The Rising Ventures Series features articles, announcements and profiles of investors and entrepreneurs related to the theme of innovative small and medium businesses (SMEs) in emerging markets that deliver social and/or environmental benefits. This is the articles section - see business features here or visit the article archive.
Rising Ventures
- Regional focus: Latin America
- Sector focus: Sustainable Development, including sustainable forestry, renewable energies, waste management, environmental services.
- Investment size/type: USD$0.5 – 3 million, private equity
- Web: http://grupoecos.com/
Four Questions for CEO Andreas Eggenberg:
At a time when it seems the conventional wisdom is that larger companies offer the possibility of more attractive returns, why make SMEs the focal point of your investment strategy?
SMEs are the backbone of development in each economy, even more so in the Latin American region. Whereas investments in SMEs can be riskier in some ways, the potential rewards are also higher if the investment is accompanied closely by the investor, who acts not only as a financial partner, but also as a coach and door opener. In addition to the expectation of economic returns we have like any other investor, obviously a responsible investor such as Grupo ECOS is also aiming to contribute to the development of the societies we are operating in.
Similarly, what competitive advantage do you see in selecting environmental sectors as investment criteria?
The climate change debate has escalated to a point where the world cannot ignore these alarming facts any longer. We need to develop and market solutions that bring economic development in alignment with the concern for the natural resources we have at our disposal. It is the classical sustainable development objective which has existed for at least 20 years, but unfortunately has been gaining momentum only recently.
In what ways has being on the business side of the finance equation influenced your approach to investment?
Obviously, an investor needs to have some financial and analytical skills. However, an investment cycle does not end with the cash transfer. On the contrary: that is the starting point, and from then on, business, entrepreneurial and executive experience are key in order to successfully coach an investment in its pursuit of growth and returns.
What overall trends do you see in sustainable SME finance, and where would you envision this space being in twenty years? What role will Grupo ECOS have played in this vision?
Tough question. Twenty years is a long horizon. As mentioned before, the concept of sustainable development existed for twenty years, before it gained some broader momentum within traditional business circles. But now we have aroused the interest of such larger circles, and we have to start learning to play by the rules these circles are used to. The more professional our SME investments and the more focused the growth plans that are implemented, the more attractive SMEs will become to traditional investors. But in the end it won’t be the individual investment, which will set the trend, but macro figures, such as: How many SMEs of a certain portfolio are still in operation after a certain period of time? How many of them have grown according to their business plans? How many of them have implemented a successful exit strategy? If Grupo ECOS can contribute with individual investments at the micro level that can make the macro statistics look convincing enough to attract additional investors, then we have contributed to the positioning of SMEs as driver of development of any given economy.
Axial Par
Based on an interview with Director Paulo Bellotti
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 The tagline for Brazilian venture capital firm AxialPar is “Investing in Sustainability,” but speaking with Director Paulo Bellotti, it quickly becomes clear that a knowledgeable firm in the green SME sector must be focused on more than just a company’s environmental benefits. Paulo explains that investors moving into the profitable but largely uncharted territory of SME finance must have a holistic approach with any investment, taking into account sustainability impacts, but also placing a heavy emphasis on new technology, strong management and clear market opportunities.
It is on these foundational principles that AxialPar has based its efforts, mitigating the risk inherent in investing in small green companies by focusing on high-growth sectors including health foods, renewable energy and clean technology. Paulo asserts that small enterprises have an advantage in these newer industries, as their flexibility relative to larger corporations allows them to quickly adapt new environmental technologies to specific market demands. AxialPar also targets its investments in areas where there is a potential to create clusters of SMEs that can exchange technology and technical assistance in a mutually beneficial value chain – such is the case with portfolio company Mar&Terra, a sustainable fish farm that supports small local producers who form part of the company’s supply chain.
Still, Paulo is quick to add that a successful SME finance firm must go beyond picking the right companies. The structure of the fund is essential, and investing in small, green enterprises requires an approach that tackles the specific management issues SMEs often face. The founders of AxialPar realized quickly that the firm would have to place a special emphasis on corporate governance, separating the management side of Axial, heavily involved in and committed to the business operations of a potential investment, and the financial side, which has to be detached enough from each deal to dispassionately consider involvement with the company. As a result, AxialPar has a unique dual branch structure with Axial Gestora, the management arm of the firm providing technical and managerial assistance to companies that are then reviewed by Axial Investimentos, which makes a final decision on whether or not to make an investment.
Looking ahead, Paulo is seeking a second phase for the firm, in which an additional $30 million of capital will be raised to invest in three to four companies over the next four years. Paulo is confident in the viability of these investments, as more capital overall is flowing into rapidly expanding environmental sectors. Even with the prospects for high returns in these industries, Paulo cautions that financing green startups is not for the casual investor. “You have to be an active investor that will build the company and solve problems,” Paulo explains. “And you need patience – never believe you will get your investment back in one year, it will never happen.” With a unique approach and unwavering commitment to triple-bottom-line principles, AxialPar promises to continue to be a pioneer in sustainable investment.
Pramod Shedde
A key figure in the Indian VC sector discusses prospects for sustainable investment
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To say that Pramod Shedde is one of the pioneers of venture capital in India is no overstatement. Mr. Shedde has over 30 years of experience in the financial sector, a career studded with impressive titles including a term as President of the Indian Venture Capital Association and a recent stint as a Managing Partner of BTS Investment Advisors, Pvt. Ltd. In 1988, he helped co-found ICICI Venture, an ambitious endeavor, Shedde notes, as there was “very little in the way of venture capital in India at the time.”
But in our interview, Shedde makes clear that he is much less interested in VC’s past as where the sector is going and the trends that are shaping its growth. During our discussion, this veteran of the Indian financial community explains why he thinks triple-bottom-line investing is becoming an increasingly attractive proposition for investors in India.
Shedde sees significant investment in India beginning to move toward sustainable sectors, a shift he describes as being largely driven by environmental and social ills, such as the challenge of rampant power shortages that especially afflict rural areas, or unwieldy amounts of urban waste generation. The demand this generates intersects with India’s comparative advantages such as a large endowment of locations suitable for wind power production or low production costs that ease scalability in the organic agriculture sector.
Yet even with the gradual mainstreaming of sustainable technologies, the current dearth of triple-bottom-line funds, and the obstinate barriers to growth facing many of the country’s green and BoP focused startups warrants some further exploration. Shedde points to a number of potential factors, including the need for a better policy environment to nurture these companies, but he emphasizes that there is still mainly a lack of adequate deal flow of smaller enterprises. Many SMEs have the potential to be solid investments but suffer from poor management – Shedde points to the oft cited situation of a single promoter who does not have the team needed to help manage the marketing, financial and other aspects of the enterprise that will help it to grow.
Here Shedde places much of the burden of adaptation on investors, arguing that if they expect to unlock the growth potential of a small sustainable enterprise, they have to be willing to tailor their funds specifically to these companies. A successful green fund in India, Shedde explains, must have a long investment cycle, a specific sector focus and a lead investor who believes in that sector and has a great deal of experience in it. He laments that unfortunately, most green funds in India today are getting it wrong.
So will Shedde himself be one of the investors to popularize this new investment framework? He indicates that he has indeed explored the idea of creating a new fund for sustainable startups. He has noted the lack of VC funds in this area and just as he helped to usher in a new era of venture capital in India, he sees sustainability as being a new shift on the horizon. Shedde makes clear that he believes the low levels of sustainable SME investment are not out of any absence of interest from entrepreneurs, a fact he noticed through his participation in the 2006 New Ventures India Investor Forum, when a deluge of 150 business plans from eager entrepreneurs flooded the NVI offices. In all, Shedde argues that there is no real shortage of potential deals, only of willing investors. Whether Shedde becomes one of those investors remains to be seen, but if he does, it would not be surprising if many others in the VC community followed.
LESS Limited - Envirovision
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 “We don’t find companies, says Yeung Hau Man of the environmental monitoring and due diligence firm he helped to create, “We find people.” Through eighteen years of experience in the intersection between environmental issues and business concerns, Hau Man has learned that the long-term sustainability and market viability of any company is not so much about the business itself as the people behind it. He realized this as a manager of green fund LESS Limited, where he saw company after company that had poor sustainability standards due to a lack of commitment at the management level. He took this experience to heart when the LESS Limited team charged him with creating a monitoring and due diligence vehicle that would generate a deal flow of truly sustainable companies. This project came to fruition as Envirovision, a consulting firm dedicated to providing a quality portfolio of sustainable companies to ‘green’ funds and angel investors.
Envirovision is the result of Hau Man and the LESS Limited team perceiving a growing market opportunity for standardized sustainability reporting. Hau Man understood that with green funds blossoming in China, the primary obstacle to sustainable investment in the future would not be a lack of funds, but unclear environmental and social standards and spotty due diligence. In particular, the rapid and unchecked expansion of the country’s private sector has left in its wake a large number of companies that grew inefficiently, relying on outdated technologies and wasteful operations – especially in the heavily coal-reliant energy sector. As the government has set up market incentives for sustainable enterprise and investment capital in high-growth environmental sectors has flourished, companies are increasingly looking to tap into the ‘green’ investment flooding the country.
Envirovision supports the best and the most dedicated of these companies by providing verifiable and independently accountable sustainability benchmarking. This is an especially difficult and important challenge in China’s private-sector, which Hau Man describes as having a culture of agreeing to the principles of sustainability but being vague in setting verifiable goals and milestones. He criticizes current due diligence methodologies for being far too lenient in allowing companies to self-report their progress. Envirovision works with companies in a cooperative system where mutually agreed upon sustainability benchmarks are set. These benchmarks are sector-specific and can range from obtaining organic certification for agricultural businesses to reducing chemical inputs in paper industry companies. Envirovision then checks in on each client’s progress through yearly audits, and if there is clear and steady improvement in the business’ sustainable practices, it becomes eligible for potential investment by LESS Limited and other investors. Still in its early stages, Envirovision is engaging a handful of projects in the water treatment and emissions sectors, and Hau Man is working to expand his reporting methodology to include the lucrative mining, forestry and organic agriculture sectors.
Hau Man notes that just five years ago, sustainability was a nascent concept in China. Today, ‘green’ companies like Sun Tech, a solar PV company listed on the NASDAQ stock exchange, are quickly becoming the norm. As sustainable investment takes off in China, the demand for strong due diligence methodologies that minimize company ‘greenwashing’ will grow as well – a market demand that Envirovision is optimally positioned to fulfill.
For more information on LESS Limited, visit http://www.lesslimited.com.
Stratus Investimentos - VCIII Fund
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 A lone tree grows in the middle of Rua Direita, a street that cuts through the heart of Sao Paulo’s bustling financial district. The small slice of nature stands in contrast to the surrounding urban landscape, layered with thick traffic and towering offices, including those of Stratus Investimentos, a prominent Brazilian commercial investment firm. “Sustainable investment is tricky,” Philippe Lisbona points out. It’s been a busy week for him and his colleague, Wagner Duduch. The two fund managers recently launched the Stratus VCIII fund for small, sustainable businesses, and are wrapping up multiple day-long meetings on potential deals.
“You have to know how to use the right language to attract investors,” Lisbona comments. This is an understatement in a country where the investment environment is strong, but overall growth has lagged. Despite Brazil’s recent shaky performance, Lisbona is confident that investing in green small and medium size enterprises (SMEs) is becoming a mainstream concept. Even in its short existence, VCIII has managed to attract traditional investors while pushing Brazil’s emerging green sectors.
VCIII, in fact, was designed to appeal outside of the sustainable investment niche. Stratus analysts found that although there was a great deal of interest in sustainability, the fund would have to take a more sophisticated approach than simply investing in any green business that seemed worthwhile. Instead, Lisbona and Wagner understood that the best returns were coming from high growth sectors such as new materials, biofuels, and clean technology, in which companies have a strategic advantage because of Brazil’s natural resources and timely support from government initiatives. These sectors were achieving growth rates in the double or even triple digits. The environmental impact of each potential investee is arbitraged with its financial information to create a holistic risk assessment that considers the company’s market potential as well as its creativity in tackling environmental challenges. By screening for sophisticated businesses and focusing on sectors with high growth potential, Stratus ensures that it will generate deals with a diverse range of exit opportunities.
Despite the marketability of VCIII’s target companies, Lisbona explains that small businesses often require more creative financing and risk mitigation strategies than larger companies. Accordingly, Stratus offers an array of investment tools for its portfolio, ranging from standard equity to long-term debt for smaller companies or carbon financing, depending on the specific needs of the enterprise. As a general risk mitigation strategy, VCIII extends a longer time horizon of five to seven years to allow for time to gain market positioning, establish themselves in the market, and produce strong returns before exit.
Lucrative deals in this sector also require greater involvement by fund managers, such as the technical assistance and advisory services Lisbona and Wagner offer the companies they work with. In other words, the returns can be extremely high, but these deals are made for investors that are, in Lisbona’s words, “in it for the long haul.” 
For more information on the Stratus VCIII fund, visit http://www.stratusbr.com. |
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