SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET

SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC

MARKET

A STUDY ON THE INVESTMENT CONDUCT OF EUROPEAN VENTURE CAPITALISTS

Examiners:

Dipl.-Kfm. Stefan Eghbalian

Prof. Dr. Jörg Schmütz

Master Thesis - Gratian Permien

SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET

Agenda

Background of the study

Significance of the topic

Purpose and object of the study

Procedure of the studyOverview

Definition of Sustainability

Application of investment criteria

Venture Capital

Survey methodology

Survey results

ConclusionsInsights

Problematic issues

1st February 2013



Background of the study

„[...]the overall level of capital investment in sustainable electricity technologies is not sufficient to make a significant difference in the penetration rate of renewable energy and in reducing undesirable byproducts going forward.“

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Moore, B. & and Wüstenhagen, R. (2004): INNOVATIVE AND SUSTAINABLE ENERGY TECHNOLOGIES: THE ROLE OF VENTURE CAPITAL. In Business Strategy and the Environment 13 (pp. 235–245). St. Gallen: John Wiley & Sons, Ltd and ERP Environment

Overall VC investment

Seed stage Early stage0

50010001500200025003000350040004500

VC conduct changes in the U.S.

2011

2012

Com

pan

ies

PricewaterhouseCoopers/National Venture Capital Association (2013): MoneyTree™ Report, Data: Thomson Reuters



Significance of the topic

• No proven common opinion about responsible behavior influencing investing patterns or share prices

• Motives of investors often hidden from the public• Lack of investment strategy research in the private sector

• Concernment of the author• Involvement with VisionGreen

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Current research / industry status

Personal relevance



Purpose and object of the study

Does sustainability influence the investment strategy of Venture Capital firms?

– How do VC interpret the term “sustainability”?– By which means do they ensure their investment strategy to be

sustainable?– Which outcomes do VC expect from a sustainable investment

strategy?– Which motives do VC follow?

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Core question

Subordinate questions



Procedure of the study- Overview-

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Definition of the term “Sustainability”

Application of various investment criteria as well as the current market

situation

Venture Capital branch and the financial sectors already having

sustainable investment criteria in place

Survey of a sample of European VC regarding sustainability and the design

of their investment criteria



Procedure of the study- Definition of Sustainability -

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situation





Public understanding of “sustainability”. German online households of all ages. Referring to Nielsen PanelViews Homescan, 2011

• Utility for future generations = utility

for present generation

• Triangular model vs. egg model

• Weak definition = constant capital

stock

• Strong definition = preservation of

the environment and its natural

functions for future generations

• Difference: balance of artificial,

physical capital and natural,

environmental capital

ESGCSR

PRISRI



Procedure of the study- Application of investment criteria -

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situation




of their investment criteria Outperformance of SRI. Referring to Kiernan, 2009, p. 66

Effect of RI approaches on performance. Referring to Eurosif, 2009, p. 12

- Monetization methods

• Governance Evaluation

• Codices / guidelines- Frankfurt-Hohenheim

Guidelines

• Ratings

• Indices

• Ecological evaluation

• Social Evaluation- Process methods- Impact methods



Procedure of the study- Venture Capital -

1st February 2013



situation





Moore, B. & and Wüstenhagen, R. (2004): INNOVATIVE AND SUSTAINABLE ENERGY TECHNOLOGIES: THE ROLE OF VENTURE CAPITAL. In Business Strategy and the Environment 13 (pp. 235–245). St. Gallen: John Wiley & Sons, Ltd and ERP Environment

• Venture Capital vs. Venture

Philanthropy and Donations

• Independent VC vs. Corporate VC

and Government-sponsered VC and

• Funding Stages:- Seed stage- Early stage



Procedure of the study- Survey methodology -

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situation





• Nonprobability sample at a 95%

confidence interval

• Target population: 459 seed and early

stage European VC funds (2011)

• Question types:- dichotomous Yes / No

questions- free response questions- multiple choice questions- ranking and rating questions

• Participation quota of 7.8%



Procedure of the study- Survey results 1 -

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situation





Associations of the term "Sustainability"

Activity in SRI

• Average investment level 460.000 € -

740.000 €

• Expected return rates 14.6% - 21.1%

• Focus on production of sustainable

goods / services (in RE/Cleantech)

• Main investors: Public institutions /

High Net Worth Individuals




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situation





Positive criteria

• Focus on RE production and natural

resources protection (“green”

technologies)

• Negative criteria were equally

distributed

• All methodologies treated rank

below “sometimes”:- Best-in-class approach- Engagement- Codices/guidelines- Ecological evaluation- Social impact assessments- Ratings / indices

Evaluation methodology ranking




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Application of various investment criteria as well as the current market situation

Venture Capital branch and the financial sectors already having sustainable

investment criteria in place

Survey of a sample of European VC regarding sustainability and the design of

their investment criteria

Repercussions of SRI engagement

• Involvement with SRI increases both

the employees' motivation and

investor attraction

• Impairment of sustainable conduct

only rarely leads to specific measures

(such as exclusion of ventures from

the portfolio)



Conclusions

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• “Sustainability” does influence investment conduct:– Product choice– Lowered average investment amount, but similar return expectations– Outcume expectations similar to standard investment

• Common understanding of sustainability = VC’s understanding:– Availability of products and services on a “green” market– Energy turnaround

• Motives: fiduciary duty, reputation vs. additional profit / outperformance remaining a non-core issue

• Means to control the investment strategy to be sustainable are often left unused

Insights



Conclusions

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• Gained data may be affected by a hybrid error• Sampling error:

– Nonprobability sampling method not random, but arbitrary and purposive (uneven proportions: German VCs in favor)

– Low precision due to sample choice bias-variance tradeoff

• Non-response error:– Lack of participant cooperation– Large question catalogue

Problematic issues

SUSTAINABILITY AND ITS IMPACT ON INVESTMENT STRATEGIES IN THE VC MARKET

Education