In this guest blog, Jon Coker, Founding Partner at Eka Ventures, explains Eka’s approach to impact investing and the theory behind its recently launched impact-driven venture capital fund.
We set Eka up to create a new impact focused, but highly commercial, early stage venture fund. We believe the category leading companies of the future will positively transform both the economics and the societal impact of the industries they operate in. This post works through the technology, demand and regulatory changes we think will drive this dynamic.
We define our impact focus as only investing in companies where the product delivers a direct and measurable societal impact. We don’t define it through ESG or responsible investing policies. While they are important and a key part of how we operate, they are not what we mean by impact investing.
Technology Led Change
Today’s industries are built on business systems optimised by previous generations of technology. This means the lowest cost way of doing business is often horrifically inefficient and fosters major negative societal side effects (“externalities”). High profile examples of this would include wasting about a third of the food we produce, spending about 95% of our healthcare budget treating people who are already sick when we could have invested in helping them stay healthy and only 40% of low income households having home & contents insurance.
We believe these inefficient systems will change as the next generation of technology is fully adopted. At the core of today’s emerging technology is information: the ability to collect, transmit, process and act on effectively infinite amounts of information instantaneously. The innovative application of this new technology enables entrepreneurs to build far more intelligent business systems. These more intelligent business systems can better connect supply with demand and remove inefficiencies, simultaneously transforming the economics and the impact of our largest industries.
We are starting to see this happen, expanding on the examples above:
- Gousto has combined an innovative model, operational excellence and the committed application of data science to operate at less than 1% food waste while still delivering the food their customers want when they want it. As a result, they have much higher operating margins fuelling faster growth and profitability than the rest of the grocery sector.
- Kheiron is augmenting doctors conducting breast cancer screening with advanced image recognition technology. This increases the screening capacity of the health system and reduces the age at which women can be screened so more cases of breast cancer can be caught earlier leading to better health outcomes with less invasive treatment at a lower cost.
- Urban Jungle is a contents insurance company using behavioural rather than demographic data to better predict fraud in order to reduce their loss ratios and offer insurance to underserved groups. This makes insurance more inclusive while increasing their addressable market and reducing their cost.
It is no coincidence that the examples above fit into the three themes we focus on at Eka:
- Sustainable consumption models: disrupting large consumer markets with products that are both better for the customer (experience, convenience and cost) and better for the environment (emissions, pollution and resource usage).
- Consumer led healthcare: facilitating better health, earlier diagnostics & lower impact treatment to build a health system that is better for us (better health outcomes and quality of life) and operates at a lower cost of care.
- Affordable essential products: using data to better understand a customer’s individual needs in order to deliver our core, life essential products and services to more people at a lower price point. Reducing inequality and cost while increasing addressable markets.
Demand Led Change
The technology led change we described above can deliver a fundamental change in the core operating cost of a business. Companies that achieve this will leverage a second driver of value connected to demand trends.
There are three stakeholders in a business: your customers, your talent and your capital and ultimately all three are controlled by people. We are in the middle of a major demographic and values driven shift in demand that is affecting the way these people show up in your business as consumers, talent and investors.
Consumers: our growing, ageing and global population will drive huge demand for businesses that are reducing the cost of both healthcare and the products that determine our health and wellbeing. At the same time increased awareness is driving consumers to demand more social and environmental responsibility from the companies they purchase from: 64% of consumers are now “belief driven buyers”. Consumers will not compromise on cost, experience or convenience but companies that have leveraged technology to transform economics and impact won’t need them to. These companies will experience lower cost to acquire and retain their customers.
Talent: people are gravitating towards businesses with a clear societal purpose and once they are there they are more productive. 74% of candidates include purpose when selecting work and millennials are 5.3x more likely to stay in a job where they have a strong connection to the company purpose. People will not compromise on quality of work or income but in the right companies they won’t need to. These companies will reduce their cost to hire and retain talent while improving productivity.
Investors: we are seeing a huge shift towards impactful companies. An EY investor survey showed that 72% of investors say they conduct a structured, evaluation of non-financial disclosures in 2020, up from 32% two years earlier. Investors will not compromise on returns but in the right companies they won’t need to. These companies will have better access to capital and be able to create liquidity for their shareholders at higher values.
Policy and Regulation Led Change
There is a less obvious people led stakeholder in a business: the government of the jurisdictions it operates in. As we start to experience the effects of shifting demographics and climate change, governments will need to react and businesses will be forced to pay for their negative externalities, with carbon being the most obvious. The companies that have used technology to redesign their business systems to remove or reduce externalities will be playing on a different, lower cost playing field.
Desire to build true scale
Bringing this all together, we see three steps to impact as a driver of value:
- Leverage information technology to remove inefficiencies and give an economic advantage over competitors while also positively transforming the impact of the industry you operate in.
- Leverage the impact transformation to improve your access to customers, talent and capital.
- Further increase your advantage over your competitors through regulatory tail winds.
There is a final step in our approach to impact investing that is more individual and less thematic. For a company to be truly impactful it needs to scale. Too often we see fantastic impact driven innovation set the bar of success too low.
We are focused on backing companies that change industries, and the only way a company will change an industry is if it can get enough market share to make all the other companies react. Think what you want about Tesla, but there is no doubt their approach has accelerated the shift to EV through their own vehicles, but perhaps more importantly, because the whole car industry was forced to move faster than they ever would have.
At Eka we are unapologetic in our desire for scale. We are looking for that rare combination of extraordinary ambition, mission alignment and leadership capability that drives a founder to build a truly global business.
Over the next 20 years the effect our old business systems have on our health, climate and ecosystems are going to become increasingly and undeniably apparent. This will continue to change how we show up in businesses as consumers, employees, investors and policy makers.
At the same time the power of our new technologies to meet, shape and change these old businesses systems can be realised in mainstream adoption.
The combination of these two dynamics will create an environment of unparalleled opportunity for entrepreneurs to build companies of extraordinary value that positively shape the world.
These are the entrepreneurs we set up Eka to back. And that is why we are an impact investor!