By Richard Georg Engström
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Since 2018, venture capital for global impact startups has increased from USD 0.5 to 2.4 trillion.
Over three decades, the Nordic region, led by Sweden, has built a strong innovation ecosystem for startups and investors, which has produced unicorns such as Spotify, Minecraft and Klarna. Although the Nordic countries only account for around two percent of the world’s gross domestic product, the Nordics account for seven percent of the world’s exit of tech startups (each of them valued to USD 1 billion).
We are also making huge progress in startups with sustainable solutions and impact investments. Today, over a third of all venture capital in the Nordics comes with a mandate for impact, mainly driven by business angels, family offices and VC funds, but also by state investment funds such as the Danish EIFO, Finnish Tekes or Swedish Almi, which delivers a combination of blended finance donations, loans and equity .
As a serial entrepreneur in the Nordic innovation ecosystem since the mid-1990s, and specifically in impact investing since 2015, it has been pretty overwhelming to see all these new technologies and solutions developing around the clock.
But if we only base our assessment of the long-term sustainable transition on how much capital we invest in entrepreneurs with sustainable solutions, there is a risk that we will have no positive impact at all on the most relevant social and environmental problems.
The Nordics are ahead of the curve
Investments in impact startups are growing year by year. This means that we invest more and more in the innovation that will transform the world for the better.
We can see this in the latest editions of Dealroom’s and Danske Bank’s annual reports “The State of Impact Startups” from November 2023, covering the whole world, and “Nordic Impact Startups” with a focus on the Nordics from September 2023.
It’s enjoyable reading if you’re interested in the green transition, but the reports – in my opinion and that of a growing number of impact investors – don’t give the full picture. I’ll come back to that.
Compared to the rest of Europe, the Nordics are far ahead in the technological development and innovation needed to design and develop sustainable solutions. And investors have discovered that.
Since 2018, the value of global impact startups has increased by an average of 328 percent per year, from USD 455 billion in 2018 to USD 2.4 trillion in 2023. This gives a total value increase of 1641 percent over five years. Big numbers and staggering growth.
In 2018, there were 60 global “impact unicorns”, startups with a sustainable proposition and a valuation of at least one billion dollars. In 2023 there were 257.
This means that small entrepreneurial companies that change the world for the better with new technology and new business models are no longer a niche, but are now more than mainstream in the innovation and investment market.
This is because impact startups with their products and services are establishing completely new product categories, defining new markets and setting standards for how our largest industries – food, the built environment, pharmaceuticals, transport, shipping and so on – are going to function in an imminent future. In the same way as digitization has done for the past 25 years.
In the period from 2018 to 2023, global investment capital from venture capital funds has simultaneously increased by 58.9 percent on average – equivalent to an increase of USD 20.22 billion per year.
As a region, we are well ahead of the curve. In the Nordics, 36 percent of all venture capital in 2023 went to impact startups, while the figure is 22 percent in Europe as a whole.
In the US, the reports state, only 7 percent of venture capital goes to sustainable solutions, just overtaken by Asia, where 8 percent of all venture capital in 2023 was invested in impact startups.
Despite a slowdown and decline in the total venture capital market, the total Nordic venture capital invested in impact startups in 2023 was 2.4 billion dollars – peaking in 2021 with 5.5 billion dollars.
Measured in terms of investments, Sweden leads the way. In 2023, 48 percent of all Swedish venture capital was invested in impact startups. In the period from 2017 to the first half of 2023, Swedish venture capital funds invested USD 12 billion in impact startups – ahead of Germany, France and the Netherlands, and in Europe only surpassed by the UK with USD 16 billion.
In the same period, Danish venture funds invested just under a billion dollars in impact startups, while Norwegian VC funds invested 1.7 billion dollars.
If you break it down to major European cities, Stockholm is the leader in Europe – not entirely surprising with major players such as Norrsken VC and EQT.
We do not benchmark on the important
This is of course a good trend. Small startups that set out to change the world are able to attract investment that enables their innovative, sustainable solutions.
But, in my opinion, that is not enough. The opportunity for me as an investor to benchmark them on what really matters is not present at all in these reports.
If I invest, for example, 1 million dollars, I first of all want to know which new products and services reduce food waste the most, avoid the most CO2 emissions, retain the most children with ADHD in school or provide the most nature-based packaging – per dollar invested.
I call for the “unit per unit” mindset, which in my opinion is absolutely crucial.
The increasing amount of capital is also good news for another reason. This means that these startups can attract more employees.
In 2018, impact startups accounted for 4 percent of all job postings from Nordic startups. In 2023, the figure was 14.3 percent. This is an increase of more than 258 percent in five years. The reports show that in 2023 one seventh of the employees in all startups were employed in companies that have a goal of creating a positive impact.
But who want to work for an oat drink manufacturer instead of a cow’s milk producer, if you don’t have measurable idea on the sustainable improvement when scaling. I’ll give my view on that further down: the “unit by unit” thinking.
A significant market for impact
More and more of the companies that have seen the light of day in the past handful of years are not so small anymore.
With the help of venture capital, they grow very quickly. Especially in Sweden, a number of impact startups have grown rapidly and are today “impact unicorns”.
This applies, for example, to the three Swedish companies Oatly, a leader in oat-based dairy products, Northvolt, producing batteries, and Einride, which are electrifying transportation on a global scale.
Overall, the market value (based on invested capital) of the Nordic impact startups, according to the reports, has grown from 8 billion dollars in 2018 to 71 billion dollars in 2023. That is an average increase of 887.5 percent in five years – eight hundred eighty seven percent!
In other words, we are talking about a significant market that, in addition to providing solutions to some of our biggest social and environmental challenges, employs tens of thousands of people and contributes good tax revenues.
So far so good. But not good enough.
We must analyze the impact
Going forward, it is a completely different number than the amount of investor capital that we need to focus on.
Imagine that the market analyzes that Dealroom and Danske Bank and others come up with not only focus on the amount of capital, but also emphasize how much influence these future-oriented startups have. How many tons of greenhouse gases are avoided, how much food waste they reduce, how many vulnerable citizens they help find jobs, how many transport vehicles are electrified or how many tons of plastic packaging are replaced by degradable material.
This, I believe, will be the most important signal that we as a society are heading in the right direction.
The report from Dealroom and Danske Bank sends very clear signals that commercial companies today contribute significantly to the sustainable transition.
But we are far from a reality where we assess progress on the impact that companies create.
In my view, it does not matter how many billions or trillions of dollars or euros are invested in impact startups if we do not analyze how big a difference the companies make.
The will to allocate investor capital to a sustainable transformation of our society with new technology is not enough. We must have the right measurement systems in place, internationally referred to as “impact metrics”.
These are frameworks that may eventually become legislation, prompting you to be able to show exactly what impact comes out of every kroner invested.
Those numbers have enormous value for us as citizens, society and investors. More than how many billions are invested in sustainability.
Capital is a means, not an end
Why?
Because together we must ensure that we can all make the right daily choices about our consumption, trade and investments. We need to know which of our actions have the greatest impact.
If I buy oat drink instead of cow’s milk, it matters to me whether Oatly, Naturli’ or SPIR or any other oat drink brand reduces the most greenhouse gases per liter oat drink.
If my company replaces its car fleet, it will matter a lot going forward whether a Tesla S, a Volkswagen iD3 or a Polestar has the longest battery life.
We have to break things down “unit by unit”. So we know whether it is 1 liter of oat milk from Oatly, Naturli’ or SPIR that reduces the most cubic meters of water in the production, reduces the most kilowatt-hours of energy during transportation, or limits the most grams of PET plastic in the packaging. Not how many billions of dollars have been invested in Oatly, Naturli´or SPIR, or what value the market values the three companies at.
What is absolutely crucial is that more and more investors will make increased demands that all the impact startups they invest in can measure and report on their impact and what it costs to create that impact.
How else would they be able to benchmark which technology in terms of reduced food waste, inclusion of vulnerable people in the job marker or increased use of nature-based packaging to invest in?
We must invest much more in sustainable solutions and technology that can bring our society into balance and reduce the negative impact on our climate systems, nature, environment and citizens.
But increased investor capital is not a goal in itself. It is a remedy. And it only works if we know what positive impact each individual solution and technology creates, and we can quantify it.
I fully support the reports’ analyses, which I have read with great interest since 2018. They promote development.
In this year’s upcoming reports, “State of Impact Startups 2024”, I hope to see some analyzes of which technologies and startups create the greatest impact per dollar.
Because if we don’t focus on the goal instead of the means, we risk that a large part of the money we invest will be pure waste.
Richard Georg Engström has worked in the Nordic ecosystem of technology, business and financing since the mid-1990s. For the past ten years, he has invested in startups with sustainable solutions and advised on impact investing.
In 2017, Richard established the company Impact Business Modeling System™, which has assessed more than 8,000 Nordic and Baltic impact startups and coached more than 300 to make their impact measurable in order to subsequently match them with international investors.
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