Mid-year review: A ‘profound shift’ in LP demand for impact, says Lightrock

Demand for climate funds remains robust despite the slower market, according to partner Umur Hursever and head of impact Marc Moser.

Lightrock partner Umur Hursever and head of impact Marc Moser reflect on 2023 so far and look ahead to H2 as part of our mid-year review series:

How would you characterise the fundraising market in H1 2023?

Umur Hursever: The fundraising landscape for venture capital and growth capital funds in H1 2023 is less buoyant. The buyout landscape grows increasingly polarised, with investors gravitating towards mega-funds and sector specialists capable of differentiating themselves in a cooling market – whereas strategies led by seasoned managers or those which operate over a longer time horizon have proved relatively resilient in the venture and growth sectors. Demand for climate-focused strategies remains robust, boosted by technological innovations and regulatory developments like the US’s Inflation Reduction Act and the EU’s taxonomy for sustainable activities, as well as the energy crisis and the increasingly severe climate change impacts.

The fundraising process, both for funds and companies seeking fresh capital, has prolonged across private equity and venture capital, influenced by investor demand for greater transparency and recalibration of illiquid asset exposure. An interesting facet for PE and VC fundraising in this scenario is the advantage seasoned managers possess thanks to pre-existing relationships with time-pressed institutions, which have more limited alternatives allocations due to a reset in public equities that facilitate quicker re-upping decisions. Overall, while challenges persist, differentiated expertise was often key to driving fundraising success for funds in H1 2023.

The impact investing market is scaling up and going mainstream; how is this affecting your business?

UH: Our support of impact investing’s integration into the mainstream is unwavering. We want to champion the long-term sustainability of our entire sector and see every participant who is driven by the fusion of impact and returns succeed in their endeavours. A thriving impact ecosystem not only supports Lightrock’s long-term success, but also empowers us to harness multifaceted perspectives, data-driven insights and expert partners. This improves our understanding of risk, unlocking portfolio company potential, and potentially enhancing environmental, social and investment returns.

The exceptional response from the founder community to this evolving sector and their receptiveness to adding impact investors to their cap tables has underscored the value of an impact-led approach to growth-stage businesses. We’ve witnessed a profound shift evidenced by LPs’ rising demand for impact solutions and their increasing willingness to invest in impact funds from generalist pools, with a significant majority signalling that they will escalate their commitments to impact strategies in the coming years.

Ultimately, we want to see a future where the delivery of positive impact propels remarkable commercial outcomes, supporting the success of all stakeholders in the impact space and the communities around us as well.

Which impact themes, sectors or strategies do you see as being most exciting and untapped?

UH: As growth-stage investors, our focus consistently centres on technology verticals poised to disrupt conventional norms and which provide commercially viable tech-driven solutions to the world’s most pressing challenges. Naturally, we gravitate toward sectors with inherent impact, such as healthcare. For instance, our support for CMR Surgical, which employs robotics technology for minimal access surgery, exemplifies our commitment to improving patient outcomes. Climate solutions also resonate with our ethos, as seen in our investment in Group14 Technologies, a pivotal player in the global battery supply chain.

Within the climate realm, our enthusiasm extends to founders dedicated to decarbonising hard to abate sectors. Notably, we explore sectors others might hesitate to engage with, including agriculture, construction and heavy industries. Beyond sector-specific considerations, our investments align with entrepreneurs and companies driven by a shared commitment to impact. We seek to champion socially responsible practices in emerging technology landscapes, particularly within the burgeoning AI domain. Our portfolio already includes two notable players, Dataiku and Neo4j, with a strong likelihood of welcoming more like-minded ventures.

How will the development of generative AI affect your business? Are you using or planning to use it?

UH: It’s exciting to witness such an impressive technological leap, but we’re approaching this development cautiously, steering clear of the hype and avoiding the potential early-stage pitfalls as growth equity investors. While we’re also exploring uses of generative AI within Lightrock, we’re more focused on maintaining a dialogue with our SaaS portfolio companies, collaborating with them to shape their data and AI strategies. This proactive approach enables us to harness generative AI’s potential offensively, such as by developing novel products, and defensively by fortifying our business against future uncertainties.

As impact investors, our commitment to AI ethics remains solid, and we’re dedicated to guiding our portfolio companies in leveraging its potential for business enhancement. At the same time, we remain cognisant of the potential consequences of its widespread rollout on individuals and industries, and what role we might play in making this technological leap forward more equitable.

Do you use benchmarks to evaluate your impact and why (or why not)?

Marc Moser: Benchmarks being a standardised approach for investors to compare the impact of their investments within a sector and against the performance of peers certainly have the potential to drive accountability, confidence, and, in turn, the ongoing growth of the impact investment industry. While we do not currently rely on them to formally evaluate our investments’ impact performance, we are involved in their early-stage development by contributing to the important work of The Global Impact Investing Network and other initiatives. Although it may be too soon to embrace these benchmarks fully, their objective of holding investors accountable for their impact promises and the role they play in enabling rigorous investment decisions based on impact is critical to our industry’s success and integrity.

Until we can embrace benchmarks fully, our approach remains grounded in continuous qualitative and quantitative analysis of each portfolio company and the tracking of their impact performance. This process begins at the pre-investment stage with the formulation of an impact thesis, followed by the application of our proprietary impact assessment tool and the monitoring of meaningful impact KPIs. This approach integrates industry best practices to comprehensively understand the risks and potential associated with specific investments. We consistently evaluate and monitor progress on impact throughout the holding period to ensure accountability to our investors, who seek more than just an IRR.