A new lens for startup investment

With investors becoming more resolute about investing in and building more responsible and purposeful companies, the ESG journey could start much earlier for startups – which works out well for 500 Global managing partner Khailee Ng.(pic)

IN the tech startup space, where the focus has largely been on developing tech-solutions to solve gaps in the market, the consideration for environmental, social and governance (ESG) issues is still somewhat of a novelty.

Startups generally start small and bootstrap until they’ve gained some traction and secured funding, which then gives them space to widen their scope and, perhaps, look into ESG.

But with investors becoming more resolute about investing in and building more responsible and purposeful companies, the ESG journey could start much earlier for startups – which works out well for 500 Global managing partner Khailee Ng.

“Because 500 Global has seen how quickly many of our over 2,500 startup investments in 77 countries grow to become large tech giants, we have decided to play a more proactive role in onboarding our next 2,500 investments onto their ESG journey.

“Today, US and South-East Asian startups need to have ESG policies installed in order to receive our investment.

“It’s a requirement. We believe that one day, every startup pitch deck and business plan will have an ESG page. Startups might as well start now,” says Ng.

The venture capital (VC) firm’s portfolio today features 35 unicorns – a company valued at over US$1bil (RM4.19bil) – including Grab, Canva, Carsome and Carousell.

Ng notes that the VC is not alone in this movement. While ESG is not a requirement from the majority of its US$1.8bil (RM7.54bil) of assets under management, many of its institutional investors are starting to encourage ESG by allocating their capital to startups that have such practices.

Notably, there is a growing trend of institutional investors flexing their influence in the adoption of ESG, which encourages VCs to install ESG in their startups. This, says Ng, would mean that VCs can be a potent collective driver of widespread ESG adoption.

Locally, Malaysia Venture Capital Management (Mavcap) is also looking into this area as an investor.

“Given the renewed global push towards ESG standards as well as increasing global awareness on the urgent need to fight climate change, there is indeed strong potential in sustainability investing and this is expected to continue to grow,” it says.

However, Ng highlights that it is important not to conflate ESG with sustainable investing, or impact investing.

“They can be very different. For example, any and every company can and should have ESG policies built in. Some may express their ESG by ‘doing no harm’, while some may proactively regenerate the environment.

“ESG makes it easy to read and assess a company to see how aligned they are with your values. ESG makes it easy to read if they are indeed ‘sustainable’ or ‘sustainable enough’ depending on the criteria of the investor,” he explains.

He also addresses the misconception that sustainable companies have lower or longer return on investment (ROI).

“Our data is showing that the opposite can be true.

“Our top performing seed investments continue to deliver ROIs in the 10X, which is 2,000X range under 10 years. And, they are pioneering inspirational examples of sustainability.”

He points to several 500-backed tech giants such as Canva and Grab as examples.

“Canva is a mobile app that makes it easy for anyone to create digital designs. No paper is used, trees cut, or environments harmed. Canva is worth US$40bil (RM167.54bil). The founders pledged to give away 30% of their shares to create a non-profit Canva foundation, eclipsing the largest foundation in Australia by three times. “Grab is also worth close to US$40bil (RM167.54bil). Their ‘Grab for Good’ actions and policies spell out how they approach sustainability at scale inside their business, as well as the communities they serve.

“We can also look at Bukalapak, the largest initial public offering in Indonesia’s history and how they uplift rural economies,” he elaborates.

The best ROIs, he adds, can drive the best returns to society. And this should be the goal of the savvy investor.

“Every single startup that has been offered our investment has agreed to start their ESG journey as well. Not a single startup has refused this.

“This included multiple Malaysian startups, as well as startups from the rest of the world. They are given templates, webinars and guidance.

“Together, we are taking baby steps as a tech industry, but we are very encouraged by the reception.”

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