The rise of ESG, doom and gloom, and decision making
The future of innovation is global. We discuss it here. August 2021 Edition.
News of the month
I have often argued that the best startups are Multi-Mission Athletes, combining a focus on operational success with a lens that encompasses multiple stakeholders beyond shareholders, including (but not limited to) customers, employees and their community. It isn’t that multi-mission athletes only do good, they also do well, and often better than ordinary startups.
This outlook on the world seems to be going mainstream.
This month, the CEO of Techstars, one of the world’s leading global accelerators, signed on to the United Nations-backed Principles for Responsible Investment (UN PRI). “I hear entrepreneurs and investors alike worry that if we are not ruthless in our decisions, our returns will fall short—that ESG is a distraction. To them, I say: We are better than ruthless. We are smart. We take all the factors, including ESG, into account when we choose our investments.”
At the same time, Blackrock continues its push in this direction. “It promised to screen all investments against sustainability criteria, and to begin divesting from companies such as thermal coal producers.”
McKinsey & Co argues that “more than 2,000 academic studies [have been conducted looking at ESG and company performance] and around 70 percent of them find a positive relationship between ESG scores on the one hand and financial returns on the other, whether measured by equity returns or profitability or valuation multiples. Increasingly, another element is the cost of capital.”
The markets substantiate these points in both cash inflows for funds and ultimately performance. “This tracks the superior market performance of ESG investments across the board. Funds screening out bad actors for environment, social, and governance issues saw four times more cash flow into them in 2020 relative to the same period the previous year. Many outperformed the S&P 500.”
And, at the end of the day, it’s the right thing to do.
One of the reasons the impetus for ESG reporting discussed above is so strong is because the evidence for climate change is irrefutable. This month saw the launch of the quadrennial IPCC climate report. The short story: “Global warming is happening, it’s caused by human greenhouse gas emissions, and the impacts are very bad (in some cases, catastrophic). Every fraction of a degree of warming we can prevent by curbing emissions substantially reduces this damage. It’s a message that hasn’t changed much since the first IPCC report in 1990.” Great piece that summarizes the longer version.
I’m feeling I should balance this doom and gloom with some optimism.
Ok, here you have it: incredible story on our ongoing progress in healthcare, with AI demonstrating its potential to predict protein folding structures*. “The human genome holds the instructions for more than 20,000 proteins. But only about one-third of those have had their 3D structures determined experimentally. And in many cases, those structures are only partially known.” Without them, it is much harder to create effective drugs. “Now, a transformative artificial intelligence tool called AlphaFold [from DeepMind] has predicted the structure of nearly the entire human proteome (the full complement of proteins expressed by an organism).” This will be a massive step towards our ability to develop new lifesaving drugs, at much more affordable prices.
Now that you’re cheered up, onto the next story.
It is easier today than even before to launch a new startup. You can rent a super computer by the hour with Amazon Web Services and have a storefront with all the economies of scale of the largest merchants with Shopify.
And apparently, you can also have your product creation outsourced to the best too. “The Our Storypage, which typically introduces founders’ aha moments and lays the groundwork for entrepreneurial mythmaking, is a familiar trope on direct-to-consumer companies’ websites. What these companies don’t include in their brand stories is something they, in fact, have in common.” They worked with an outsourced agency to develop and then ultimately produce and deliver their product. Of course, outsourced production is not unique or new to direct to consumer startups. But in the context of our previous ESG conversation, and the direct customer relationship, “[w]hat is new is consumers’ expectation of visibility into the process of how things are made, who’s making them, and where the materials are coming from — which is where the prevalence of this model starts to raise eyebrows. If the people inside a company aren’t sourcing the materials or selecting the factories themselves, they’re relying on others to vet them. And these others, well, do they care about the things we want them to care about? How plugged into the business are they anyway?”
One of cryptocurrency’s promises was not just more efficient transactions, but in Bitcoin’s case, a more efficient reserve currency. Interesting piece that stacks the advantages and disadvantages of the various contenders: USD, EUR, Yuan, Yen and BTC. Yes, the USD is dominant, but there is a case things might be changing: “But now, the status quo of dollar dominance is eroding. Post-pandemic inflation has reignited worries about the dollar’s declining reserve status, but it’s a much longer-term trend: In May, the dollar’s share of central bank reserves fell to a 25-year low of 59%.”
Last month we talked about how problems are solved. (Apologies the link was missing, included here.) As a follow-up, I found this fascinating (albeit depressing) research that when faced with tough uncertainty, people will often prefer bad news just to have certainty. “What we’re really documenting here is a strong aversion to making difficult decisions…where people are willing to put themselves in an objectively worse position to absolve themselves of the choice.” More information isn’t better: “Access to seemingly endless information online means you can find information to support the feasibility of any possible option. This may actually make decisions harder, not easier.”
In Out-Innovate I wrote about how the best global startups often build distributed teams, and this would become best practice everywhere. Certainly the pandemic has accelerated this trend. Amazing to see that startups are now spending more on Airbnb than on office rent. “Only 60 percent of startups are currently paying for rent, with that amount set to decrease as many expect to cancel their lease as soon as it expires…The average quarterly rent expense is also the lowest to date, at $21,000 per quarter per company. During the fourth quarter of 2019 it was $32,000…Co-working space providers would be the logical benefactors, but it turns out the cash is going into the pockets of Airbnb hosts instead.”
If you want to hear more about the opportunity for distributed teams particularly outside Silicon Valley, it was one of the topics in my conversation with Your Working Life podcast.
Book of the month
One of the barriers to entrepreneurship is the risk of failure. Many would-be entrepreneurs dream of success but never start, because they have no idea how to succeed and are intimidated by the likelihood of failure. This critical decision rests on myriad factors, including individual sensitivities to risk, about which much has been written in the academic theater.
That’s why it is oh so critical for global entrepreneurial communities not just to celebrate success, but to talk openly about failures. This is not just to learn from them but to also create a more understanding and accepting ecosystem. I was excited about the launch of my good friend Mike Quinn’s new book “Failing to Win”.
As he describes it: “After backpacking across Africa in search of changemakers building scalable, high-impact businesses, Canadian entrepreneur Mike Quinn convinced his retired parents to mortgage their house and lend him $100,000 to co-found Zoona, one of the continent’s earliest fintechs. That risk paid off big time, as Zoona went on to process $2.5 billion of transactions and generate $26 million in income for thousands of micro-entrepreneurs across Zambia and Malawi. Ten years later, following a series of currency crises, competitor attacks and investor dramas, Mike stepped down as the company’s CEO and wrote a book about his experience of going ‘all in’ as a purpose-driven entrepreneur.”
In the book Mike talks openly about failure, and the complex set of circumstances and choices that led to them. But the book also offers an upbeat tone, sharing about why failure is a stepping stone for future success, and a part of the leaning journey.
*Thank you to [99%Tech] reader Nick Nash for sharing the Nature article.