“When we started, we had to explain to investors that you can have profit and purpose together,” says Patrick Sheehan, “We don’t have to explain that today.”
As a founder of ETF Partners – a VC fund focused on backing businesses that deliver “sustainability through Innovation” – Patrick Sheehan has witnessed at least the beginnings of a sea change in investor attitudes. Over the past year or so, global warming has been rebranded as a climate emergency. And this year, the world is struggling with a more immediate crisis in the shape of Covid-19. Against this backdrop, investors – some of them at least – are looking for technology companies that can not only solve the requisite “big problems,” but also have a real environmental, or societal impact in a world that seems increasingly fraught with risk.
I spoke to Sheehan earlier this month as ETF announced that its third fund had secured £167 million from institutions and other investors. And as he sees it, the Covid-19 crisis has helped focus minds on the importance of solutions that will deliver sustainable prosperity.
“Covid has had two effects,” he says. “On the one hand, it has accelerated the adoption of digital technology. At the same time, it has also demonstrated that crises happen.”
That has, in turn, focused minds on green issues. “I am really encouraged by the trend,” adds Sheehan. “Today sustainability is on the agenda of every investor.”
You could probably also argue that there is an even more direct link between the Covid pandemic and a climate crisis that is waiting in the wings. Covid has encouraged all of us to think about more deeply about the world we are building for tomorrow while also posing a huge economic problem. The imperative now is to preserve as many jobs as possible in the face of an inevitable global downturn. That involves bailing out industries and creating jobs programs. Here in the UK, the government has announced an investment in green projects – insulating homes, fitting more efficient heating – that are specifically designed to create jobs. Thus, Covid has put the environmental agenda front and center stage in terms of economic policy. It’s a similar story elsewhere in Europe. For instance, France has tied support for Air France to emissions cuts.
A good time, then, to launch a fund dedicated to sustainability and the environment, but as Sheehan explains, ETF3 is quite specific in terms of its investment criteria. With a focus on companies that are already established, making sales and ready to scale up, it is essentially looking for digital solutions providers rather than opportunities that involve hardware or infrastructure.
A Third Phase
In Sheehan’s view, investment the green and sustainable space has entered a third era. “In the cleantech era, people were saying that cars should be electric, so there was a lot of investment in electric cars,” he says. Then there was infrastructure investment. “People saw that solar was booming, so they invested in solar.”
These capital intensive engineering-led ventures didn’t necessarily suit the VC model, not least because in some cases – Sheehan points to solar as an example – a great many companies attracted investment in a space where there could only be a few winners.
So, ETF is now focused on the kind of digital projects that can make a difference, without requiring a huge investment on infrastructure. Sheehan cites the example of portfolio company, Zeelo, which provides smart bus services to ferry people to work who would normally drive.
As Sheehan acknowledges, the key to attracting continued investment in sustainability-led ventures is to demonstrate that in addition to being good deeds in a wicked world, they are viable, profitable, and growth-friendly businesses with a long-term future. In this respect, he believes that the Covid-19 crisis has demonstrated the adaptability and resilience of digital companies. Again, he cites Zeelo. “After the lockdown, the company pivoted and began to provide transport services for critical workers,” he says.
Investment patterns change. Over the past few years, there has been a concentration on areas such as fintech and deep tech. In the midst of Covid, the potential for ed-tech and health-tech businesses to flourish has become apparent. In a post-Covid world in which thoughts are turned to building a more resilient future, investment in environmental technology may also see a sustained upsurge.