The global surge in climate tech startups is not only exciting but also essential for addressing pressing environmental challenges. As these startups seek funding, a new breed of investor, the impact venture capitalist (VC), has emerged, showing a commitment to both financial returns and positive societal and environmental impact. For climate tech founders looking to secure the right investors, it’s crucial to ask key questions that ensure alignment with their goals. Here are five essential questions to consider when evaluating potential impact investors:
1. Are you actually an impact investment fund?
- Understand the classification under the Sustainable Finance Disclosure Regulation (SFDR) to discern whether the investor is an Article 6, 8, or 9 fund.
- Article 9 funds, known as “dark green funds,” are exclusively focused on sustainable investments with a strong impact objective.
- Article 8 funds, or “light green funds,” aim to promote environmental and social characteristics without an exclusive commitment to sustainability.
- Article 6 funds, or “gray funds,” make no claims of impact or sustainability but may allocate some funds to sustainable investments.
- Consider the implications of EU Taxonomy, which identifies environmentally and socially sustainable economic activities.
2. Choosing between Articles 8 and 9:
- For climate tech founders, opting for specialist impact investors (Article 8 or 9 funds) is advisable.
- Article 8 funds may ask for alignment with specific environmental or social criteria, including Principal Adverse Impact (PAI) indicators.
- Article 9 funds demand tangible evidence of the company’s impact, emphasizing responsible business practices throughout the value chain.
- Article 9 funds are often perceived as more credible, providing a significant impact stamp of approval within the investment syndicate.
3. Which impact key performance indicators (KPIs) do you prioritize?
- Challenge investors to define their understanding of “impact” and how they measure it.
- Seek investors with a deep understanding of impact measurement nuances and a commitment to setting realistic and relevant impact KPIs.
- Ensure alignment with investors who appreciate the challenges of early-stage companies and are enthusiastic about the business.
4. How will you support me with ESG and impact alignment?
- Differentiate between strong impact VCs and less optimized ones by assessing their practical support.
- Look for VCs offering workshops to frame impact objectives, support to mitigate ESG risks, and assistance in identifying new opportunities.
- A good impact VC should consider sustainability throughout the entire value chain, aligning with EU criteria and the EU Taxonomy.
5. How do you address conflicts between financial returns and impact goals?
- Understand the VC’s philosophy on balancing financial returns and impact goals.
- Seek VCs that view impact as integral to measuring success, rather than secondary to profits.
- Consider the time horizon of the investor and whether they understand the societal change required for climate technologies.
6. How do you support beyond ESG/impact regulation?
- Evaluate the value impact investors bring beyond funding, considering mentorship, experience, partnerships, and industry networks.
- Assess the investor’s commitment to helping startup operations mature, recognizing the importance of networks in the emerging climate tech sector.
Additional Question: Can you talk to any of the founders of the VC?
- Request references from other founders in the VC’s portfolio to gain real-world insights into the investor’s support and commitment.
While these questions may seem demanding, they are essential for ensuring a long-term investor relationship that aligns with the ambitious goals of climate tech founders. Impact VCs who can provide satisfactory answers and demonstrate a commitment to positive change will not only support startups financially but also contribute significantly to the success of impactful solutions for our planet’s future
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