Originally published by Barrons in July, 2020. Source: https://www.barrons.com/articles/future-returns-investing-in-tech-for-good-01594748538
Future Returns: Investing in Tech for Good. Barrons. by Rob Csernyik, July 14, 2020
Worries about personal data and privacy have taken some of the sheen off investing in technology.
From Facebook improperly sharing the personal data of up to 87 million people with Cambridge Analytica, to security fears that have led employers to demand employees remove the TikTok video app from their work phones, recent scandals may leave investors wondering if there are ways to invest in tech with fewer confidentiality and ethical issues.The growing world of mission-driven tech offers an enticing option.
In this corner of the impact space, investors seek double or triple bottom-line results from companies tackling the era’s pressing environmental and social challenges. This includes players around the world providing everything from healthcare solutions and clean energy to educational technology and financial services.
Kathryn Wortsman, managing partner of impact-focused venture capital fund Amplify Capital in Toronto, focuses on these investments that use tech for good, and remembers that a few years ago, it was a challenge to find them.In fact, Amplify had to turn down companies because they lacked a mission-driven focus. “Five years later, our pipeline of opportunities has grown substantially—at least tenfold,” Wortsman says.
But investors in general haven’t caught up. There’s still a myth that these investments require sacrificing returns, even though that’s no longer the case. And it’s not just Wortsman’s view: The Global Impact Investing Network’s 2020 survey reported 88% of respondents met or exceeded their financial expectations, and 69% see the impact-investing market growing steadily. Wortsman hopes this growth will lead to needed returns and wins in this sector bubbling up through the public market.What the companies lack in name recognition, they make up for on the balance sheet. Wortsman says early and later stage private companies are succeeding in delivering double bottom-line results in her portfolio, and that investors can make a mission-driven investment across different structures.
There’s also a challenge in convincing non-impact investors to shift from how and where they’ve traditionally acquired wealth.“I think it’s a bit of a psychology leap, because they might have trouble understanding a customer, or an employee, or a supplier that thinks about something other than the bottom line,” she says.But Wortsman offers the following tips as a starting point for investing in tech for good.
Follow the Talent
“Investors should watch where talent is going...today the top talent is going to mission driven companies to work with a purpose to build something beyond a salary. ”
Investors should watch where talent is flocking, Wortsman says, as an indicator of where to put their money. She says by talking with friends, kids, and colleagues, investors can get a sense of where top talent is headed.“Twenty years ago, the best talent probably went to Goldman Sachs, McKinsey, Bain, et cetera,” she says. “Ten years ago, the best talent went to Google, Facebook, and maybe Salesforce. And today the top graduates from Stanford’s computer science program, I can bet you they’re going to some clean tech, innovative, or health-care tech company.”
Companies in Amplify’s portfolio are also attracting people who previously worked at companies such as Shopify or Uber, or elsewhere in the startup world. “But then after a few years, they get excited,” she says. “They want to do something more; they come to a mission-driven company.”
Wortsman says these companies are able to retain highly productive talent and that benefits the bottom line.“Companies that can attract top talent will outperform companies that can’t,” she says.
“Companies that can attract top talent will outperform companies that can’t”
Invest Where Customers Are Headed
Asking the same questions customers and users ask, Wortsman says, is essential in deciding which companies to invest in. That goes beyond how an individual customer may evaluate their buying decision.“
The customer could be someone like BlackRock, that’s saying, look, we’re not interested in supporting companies that don’t have a social mission.”
Even if customer bases seem small or niche, Wortsman says it’s important to note the upcoming groups making big financial decisions today and in the future—especially millennials and women—have different priorities than the past. She says mission-driven customers also tend to be very sticky, which makes them extremely valuable.
The current moment offers opportunities to follow customers as they find strategies to deal with the interruptions caused by Covid-19. Wortsman uses education as an example, noting that in the near future, investors will pay attention to the learning technologies used by major players like the New York State Education Department.“
As an impact investor—we were ahead of the Covid-19 curve in investing in healthcare efficiencies, and outcomes and improvements in education outcomes,” she says. “More investors are interested in these segments today than they were pre-Covid-19, but we were already there.”
“As an impact investor - we were ahead of the Covid-19 curve in investing in healthcare efficiencies and improvements in education outcomes across different demographics”
Take Advantage of Non-Dilutive Capital
Sectors such as clean energy, education, and healthcare have significant research and development tax credits and non-dilutive capital—sources that don’t require a stake in the company—such as low interest or forgivable loans or grants which don’t eat into equity. “Governments aren’t investing in food delivery or a marketing app, but they are very interested in helping innovate on healthcare efficiencies, education outcomes and providing clean energy at scale,” Wortsman says.
For example Sustainable Durable Technology Canada has invested more than C$1.15 billion (US$830 million) in 400 companies, creating 13,000 jobs.She adds that mission-driven companies “especially now, but even before Covid-19” had access to non-dilutive capital.“So if I get 5% of the company, the company doesn’t have to dilute me to raise more equity capital. Instead, they can reach out and get grants, so that again, falls to the bottom line.”
“Mission driven business can raise 5x the capital of a non-mission driven business without giving up equity ownership because the business outcomes will affect more stakeholders than simply financial investors.”
In companies where such funding is successful, including some in Amplify’s portfolio, Wortsman has noticed companies can raise almost twice the amount of capital, with half coming from non-dilute sources.
