Category: Investment

The Impact of Social Venture Capital on Society

August 18, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

Venture Capital as a Force for Societal Change

While traditional venture capital investment continues to provide investors with opportunities for financial reward, impact investing and social venture capital are beginning to take center stage in the investment arena. Venture capital projects with a potentially positive impact on society provide investors with an opportunity to return profits while supporting the most critical, necessary societal changes. Often supported by both the public and the public sector, there are many advantages to social venture capital.

Trends in Social Venture Capital in 2022

Venture capital grew throughout 2021 and into 2022 after exiting the disruptions of 2020. It was up $332 billion in the first three quarters of 2021 compared to the same period in 2020, and early-stage funding was up by more than 100%. Despite that growth, venture capital did not see the types of growth in ESG considerations that other investment areas did. That creates a significant opportunity for growth in social venture capital in 2022 and beyond.

Over the past year, movement in social venture capital indicates many firms and sectors are poised for that growth. Venture capital collaborations are moving to improve practices across the industry to support diversity and other critical missions, and many firms are hiring directors of sustainability and other professionals meant to steer investments and initiatives in ESG directions.

What Are the Main Advantages of Social Venture Capital?

Social venture capital offers many benefits for firms, businesses, entrepreneurs, and the community or society. Some of the benefits of social impact investing and social ventures include:

  • Better access to funding sources. Governments and other agencies offer incentives for social impact investment, making investors of all types more likely to enter the pool. In addition, channels such as crowdfunding and angel investments are typically easier to access when a mission backs the venture.
  • Increased service to the community. Services developed in social impact finance tend to be more relevant to community needs and more likely to solve known social or environmental problems.
  • Easier buy-in. ESG venture capital firms act on agreed-upon environmental, social, and governance missions. Because of that, it is easier to get buy-in from all stakeholders because the mission is clear, and most people can stand behind it.
  • Greater diversity. Consumers increasingly buy from brands they believe support important missions and social responsibility. Social venture capital tends to lead to increased diversity naturally.

Does Social Venture Capital Have Any Disadvantages?

Social venture capital is not without disadvantages. For example, social entrepreneurs relying on social venture capital may give up control to get funding. In addition, a lack of historical case studies may make it difficult for social entrepreneurs to convince potential investors. This may be challenging until social venture capital becomes a long-term trend.

The Dual Nature of Social Impact Investing

One of the challenges leading to investor hesitance for social impact investing is its dual nature. Investors and venture capitalists historically were concerned with the return on their investments. The bottom line can not be ignored, as investors that pour money into ventures that do not perform go out of business quickly. But social investors are also concerned with how the venture performs with regard to social or environmental factors, including diversity, sustainability, reduced emissions, or policies that provide for the community.

A business woman investor examines solar panels while holding her notebook with social venture capital impacts listed.

Social Impact Investing To Cool the Planet

One growing area of social impact ventures has to do with the environment. Social entrepreneurs are leveraging innovation, sustainability, and other processes to create products or provide services in a way that safeguards the planet. Climate impact investors are putting money behind those efforts, funding businesses and efforts that keep the planet central to all missions.

Venture Capital to Reduce Poverty

In the same way, for-profit and nonprofit venture capital investors seek to improve the quality of life of people across all borders. For example, many are looking at ways venture capital can reach the poor in developing countries. Funds from private and public sources are being used to educate and train people in these nations to help them develop businesses, local economies, and even entire infrastructures that might lead to longer-term profits or prosperity. Again, the efforts come up against significant challenges, including currency risk, cultural barriers, and long-term poverty that can be difficult to change.

Removing Barriers for Minority Entrepreneurs

Women, Black, LGBTQ, and other minority entrepreneurs have historically found it challenging to get funding for several reasons. First, historically, not many partners in venture capital and investment firms match these demographics. People often invest in ventures that make them feel comfortable, which can mean a trend of investors funding ventures for and about people that look and act as they do.

Cultural and societal barriers, including systemic racism, also play a role in reduced funding opportunities for minority entrepreneurs. However, as more investors seek social impact ventures and awareness about diversity needs continues to rise, those trends are changing. As a result, venture funding to minority businesses has been up in recent years, though there is still a lot of ground to cover, as it remains small compared to the entire funding pie.

How Do You Measure the Impact of Social Venture Capital?

The first step in measuring the impact of social venture capital is to define why it matters and what success looks like for all involved. The second step is finding a numeric measurement that can help indicate performance.

If someone is trying to create more diversity, a good metric of success might be how many of their venture investments are run by or related to minorities. Investors interested in climate impact investing might want to measure the emissions associated with their portfolios.

Going beyond measurement, social venture capitalists might rely on case studies to demonstrate success in a more narrative format. Case studies can raise additional awareness and funds and illustrate the impact on investors and other stakeholders.

Examples of the Effects of Social Virtual Capital on Society

Social virtual capital has plenty of positive effects on society. For example, a venture capital fund that seeds startups helps businesses get off the ground. But a social venture capital fund that specifically seeds startups with a community mission does more than that: It helps a business help others. Likewise, a social impact investor that puts money behind ideas that introduce sustainability into sectors that do not tend toward eco-friendly processes helps those businesses grow and protect the environment.

Ultimately, social venture capital can change the world. Investors must do so, however, with one eye focused on change while the other eye remains trained on the bottom line. It can be a problematic duality to walk, but it is critical to the future success of communities, nations, and even the planet.

AI Investments Shaping the Future

August 6, 2022 Fintech

Jeff Bartel

Chairman and Managing Director

Artificial intelligence and venture capital have become incredibly intertwined. Whether it is the benefits of artificial intelligence in vetting investments or funds driven by AI technology, it is hard to separate the two. This article discusses how AI investments are changing the marketplace.

Venture Capital Growth in AI Investments

The venture capital sector is investing more in AI technology, a growing driver in almost every industry.

Artificial Intelligence and Machine Learning

Machine learning and artificial intelligence are not interchangeable terms. AI refers to computer systems that appear intelligent or demonstrate human traits and understanding of the world. You can have AI that cannot, on its own, learn. Instead, it is programmed to respond to queries or stimuli in intelligently.

Machine learning is a type of AI. It refers to computers that are so advanced they learn, taking in copious amounts of data and coming to conclusions that would be difficult for humans to determine. In short, machine learning makes AI capable of going beyond human abilities and is driving the sector’s growth.

Artificial Intelligence Growth by Industry

Venture capitalists are pouring increasing amounts of money into AI across various sectors due in part to the promises that machine learning and the subsequent evolutions in AI can make. From 2012 through 2019, there were more than 20,000 venture capital investments involving AI. More than half of those occurred in three sectors:

  • IT infrastructure and hosting
  • Media, social media, and marketing
  • Business processes and support services

Other industry sectors with strong growth (more than 1,000 deals from 2012 through 2019) in AI investments include healthcare and biotechnology, robots and sensors, finance and insurance, and digital security.

Returns for AI Investments

The relationship between venture capital and AI is not a one-way street. While investors are banking on AI wins across all industries, firms also turn to AI to increase investment returns.

Machine learning capabilities support AI-based algorithms that outperform human “gut reaction” and knowledge when choosing worthwhile investments. A University of St. Gallen team created an algorithm to select investment opportunities. It compared the machine’s performance against 255 angel investors, and the machine outperformed the average human by 184%.

How AI and Venture Capital Work Together

By 2025 AI will be involved in 75% of investment decisions. However, that does not mean people are set to become obsolete in venture capital processes; instead, it points to a growing collaboration between human knowledge and computational power.

Use of Artificial Intelligence in Finance

Artificial intelligence in finance and investment management is no longer a fringe idea. Most investors and finance organizations utilize some level of machine learning to understand the viability of funds and investments or drive workflows to get things done.

Artificial Intelligence in Business

Some ways AI and venture capital already work together — and some trends that will only increase in the future — include:

  • Evaluating investments. AI can take in and consider so much more data than a human mind can. That leads to a deeper understanding of potential investments, ensuring investors can make more informed decisions.
  • Creating more efficient workflows. Firms are already using AI to drive automated workflows, reducing the time it takes to act on a potential investment.
  • Forecasting performance of portfolios. Machine learning capabilities will continue to help firms create ever-more accurate forecasts, driving more innovative investments and increasing wealth-building capabilities.
Machine learning algorithms and artificial intelligence venture capital

Artificial Intelligence Stocks and Startups

While many companies and funds are putting money into AI investments, pure AI stocks are still rare in the market. Instead, investors must look for opportunities for companies using AI to drive growth and innovation. Amazon, Google, Microsoft, and IBM are obvious choices, but others exist, including Toyota, Baidu, and Nvidia.

As with any disruptive growth concept, AI investments are perhaps even more exciting at the startup level. In 2018, more than $9 billion was invested in these types of companies. Some leaders include:

  • Softbank Group, which has a dedicated tech development fund called Softbank Vision Fund
  • Intel Capital, which is part of Intel Corporation and invests in thousands of tech companies
  • Lightspeed Ventures, which provides funding for tech startups in the early stages
  • Andreessen Horowitz, which has raised more than $7 billion for tech-driven funds

Venture Capital, AI Investments, and Autonomous Vehicles

In 2021, billions of venture capital dollars were funneled into the mobility tech sector, primarily in the niche related to autonomous vehicles. Rapid growth in machine learning and AI is making driverless vehicle opportunities a reality, as evidenced by tests Walmart has done that include autonomous box trucks making deliveries to customers.

Autonomous vehicles could bring huge monetary and supply chain wins in the transportation sector alone. Driverless delivery or transport vehicles would help keep many of the supply chain problems that occurred during the COVID-19 pandemic from happening in the future, for example, so it is not surprising that venture capitalists are flocking to these AI investments.

AI Investments in Media and Social Media

Media and social media play enormous roles in society. They shape world views, sway voters, and inform the policy of governments and agencies. Disruptive models put publishing power in the hands of every person, the need for accountability across media types, and the increasing use of AI to manage publishing, marketing, and content creation. As a result, venture capitalists are looking for up-and-comers with the technology to make a splash in the niche.

Reacting to Recent Trends in Shareholder Activism

July 18, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

Shareholder activism was robust from 2017 through 2020. Though it saw some decline in 2020, partly due to economic and business disruptions related to COVID-19, activism is bouncing back. Large-cap companies in the United States saw a 30% increase in activist campaigns in early 2021 compared to the same period in 2020. The expectation is that shareholder activism will continue to rise. Understanding shareholder trends and reacting proactively to them is essential for businesses, investors, and governments.

Shareholder Activism in 2022

M&A and shareholder activism trends in 2022 continue to follow paths set in 2021 and even earlier. However, the evolution of societal, economic, and political factors continues to play a role in how these paths develop. Some types of shareholder activism investors and businesses can expect through the rest of the year and the immediate future include:

  • ESG as a continued focus. Record numbers of ESG-related proposals were presented and successfully won shareholder support in 2021. That trend is expected to continue, especially given that governments and other agencies are pushing these agendas alongside private equity and activists.
  • M&A activities leveraged as change mechanisms. M&A activity continues to be a driving force in shareholder activism, with hostile takeovers and board member removal used as change mechanisms to drive desired future states. For example, when Senator Investment Group failed to secure CoreLogic due to the CoreLogic board voting down the proposal, it teamed up with activist shareholders to vote out members of the board and replace them with people willing to vote in the acquisition.
  • More shareholder support for social and environmental activities. Board takeovers and other changes managed through shareholders and voting are likely to increase with growing support from shareholders in certain areas. In addition, shareholders are increasingly stepping up to champion environmental and social proposals—a fact that boards, other investors, and businesses must take note of to continue with success in 2022 and beyond.
  • More activist efforts are succeeding. Historically, boards and businesses could count on activist efforts to fail in most cases. But the David and Goliath dynamic has slipped, and shareholder activism holds more power than existing structures. As a result, business leaders and others should not act on the assumption that activist efforts are likely to fail.

Growth of ESG Shareholder Activism

Investors’ desires to back personal and societal missions with money have increased, creating a significant force in the changing balance of power that ensures more activist efforts succeed. These factors have, perhaps, the most current momentum in two areas: climate change and social justice.

Activist investors and activist shareholders are putting pressure on firms of all types to go green to reduce emissions and carbon footprints, reach toward Net Zero futures, and reduce risks associated with climate change. Tactics used by these investors range from creating awareness for their missions to negotiating with firm management to make change happen. For example, they may put proposals in front of boards or other shareholders for votes. They can even go so far as hostile takeover activities such as voting out board members or arranging proxy votes to orchestrate change.

One interesting note in 2022 is that this type of environmental-economic activism is taking a top-down journey. The greenest companies have become too expensive for some investors, and shareholder activists may find they have done all they can with such firms. The dollars, then, are trickling down to investments where ESG is fledgling and shareholder activists can make more significant changes.

Social justice is another rallying point for shareholder activists, who look to embed missions related to economic and social equality into firm activities and growth. In many cases, shareholders support these proposals because failure to engage in social justice is seen as a risk for modern businesses, especially as business partners and consumers become increasingly aware of such activities.

M&A Shareholder Activists: Firms Should Remain Vigilant

It is increasingly important for firms to be aware of shareholder activism and its potential impact on M&A activity. Activist investors are increasingly driving M&A activity, selling, or breaking up companies to achieve desired results for social or environmental concerns. 

Firms should always remain aware of potential shareholder activism and how it might impact mergers, acquisitions, or overall business growth. However, before launching any effort, firms should take time to analyze weaknesses, particularly concerning ESG, and understand shareholder desires and makeup. Looking for shareholder positions of strength that can leverage to force M&A activity to move in a specific direction can help firms understand where weaknesses are and what potential paths shareholders might try to push the business down.

Sustainable Banking to Address Climate Change

June 17, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

Modern finance and banking must integrate a new green — one that has nothing to do with the color of the American dollar bill. Organizations within the industry are being called upon to address climate change through policies, investment practices, and sustainable banking.

These burdens come when the nation — and the world — is looking to change. The disruption of the COVID-19 pandemic created new normals in all sectors, and leaders and citizens wonder if returning to old ways following the global health crisis would be a wise or sustainable move.

One of the drivers behind a desire for ongoing change is the climate crisis. According to the National Oceanic and Atmospheric Administration July 2021 was the hottest month on record at that time for planet Earth. Wildfires, record-breaking rainfall in many areas, and rising sea levels lead to growing concerns, and those concerns are turning into action.

Governments are initiating regulations, pushing banks and other financial organizations to enact sustainable practices. Discover more about these practices and the current transition in financial sectors below.

How Financial Institutions Enact Sustainable Banking Practices

Supporting Partnerships With Regulatory Organizations

One essential strategy for sustainable banking is collection action between regulators and others within the industry. Banks and other financial organizations get a say in those policies by partnering with regulatory agencies and demonstrating a sincere desire to enhance sustainable policies. They can bring expertise and background to the table to help regulators understand changes’ business and economic ramifications and find the right compromise between sustainability and support for financial concerns.

Helping to Direct Private Sector Financing with Sustainable Banking

Sustainable investing, such as socially responsible real estate investing, can amplify positive policies enacted by governments, bringing practical change to financial sectors. But environmental integrity is a top-down asset. So financial institutions must model it and encourage private investors to do the same.

Moving Toward Green Agendas With Financing

Banks can help push forward green agendas by choosing to finance efforts with those goals. Ultimately, corporate responsibility for sustainability is shared across industry sectors, and banks can support partners by backing the appropriate measures.

Windmills financed with sustainable banking.

Impact of Low-Carbon Transition on Asset Values

The move to reduce carbon footprints across all sectors around the globe is changing asset valuation for banks. During this period, financial organizations may be looking for sustainable banking opportunities such as alternative energy investments, but they must also be mindful of assets in transition that may become stranded.

Examples of Investment Needs During the Transition to Sustainable Banking

Investment needs during the transition range from supporting new infrastructure to backing products and projects that drive positive outcomes for the environment. Some examples include:

  • Sustainable energy, including infrastructure such as wind farms and solar panels as well as R&D on innovative solutions
  • Upgrading existing infrastructure, particularly in fields such as manufacturing, to support ongoing functionality with a reduced carbon footprint
  • Products and services that move communities and nations away from reliance on fossil fuels, such as electric vehicles

Financial Factors Impacted by the Transition

The evolution during this transition has an impact on financial factors, including:

  • Operating expenses are likely to increase — at least in the short term — for organizations that work to enact change. Research and development, implementation, and training are just some efforts that could drive up operating costs and impact asset cash flow during the transition.
  • Depreciation and amortization of equipment and assets that don’t align with sustainable practices. The value of these assets may drop faster than initially planned, creating monetary stress that ripples up through financial organizations.
  • Costs of financing can create burdens for investors and other businesses as they seek to generate sustainability while maintaining current cash flow and other financial goals. As a result, investment financing may be an option that more partners turn to during this period.

Stranded Assets

Going increasingly green means abandoning long-term infrastructure and processes, stranding once valuable assets. As a result, transportation, oil and gas, and manufacturing are all at risk, and assets in these sectors may quickly become liabilities soon.

Climate-Focused Credit Risk Assessments

Banks are working to embed climate risk into lending practices to reduce the potential for losses in the future. Some techniques in this effort include:

  • Considering climate risk assessments at the origination of investments or loans. Businesses and even individuals seeking financing may need to demonstrate a plan for sustainability on top of traditional factors such as creditworthiness.
  • Banks are using practices such as ESG scoring to include climate concerns in underwriting practices to mitigate risks further.

Sustainable Banking Stress Testing

Traditional risk forecasting does not work well in assessing climate risks because traditional models were never built with sustainability in mind. So instead, governments, central banks, and other institutions are implementing climate stress testing.

At its highest level, sustainable banking stress testing looks at whether an institution or process is taking the right actions and has a good mix of suitable investments to make it through the climate transition. However, stress testing should also occur at lower levels concerning each customer, investor, and investment.

Projecting the Market Growth for Integrated Risk Management

June 9, 2022 Investment

Jeff Bartel

Chairman and Managing Director

A robust integrated risk management approach is becoming critical for businesses of all sizes and sectors. Increased cyber risks, rising demands on governance, and growing FinTech reliance are just some factors spurring growth for integrated risk management services.

Predicted Market Growth for Integrated Risk Management

Estimates of the market growth for integrated risk management are substantial. Gartner estimated year-over-year growth from 2014 through 2016 at around 17% in 2017, predicting continued growth of 13.4% through 2020. Growth predictions are even more favorable for the look forward through 2027. The integrated risk management market size is expected to grow at a rate of 18.7% CAGR, reaching $28.87 billion in value by 2021. That is an increase of more than $20 billion in less than a decade.

Key Factors for the Growth of Integrated Risk Management

IRM approaches are complex, and they address numerous challenges and threats. However, a few factors stand out as being significant drivers in the growth of IRM markets.

A Rise in Data Breaches

Data breach numbers continue to rise, with record-setting numbers in 2021. According to the Identity Theft Resource Center 2021 report, data breaches jumped 68% from 2020 to 2021, driving the number to the highest total on record in any year. Data attacks will not suddenly decline in the future, and the demand for proactive defenses against cyberattacks drives tech-related growth in risk management markets.

 

New Regulatory Frameworks and Integrated Risk Management

The National Institute of Standards and Technology and the U.S. Securities and Exchange Commission are just two organizations advising increased regulatory strategy to support risk management — particularly when it comes to digital security or finances. For example, the SEC proposed rules require advisors and funds to disclose cybersecurity risks publicly. Previously, most frameworks required public disclosure when a major breach occurred. Still, this new language might put the onus on businesses to proactively alert stakeholders of all types to potential issues and weak spots in security.

Business woman using a laptop to predict the growth of integrated risk management.

IoT and FinTech Challenges

Of course, those risks do exist for all organizations. No modern business is without some connection to the internet, and an Internet-of-Things world that relies heavily on integration and data creates risk channels.

For example, financial processes of all types rely on digital processes. Increasing numbers of people turn to online and mobile banking, managing their accounts and depositing checks from smartphones. That represents a multitude of channels, people, and processes that could leave a bank and its customers at greater risk of experiencing data breaches, fraud, or other issues.

The risks increase as IoT connects and networks more touchpoints. For example, if someone sets up automatic bill pay via a checking account, they link those bill accounts to their bank account. Or, if someone signs up for a service that reports rent and utility payments to credit bureaus to boost their credit score, they often have to integrate their bank account as well.

For individuals and businesses alike, increasing connections goes hand-in-hand with increased risk.

Industries Driving the Growth of Integrated Risk Management

No one is immune to risk. More than 40% of data breaches involve small and midsize businesses. These attacks span all industries, though hacks in 2021 were up in the following industries by extreme amounts year-over-year:

  • Education and research saw a 75% increase in attacks
  • Healthcare experienced a 71% increase in attacks
  • Internet service providers and managed service providers saw 67% more attacks
  • The communication sector experienced a 51% increase in attacks
  • Government and military organizations saw an increase of 47%

Some organizations specifically driving the growth of integrated risk management solutions and markets are found in sectors like banking, healthcare, and IT. sectors

Banking

Financial services have always demanded intentional, high-level security. Safeguarding accounts and assets for customers — whether the public or businesses — is critical to the services provided in the banking sector. However, this protection is becoming more complex and difficult to provide as services go increasingly digital. Banks and other financial institutions are turning to corporate best practices and risk management solutions to meet the challenge.

 

Healthcare

In 1996, the U.S. government passed the Health Insurance Portability and Accountability Act. HIPAA demanded processes that allowed patients to access their medical records appropriately and have the ability to “transport” them to other providers when switching doctors or working with care teams. The act is just one of the many rules and regulations governing how patient data must be handled and shoring up requirements for confidentiality.

Yet healthcare has the same challenges found in banking. Sensitive data is increasingly required across many channels, including inpatient portals and apps. As a result, organizations within the sector are spending on security and risk management solutions to help accomplish business and patient-facing goals while standing firm on data security.

Information Technology

The push for integrated risk management from the IT sector is two-prong. First, some companies offer technical solutions for other businesses, such as banking, healthcare, and retail apps that involve the use of confidential information. These companies drive demand for IRM solutions in the same way businesses in other industries do.

Second, some companies work to provide IRM services to others. These companies create products that solve common risk problems, increasing the amount and value of the solutions on the market.

Integrated risk management is a vast and growing field — one that’s essential to success across all sectors.

Hamptons Group
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