How 500 Startups Built An ESG Strategy Across Its Latest Funds
A micro-case study for Founders from the Startups & Society Initiative.
500 Startups was founded in 2010, and has invested in 2,500+ startups in 77+ countries. The global accelerator and early-stage investment fund has prided itself on being different from Sand Hill Road VCs. On the threshold of raising its 5th Global Flagship Fund, the organization’s leadership took decisive action to integrate environmental, social and governance (ESG) matters — long considered extraneous to building fast-growing businesses — into its the 5th Global Flagship Fund’s investment and portfolio management processes, without changing its distinct approach
Tracy Barba, Executive Director, Global Stakeholder Engagement & ESG, joined 500 Startups in early 2020. Her fundraising role gave her insight into LPs’ growing interest in ESG. When 500 Startups examined the thousands of companies it had already invested in, it discovered that the founders in its portfolio were already fairly diverse across gender, race, and industry. But the fund had never sought to measure diversity across its founders, or set an intention to support portfolio companies’ sustainability efforts. After George Floyd’s death and the nationwide Black Lives Matter protests, Tracy knew that the fund needed to formalize its efforts.
Here are four steps the accelerator is taking to weave ESG into its core processes and operations.
1. Collect baseline ESG data
Tracy designed a survey and asked all of the companies applying for 500 Startups’ flagship accelerator to respond. The survey was designed to screen out companies operating in areas considered to have negative impacts, such as weapons, tobacco, alcohol, and gambling; 500 decided to avoid these companies entirely. It also established a baseline of the interest, knowledge, and capacity of its startups regarding ESG issues. This helped 500 figure out where to focus its efforts.
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2. Publish the data
The organization published the 500 Startups ESG Founder Survey Results to share this data publicly. Tracy knew she was on the right track when an impressive 91% of founders said implementing ESG would help them attract and retain talent; more than 69% thought that ESG would help with sales.
500 has also pledged to administer the survey on an annual basis, with the intention of tracking its portfolio companies’ progress over time. 500 also put out a 2020 ESG Annual report describing its efforts over the course of 2020, and spotlighting a few of the startups in its portfolio that stand out on ESG.
3. Identify the area of greatest strategic overlap
It took a while for 500 to figure out where ESG fit in. Tracy didn’t think that focusing solely on startups targeting a positive environmental or social impact was a good match. But the accelerator invests in, and provides a lot of education and support to hundreds of companies every year. As Tracy reviewed the survey results, she saw that 500 Startups’ opportunity to make a difference lay in educating its many founders and early operators on how to start thinking about ESG from the very beginning.
• Better portfolio management
The accelerator has created stage-appropriate ESG content and training for its portfolio companies. It has also sought to add mentors with knowledge in ESG topics to its roster of mentors, and helped companies connect with advisors with the right expertise when they express interest in going deeper, for example, if they consider obtaining the B-Corporation certification, or are particularly committed to one or several of the UN Sustainable Development Goals. Portfolio companies have requested tactical support. 500 Startups developed the ESG for Startups Primer to help them get started.
• Better investment processes
Integrating ESG aligns well with its own evolution, as 500 Startups has started raising larger funds to invest in later-stage companies. In addition to the data collected via the annual ESG survey, Tracy is designing a deeper layer of metrics for the companies to which 500 provides follow-on capital, prompting a more substantive conversation with the companies who are looking for more funding and willing to take on ESG best practices. Like 500 Startups’ broader portfolio, these companies will range in geographies and regulations, growth rates, industries, and product type. This approach embeds ESG topics into the fund’s portfolio management for the long term.
• Better LP alignment
As 500 fundraises from a growing number of institutional investors, Tracy is developing a standard ESG component to its response to LP DDQs in order to better communicate its approach to investors. In 2021, the fund is aiming to become a signatory to the UN-backed Principles for Responsible Investment, the main industry body for investors taking ESG matters into account.
The fund is still experimenting and learning about where 500’s companies need help. Tracy noticed that many companies were still struggling to place women in senior roles or on their boards; she is looking to partner with an organization that can help improve the gender mix in company leadership. Only 17% of 500’s companies were monitoring their environmental impact; many thought it was too early. She knows there are steps the companies can take now to establish the habit, and wants to provide target support here, too.
500 Startups has a powerful global brand; it runs accelerators and other startup ecosystem-building projects around the world. In spite of its success, the organization has remained nimble and curious, and recognized early the opportunity and necessity for better ESG management. 500 isn’t stopping there: it also became one of the first US-based VCs to receive the Diversity VC certification.