. The story of one of these companies has resonated deeply with me and it is a company I describe when people discuss investing in sustainability.
The start-up in this instance transforms waste wood into building materials of a quality and a size which can be used for, e.g., residential construction. It utilises wood which in its home market would be destined for being fuel for the smelter or rotting in a landfill. The start-up earns revenue from the government for accepting the wood from either the waste management company or other entities disposing of the wood. Those same entities also must pay the start-up for accepting their waste wood. In sum, by doing nothing but collecting the wood from those who wish to dispose of it, the company generates revenue. Then, if it had the machinery in place, it could produce building materials from the waste wood to be sold in its home market. This whole process generates carbon credits and prevents deforestation for the production of new building materials. They can show that their technology and business model can be replicated in other markets where they have identified similar sources of waste wood.
So, why can this start-up not get its machinery in place? Because it cannot find an investor. And why can it not find an investor? In very, very simplified terms, because it only needs a million dollars to get to the first stage. And because it isn´t an app. Or a flavour of “tech”. Projects like theirs require significant investor due diligence; a level of due diligence only feasible for the larger institutional investors. But due to the overheads of keeping teams that can perform that level of due diligence, those investors can only write a ticket for (i.e., invest) a minimum of 50 million dollars. And they don´t like to take risk alone, so they invest in syndicates of 3 to 4 other institutional investors. Meaning, any project they look at will need to be a 150-million-dollar investment. Also, ESG investments tend to be the interest of those larger institutional investors who have the expertise in-house to review these more complicated initiatives. In sum, if this start-up wanted 150 million dollars, they might have an easier time. On the other hand, if they were a technology focused company, perhaps an app to measure the carbon footprint of the smelter which burns the wood not being recycled, they could get that million dollars because there would be less due diligence involved and smaller investors would have the ability to review them with greater ease.
As I type, the start-up continues to collect waste wood, earning revenue, and searching for an investor to build out their plan of creating building materials from waste wood. (Their plans are also stymied by the high interest rate environment which makes taking out loans too costly)
Some say that if this is the current outcome, something must be broken with our financial system. However, the financial system isn´t broken it´s working the way it was designed to work. But that does not mean there isn´t (significant) room for innovation…or improvement!
