Venture firm Rockstart has launched a new fund to invest in impact-driven innovation. While the fund targets technologies that are purpose-driven, it is unclear whether the companies themselves will have a positive impact based on double materiality reporting.
- Rockstart has launched its third fund, called Emerging Tech fund to invest in technology start-ups with a purpose-driven agenda.
- The firm sees this as furthering its mission to drive positive change on a global scale, leveraging its experience as an accelerator and venture capital investor.
- Impact investors may be tempted to invest in purpose-driven funds investing in climate tech innovation, but must be aware of their primary focus on financial returns, rather than positive environmental or social gains.
Rockstart’s three funds focused on food, energy and technology draw heavily on its experience and expertise in running accelerator programs, as well as participating in funding rounds for early stage companies, similar to a venture capital company.
The technologies and innovations it invests in are all focused on some aspect of providing improvements to the environment and society.
Lacking some form of double materiality disclosure, it is unclear whether investing in these early stage companies qualifies as impact investing.
Rockstart’s history of accelerator funding and exits
On its home page, Rockstart lists its track record in terms of the number of start-ups funded, the alumni value, follow-on rate and the number of exits, suggesting a strong VC culture being embedded in its history.
Yet, the company may not be a typical venture capitalist, having started out as an accelerator, and run over 30 programs focused on start-ups in technology, energy and agri-food.
It also funds companies up to the series B, or second round of funding. A company typically attracts series B funding after it has met certain growth milestones and is past the start-up stage.
Accelerator programs claim to differ from venture capitalists in the way they invest, and in the mindset behind their investments. They provide training and mentorship to cohorts of entrepreneurs, thereby creating an ecosystem that facilitates investment.
The Danish sovereign fund, Vaekstfonden, has been an investor in two of Rockstart’s funds, AgriFood and Emerging Tech. Vaekstfonden is focused on growth businesses, with a focus on Denmark, with an affinity for technology investments.
Rockstart’s Energy fund launched in 2020, and focuses on five of the UN’s Sustainable Development Goals, and includes Dutch pension fund ABP, and De Hoge Dennen Capital among its investors.
The firm has also teamed up with Orsted (CPH:ORSTED) to fund accelerated solutions for renewable energy in May this year.
VCs profit focus may limit its ability to be impactful
Venture capitalists (VCs) have been the lifeblood of technology and innovation start-ups, and are credited with helping the rapid rise of technological development, with silicon valley serving as the best example of this type of investment.
Yet, VC’s are fundamentally focused on generating superior returns to those available in more liquid, public investments. This prioritisation of profits has been seen by some as being contradictory to societal and environmental wellbeing.
Quite often venture funding can be seen to ignore many environmental, social and governance issues. But they could invest in companies that score highly on some ESG metrics, which may qualify to be classified as an ESG fund.
What do we mean by impact investment?
Impact investing, on the other hand, is about investing with a view to generating a measurable positive environmental or social benefit, in addition to a financial return
Impact investors have traditionally been viewed as those willing to take a less-than-market return to invest in industries like healthcare, education, energy (renewables) and agriculture. As an investment approach, it grew out of philanthropic approaches, and has very specific metrics on which its performance can be judged.
Investing in innovation and technology that solves a particular climate change problem is not necessarily the same as impact investing. An application of technology or product being able to achieve measurable positive environmental or social impacts does not preclude the start-up company from having an operationally poor sustainability profile.
Investing in innovation does not equal impact investing
Climate tech investing rose by 80% between 2020 and 2021 to reach $56 billion, according to Silicon Valley Bank, a financial services provider to venture capital and early stage companies, and is expected to reach $1.5 – $2 trillion annually by 2025.
A large proportion of climate change solutions being technology-based has naturally attracted venture capital (VC) to them because of their growth potential. Rapid growth is not always associated with sustainable outcomes, and the discussion of growth versus degrowth or the decoupling of growth from emissions is a core part of the sustainability debate.
In the public markets, for example, ESG indices are often overweight in technology companies such as Microsoft and Apple, logistics and retail giants like Amazon but underweight in energy companies. In the same way, venture capital and private equity funding have been seen as being less-than ESG friendly, let alone having an impact focus.
The many criticisms levelled at VCs have been aptly described by the term ‘Blitzscaling’, also the name of LinkedIn co-founder Reid Hoffman and entrepreneur Chris Yeh’s new book, and certain to become the latest in a string of verbs popularised by Silicon Valley.
It refers to the process of scaling up companies at lightning fast speeds to create monopolies, like Uber (NYQ:UBER) and Lyft (NMS:LYFT), the process is described as dangerous to competitive markets, prioritising hyper growth in businesses rather than those that could make meaningful contributions to society.
Rockstart’ mission is an interesting one, and the idea of investing in sectors which are likely to have a positive impact on the climate or society is a good approach to refocusing capital flows.
The question is the extent to which we see a differentiation between impact investing and investing into impact, and how far a looser approach to terminology opens the market up to confusion.
As long as they attract private equity or institutional investors that are well aware of the risks of early stage investing, Rockstart would appear to be more part of the solution (of promoting climate action), than the problem (greenwashing).
