June 22, 2021
At PDENH, we were able to close a series of no fewer than seven parallel follow-on investments in Q1 2021. That is why in this second blog I would like to take you through the results of 7 years of impact investing and benchmark these with the industry.
2. The results of 7 years of impact investing
To be specific, I look at the degree of success with which the start-ups have or have not progressed to 'scale-up status'. In my opinion, the recently concluded 'uprounds' meant the final one for many companies right of passage to the stamp 'scale-up', but is this also the case? Also, since we're talking about impact investing, how much impact have they made relative to the plans we've stepped into? To keep it clear, I'm looking at it here sec team startups where I initiated the first investment as an Investment Manager and which companies I have (had) under management. These have all been early-stage investments in my focus areas energy storage (E-magy, EST-Floattech), grid balancing (Sympower, Dexter Energy Services), circularity (Chaincraft, Fairphone, MX3D), sustainable heat (Triple Solar, Asperitas, RGS) and sustainable mobility (Covadem, EST-Floattech). I am not taking into account the eight project financing and investments in project developers in which I was directly involved. This is because these are companies that by definition cannot become a scale-up. Also investments that I have indirectly supported as Investment Director or the many other VC investments from StartGreen Capital and its funds are not included in this blog.
Scale up definition
Striking fact: The percentage of companies that manage to grow from startup to scale-up is only 16 percent in the Netherlands, where this number is 51 percent are in the US. This is not a fault of the quality of Dutch entrepreneurs, but in my opinion simply the result of the fact that the home country is small and the European market is very fragmented. In any case, it is important to increase this percentage with smart cooperation. Exactly the purpose of my next blog in this series.
What exactly is a scale-up? A Google search for 'scale-up definition' shows that the interpretation of this term varies quite a bit:
- Deloitte: Researchers from Deloitte and leadership program THNK wanted to know how to recognize a fast-growing startup. To this end, data from as many as 400,000 start-ups from 24 countries were examined. Half of this turned out to still exist after 5 years, a relatively high number if you look at other studies on startups. Anyway, the median revenue after 5 years turned out to be around €300,000, with an average revenue growth of 5% in subsequent years. Deloitte described the top 2,000 as scale-up, namely those companies that at least $10 million in turnover after 5 years;
- Emerce: A scale-up is a company with at least ten employees that during grows at least 20 percent per year for three years. This definition appears to be the most common and most common (see also Wikipedia, Quote, etc.);
- Young Business Award: “Startups that use the have survived the first phase and also their have achieved first success. Often a scale-up has already had several investor rounds. In fact, a scale-up is a startup that is no longer looking for a repeatable and scalable business model and that scaling up”.
If I compare these definitions to my 'own' VC-type investment portfolio, I arrive at the following 'judgment'. How many companies have scaled-up in the meantime? And how much impact has been created in relation to the business plans? You can see that in the diagram below.
Immediately growth factor of 4.0x averaged over a period of 1.9 years on average (from the first investment of PDENH until measurement moment 31/12/2020) you can say that the majority of these companies scale up quickly, well above the required 20% per year. Only a few have already overcome Deloitte's $10m turnover barrier, a logical consequence of the early phase in which investments were made relatively recently (average 3 years ago): mostly tech companies with very low turnover (<€300k) and at the time of enter an as yet unproven product-market fit. According to the most common definition in the Netherlands (Emerce/Wikipedia), 7 startups obtained 'right of passage' to the scale-up stamp. A 20 (Deloitte) – 70% (Wikipedia) 'scale-up conversion rate' is an above-average score by any of the above definitions. Moreover, there is even more in the barrel: with large purchase contracts in prospect and innovation credits in their pocket, companies such as Chaincraft and MX3D will soon also be able to color the 'Wikipediavink' green. And with the relatively large follow-ons to Q1, the entire line-up from E-magy to Asperitas has a good chance of accelerating towards the $10m mark within 1-3 years. For Covadem (a recent pre-revenue investment) it is too early to draw any conclusions.
The above overview is certain no ranking of the degree of success to date: For some companies, the growth factor cannot be clearly demonstrated, since they have started from an early R&D phase or have recently entered the market with beta/POC (proof-of-concept) products, so that the 20% growth rule not tracked in three years. E-magy as an example logically still has relatively little turnover in the current R&D phase, but with its proven technology it already has plenty of traction in the form of qualification processes at automotives. When you look at funding for such a company as a better KPI for growth (with a recent investment round of €5m), this company is undoubtedly already a scale-up in the investment world.
As an impact investor, we are naturally also curious about the social results in addition to the financial results (turnover and/or funding growth) of these companies. Although it is still too early, for example, to compare the CO2 impact of this relatively early-stage portfolio with the original business plans (small pilots, etc. are not measured in R&D phases), the growth in employment (also an important social factor) is compared to the original expectations. Until the measurement moment of December 2020, the investments have 75 additional FTE led, a growth of 74%. If we look at how this growth relates to the original business plans, you will see that at the end of 2020 you will see that approximately 84% of target growth in employment was achieved. The fact that this figure is slightly lower is, in my opinion, on the one hand due to the fact that management cases are often more optimistic than reality, and on the other hand due to the fact that, especially in the past year, in some cases the hand was kept on a tightrope due to the corona crisis, with contraction or a brake on the growth of the number of FTEs as a logical consequence.
All in all, it is the social and financial results that make me appropriately proud, but until the exits have actually been made: “The jury is still out.”
Next up: the Lessons Learned
In a next blog I would like to share the lessons I learned on the way from start-up to scale-up with the above portfolio. Would you like to know more about Impact Investing via StartGreen? Feel free to connect on LinkedIn and read all about it here our Impact Report 2020. You can read my first blog here, in which I take stock of the switch from M&A to impact investing.