The Nordics have been seen as an example for many countries on the sustainability front and known ... [+]
Direct startup and impact investments promote next-generation engagement in family offices. They also have the potential to encourage innovation and increased agility within these organizations as they expand into new areas. All of which helps to ensure that there's a legitimate place in family offices for future generations.
Danske Bank recently released two reports on impact investing. The first examining the state of Nordic impact startups, the second, impact investors and the dynamics of where and how they're investing in this space.
Commenting on the findings of the reports, Klavs Hjort head of Growth & Impact at Danske Bank explains, "The world faces major challenges that require new ways of doing things – new ideas, new habits and innovative solutions."
Impact-driven entrepreneurs play an important part in driving this change as they build viable companies earning profits and solutions that can make the world a better place to be.
Impact-driven entrepreneurs play an important part in driving this change as they build viable companies earning profits and solutions that can make the world a better place to be.
What does this mean for family offices of the future and what can be learned from these reports when it comes to investing and next-generation engagement?
The Nordic example
According to the Danske Bank reports, Nordic startups and impact organizations are addressing real-world issues that will contribute towards promoting prosperity while protecting the planet. While these objectives were developed in line with the United Nation's sustainable development goals (SDGs), they also align perfectly with millennial values and beliefs when it comes to purpose-driven business. This value-alignment is an active driver of millennial engagement.
Both reports show that the UN sustainable development goals (SDGs) that are well-represented in the impact startup space within the Nordics. These include Health & Wellbeing (SDG3), Clean & Affordable Energy (SDG7), Sustainable Cities (SDG11) and Responsible Consumption & Production (SDG12). According to the Better Business Better World report, these categories also happen to coincide with the most lucrative market opportunities. Impact startups in the energy (SDG7) field accrue the most substantial accumulated profits, making them an attractive proposition for family offices looking for viable investment options.
What is also interesting is the under- or non-represented areas, which could offer opportunities for family offices looking to make these types of investments. These include No Poverty (SDG1), Gender Equality (SDG5), Climate Action (SDG13) and Life on Land (SDG15).
The reason these have remained untapped isn't necessarily because there aren't lucrative opportunities within them. Instead, this may be attributed to the fact that Nordic startups aren't particularly exposed to specific SDGs. According to Richard Georg Engström, Founder of ImpactX, who conducted the studies, "Many startups simply focus on solving the problems that are close to them." He adds that another reason for the disparity may be due to the UN's SDGs not being identified as investable themes, only goals. As such, a degree of translation may be necessary to make some of the SDGs more investable opportunities.
Regardless of the SDG being addressed, the Business and Sustainable Development Commission emphasizes the potential in game-changing, largely digitally enabled business models that can be adapted to capture market opportunities in line with these.
Impact startups as a next generation engagement tool
Impact startups, and particularly those with digitally enabled business models, are the perfect tool to engage the next generation in family businesses and family offices.
As millennials are considered digital natives and, for the most part, are already aligned with SDG ideologies, impact businesses focusing on these areas could attract top next-generation talent. If family offices invest in these types of startups, it stands to reason that they would also be positioned to attract and engage the next generation within their own families.
Diminishing risk along with better management
For traditionally more risk-averse family offices, getting involved in impact investment doesn't necessarily require developing a higher risk appetite. The reports highlight that close to half of the startups garnering investment are over five years old. This suggests that many of them may not need early-stage funding but are instead entering their later series or growth funding phases.
The Nordic impact investors report reveals that most Nordic investors follow a financial first approach, aiming to maximize their financial returns while achieving some impact objectives. These organizations are looking for impact investment startups with robust and proven business models as it is generally accepted that only these can survive.
Startups that can demonstrate these business models offer attractive opportunities to established family firms. An invested alliance with a high turn-over impact startup in a related industry could enable the family office to bring other competitive advantages, distribution channels, optimizations or economies of scale to the table, ultimately determining the success of the investment.
Funding gaps remain
Not all evidence suggests that the Nordics are the perfect case study though. A recent study conducted by the Green Innovation group for the Danish Ministry of Business reveals that the capital needed for impact startups to thrive is not being deployed effectively enough in all regions.
According to Frederik van Deurs CEO of The Green Innovation Group, "The impact investment ecosystem in Denmark and Finland is currently unhealthy with lots of investment opportunities and a lack of capital being deployed in the €100 thousand to €5 million space."
This indicates that while the Nordics are very focused on the sustainable and impact business, they too are still figuring out the best way to ensure effective and responsible investment capital allocation.
The way forward
For families and private investors who want to invest in impact startups, Hjort offers the following, "The family offices have the great advantage that they can follow their hearts and potentially also align values, expertise and company history with their investments in impact startups."
Families looking for support can join networks like Toniic from The GIIN, or they can browse +Impact to explore Nordic opportunities. Whichever route they choose, a clear strategy and a precise alignment on expectations on returns, both impact and financial are crucial.
When carefully selected so that they align with the family office's values and objectives, direct startup and impact investments serve a dual purpose. They engage the next generation while also making financial sense. It's a win-win and something every forward-thinking family office simply cannot afford to ignore.
