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European VC funds are building community around ESG initiatives

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In general, ESG stands for “environment-social-governance” and comprises a set of principles that touches on issues from diversity and board structures to labor relations, supply chain, data ethics, environmental impact and legal requirements.

Unlike impact investing, which is squarely focused on the (external) effects of a business, ESG concerns mostly internal practices and processes that could support both a fund and its portfolio companies to make them more sustainable.

While other asset classes from buyout funds to public equities have seen a big push toward ESG ratings and initiatives, venture capital has been lagging behind. What has changed recently?

Over the last several months, quite a few mostly European funds have stepped forward with initiatives to tackle ESG. Balderton, for instance, announced its Sustainable Future Goals with a bang at the startup event Slush in early December 2020. Their efforts are focused both internally on the fund and externally on investment decisions and portfolio support. I asked Colin Hanna, one of the leaders of the development internally and a principal at the firm, how this initiative came about:

While our efforts on this front preceded COVID, this year we saw that a real impact was possible on climate-change-related goals […] we have become accustomed to doing virtual board meetings, cutting down on travel; the challenge will be to continue those efforts going forward and rolling them out to our portfolio companies even as the world returns to normal. Having a framework helps us do that.

This rationale also recently brought a group of about 25 VCs to form a community around ESG for VC for the first time. The initiative is led by GMG Ventures and Houghton Street Venture, a new firm affiliated with the London School of Economics that met for the first time in December with representatives from LocalGlobe and Latitude, Kindred Capital, Balderton, the Westly Group and Blisce. The group’s stated goal is to share expertise from the bottom up and fill the gap where existing frameworks don’t quite work.

This is direly needed right now, says Sophia Bendz, partner at Berlin-based firm Cherry Ventures:

Beginning with topics around DEI and climate issues, we are really keen on upping our ESG game. ESG involves such important issues and we have to dedicate the time to learn more to ultimately do more on these fronts now. Yet, I also believe that true impact doesn’t result from knowledge silos. It’s great that we are learning from and supporting each other to have more societal impacts in our day-to-day roles. I am really passionate about this.

What are the main drivers for this push? 

I asked Susan Winterberg, an ESG consultant who recently finished a two-year fellowship at Harvard producing a groundbreaking report on the subject of ESG for VCs specifically about the “why now”:

There are broadly two sets of reasons why investors and company leaders adopt ESG. The first set relates to increased awareness of how their activities impact external events happening in the world such as climate change and social justice. The second relates to increased awareness of how adopting ESG can advance specific business goals they have such as increasing sales, attracting top talent, and reducing operating risks.”

Obviously, 2020 was a watershed year to drive change based on both of these sets of rationales. Social justice issues — from Black Lives Matter and racial equity, COVID-19 and healthcare to freedom of expression and democracy — were prevalent across the spectrum. Startup leaders and investors were influenced by these societal movements as much as by new research helping them understand how ESG can help advance business objectives in venture capital. The two reports published by CDC/FMO and the Belfer Center are only two examples of this evidence.

What do VCs say, how has change happened for them? Hana told me that at Balderton a combination of factors mentioned by Winterberg above, worked together to start the process:

It was both a push and a pull within Balderton. Our investors and the leaders at the top of our firm were proponents of this change but the efforts were also driven by the younger generation within the firm; they felt it was important. Overall, we were silent about climate change and sustainability for a long time, which was not really an option anymore.

For Martin Weber, founding partner at HV Capital that’s working with the St. Gallen-based ESG initiative ROSE, the conversation really started with Leaders for Climate Action. Weber admits: “We didn’t think about ESG enough […] beyond our own horizon really […] sometimes you really need a kick in the butt, that’s what Leaders for Climate Action did for us; a small change started our awareness and commitment to ESG.”

ESG concerns mostly internal practices and processes that could support both a fund and its portfolio companies to make them more sustainable.

For HV Capital but also some funds in the U.S. such as the Westly Group a specific ESG vector started the journey — that could be the E as in environment but also DEI as part of the S and G of ESG.

I also spoke to several LPs recently among others moderating a panel at the U.K.-based Allocate conference; the atmosphere seems to be shifting more drastically toward “doing business better” among the asset owners, too. Particularly family offices managing their own money are outspoken already, but big asset owners are becoming aware (and active) as well.

Michael Cappucci, managing director of Compliance and Sustainable Investing at the Harvard Management Company — Harvard’s endowment — thinks that “we are long past the time to ‘wait and see’ if ESG integration is a worthwhile undertaking for investors” (see the UNPRI report for more context).

The movement here seems to be coming even stronger from Europe again, however. As a result, the same group around Houghton Street Ventures and GMG Ventures pushing ESG for VCs is also in the process to get more LPs on board with a special workshop in February, as I learned. The tempo on the LP front is increasing as we speak.

What is still missing?

While lots of progress has been made on the level of individual funds, individual LPs and in baby steps toward a more general industry-wide push, there are still some core elements that are not in place. I believe the five key gaps concern a clear differentiation of ESG from impact, finding the right language, establishing a common framework, agreeing on metrics and real LP commitment.

  1. Know what ESG is: Many investors (and LPs) I speak with still don’t really know the difference between impact and ESG. In very simple terms, ESG principles are about the (internal) processes (of a fund, portfolio company, etc.) while impact investing is about outcomes (sometimes operationalized through the Sustainable Development Goals (SDGs)). While impact will likely remain a niche asset class for the foreseeable future, ESG principles should inform the practices of all investors in one way or the other.
  2. Find the right language: On a related note, finding the right language to talk about what ESG (versus impact) is, might help us to differentiate better. As Sarah Drinkwater of Omidyar Network made very clear in her post from September last year, we simply don’t have a good word to describe (and own) what ESG expresses in the world of venture capital and technology — principled, progressive, equitable? Possibly, “setting a standard” can help with this issue, too.
  3. Somebody, set a standard: ESG (and impact) frameworks developed and deployed slowly in the venture industry are still all over the place; they are influenced by all kinds of other frameworks (from other asset classes and related activities, such as impact) and mostly made up by individual funds themselves. There is certainly a risk of green washing if it stays that way; (self-proclaimed and reported) marketing is one thing but if we really want to change the industry, an authoritative body will have to step forward. What the biggest European anchor investor — the European Investment Fund — has done on that front so far with a very high-level questionnaire is not enough. How about, for instance, the UNPRI descends from the plane of high level down to individual industry principles?
  4. What isn’t measured: One part of what could really lead to an industry standard is a set of widely accepted and benchmarkable metrics; what are the most important measurements across early-stage and late-stage VC portfolio companies? The group of funds in London has for good reason announced that this particularly question will be one of the focus points they are working on next. But how will this again be adopted and spread industrywide? Another set of players might get involved in that again: LPs. If they make their GPs report on ESG on an annual basis, this will surely shift the industry as a whole and make the next generation of startups more equitable, responsible and stakeholder-focused.
  5. LPs really need to bite: So far, we are still missing real LP commitments when it comes to ESG. On the one hand, many GPs I spoke with that have recently been fundraising reported that LPs in general still don’t ask about ESG. In fact, some LPs particularly in the U.S. believe ESG might be a distraction from generating returns. In any case, ESG still has not become a must-have but is merely regarded a nice-to-do. The ESG questionnaires that do exist — like the EIF framework — are so far really high level and unspecific. When big anchor LPs like the EIF and BBB in Europe or big foundations and university endowments ask about it in their due diligence meetings, GPs will have to comply — all of them. Their influence as agenda setters might in the medium term be the biggest driving factor toward making ESG for VC the normal way of doing business. Given that there is state-money, all of our money, involved here, it seems an absolute no-brainer to take that step.

Lyron Foster is a Hawaii based African American Musician, Author, Actor, Blogger, Filmmaker, Philanthropist and Multinational Serial Tech Entrepreneur.

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Backed by Blossom, Creandum and Index, grocery delivery and dark store startup Dija launches in London

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Dija, the London-based grocery delivery startup, is officially launching today and confirming that it raised £20 million in seed funding in December — a round that we first reported was partially closed the previous month.

Backing the company is Blossom Capital, Creandum and Index Ventures, with Dija seemingly able to raise pre-launch. In fact, there are already rumours swirling around London’s venture capital community that the upstart may be out raising again already — a figure up to £100 million was mooted by one source — as the race to become the early European leader in the burgeoning “dark” grocery store space heats up.

Image Credits: Dija

Over the last few months, a host of European startups have launched with the promise of delivering grocery and other convenience store items within 10-15 minutes of ordering. They do this by building out their own hyper-local, delivery-only fulfilment centres — so-called “dark stores” — and recruiting their own delivery personnel. This full-stack or vertical approach and the visibility it provides is then supposed to produce enough supply chain and logistics efficiency to make the unit economics work, although that part is far from proven.

Earlier this week, Berlin-based Flink announced that it had raised $52 million in seed financing in a mixture of equity and debt. The company didn’t break out the equity-debt split, though one source told me the equity component was roughly half and half.

Others in the space include Berlin’s Gorillas, London’s Jiffy and Weezy, and France’s Cajoo, all of which also claim to focus on fresh food and groceries. There’s also the likes of Zapp, which is still in stealth and more focused on a potentially higher-margin convenience store offering similar to U.S. unicorn goPuff. Related: goPuff itself is also looking to expand into Europe and is currently in talks to acquire or invest in the U.K.’s Fancy, which some have dubbed a mini goPuff.

However, let’s get back to Dija. Founded by Alberto Menolascina and Yusuf Saban, who both spent a number of years at Deliveroo in senior positions, the company has opened up shop in central London and promises to let you order groceries and other convenience products within 10 minutes. It has hubs in South Kensington, Fulham and Hackney, and says it plans to open 20 further hubs, covering central London and Zone 2, by the summer. Each hub carries around 2,000 products, claiming to be sold at “recommended retail prices”. A flat delivery fee of £1.99 is charged per order.

“The only competitors that we are focused on are the large supermarket chains who dominate a global $12 trillion industry,” Dija’s Menolascina tells me when I ask about competitors. “What really sets us apart from them, besides our speed and technology, is our team, who all have a background in growing and disrupting this industry, including myself and Yusuf, who built and scaled Deliveroo from the ground up”.

Menolascina was previously director of Corporate Strategy and Development at the takeout delivery behemoth and held several positions before that. He also co-founded Everli (formerly Supermercato24), the Instacart-styled grocery delivery company in Italy, and also worked at Just Eat. Saban is the former chief of staff to CEO at Deliveroo and also worked at investment bank Morgan Stanley.

During Dija’s soft-launch, Menolascina says that typical customers have been doing their weekly food shop using the app, and also fulfilling other needs, such as last minute emergencies or late night cravings. “The pain points Dija is helping to solve are universal and we built Dija to be accessible to everyone,” he says. “It’s why we offer products at retail prices, available in 10 minutes – combining value and convenience. Already, Dija is becoming a key service for parents who are pressed for time working from home and homeschooling, as one example”.

Despite the millions of dollars being pumped into the space, a number of VCs I’ve spoken to privately are sceptical that fresh groceries with near instant delivery can be made to work. The thinking is that fresh food perishes, margins are lower, and basket sizes won’t be large enough to cover the costs of delivery.

“This might be the case for other companies, but almost everyone at Dija comes from this industry and knows exactly what they are doing, from buying and merchandising to data and marketing,” Menolascina says, pushing back. “It’s also worth pointing out that we are a full-stack model, so we’re not sharing our margin with other parties. In terms of the average basket size, it varies depending on the customer’s need. On one hand, we have customers who do their entire grocery shop through Dija, while on the other hand, our customers depend on us for emergency purchases e.g. nappies, batteries etc.”

On pricing, he says that, like any retail business, Dija buys products at wholesale prices and sells them at recommended retail prices. “Going forward, we have a clear roadmap on how we generate additional revenue, including strategic partnerships, supply chain optimisation and technology enhancements,” adds Menolascina.

Dija testing on Deliveroo

Image Credits: TechCrunch

Meanwhile, TechCrunch has learned that prior to launching its own app, Dija ran a number of experiments on takeout marketplace Deliveroo, including selling various convenience store items, such as potato chips and over-the-counter pharmaceuticals. If you’ve ever ordered toiletry products from “Baby & Me Pharmacy” or purchased chocolate sweets from “Valentine’s Vows,” you have likely and unknowingly shopped at Dija. Those brands, and a number of others, all delivered from the same address in South Kensington.

“Going direct to consumer without properly testing pick & pack is a big risk,” Menolascina told me in a WhatsApp message a few weeks ago, confirming the Deliveroo tests. “We created disposable virtual brands purely to learn what to sell and how to replenish, pick & pack, and deliver”.

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Daily Crunch: Square acquires Tidal

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Square buys a majority stake in Jay-Z’s Tidal, WhatsApp improves its desktop app and Hopin raises even more funding. This is your Daily Crunch for March 4, 2021.

The big story: Square acquires Tidal

Square announced this morning that it has purchased a majority stake in Tidal, the music streaming service founded by Jay-Z. It sounds like an odd fit at first, which Square CEO Jack Dorsey acknowledged in a tweet asking, “Why would a music streaming company and a financial services company join forces?!”

His answer: “It comes down to a simple idea: finding new ways for artists to support their work. New ideas are found at the intersections, and we believe there’s a compelling one between music and the economy. Making the economy work for artists is similar to what Square has done for sellers.”

Square is paying $297 million in cash and stock for the deal, which will result in Jay-Z joining Square’s board.

The tech giants

WhatsApp adds voice and video calling to desktop app — This should provide relief to countless people sitting in front of computers who have had to reach for their phone every time WhatsApp rang.

Apple’s App Store is now also under antitrust scrutiny in the UK — The U.K.’s Competition and Markets Authority announced that it’s opened an investigation following a number of complaints from developers alleging unfair terms.

Google speeds up its release cycle for Chrome — Mozilla also moved to a four-week cycle for Firefox last year.

Startups, funding and venture capital

Hopin confirms $400M raise at $5.65B valuation — For Hopin, the round is another rapid-fire funding event.

Coursera is planning to file to go public tomorrow — The company has been talking to underwriters since last year, but tomorrow could mark its first legal step in the process to IPO.

Luxury air travel startup Aero raises $20M — The startup describes its offering as “semi-private” air travel.

Advice and analysis from Extra Crunch

As activist investors loom, what’s next for Box? — A company with plenty of potential is mired in slowing growth.

Unraveling ThredUp’s IPO filing: Slow growth, but a shifting business model — ThredUp is a used-goods marketplace approaching the public markets in the wake of Poshmark’s own strong debut.

(Extra Crunch is our membership program, which helps founders and startup teams get ahead. You can sign up here.)

Everything else

SITA says its airline passenger system was hit by a data breach — Global air transport data giant SITA has confirmed a data breach involving passenger data.

How to successfully dance the creator-brand tango — What makes creators succeed, and how should brands work with them?

Announcing the Early Stage Pitch-Off Judges — On April 2, TechCrunch will feature 10 top startups across the globe at the Early Stage Pitch Off.

The Daily Crunch is TechCrunch’s roundup of our biggest and most important stories. If you’d like to get this delivered to your inbox every day at around 3pm Pacific, you can subscribe here.

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Making sense of the $6.5B Okta-Auth0 deal

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When Okta announced that it was acquiring Auth0 yesterday for $6.5 billion, the deal raised eyebrows. After all, it’s a substantial amount of money for one identity and access management (IAM) company to pay to buy another, similar entity. But the deal ultimately brings together two companies that come at identity from different sides of the market — and as such could be the beginning of a beautiful identity friendship.

The deal ultimately brings together two companies that come at identity from different sides of the market — and as such could be the beginning of a beautiful identity friendship.

On a simple level, Okta delivers identity and access management (IAM) to companies who use the service to provide single-sign-on access for employees to a variety of cloud services — think Gmail, Salesforce, Slack and Workday.

Meanwhile, Auth0 is a developer tool providing coders with easy API access to single-sign-on functionality. With just a couple of lines of code, the developer can deliver IAM tooling without having to build it themselves. It’s a similar value proposition to what Twilio offers for communications or Stripe for payments.

The thing about IAM is that it’s not exciting, but it is essential. That could explain why such a large number of dollars are exchanging hands. As Auth0 co-founder and CEO Eugenio Pace told TechCrunch’s Zack Whittacker in 2019, “Nobody cares about authentication, but everybody needs it.”

Putting the two companies together generates a fairly comprehensive approach to IAM covering back end to front end. We’re going to look at why this deal matters from an identity market perspective, and if it was worth the substantial price Okta paid to get Auth0.

Halt! Who goes there?

When you think about identity and access management, it’s about making sure you are who you say you are, and that you have the right to enter and access a set of applications. That’s why it’s a key part of any company’s security strategy.

Gartner found that IAM was a $12 billion business last year with projected growth to over $13.5 billion in 2021. To give you a sense of where Okta and Auth0 fit, Okta just closed FY2021 with over $800 million in revenue. Meanwhile Auth0 is projected to close this year with $200 million in annual recurring revenue.

Identity and access management market numbers from Gartner.

Image Credits: Gartner

Among the top players in this market according to Gartner’s November 2020 Magic Quadrant market analysis are Ping Identity, Microsoft and Okta in that order. Meanwhile Gartner listed Auth0 as a key challenger in their market grid.

Michael Kelly, a Gartner analyst, told TechCrunch that Okta and Auth0 are both gaining something from the deal.

“For Okta, while they have a very good product, they have marketing muscle and adoption rates that are not available to smaller vendors like Auth0. When having [IAM] conversations with clients, Okta is almost always on the short list. Auth0 will immediately benefit from being associated with the larger Okta brand, and Okta will likewise now have credibility in the deals that involve a heavy developer focused buyer,” Kelly told me.

Okta co-founder and CEO Todd McKinnon said he was enthusiastic about the deal precisely because of the complementary nature of the two companies’ approaches to identity. “How a developer interacts with the service, and the flexibility they need is different from how the CIO wants to work with [identity]. So by giving customers this choice and support, it’s really compelling,” McKinnon explained.

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