The market for impact investing is exploding: growing 50 times in five years from USD nine billion in 2013 to USD 502 billion in 2018, which is a hundred times more than investments in Virtual Reality (VR, AR). Social and environmental challenges are becoming the main driver for innovation and are transforming both startup culture and corporate innovation culture in 2020 and beyond.

As undergraduate students in business administration 15 years ago, our professors taught us the two main drivers of innovation: one being the technology, also known as “technology-push”, the other being the market: the so called “market-pull”. 

In theory, companies would either spend big on R&D to create new technologies that would eventually become new products, or they would observe market trends to spot innovation opportunities. Following the “market-pull” strategy, whenever a trend becomes relevant, a company would allocate budget to leverage the new market opportunity.

This thinking in “markets” and “technologies” changed with the rise of customer centricity, human centered design, and design thinking in the mid-2000s. Since then, a growing number of companies have started to train their people in skills to identify unsolved customer problems or unsatisfied customer needs. Instead of observing the market from the macro-perspective, the new mantra became “empathy” developed through observations and customer-interviews.

Lean startup, coined by Eric Ries and previously described in the book “The Four Steps to Epiphany” (2005) by Eric’s mentor Steve Blank, is singing from the same song-sheet. Their core ascertainment was that most ideas/startups fail not because of funding, small markets, or inferior technology but because of either non-existent or unmet customer needs. “Get out of the building”, “build, measure, learn”, “minimum viable product” and “fail fast” became the buzzwords of a whole generation of founders and venture capitalists alike. Some years later this new lingo was adapted by managers of large organizations and academics as well. 

In 2016 the United Nations passed the 17 Sustainable Development Goals (SDGs). A study by the Danske Bank in 2018 showed that already 10% of all Nordic startups are so-called Impact-Startups, which address at least one of the SDGs. But 10% is just the beginning. Soon, the main driver for innovation will no longer be the technology, the market, or unmet customer needs. The main driver for innovation of the next decade will be the social and environmental challenges. 

But you might say: “there are all these new exponential technologies such Artificial Intelligence, Virtual Reality, Internet of Things, and Additive Manufacturing (3D Printing). How can they not be the main driver for innovation?” And you’re right. Technology is moving faster than ever before. But technology always needs to have a purpose. Products are only successful when they match with unmet needs. But in the developed world, people have enough products in their home. Their goal is not to get more of the same, they want to move up in the Maslow’s hierarchy of needs instead. And in comparison, global issues like climate collapse, finite resources, waste, contamination, animal extinction etc. put “unmet customer needs” to shame. 

Big opportunity 

The opportunity is so big that Nir Shimony, Co-CEO of TechForGood Israel estimates that the global opportunity related to the SDGs is over USD 12.3 trillion by 2030. 

The business models of impact startups go beyond customer satisfaction and profitability. Therefore, those business models are called “Sustainable Business Models” or “Impact Models” – as they are further called in this text. 

An Impact Model is the rationale of how value is created, captured, measured, and scaled in a socially and financially sustainable way, with the goal of generating positive impact regarding one or more SDGs. 

In contrast to corporate social responsibility, “impact” is a key part of the business model and therefore the core of the organization, thus the term impact startup. There is a wide spectrum of impact startups. Some of them focus more on the profitability side while others, the non-profit organizations, focus on impact over profitability. What all impact startups have in common is the goal to scale their impact to reach their ambitious visions.

The common understanding is that impact startups address at least one of the 17 SDGs or their 169 underlying targets. We will look at examples of companies that use biotechnology to suck carbon out of the air, others use IoT to create smart and efficient garbage cans and others use AI and the newest drone technology to solve health problems in some of the poorest countries in the world. So, let’s dive in!

Impact startups addressing poverty and hunger

Many impact startups are active in the fields of crowd-funding and micro-lending for the poor in third world countries. Since access to capital is a big issue, the market is huge, and an impact model can be created around that opportunity. Zidisha for instance is a successful platform for micro-loans. People – usually from developed countries – lend pocket-money for specific investments of entrepreneurs in the developing countries (e.g. to buy a sewing machine in order to increase productivity). Zidisha is the first person-to-person lending platform to connect lenders and borrowers across international borders without going through intermediary banks. Since its foundation in 2009, the platform has supported 250,000 projects, and lent over USD 16 million – what might not sound impressive in “Silicon-Valley terms” but is a lot of money for developing countries. 

But how can we solve hunger in a world that will soon have a population of 8 billion people? Like many Impact Startups, TerViva has a grand vision: We “plant millions of trees to feed billions of people.” This startup partners with growers to raise resilient, high-yielding pongamia trees on degraded land using minimal inputs. The patented pongamia tree produces a legume that is related to soybean and pea. It is high in protein, healthy, and can be used to produce a vegetable oil. The yield is 10x of soybeans and can be used for food products and organic fuels. The company also claims that the water usage is low and that those low-maintenance trees grow with little to no fertilizers or pesticides. In early 2019 the company received USD 20 million in funding in their series D round. 

But the sheer number of people is not the only problem. About 10% of the world population still lives in extreme poverty (defined as less than USD 1.90 a day). Inequalities lead to radicalization of individuals that can result in crime, terror, and wars. Therefore, it’s important that there are startups that sell products in developed countries with the goal to build up (direct) fair supply chains that provide reasonable income for those who do much of the work. Coffee Circle is such a company that pays fair income for coffee farmers and supports local communities with additional social and environment-friendly projects. In addition to fair prices and transparency, the company gives part of its revenue to the WASH-project, giving almost 20.000 people access to clean drinking water and sanitation in Ethiopia.

If politicians can't save the planet, can entrepreneurs?

Peter Diamandis, co-founder of the Singularity University claims that “If humanity could capture just one part in one thousand of the solar energy striking the Earth, we could have access to six times (!) as much energy as we consume in all forms today.” But the problems of solar cell production include costs, pollution, and energy efficiency among others. Utilight is an Israeli startup that aims to significantly reduce costs, time, and materials for solar cell production while improving solar-cell efficiency. The company has invented a patent-pending printing system for high-volume manufacturing of Solar PV cells. Robert Bosch Venture Capital invested more than USD 3 million into the photovoltaic startup in 2016. Another company, Energy Vault is addressing a different issue: the electricity storage problem. The company just raised USD 110 million from SoftBank Vision Fund with its concept of a moving tower made of heavy concrete blocks that can be elevated and or lowered in order to charge or discharge an electric grid.

One of the big problems of cities and many industries (e.g. fast food) is waste management. Enevo, a Finish startup uses IoT sensors to collect and analyze data from refuse containers in order to reduce inefficiencies, cut the cost of waste collection, and incentivize recycling. By using the “performance-based-contracting” model, the company only earns money, when the client saves money. Founded in 2010, the company already has more than 70 employees and 40k sensors in use on six continents. 

Our linear production process today produces many externalities (e.g. waste, contamination, and carbon). In addition, most products are used only a few times (e.g. fast fashion) before disposal or – in the extreme version  – never (e.g. food waste). No Food Wasted or Too Good To Go among others are mobile platforms that allow restaurants and small shops to sell old food (soon to be expired) on those platforms for a discounted price. Customers benefit from hefty discounts and do good for the environment simultaneously. The two platforms alone have already saved more than 20 million dishes each. 

Almost everyone, besides some political leaders, understands that a massive climate collapse is befalling humanity. Protesting and changing legislation (e.g. carbon taxation) are important measures to shake humanity awake after missing the opportunity to act 40 (!) years ago. Nevertheless, some impact founders go even further and lead by example. Some of them strive to tackle this grand challenge and create viable business models out if it. A great example is Skymining. The company reverses the global carbon flow by physically sucking carbon out of the air by using specialized grasses that are later turned into a clean replacement of fossil fuels. The company has developed a specialized grass that can grow up to 4 meters in less than a hundred days, exclusively on marginal land that can’t be used for any other kind of agriculture. The startup claims that 20 percent of the absorbed CO2 stays in the ground, therefore the startup achieves a negative CO2-balance throughout the whole process.

While global warming covers most of the news today, the situation in our oceans is not any better. The Ellen MacArthur foundation warns that at the current rate of plastic consumption by 2050 there will be more plastic in the ocean than fish. One company transformed this dystopia into a grand vision. The vision of The Ocean Cleanup is zero plastic in the ocean in 2050. The startup developed a passive system using wind, current, and waves to catch and concentrate the plastic in the ocean. The recycled plastic are later turned into high quality products. The company plans to sell the branded material for reuse to turn the ocean cleanup into a self-sustaining business model. The company has received significant donations of more than USD 30 million so far. In October 2019 the company unveiled the Interceptor, self-steered ship to intercept plastic river pollution, and therefore tackle the problem closer to its root-cause.  

The foundation: access to capital and infrastructure 

The foundation of sustainable development is peace, democracy, infrastructure, education, and access to capital which are covered by the SDGs. Contrary to prevailing opinion, impact investments are no less profitable than ordinary investments. Impact investment platforms are businesses that spur this growth and therefore aim to merge decent, fair-paid work with economic growth. An interesting platform that allows investments without a minimum is Newday. Newday is a mobile app that allows anyone without any prior knowledge to start a responsible investment portfolio. 

One of the targets of the SDGs is rural road access since many regions in the world are not connected to roads and/or train lines. Zipline is a company that uses flying drones to access remote locations in order to deliver medicine. Currently the startup is operating in Rwanda and Ghana to deliver medicine to 700 million people within the next five years. Since its recent funding of USD 190 Million the company reached the so-called “Unicorn” status with a valuation of over USD 1 Billion. 

Impact startups are leading the way in using global challenges to spur innovation, creating impact models, and thus creating new industries. Now, it’s time for larger companies to address those global challenges, making them to the focal point of their innovation strategy and leveraging their potential to impact the world.

Written by Felix Hofmann , former CEO of BMI LAB