Will impact companies succeed through a recession?
“In the current situation, unfortunately, I do not think that investors will reflect on the major climate problems, but think more about themselves and their current investments," says Jan Svensson, Chairman of the Board of Mikrofonden Sverige.
The Corona virus is already all over. Therefore, everyone’s attention has now shifted to how big and long a recession we are heading towards. We have never experienced such a reaction to a global danger as quickly as in the case of Corona. People respond immediately in the form of social restrictions and as a result to that reduced consumption. Business is responding with cuts in costs, layoffs and downsized budgets. Governments are shutting down countries and present financial packages so that we can get through the impending recession.
In just a few weeks, the world has changed. Maybe not fundamentally, but it’s a tough game we’re meeting. Covid-19 will leave deep marks. In every part of society. We will all have to struggle to get through, not only the Corona pandemic, but first of all this unexpected and sudden economic crisis.
Aid packages are not enough
Despite the fact that governments’ financial aid packages are larger than ever, and very broadly based, it will never ever be enough. Most people and businesses will make it through the Covid-19 pandemic. Most of us will be infected. And we will overcome it. But many companies, and also people, will simply die because of the economic downturn.
A large part of those who are heading really hard times are the small growth companies; start-ups and scale-ups. Most of them exist because of investments. And most do not leverage business progress due to more customers and increased earnings, but with the help of the next round of investments. It is part of their nature, and the way business life is growing, especially in the Nordic countries where our economy is contingent on having many SMEs. Investments are essential to our development of the entire business community.
Good ecosystem initiatives
So, just as many people these days are coming together to help each other, new initiatives are coming daily to help small businesses get through the immediate crisis, and to adapt to the coming recession. In just one week, initiatives like Corona Tech, Corona Funding, Action Against Corona, Covid-19 briefings for Nordic startups and scaleups og COVID-19 Startup Survey have evolved. All with the aim of keeping the large and strong ecosystem of Nordic startups flourishing. It is very welcoming. The need is already great.
It’s pretty clear that a recession in the global economy will reduce most investors’ wealth and reduce their risk appetite in the coming years, even if there are many venture funds out there with a lot of capital to invest. However, they have several years to do so. VCs can and will slow down their activities in the coming time. At least until we know how large an economic downturn we should expect. I think there will be fewer FOMO rounds (fear of missing out). Investors will take a little more time to get to know the companies they are considering investing in. Due diligence processes will be more detailed and rigid. This is not necessarily a bad development. But a big challenge for many small businesses that have to keep up the speed of capital inflows.
Of course, there will be startups who can continue through the crisis at the same high pace. Companies that work with e.g. online platforms in video conferencing, food delivery, communication tools for the health sector and gaming are experiencing an increase in sales these days. There are also those who already have major problems, e.g. travel sales, advertising and e-shopping.
What does this mean for impact investing?
An interesting question is whether impact companies will succeed through a recession. One would think that the entrepreneurs who have a great passion for solving some of the world’s biggest problems will go the extra mile to succeed, no matter what it takes and how limited the financial resources are. Will companies that work with green technology and sustainable solutions have advantages, or disadvantages, in a time when one should expect reduced sales, fewer resources to retain the best employees and greater competition to attract capital? In order to gain qualified perspectives on this, I have spoken to some of the Nordic investors who invest in social, environmental and sustainable development, with the aim of improving the world and making money at the same time.
Lennart Grebelius is the founder of Sätila Impact Investment in Sweden. He has no naive idea that investors are the ones who want to change the world. They are there to make money. Change must come from people and the way we consume. If that change is a good business case, then investors will flock to the options.
“We live in an advanced society. It is vulnerable. We need to incorporate robustness into our daily lives, even if we are part of a global economy. We therefore invest in the food sector, social improvements and energy. We believe in technology and companies that strengthen local production and development and make us all less dependent on a global supply chain. In energy, for example, we need to make our homes partly self-sufficient. It may be sun or wind produced at the house. We cannot live without heat, light and basic functions such as refrigeration and freezers, regardless of crises. So entrepreneurs who deliver that we will continue to invest in, ”says Lennart.
Social investment will be affected
In social investments, a recession will hit hard, and already does.
“I am not sure if impact companies have some advantages in attracting investors in an upcoming recession. The impact trend has become much stronger in recent years, compared to when we started over ten years ago, and the trend will not disappear as it is even more necessary than before. But funding for startups often decline during recessions. The Corona virus has caused politicians to respond significantly to a crisis. Maybe they can learn from it. Politicians, like so many others, have not had the same anxiety about the environment and climate, so they have not made any decisions about that crisis, despite the fact that science shows problems far greater than the Corona virus if we do not comply with our agreement in Paris in 2015. ” says Katina Greve Leiner, director of Ferd Social Entrepreneurs in Norway.
Katinka explains how they are a small part of the family-owned company Ferd, which has billions of investments in private companies, listed companies, funds, real estate and social entrepreneurs. Ferd has a strong public interest and has therefore invested in innovative social entrepreneurs over the last ten years. Ferd has a healthy economy, but many of their investments are now characterized by the Covid-19 crisis, so they have to put extra work into their investments. “In recent weeks, there has been extra close assistance to our portfolio companies to ensure tight financial management, layoffs and liquidity. Many of these social companies have the public sector as customers, such as schools, nursing homes, kindergartens, and faces a very difficult time. ” Katinka explains.
No time to reflect on the climate
Mikrofonden Sverige, which also supports social entrepreneurs in Sweden, has recently decided that they now operate with guarantees for private investors. This means that social enterprises can get cheaper capital added than before. It will be really good in the current situation where many are going to have trouble developing their business. The money in the Mikrofonden Sverige is largely public capital.
“In the current situation, unfortunately, I do not think that investors will reflect on the major climate problems, but think more about themselves and their current investments. They may have learned that the state can easily implement swift and sharp regulations though, when the climate crisis becomes more apparent to our society. Mikrofonden Sverige will continue with an ambitious due diligence and analyze whether new cases can survive the new circumstances. At the same time, we will take a greater risk in the coming time. ” says Jan Svensson, Chairman of the Board of Mikrofonden Sverige.
On the other hand, one of Europe’s leading accelerators and impact funds in food sees a number of opportunities to emerge.
“Impact startups have a massive opportunity. Sustainability was already a mega-trend for this century, and now the spotlight is on our human race to make a move to a more sustainable future for our species and planet. The key for startup winners will be to ensure that the impact sentiment is truly the core of the value proposition, and not only a marketing gimmick.” Mark Durno, Managing Partner in Rockstart AgriFood Fund, points out.
Rockstart AgriFood Fund will continue to make initial investments in early stage agrifood tech startups, at least ten companies in 2020. They are also open for growth investment in 2020, albeit they are reliant upon lead investors and anticipate that companies who can show a clear line towards profitability will be favored during the coming recession.
“We have already seen a massive move towards impact investing before the coronavirus crisis. The pandemic has put the impact further into the spotlight, in particular around themes like the protein transition, so we anticipate there will be a lot more investors integrating impact and ESG measures into their investment thesis.” Mark adds.
Corona will be a wakeup call
In Finland, the investment market for unlisted companies has frozen. Business angels are considering the situation caused by the corona virus. Institutional investors have shifted their focus from alternative investments to other options. Decisions are put on hold. Jussi Nykänen, impact investor and one of Europe’s leading people in social impact bonds sees how startups are affected, whether they create impact or not.
“Right now, all our investments are in social impact bonds that help vulnerable children and families, as well as people outside the labor market. The economy of the projects is thus not affected by a recession. But those we are there for will be severely affected. It will put pressure on families who already have low or no income. If unemployment increases, there are more social problems. Abuse increases, violence can escalate and it affects children in their daily lives.”, Jussi explains.
Another Finnish investor, Pasi Joronen, sees how impact investments are increasing. His gut feeling is that Corona will somehow act as a wake up call that threatens the traditional investments. This year will slow down for most people, but if all impact companies are actively pushing their positive stories of change into the market, he sees only a bright future for them. He also recognize a shift in focus among the wealthy families as the wealth of future generations is increasingly deployed. The 60-year-old investors stick to old habits and patterns, unless there is a chance to reduce risk and get a good return. Next gens will choose impact over return.
“In general, however, I believe that the good business cases will do best in a recession, regardless of market. Personally, I continue to focus on edutech, where there is a global need for change and for an increased positive impact. Combinations like gamified edutech solutions add a new layer to it. I also look at where there is support from the ecosystem in each sector and where is the likelihood of these new solutions emerging,” explains Pasi.
Corona gives rise to reflection on strategy
Pasi Joronen is not the only one who looks opportunistically at the future of impact companies.
Danish investor Mette Fløe Nielsen has for a number of years invested in companies that make a difference, primarily within the energy area and within social purposes with children and young people at the center. She already sees some trends caused by the Corona crisis. One is a kind of positive opportunism where the focus for both investors and entrepreneurs has quickly become companies with solutions in health and education, as well as those with digital platforms for video, work and communication. We are investing heavily in the solutions that help on the Corona crisis instantly and we are gladly adapting known products and services to be able to use in this situation. Another tendency is that as an investor you have the opportunity to stop and reflect on your own strategy. Can and should it be designed to support a situation like the one we see today? Maybe more investors will think about how we help young people through edutech, how we ensure stable deliveries of product and other goods under new conditions, or how elderly and sick can be helped, for example, with robotics technology in healthcare.
A recession in the aftermath of Corona may also be favorable for investors, Mette said. The valuation of companies before the Corona crisis was over the top and can from now on become more realistic, so there will be a greater number of more realistic deals. Transactions on Secondaries will increase in number because many companies and founders of these need liquidity. “I think in the future we will see that certain investors will invest with a longer horizon and more balanced risk, with the opportunity to come out strongly on the other side of a situation that Corona is causing in the financial markets. It will be an advantage for impact companies that often have a longer time to profit than fast scalable tech companies, “Mette Fløe Nielsen points out.
If these investors say something about the potential for impact companies in an economic recession, I interpret it as good opportunities to get through the crisis. The world probably won’t be completely different on the other side of the coming recession. Many investors will be back in the growth track again. But if we continue to believe in a positive development in the world, work for it, and show how business can make a positive contribution, then those who have these solutions will have the best conditions to succeed.
“I hope that the Corona crisis will at best, in a positive way, help to show how the world is connected and how, as an investor, we must prioritize investments that contribute to resilience, cohesion and sustainability. A positive outcome will be that our long-term crisis response also reinforces the sense of responsibility towards each other. ” says Lars Jannick Johansen, founder and CEO in Den Sociale Kapitalfond Invest.
Lars believes that if the authorities are successful in their efforts, even on the way out of the corona crisis with the help packages, and reopening the society in a positive way, it can support the social mind in general. “Then we will all hopefully think we did it, and we overcame it, because we combined social and health solutions with financial investments. And perhaps it will have a positive effect on the interest for more social investments in an economic downturn as well. But if there is chaos, and total recession, then we risk that many will wonder what went wrong, how could it happen, and think the price was too high. ” he adds.