The past year has been plagued by various challenges such as inflation, higher interest rates, public market volatility along with bank failures. Sadly, these factors have not only affected the overall economic landscape but have also impacted the early-stage investment market.
Amidst such turbulent times, valuations have decreased while investment raises have slowed due to investors adopting a more risk-averse approach. However, despite the challenging climate, there are individuals in the startup space who are actively seeking “the next Airbnb” by embracing fresh innovation, recognizing the potential for growth even during a downturn.
Below are six intriguing reasons as to why impact companies possess the right profile to thrive and exhibit resilience in adverse conditions:
- Addressing urgent problems in billion-dollar markets:
Impact businesses are focused on solving critical issues in billion-dollar markets. The United Nations estimates that an annual investment of $4.5 trillion is required to achieve the UN Sustainable Development Goals (SDGs), with healthcare alone necessitating $370 billion annually as per the World Health Organization (WHO). These solutions are no longer mere luxuries but are becoming increasingly essential. Extreme weather events, public health risks, and emerging regulations are compelling governments, corporations, and investors to recognize the opportunities presented by leadership in this domain. Notably, ClimateTech, for instance, maintained robust valuations throughout 2022 despite market turmoil, with venture capital investments in Europe increasing from $15 billion in 2021 to $17 billion in 2022. Similarly, industries like FemTech and SilverTech cater to significant markets, serving marginalized segments of society that possess substantial spending power and face significant pain points.
2. Strong Product-Market fit:
A considerable majority of consumers, approximately 84%, now prioritize sustainability when making purchasing decisions. However, they also expect corporations to take the lead in driving a sustainable future, as highlighted by a 2022 Deloitte survey. This presents an opportunity for companies to establish a unique selling proposition (USP) with consumers. For instance, Apple recognized that a significant portion (96%) of their emissions originate from their supply chain and committed to achieving carbon neutrality in their supply chain by 2030. Consumer trends, such as reduced meat consumption, also open up new markets for agile startups. Large corporations, typically slower to adapt, often need to acquire startups to expedite innovation and address these emerging opportunities.
3. Enhanced employee engagement and retention:
Today’s workforce, comprising Millennials and Gen Z, places increasing importance on finding work that aligns with their ethics and values. According to a 2022 survey by Deloitte, 46% of senior Millennials and Gen Z professionals have rejected job offers that didn’t meet their ethical criteria. Fast-growing impact businesses can offer purpose-driven work, career development, and financial security, which resonate with employees seeking positive impact.
Additionally, impact businesses, often younger and embodying a startup culture, exhibit greater flexibility and nimbleness in responding to employee requirements compared to large multinational corporations. In 2023, Hyer published their second Impact 50 Awards, which recognized the 50 most impactful companies to work for. Notable organizations, including Patagonia, Allbirds, and The Joy Club, share a common trait of making a positive difference for both their customers and employees.
- Impact-Oriented businesses face reduced risks from Emerging Regulations and Reporting Requirements
Regulations, targets and reporting requirements regarding environmental and social impact are coming into force at increasing speeds. Examples include the EU taxonomy, IFRS non-financial disclosures, net-zero commitments, and single-use plastic bans. We are now witnessing various changes as businesses begin to feel this incoming pressure, ranging from superficial attempts at impact-washing to genuinely transformative business models.
With the introduction of anti-greenwashing regulations and stricter supply chain transparency requirements, businesses can no longer hide their practices. Customers are now using their purchasing power to support companies aligned with their values, while regulators are prepared to issue fines and other penalties for non-compliance.
In addition to effectively managing environmental, social, and governance (ESG) risks, impact-oriented businesses inherently incorporate impactful solutions and transparency into their core operations. They establish impact targets, measure progress, and provide transparent reporting. This proactive approach ensures that they don’t find themselves in the difficult position of retroactively incorporating impact considerations into their reporting or making costly changes to their business practices. Instead, they can confidently provide clear responses to challenging questions about their impact.
5. Impact-Oriented Businesses thrive in crisis situations
Impact-oriented businesses are purposefully designed to address complex and urgent problems by demonstrating resilience and innovation in times of hardship. Impact companies create products and services which are not driven by short-lived trends or reliant on incessant consumer consumption. Instead, their business models focus on fulfilling fundamental life needs, driving scientific innovation, and delivering meaningful products.
Many impact founders in today’s market have been working on impact-driven initiatives long before it became popular, allowing them to build sustainable and resilient business models due to their prior experience surviving without external funding.
6. Impact-oriented businesses benefit from diverse founders
While a comprehensive dataset on diverse founders in impact-oriented businesses is yet to be established – anecdotal evidence suggests that diverse founders are more likely to launch and scale such ventures. Impact-driven founders hold a deep understanding of community needs, lived experiences and expertise in overcoming obstacles that contribute to their successes.
Investing in diverse founders not only presents an excellent opportunity but is also supported by numerous studies which show diverse businesses drive greater innovation, achieve higher profitability, outperform non-diverse peers and can generate superior returns for investors.
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Source: EU Startups (Alina Klarner)