London-based private equity outfit Lightrock closed a mammoth $860m fund in October with the aim of fuelling a new generation of founders “tackling the world’s biggest challenges”.
But in a world where every business claims purpose over profit, how can investors separate the wheat from the chaff?
Lightrock partner Kevin Bone sits down with Impact A.M. to discuss the fund’s strategy.
You say you back purpose driven entrepreneurs – can we really distinguish nowadays when almost every business claims to have a purpose beyond profit?
For the Lightrock Climate Impact Fund, we specifically invest in firms that measurably contribute to greenhouse gas emissions reduction or avoidance across our climate investment themes. Those themes correspond with the technology mix required to achieve net-zero by 2050 across areas like energy transition, decarbonizing industries, sustainable food & agriculture and sustainable transportation.
In addition to that ‘top down’ focus, we look at each investment for its impact by using our impact assessment framework which is based on market standards, best practice and which has been externally verified by an expert third party.
Only those companies that exceed a certain threshold following our assessment will be considered for investment.
2: With this new fund, what are the criteria that go into an investment? What do you look for?
The Fund will make investments with a typical initial ticket size of €10-40 million in European and North American growth-stage companies that operate across one or more of our climate themes.
We are looking for companies that are innovating towards a net-zero economy, so they must be able to demonstrate clear, significant GHG avoidance and/or mitigation. We are particularly interested in the “hard to abate” sectors where progress to decarbonisation has been slow but the impact of change in them is hugely important.
We are growth stage investors so do not take science risk (i.e. “will this work?”) so in addition to our own detailed due diligence we are also looking for emerging commercial validation where informed customers, often some of the most sophisticated industrial companies, have started to buy the products and services.
We are happy to take scale-up and cost down type risks as well as work through the challenges that these entrepreneurs face in areas such as governance and organisation building, strategy and financing. We are supportive, engaged, minority investors and often partner with like minded investors to give the best support to entrepreneurs on the journey.
3: What are some of the areas you have earmarked already to put this cash into?
We have already backed a number of firms for this fund, across the five themes of the Fund’s investment strategy, in areas like green hydrogen production, firming renewables and grid resilience sustainable wood production and circular solutions around waste/bioenergy.
We are constantly addressing areas where technologies with major greenhouse gas impact potential are maturing and starting to gain commercial traction including batteries, long duration energy storage, green industrial processes, carbon capture and removal, and smart data for climate.
4: In the UK specifically – where do you see the exciting areas of technology springing up?
The UK is showing promise in many areas like novel battery chemistries, carbon capture, waste utilisation (“Waste 2 X”) and home energy management to name but a few.
5: When raising the funds, how did you make the growth pitch to your investors around climate?
The technology to achieve net zero by 2050 already largely exists, but a lot of money needed for its impact to be realised at scale. In fact, some 85 per cent of greenhouse gas savings are believed to be achievable with existing tech. Early-stage capital has helped a lot of companies explore and develop these technologies, but investors with scaling experience and deep pockets are now needed to help them grow and realise both their impact and financial potential..
6: Do people still see this as just impact investment or have investors really come round to the fact there are returns here?
In the past two years, we have seen the tailwinds behind the themes we invest in with the Lightrock Climate Impact Fund only become stronger. The climate emergency is becoming more severe and is a key focus area for everyone across governments, corporates and consumers alike. Companies that provide scalable solutions to those challenges are seeing soaring demand and strong financial, as well as impact, returns.
We take the view that environmental and financial returns can be mutually reinforcing supported by the flow of talent, capital, brand loyalty and other factors to businesses that are driving environmental (and social) change.