Welcome to our Conversation Series, where we discuss topics relevant to our work around impact and sustainability. In this conversation, Pauline Brunner spoke with Kola Aina and Dr. Dotun Olowoporoku, who are, respectively, the founding partner and general partner at Ventures Platform. Ventures Platform is a discovery fund that invests in and supports early-stage startups leveraging technology to improve livelihoods in Africa. The conversation occurred at the 2023 African Private Capital Association conference in Cairo, Egypt, and touched on the challenges of meeting ESG requirements from LPs while adapting to the needs of tech startups in Africa.
Pauline Brunner: What are the most prevalent ESG risks in your investment universe and how do you manage these?
Kola Aina: As investors in tech-enabled companies, the most prevalent risks are data privacy, consumer privacy and cybersecurity. We also look at corporate governance and business integrity risks because of the early-stage nature of the companies we invest in. We do see more companies with physical operations, so occupational and workplace safety is also increasingly important.
For our risk management approach, given that we have four development finance institutions (DFIs) as LPs, we tried to synchronize the data requests from all the DFIs. Beyond that, we’ve also adopted a ‘stage appropriate’ approach, where the questions we ask, things we seek to test for and the themes we focus on differ according to the company’s growth stage. At earlier stages, we try to paint a picture of what risks might emerge in 12 months, which informs the ESG action plan. At the series stage, the litany of things we look for is probably 10 times what we look at for a pre-seed stage.
PB: Some investors may not have similarly stringent ESG standards and may be more focused on growing these companies to be profitable. How do you deal with that?
KA: The first challenge was being pulled in different directions during fundraising. To overcome this, we worked to align all our DFI partners to develop a joint plan. In the end, we had to commit to some DFI-specific requirements, but the bulk of our ESG requirements were harmonized.
The second challenge we faced was on the investee side. Besides the ESG data we collect and report, we track performance metrics too. We found ourselves in a situation where various funds invested in the same company were demanding the same data at different times, which is sometimes frustrating to the company. To solve this, the way all the different funds collect data needs to be harmonized, in terms of when, who, and how often the data is reported.
Although we talk about harmonization, ultimately, funds compete against each other. We do see a challenge competing against funds that don’t have ESG requirements. I think our DFI partners need to be mindful that you don’t want to over-regulate your GPs, and render them uncompetitive, particularly at the early stage.
PB: It’s important that investees see more value in ESG, rather than it being a hindrance. How do you convince them of that?
Dr. Dotun Olowoporoku: For early and growth stage startup founders, gaining capital to fund their growth is a key challenge. However, we’ve also observed that while ESG may not be seen as relevant for these startups, corporate governance and business integrity are actually catalysts for business growth. They help companies become more resilient and trustworthy, which in turn attracts funding. When acquirers consider the African market, they often filter for businesses that have the right governance in place. This includes having a board of directors with appropriate governance and clear board resolutions that enable accountability and risk management.
Moreover, we also see differences based on the location of the company’s operators. If the management and those making day-to-day business decisions are located on the continent, they tend to make decisions that benefit their local community. For example, they may consider the problem of long commute times to work in a city like Lagos due to traffic and environmental impact, and adjust their operations and staff on-premise policies to mitigate these issues.
KA: It is also important that our partners are pragmatic and tailor ESG requirements to the local investing context. The ESG requirements that have been applied to African VCs are largely Western, which is a problem that we haven’t unpacked yet. Preferably, there would be more African investors. Certain countries in Africa need growth at any cost right now; if ESG requirements get in the way of that, whose interest is being served?