Investing in the future

Prof. Dr. Reto Eberle: You are the Managing Partner of Emerald Technology Ventures, one of the world’s largest cleantech venture capital firms, with a focus not only on energy and water, but also on sustainable packaging, food and agriculture, mobility and urbanization as well as on industrial IT. Sustainable investments, once a unique selling proposition 25 years ago, are embraced by countless companies today. What is your recipe for success?

Gina Domanig: Back when we started 25 years ago, this was not an interesting sector for people to be in. We were the first team to do what we do. There were a lot of “thin” years in the beginning.

We stuck with our strategy, though, and survived the financial crises, the clean tech bubbles – and the bursts. Today, sustainable investment is booming, and we’ve grown a lot as a company recently. 

Other players can’t match our depth of experience
Because we’ve been in the business for so long.

What kind of investments do you make? Are you investing directly as private equity or indirectly as a fund?

How does your company approach investment decisions?

I wouldn’t call us impact investors but, by definition, our strategy is impact-driven if you look at the sectors and companies that we invest in. It has a lot to do with the energy transition, clean water, access to water, recycling, plastic waste solutions.

Alongside sector, our strategy considers stage and geography. Most of what we do at Emerald is venture capital, so we tend to focus on the early expansion stage. These companies will typically have proven that their technology works, hopefully they will already have two or three customers, but are not yet profitable. That’s where we come in to help them to accelerate the commercialization.

Our investment geography is global but most of our investments are in North America, Europe and Israel. We’ve also had an office in Singapore for four years and are starting to build that up. Even so, the deal flow or investment opportunities in venture capital in Asia are not yet at the level of Europe and North America.

To what extent does good governance play a role in your investment decisions? Does governance for start-ups look different from that of established companies?

For us, good governance is about implementing best practices, even if that’s on a small scale. The board composition may change, but the governance must already be in place and the history documented as the company grows. We want a certain balance between management investors and independents on the board, and we set up committees right from the start: compensation, audit. 

Even if it’s a really young company, you need to have proper board meetings, with minutes, agendas and board documentation. You never know when the company is going to be sold. During the exit process, the acquirer – often a large cooperation – will be checking to see if everything is in order.

That’s also one of the reasons we require companies to have audits, which is not very common in the venture capital space. Another reason is that it forces the smaller, often less experienced finance team, to dig into complex issues like percentage-of-completion accounting, transfer pricing and VAT in different countries. It’s better to get this expertise in house sooner rather than later.

Surely start-up companies should also make a profit in the medium term and generate a positive cash flow?

With this in mind, how do you explain the fact that some listed companies, including large ones, have innovative business models but are still a long way from generating profits and positive cash flows?

Do start-up companies render traditional business management ineffective?

It’s about cash at the end of the day. In our sector most of the time we are selling our companies to large corporations. They do not want to buy loss-making businesses. Now it could be that the technology is so incredibly critical to them, strategic to them, that they may be willing to buy something that is loss-making in the short-term. But they want to see how it’s going to become profitable.

What we have in the US, or had especially a couple of years ago, were the SPACs, which were just crazy. If you look at the statistics, the average SPAC has lost 90% of its market value. These companies were way too immature to have ever been listed. Many of them ended up going bankrupt or being delisted because they were trading below 1 dollar per share for too long. I’m still an absolute believer in cash flow. I think, at the end of the day, people want to get paid with cash, not clicks.

How should sustainability be managed by the board of directors: as a separate committee or as a task for the entire board?

How do companies view regulatory developments in general?

I can imagine that at the beginning you might need a task force to implement sustainability processes, procedures and structures. But afterwards it should be integrated, otherwise you send out the wrong signal. Sustainability-related metrics should be in place. For me, it should become part of the normal processes and reported to the board like other metrics related to profitability, employee health and safety, operations. In terms of regulation, I think the private sector often welcomes regulation because it levels the playing field.

There are a lot of voluntary measures being taken by corporations, and many are looking for innovation. In fact, that’s where many of our investors come from. They want to reduce their footprint or align their business with sustainability opportunities. There are a lot of positive things happening.