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The rise of impact investing, fintech's moment, cross-pollination and more.
The future of innovation is global. We discuss it here. March 2021 Edition.
News of the month
Impact investing is a relatively new industry. Yet, it has grown rapidly, today amassing $715b in assets (and up to $2.1t by some estimates).
But where is the industry going?
Great piece that offers some key predictions for the next decade. “Not only will private impact investment capital be key to funding the SDGs, but it will also play an important role in finding solutions to problems conventionally seen as the domain of the public sector as it struggles with new and unprecedented crises.” The authors project a growing focus in diversity, equity, and inclusion (e.g. funding diverse managers and reaching the historically underserved), climate (e.g. adaptation & resilience, sequestration, etc) and the requisite toolset (e.g. new financial instruments, data and transparency, etc).
Looking forward, I also believe we need a new name for ‘impact investment’. Or rather, many names. Much like the Inuit have many words for the qualities and types of snow, so should we in impact investing. As the industry grows up, so does the need for diversity in words to describe what we mean. This extends from hedge funds which invest in public companies with strong sustainability metrics, to foundations leveraging guaranteed demand for lifesaving drugs…and everything in between. My prediction is that in the next decade, we will have a larger and far wider vocabulary.
What else do you predict?
In previous issues, I have explored the rise of fintech, and its power to drive financial inclusion. Innovators are today being recognized as a force to be reckoned with both domestically and globally. In the U.S., the largest is Stripe, which recently raised $600m and is valued at nearly $100b. Coinbase filed to list at a similar valuation. “In total, venture capital investors poured $44.4 billion into financial technology start-ups last year, up from $1.1 billion in 2009, according to PitchBook, which tracks private financings. Many investors are now making bold predictions that these start-ups will upend big banks, established credit card providers — and in some cases, the entire financial system.” This is powered by new infrastructure that make it cheaper and faster to start and launch a world class service. “Just as cheap cloud computing and smartphones once enabled a wave of new app start-ups, the financial technology sector has developed its own set of building blocks, allowing new companies to spring up faster.” My sense is that while it is a hot market, it is still early in the story. Financial services after all represent nearly 20% of the global economy.
I called it global cross-pollinization. Others are talking about digital decolonization. What is happening is that the best startups around the world will come from anywhere and scale everywhere. “Only 8% of the world's population are Americans, yet American tech giants make up eight of the world's ten largest tech companies…But will it stay like that?..The rest of the world increasingly starts to develop homegrown tech solutions for one reason or another, which will likely make the pendulum shift.”
In Out-Innovate, I highlighted the rise of remote work. But doing remote well is not just about telling people to work from home. It requires a conscious effort to build a culture, incentives and structures that support it. One company I interviewed and featured was Hashicorp and enjoyed this piece about their culture about building a principled’ culture. “Culture itself is not created. It is an emergent property of our organization’s people and systems, which are built on shared principles. Culture is like consciousness—you can't point at it or touch it. Consciousness is the result of complex interactions between neurons and synapses. In the case of company culture, it’s the result of interactions between people and systems practices.”
New forms of capital are on the rise, and will power the dispersion of innovation, both domestically and around the world. One such trend is revenue based finance. “the financial structures used by VCs haven’t evolved much since they first emerged in 1957… More recently, we have seen numerous new investment models and financing instruments, including shared earnings agreements and point-of-sale capital. One of the most prominent and popular new models for investors is revenue-based investing (RBI).” The number of RBI focused firms has increased exponentially from under 5 in 2005 to over 30 today. To give you a sample, check out this running list. One player in this budding field, Pipe, raised at a $2 billion. I expect the sector will continue its growth trajectory to fill the needs of startups outside the venture capital orbit.
To solve the world’s toughest challenges doesn’t just require innovation. It requires surprising and constructive partnerships. In that vein, will be interesting to see how power grid and auto manufacturers will work together to manage grid load and decrease carbon. “BMW Group and California utility Pacific Gas & Electric are rolling out the next phase of a pilot that aims to test — and learn — how electric vehicles could support the integration of renewable energy on the electric grid…drivers can sign up to voluntarily allow their vehicle to be “smart charged” when electricity demand is low and renewable energy availability is high.” Technological change breaks links in the system (e.g. increased grid load with new demand from vehicles). But to make the system work over the long-term requires rebuilding new ones, like this.
How can business maximize profit but also maximize impact? By building impact into the operations, culture and life-blood of the business. Fun discussion with Miles Laseter on his podcast Startups for Good.
On the personal front, wanted to share the fun news that Out-Innovate won Gold at the Axiom Book Award in the international business and globalization category.
Book of the month
Last month I told you I rarely read fiction, and sheepishly admitted I read a Dan Brown. This month, I wanted to proudly share The Overstory by Richard Powers.
As the NY Times reviews it: “Trees do most of the things you do, just more slowly. They compete for their livelihoods and take care of their families, sometimes making huge sacrifices for their children. They breathe, eat and have sex. They give gifts, communicate, learn, remember and record the important events of their lives…Some of this might take centuries, but for a creature with a life span of hundreds or thousands of years, time must surely have a different feel about it. And for all that, trees are things to us, good for tables, floors and ceiling beams: As much as we might admire them, we’re still happy to walk on their hearts. It may register as a shock, then, that trees have lives so much like our own.”
Heavily rooted in science but told as a story, the author’s “monumental novel ‘The Overstory’ accomplishes what few living writers from either camp, art or science, could attempt. Using the tools of story, he pulls readers heart-first into a perspective so much longer-lived and more subtly developed than the human purview that we gain glimpses of a vast, primordial sensibility, while watching our own kind get whittled down to size.
PS: I have switched to Substack from Mailchimp. Would love your feedback.