Rapid change is needed to overcome humanity’s massive environmental and social challenges. This change may sound like an obligation, and it is, but it’s also an incredible opportunity to create an immense amount of value for society and investors.
No Time to Wait for Gigacorns
Gigacorns are like Unicorns, but instead of tech companies valued at over one billion dollars, they are companies that have the potential of lowering or sequestering CO2 emissions by one gigaton (one billion tons). Humans collectively face a 50 gigaton problem, and it’s compounding daily.
“The difference between +1°C and +2°C is not twice the problem. It’s more like a hundred times the problem! We can’t wait for a carbon capture company to make it big by itself.”
Startups that achieve unicorn levels get portrayed in the media as an ‘overnight’ success, but this can be misleading. For example, Mailchimp, now a household name in the email marketing industry, began as a bootstrapped side project that grew over a 20-year timeframe. Success stories like these don’t just appear overnight. They require money and time; we have an abundance of the former, and we are quickly running out of the latter.
“When it comes to the future of impact startups, we don’t have time to wait for the overnight successes, and we need to move faster. Getting the necessary friction requires startups and corporations to work together.”
Impact innovation is not in short supply, except in a few key areas like cement and steel. What is genuinely lacking falls on the implementation and deployment side of innovation, and shifting focus towards this side of the problem requires corporate participation.
But getting startups and corporations to work together is a complicated process, often framed as a race between innovation and distribution. This concept, called the Tivo Problem, was first introduced by Marc Andreessen. Marc’s theory suggests that startups and corporations are locked in an existential battle between innovation and distribution.
“If the startup gets distribution before the corporate gets innovation, the startup wins and vice versa, but if you can get the startup and the corporate to work together, you get the best of both worlds and its magical!”
Corporates have the capital and the distribution channels. They’ve already spent years establishing a brand reputation and tackling licenses and regulation. They also have extensive data and insights that are extremely valuable. On the other hand, startups have innovative ideas, breakthrough technology combined with an entrepreneurial mindset, and motivated talent. Startups can work with speed and agility while developing cutting-edge business models that give them a competitive advantage.
Speaking Corporate Innovation
So, how can startups and corporations overcome the paradox of competition? Well, they can start by listening to each other. Startups are inherently working at a different frequency than corporations and often communicate in a particular way.
Imagine a corporation operating at a relaxed frequency like 100Hz. Along comes a small startup with great innovation but little funding. They need to hustle, so they’re working at a much higher frequency, like 800Hz. This approach often fails because it neglects to understand or even consider the corporation’s objectives concerning innovation.
To make conversations between startups and corporations work, startups need to understand what a corporation is looking for in regards to partnering. For example, are the corporates looking for startup DNA to help drive a cultural shift towards innovation (soft, intangible benefits)? Or are they looking to create investments in startups that will generate future business opportunities for their organization (hard, tangible benefits)? Defining this fundamental value proposition is imperative because corporations don’t change that quickly, even though their management may.
“You would think employee turnover is faster in startups, but it’s much faster in corporations. It’s a long story, but basically, changing the direction of a big tanker can be extremely slow. Corporates are kind of like big tankers. If they want to change the direction, they’ll keep changing executives, hoping it will somehow change the trajectory of their business.”
The Impact of Impact
So far, our conversation has focused on revenue growth and cost-efficiency; impact is an entirely different ball game. So what is impact? One way of understanding it is by looking at the Sustainable Development Goals (SDGs) published by the United Nations. The SDGs consist of seventeen sectors, encompassing everything from clean energy to social inclusion.
On the other side of the coin lies environmental, social governance (ESG). If you’re going to create impact, you need a system of rules to define the game and measure outcomes so you can keep score. By the end of 2022, the Corporate Sustainability Reporting Directive (CSRD) will come into effect, requiring a substantial percentage of European companies to publish their sustainable reports while also having them assured by auditors. Banks will begin tracking the ESG impact of their investments and offer preferential rates to more environmentally and socially sustainable projects.
“The entire financial sector is saying: we don’t only worry about dollars and cents anymore.’”
You might be thinking, well, my company only sells X, so I don’t have a footprint? The truth is, everyone has an environmental and social footprint, from bitcoin to broccoli. Commercial activities create impacts categorized into three scopes, and everyone should know the difference between them. Scope-1 refers to the “direct emissions” caused by “owned or controlled” sources. Scope-2 refers to the “indirect emissions” from purchased energy. Scope-3 is the fun one. It refers to “all other indirect emissions that occur in a company’s value chain.” So if you’re manufacturing ice cream, for example, you need to know the upstream and downstream impact of every ingredient you use in detail. You also need to know random things like the emissions of the accounting company you use to quantify and audit your emissions. Very soon, quantifying all of this data will be extremely important to SMEs doing business with any company that operates globally!
2020 was a big year for impact investments, and when the 2021 numbers are out, they will most likely be more significant. It’s projected that ESG investments will reach $30 trillion by 2030. This change sounds like good news, and it is, but investments alone will not get us to the 1.5°C limits set by the Paris Agreement. There is still an innovation gap, so startups need to go deep on impact measurement, vertically and horizontally.
“If you’re a fashion company, you should know your footprint, and there are lots of niche consultancies that can do that. In this context, horizontal means you should also know all the ESG relevant topics in your industry.”
Since the 1930s, we’ve had a common language around financial reporting. Impact reporting is only a couple of decades old, and because of that, it’s still quite chaotic. Reporting frameworks include the GRI, the CDP, the TCFD, and the SASB. Not to worry, this isn’t going to be another Betamax vs. VHS moment. These organizations are currently working to integrate their frameworks to create one universal standard.
This article was extrapolated from a talk given by Alex Farcet on October 28th, 2021 at The Camp. Alex is a self-described “Born Again Entrepreneur” who has worked extensively in corporate and startup environments. He is currently a Partner at Rainmaking and Co-founder of Startupbootcamp.