From Survival to Sustainability

How Covid-19 has impacted the sustainability outlook for young businesses

Not long after the United Nations decreed Covid-19 a global pandemic, over three billion people were restricted to the confines of their homes (Statista). Business activity alarmingly slowed down, and public life all but halted.

Covid-19 brought the global conversation on sustainability and climate change back to the front pages. Daily global carbon emissions dropped 17% by April as compared to 2019, according to Nature Climate Change. Pollution levels also fell significantly in some of the world’s most polluted countries, such as India (European Space Agency) and Pakistan (Centre for Research on Energy and Clean Air).

Unfortunately, these developments are temporary, as countries work their way back to normalcy. The world still needs innovation to lead the vanguard on long-term climate action and sustainability, and the case for innovative, sustainability-driven startups is looking stronger than ever.

Telling numbers

In a time of contracting venture capital, investor focus shows signs of aligning with startups driving sustainable innovation.

Total capital injections received by sustainability startups between January and May 2020 was up 14% from the same time frame in the previous year (based on data from Alleywatch). Further, the total sustainability-focused capital injections received in this period were more than double that of the five months preceding the first known Covid-19 case.

“We are being extra cautious in implementing our investment strategy but we are foreseeing some attractive opportunities in the pipeline,” says Prashant Singh, CEO of Blue Planet Environmental Solutions, a Singapore-based waste management tech startup. The company raised US$25 million in corporate funds from Asian global investment bank Nomura in late March.

Despite the increase in the ticket sizes, the number of startups clinching such deals remains small. Sustainability investments represented less than 20% of the total number of top deals since 2019, which was dominated by the autonomous and electric vehicles segment (based on data from Alleywatch).

Even in the wider startup environment, Startup Genome’s Global Startup Ecosystem Report 2020 found that four out of every 10 startups in the world could be out of capital in three months or less, and that global venture capital activity dropped 20% in the first quarter of 2020.

Startups may, in fact, not be able to raise funds for the next 12 to 18 months, “given that venture capital firms, institutional investors, corporate investors, family offices and Limited Partners […] may find it hard to raise funds or justify capital calls during this period,” says Hsien Hui-Tong, Head of Venture Investing at SGInnovate, an entity of the Singaporean government.

Sustainability-driven startups are no exception. Ajay Etikala, Founder of India-based organic farming startup Organic Ubuntu, has decided to postpone the startup’s seed funding round, which he had planned to raise this year, to 2021.

A bootstrapped social enterprise, Organic Ubuntu provides end-to-end support for organic farmers over three to five years. With farmers facing severe movement restrictions and containment measures under India’s ongoing lockdowns, the company’s activities have come to a standstill.

“Our revenues have gone down drastically, most of our new partnerships that were in the pipeline have pulled back due to uncertainty,” Etikala says. 

But he remains hopeful. For now, Organic Ubuntu continues to provide training modules through phone calls, SMS, and WhatsApp, as it rethinks its business strategy for an uncertain future.

New investment opportunities in sustainability

Etikala is not alone in his search for a silver lining–investors and other ecosystem enablers have been buzzing with activity.

“The handbrake that was pulled on the global economy has offered a sustainability reset button, which represents an opportunity to those companies that truly believe in it,” Tong says.

For instance, in April, Hong Kong-based accelerator, Brinc, partnered with Australian alternatives management company Artesian to launch a clean energy accelerator program. Further, U.S. and Hong Kong-based alternative protein venture capital fund Lever VC announced an RMB 200 million fund for alternative protein innovations in June.

Tong predicts that the post-pandemic investment flow will be focused on emerging technologies, such as AI and biotech. Additionally, he says that changes are likely to take place in an industry that contributes to pollution rather inconspicuously: the semiconductor industry.

“As AI becomes central to a company’s business, more and more power will be consumed to process data and models,” says Tong. “The carbon footprint resulting from AI and cryptocurrencies–which are not your obvious contributors to pollution–is actually very significant.”

He adds that the scope for sustainable technologies has widened, particularly with a drop in crude oil prices temporarily mitigating the devastating environmental impact of the oil industry. With greater funding and innovation in electric vehicles and autonomous vehicles, transportation, too, will refocus on sustainability.

The heavily-hit supply chain segment will also be looking to recalibrate, which Tong believes will lead to sustainability-aligned innovation in the post Covid-19 world. Supply chain accounts for 80% to 90% of the total environmental costs for most consumer companies (McKinsey), making way for companies like Convoy, which provides digital freight networks. 

Both these unicorns raised nearly half a billion dollars through funding rounds in May 2020 (Bloomberg) and November 2019 (Business Insider) respectively, although Samsara had to accomodate a valuation cut (Bloomberg).

Homegrown startups may also find themselves at the forefront of driving innovation, as the pandemic and global trade tensions force world leaders to take a closer look at self-sufficiency.

“For investors, this represents opportunities that are not to be missed, especially in larger markets such as China, India, and Indonesia. At the same time, startups that come out of smaller countries with a strong R&D ecosystem, like Singapore, may pioneer technologies in these spaces which can be adopted in other countries,” Tong says.

Discovering a sustainable future

Like climate change, Environment, Social and Governance (ESG) expert Manishankar Prasad sees the pandemic as a more current and urgent ‘society-as-a-whole’ problem.

“As startups focus on renewal post pandemic, sustainability can be a moral compass in the quest for regeneration for the long-term,” he says.

Thinking long-term is likely to be a more fundamental shift in business strategy as young companies pace for recovery. A good first step, Prasad believes, would be to adjust expectations and strategize for the needs of a post-pandemic digitized world.

“Black swans don’t invite themselves […] Short-termism is dead for now,” he says.

Prasad also foresees a shift in business priorities, which are currently geared toward profitable exits at all costs. A true test of sustainable innovation startups, he believes, is to move away from exit culture, and commit instead to driving sustainable transformation in the world as a key differentiator  

As the transformation of the world’s ecological and systemic hierarchies is catalyzed by the pandemic, businesses have understandably become hyper-focused on survival. However, fulfilling business responsibilities still needs to be on the agenda if they want to remain relevant in the post-Covid-19 era.

Sharon is a staff writer at Jumpstart.

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