VC evergreen: the long-term impact
Is the VC as it has evolved suited to financing impact and sustainable projects? Could evergeen models (with no predefined exit horizon) become more widespread? At Asterion, we take these questions very seriously... We tell you what we think in this article.
A week ago, Roland Berger and Station F published a joint study on the evolution of venture capital companies in the face of the climate challenge.
8,000 billion euros are needed for the ecological transition between now and 2030, according to the EU. Responding to the urgency of climate change requires substantial resources, and this cannot be achieved without private capital.
According to Roland Berger, who interviewed dozens of French and European companies for this study (we answered the questionnaire online), the small world of VCs is undergoing a significant shift in the destination of these investments. Here's the proof: by 2021, $111 billion will have been invested in start-ups and scale-ups with a climate impact worldwide.
Fad or lasting conversion? Is VC as it has evolved adapted to financing impact and sustainable projects? Could evergeen models (with no exit horizon) become widespread?
The study outlines a few possible answers... The conclusion, very much in line with Asterion's investment philosophy, obviously appealed to us... Decoding:
- Momentum in the tech ecosystem around the climate issue
Today, 85.3% of VC funds claim to have a dedicated vertical or climate pocket in their portfolio (STATION F & Roland Berger survey, 2023).
Among the reasons behind this movement, the study mentions :
- Tighter European regulations accelerate the creation of new markets
- Pressure from internal teams
- Growing demand for institutional LPs to respond to the climate emergency
- Classic VC and long-term vision: a fundamental incompatibility?
In the second part, the study's authors address the vexed question of the mismatch between contemporary VC models and the quest for sustainability. There are at least three reasons for this.
- The 6-8 year exit requirement is not suited to the long-term investments needed to develop sustainable solutions. Disruptive innovations in fields such as low-carbon energy require sustained R&D efforts, with proof-of-concept phases generally taking longer.
- The current system based on serial reinvestment by funds with different exit horizons sometimes leads to a lack of alignment among investors, with contradictory objectives and priorities, with deleterious effects on the growth and development of the companies financed.
- Finally, many funds act out of mimicry, preferring to minimize their risk by replicating past successes. The result is a lack of investment in sectors and technologies that are essential to the zero-carbon transition. The lack of investment in hardware is often cited as an example, despite the fact that it could account for 60% of tech revenues over the next five years.
- The need for more evergreenfunds... and more of the same
To counter these shortcomings of the current VC model, the study concludes with the emergence of evergreen schemes: funds with patient capital and no exit horizon. Evergreen funds offer an alternative to funds with a fixed exit date, which require a return of capital over a short-term horizon, and thus polarize investment towards companies with a potential for a rapid return.
We had the opportunity to share this conclusion in a Linkedin post, which I am republishing here for the occasion:
At a time when every fund is creating an "impact" arm, it's not easy to find your way around. Most VCs (including "impact" VCs) create funds with an exit date (between 6 and 8 years for most).
This has two consequences:
- The need to return capital over a given timeframe leads to the selection of companies with short-term potential VS breakthrough innovations
- Additional pressure is put on founders to sell earlier or find a new investor, which often has a negative impact on the company, the founders and their employees.
An evergreen fund, on the other hand, has no pre-established exit date, providing greater peace of mind for founders who can plan ahead for the long term.
At Asterion, structuring our investments via dedicated vehicles (SPVs) also brings greater flexibility to our community of investors, who can exit at any liquidity event.
In short, yes, there is momentum in climate tech. But if we're serious about the long term, this evolution must go hand in hand with a reinvention of investment patterns, starting withevergreen.
Of course,evergreen is only one stage in the reinvention of the model. Other initiatives and safeguards need to be put in place. For example, anchoring the mission in the company's articles of association, assessing impact by mobilizing all stakeholders, long-term governance of investment vehicles and the creation of commons will enable the entire ecosystem to move forward. And we have many other projects in the pipeline. But we'll come back to them later.
To find out more :
- "Evergreen" funds, the "patient" version of venture capital. Les Echos
- "Why Evergreen Funds are the Future of Climate Tech Investing... and all of Venture Capital!" 4Ward.vc
- "Climate: 8 billion euros are needed, will VCs be there?". Maddyness