Do you remember Doc Emmett Brown’s flying DeLorean car in the 1989 film “Back to the Future II”? Doc, the time-travelling gray-haired inventor, puts food waste into what looks like a food mixer, the car takes off with Marty McFly and the good professor disappearing into the future… flying cars! Back then I would never have suspected that one day I would see one – I was all the more astounded to read that in 2021, according to TNMT, a little over 5 BILLION USD dollars have been invested in businesses developing flying taxi services. You would be excused in asking – why do investors invest in technology, what are they looking for?
The short answer is that investors are investing in the means to meet consumer needs more cheaply or simply better than those means that currently exist. These means may be based on technology but also require a solid business model (how money is made from the technology) and a credible team that is able to execute. Sometimes investors will invest in technologies alone, even when the business model or even the market need are not clearly defined.
The magic of technology is that, if you are sure that it will unlock many future opportunities to meet needs (“applications” in simple terms) – whether these be current or emerging – then controlling this technology is a route to making a lot of money. While risky in the short term, the potential return on investment is so substantial that it becomes worthwhile. This goes a long way towards explaining why investors have previously invested trillions in loss-resulting businesses in the early days of the dot-com boom, and why early investors are investing in flying cars today.
But are there other reasons to invest, apart from making money? You cannot have missed press coverage of “ESG” investing – investing according to Environmental, Social and Governance principles and guidelines.
It is to be noted that such investment is not philanthropic or a desire by investors to take responsibility for making the world a better place (although many are trying to present it to be this way). The motivation remains making money; ESG investing is simply an extension of what investors have been doing until today, that is, better managing risk. What is new, is that the definition of risk has expanded to include those risks linked to the environment, to social and governance issues in the majority of cases because society has started, collectively, to attach importance to these issues. Not considering ESG has simply become bad business practice (and by extension bad investment practice if these matters are not taken into consideration in the investment decision).
Accelerating the emergence of a collective awareness of these issues, and created because of it, are the United Nations’ “Sustainable Development Goals” (SDGs). The SDGs provide a framework of objectives to meet environmental, social and governance issues that are impacting on humanity’s well-being today, and will increasingly do so in the future. Government support for these objectives, associated emerging regulations, and increasing public awareness of the issues that these are trying to address, are shaping and developing new markets, consequently awakening innovators globally to new opportunities. This is where, for the investor that I am, it gets interesting.
The SDG’s are bringing innovators to consider new needs – those linked with the “market pain” defined by the SDGs – whether these be climate change, lack of access to basic needs, gender equality and so on. Innovators are starting to develop new business models to create value from meeting these needs, and are applying and developing new technologies to support them. New, emerging technologies, including but not limited to, those linked to battery storage, renewable energy, mobile information technologies, big data and machine learning are furthermore making it increasingly cost-effective to meet these needs. I have been watching this trend for 20 years, and can say with confidence that we are at the very beginning of extremely exciting times where we can do well – yes, making money – not only while doing good, but because we are doing good!
And technology is making this virtuous circle increasingly possible – as EUTECH so aptly says “technology obliges”, meaning that it is at our service, to create collective value through supporting the meeting of the SDGs, and at our service as individuals, investors, business people and simple consumers no matter where we are in the world. But the story does not stop here. What if we want to use our financial assets to make a positive difference in the world – what if we set out to make that difference before deciding on the object of our investment?
This “intentionality” is the foundation of a branch of finance called “impact investing”. Put most simply, it assumes that the investor is deploying capital to make money ‘and’ to create a positive environmental, social and economic impact. The impact investor considers making money a vital component of his or her work, as making more financial return allows the object of investment to grow, and with it, the impact that the investor seeks. Here again, you can see that one cannot confuse impact investing with philanthropy, the important element is the intention to create and to scale impact, and making money is the (vital) means to this end. This is not money for money’s sake, rather it is money as a means to an end.
I hope that you can see from my explanations that there are many different reasons why an investor might invest in technology – all are market driven. In the case of impact investors, these are ordinary profit-seeking investors, who have found a purpose for deploying their assets that goes beyond the simple profit maximization model. Impact investors are increasingly adopting the language of the SDGs to communicate, and to help organize their intention to produce positive, scalable, environmental, social and economic impacts and the financial returns that make this possible.
Technology obliges a personal journey
Enough theory, I will now illustrate the work of an impact investment entrepreneur seeking to do well because he is doing good, let me use an example with which I am most familiar – my own.
It is not by chance that I chose a flying DeLorean in my example above – my business, VAI Capital, invests in the electrification of commercial vehicle fleets, providing owner-operators of fleets with vehicles and charging as-a-service, avoiding up-front capital costs, and reducing the “total cost of ownership”. How did I get here?
It has always been my undeclared desire to make a difference (I think we are more numerous in this yearning than many care to admit). In the environment, and the shocking impact that our economic and social models have on it, I found my mission, but it came to my realization that finance could deliver this mission that was transformational. By investing in new technologies and business models I realized that it was possible to deliver significant financial returns from meeting our everyday needs more cheaply and better – while producing dramatically less environmental damage.
In 2009, I created a venture capital fund in partnership with the European Space Agency, investing in terrestrial applications of the inherently more reliable, and resource efficient, technologies developed for space. While being a precursor to “cleantech venture capital” I was still only investing in a “technology efficiency” theme, I wanted more. It was a dual realization that brought me to identify the opportunity that we address today at VAI Capital.
First, road transport represents almost 18% of Europe’s greenhouse gas emissions and is the main cause of air pollution in cities. Second, the technologies necessary to address these emissions, notably renewable energy and battery storage had reached a level of maturity necessary to deliver, at least the same level of mobility services as with combustion engine vehicles, more cheaply and with zero emissions. And the potential market is huge, whilst remaining accessible. Commercial vehicles and buses represent almost fifteen percent of all vehicles on European roads, some 35 million vehicles. These have two unique characteristics – first, they are used far more intensively than private vehicles, producing a disproportionate share of emissions, and second, fleets represent fewer decision-makers per vehicle.
Converting commercial vehicle fleets to low emission electric alternatives is a fast-route to reducing emissions, and the lower total-cost-of-ownership for these solutions means that there is a compelling commercial incentive for fleet owner-operators to adopt them. VAI Capital addresses the main barriers to the conversion of commercial fleets to electric vehicles, by proposing vehicles, charging and energy infrastructure as-a-service. Owner-operators pay a per-kilometer fee for the use of the vehicles of their choice and for their charging, removing the need to invest upfront in the associated vehicles and infrastructure. Fleet operators benefit from lower maintenance and operating costs, whilst forfeiting a portion of their savings to pay for the initial investments that are necessary to deliver the vehicles and charging services.
They are thus able to concentrate on their core business, to reduce the business risk of converting their fleets, and to claim credit for reducing their impact on the environment and public health. VAI Capital has won an international competition run by an initiative of the Luxembourg Government and European Investment Bank to support implementation of this model at scale. The Vehicle Electrification Fund will invest in a series of projects to convert commercial vehicle fleets to electric vehicles, in Europe and Africa.
Our priority today is to develop a pipeline of appropriately structured fleet electrification projects, and to this end, we are piloting two project models in Kenya that can be replicated and scaled internationally. The first serves a large corporation with 800 vehicles of different types – from motorbikes to delivery trucks – to whom we will provide (initially electric motorbikes), charging infrastructure and cheaper onsite electricity as a service (pay-per kilowatt). Shareholders in the project will take a percentage of the service-fees paid by the corporation, covering the initial capital investments made, plus a margin of profit. The second project is a mobility “application” that has several thousand vehicles registered on its platform.
The firm wishes to provide drivers (who own their vehicles) with lower cost and environmentally friendly means of earning a living, by registering with their platform. VAI Capital will invest in the infrastructure necessary to deliver charging services to drivers, and will arrange for micro-loans to drivers so that they may buy electric motorbikes. Drivers will have more money at the end of the month, while the mobility application will have a competitive advantage in attracting drivers to their platform, and will be able to claim that they are reducing their carbon footprint.
VAI Capital shall leverage these first projects to demonstrate the opportunity to investors, raise capital commitments to the fund, and replicate and scale projects internationally. Our main innovation is the financing model, enabling the delivery of electric vehicles and charging as a service. While we are demonstrating this model with the first pilots, we are also working on a second innovation, an Accelerator to support project development partners so that they may develop projects that meet our investment requirements. Our business is investment, hence we need to enable others to (re)-produce the projects in which we shall invest. Within six months we expect to structure an independent facility that will advance costs and provide know-how to project development businesses that are already familiar with energy technology, but not yet with electric transport. Our fund will work in concert with this Accelerator, making available capital to invest in projects, providing project developers with a fast route to implementation – and to revenues. I hope that I have illustrated to you how “technology obliges”, supporting us all in meeting our individual and collective needs, and not least supporting an investment industry that is forever in transition.