Delivering profit and purpose through corporate venturing
Beyond the Binary: Corporate Venturing & Impact Investing
This infographic is part of the ongoing project, Beyond the Binary: Corporate Venturing in the 21st Century, aiming to show why and how companies are increasingly striving to generate profit with purpose. This project is managed by the Multilateral Investment Fund (MIF) with funding from the Inclusive Business Action Network (IBAN), a global partnership implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), and support from Saïd Business School, Oxford University and Global Corporate Venturing.
The Beyond the Binary project will also include a series of videos with corporate venturing practitioners, as well as roundtables with corporate venturing professionals interested in developing their strategies to include a ‘profit with purpose’ focus. This effort builds on MIF-supported activities carried out in 2016 including commissioning the development of a step-by-step Practical Guide for companies looking to generate both positive social and financial returns through their innovation and investment strategies, in partnership with Big Society Capital, as well as a complementary Caribbean briefing focusing specifically on corporate venturing-related activities and opportunities in that region.
Treasure Chests
Companies are holding onto significant amounts of cash, cash equivalents and short-term investments, approximately $19 trillion dollars’ worth. This eye-popping number comes from a recent analysis of the balance sheets of publicly traded operating companies generating over $100 million in annual profits, using S&P Capital IQ data. US publicly traded companies lead the way with over $5 trillion in their treasure chests, followed by Japan with $4 trillion and China with $2.2 trillion. In Latin America, Brazilian firms have over $350 billion available on their balance sheet.
Keeping hold of so much capital may not always be the most effective strategy—for investors/shareholders, for company growth, or for society. If even a fraction of these balance sheet assets could be allocated towards generating positive outcomes in areas such as health, education, sustainable infrastructure, or agriculture, it could help fill the $2.5 trillion annual investment gap needed to meet the Sustainable Development Goals (SDGs).
Beyond the Binary
The good news is that some companies are exploring how they might allocate more of their balance sheet resources towards a new kind corporate venturing (CV) strategy – one with a clear focus on creating positive outcomes for both the business and society. Corporate venturing teams are all about engaging with entrepreneurs as a way to bring entrepreneurial energy and ideas into a business strategy. Going beyond traditional philanthropy and CSR, corporate venturing for impact is a strategic investment approach linked to a company’s core business that offers opportunities for generating both social and financial returns. In many cases, this involves new ways of thinking about the ‘purpose’ of their organization in generating ‘profit’. These businesses are rejecting a traditional binary notion that the two elements are separate – and instead finding ways of achieving both profit and purpose simultaneously, just as impact investors do. This means investing in innovative startups related to clean energy, HealthTech or FinTech, for example, that not only make sense in terms of corporate strategy, but also offer solutions that are beneficial to society.
To this end, there are four notable traits that corporate venturing professionals and impact investors have in common:
- Both are interested in ‘beyond financial’ returns (i.e. strategic imperatives for investment)
- Both share an interest in social and environmental outcomes
- Both recognize good investments require more than just cash
- Both have an appetite for collaboration
As far as converging interests around key sectors, according to Global Corporate Venturing (GCV) Analytics, health and energy were two of the top ten sectors for Corporate Venture Capital (CVC) deals in 2016. On the impact investing side, according to the Global Impact Investment Network’s (GIIN) Annual Impact Investor Survey, the largest sectors by asset allocation are those meeting basic needs, such as housing, energy, financial services, food and agriculture, and healthcare. Approximately 25% of respondents (of the survey) have plans to increase their proportional allocations to food and agriculture in 2017, as well as in the energy, education, and healthcare sectors.
In terms of the overall size of the market, over 200 GIIN survey respondents reported $114 billion impact investing assets currently under management. “In aggregate, 205 respondents invested $22.1 billion into nearly 8,000 impact investments in 2016 and plan to increase capital invested by 17% to $25.9 billion in 2017.”
Clearly, there are strategic opportunities for collaboration among corporate VCs and impact investors. The outlook is also brighter on the deal flow side. There are over 2,100 certified B Corps (for profit businesses which are run for the benefit of both shareholders AND stakeholders) from 50 countries which represent 130 different industries. These businesses are one potential source of ‘profit with purpose’ deal flow. Likewise, there is a growing number of intermediary organizations cropping up in different markets to help accelerate the investment readiness of social enterprises that seek both social and financial returns.
In Latin America and the Caribbean, for example, over 30 impact-focused accelerators and incubators have launched since 2010, and traditional incubators and accelerators are increasingly integrating an impact focus into their activities. For instance, this integration of impact into traditional acceleration activities is a key part of an effort underway in Brazil to catalyze the country’s nascent impact investing ecosystem, whereby at least 40 incubators and accelerators will be fortified with an impact focus. Led by the Instituto de Cidadania Empresarial (ICE), this ecosystem building project also entails channeling a larger volume of capital from diversified sources to the sector. Just a portion of the $350 billion on the balance sheets of publicly traded Brazilian firms could play a catalytic role here.
Positive Outcomes in Action
There are many forms that corporate venturing can take to generate positive social and/or environmental outcomes. For example, in Chile, corporate investors CODELCO (the Chilean National Copper Corporation) and Mitsui & Co. invested in the $50 million AURUS Fund, along with other multilateral, public and private investors, to finance innovation and environmentally-focused investments around the copper and mining industries. To date, AURUS has invested in environmentally-friendly technologies for scrap tire recycling, sensors for selective ore extraction, and the use of antimicrobial copper in off-shore fish farming systems and in textile fibers. Another example is the French multinational electric utility company ENGIE’s corporate impact venture fund, ENGIE Rassembleurs d’Energies, which invests in profitable, local enterprises providing B to C, sustainable and relevant energy access solutions to poor and remote populations in Africa, Latin America, Asia and Europe. In April 2016, ENGIE reinforced its fund, raising its endowment from €10 million to €50 million.
In sum, many corporate venturing teams realize that change is happening and they are seeking ways to invest, innovate, and collaborate with others who similarly believe that it is possible to move beyond the binary to create both profit and purpose. With the resources these corporations have available – both financial and non-financial assets that they can bring to partnerships – let’s set a big table. There are many opportunities in the world today to create positive outcomes together.
This blog was written by Norah Sullivan and originally posted on the Multilateral Investment Fund.