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ESG has been with us for a while now. It has been slowly gaining momentum since the principles (Environmental, Social and Governance) were first mandated in financial evaluations through the 2006 United Nations’ PRI report. Initially, 63 investment firms with $6.5 trillion AUM signed on, growing to 2450 signatories representing over $80 trillion AUM by June 2019. While traditionally associated with large corporations, ESG considerations are now extending their reach into the realm of startups.

Success of a startup is no longer solely determined by financial performance as founders are expected to adjust to a dynamic and quickly evolving world. The path to achieve quantifiable value now leads through recognizing ESG factors at the core of business operations. Of course, not all ESG factors are applicable to your business, so you have to find the ones that do. Nevertheless, taking this approach will ensure long-term resilience and viability. In this blog post I will try to explain why I believe having ESG factors incorporated in your startup is beneficial and how Rockaway Ventures incorporated ESG into its mindset.

What are the benefits of ESG factors for your Startup

Prioritizing ESG from the outset expands your potential investor pool and significantly increases the likelihood of securing investment support. Angel investors as well as VC funds now assess these factors more than ever. This shift is driven by the growing influence of ESG practices on market benchmarks and financial performance. Additionally, meeting ESG standards becomes imperative for investments from development finance institutions (DFIs), and impact investors specifically seek out businesses with ESG factors in mind.

A recent study from Karney found that roughly half of the consumers in Central and Eastern Europe (CEE), about 49 percent, consider ESG factors to be highly important, while an additional 40 percent view them as moderately important.

Ignoring ESG practices can lead to missed opportunities. Although it is challenging for resource-constrained startups, investing in ESG pays off when consumers and investors recognize your responsible approach.

ESG practices can also play a decisive role in the process of building trust, particularly when startups lack an established reputation and showcasing your corporate responsibility through ESG reporting can foster trust among internal and external stakeholders. Highlighting your focus on sustainability helps instill confidence when pitching to VC’s or investors as they often value transparency and a long-term commitment to the company’s success.

What does ESG factors mean for startup investing

Integrating ESG factors into startup investing means that the fund has to understand clearly what ESG is about and try to implement and integrate as many ESG factors as possible into their own policy to be able understand the complexity and importance of each of the metrics, to evaluate the investees based on clear process and to lead startups throughout the entire lifecycle. Today, startup investment demands a whole new approach within due diligence integrating exclusionary screenings, positive screenings and where possible also detailed impact of the environmental factors.

Even though such a process is hardly applicable on startups at pre-seed or seed stage having 5 or 20 employees focused on different problems it’s clear that this approach starting with always on ESG education of the startups, considering ESG factors throughout the evaluation process has an important impact and drives a mindset change. It is obvious to corporations and bigger companies already that this approach goes beyond short – term financial gain. It embraces the idea that responsible and sustainable practices incorporated in the business lead to financial savings, better product outcomes and overall more sustainable future and this applies to startups and investors as well.

By Kateřina Havrlant, Operating Partner of Rockaway Ventures Fund

The year 2021 was truly an exceptional one for the entire European venture capital ecosystem. Fundraising for growth funds set a new record of EUR 20 billion and venture capital one of EUR 18 billion. Roughly 5300 companies were on the receiving end of the investments, with the vast majority being small and medium-sized ones. All this despite the uncertainty caused by the Covid-19 pandemic.

At Rockaway, we didn’t stay behind. In the fall of 2021 we started the Rockaway Ventures Fund and in April we’d received over CZK 600 million from investors. Building on the success of Rockaway Ventures, which since 2014 has managed to invest EUR 29 million, finish 22 investments and 11 exits, and with an annual IRR of 46 % can boast a portfolio valued at EUR 139 million that includes super-successful Czech unicorn Productboard or the Balkan Gjirafa.com e-commerce platform.

We started the new Rockaway Ventures Fund when company valuations were at a record high. We bet on highly fragmented and hitherto unconsolidated markets that have yet to be digitalized. Some examples are investments into Campiri, a Czech platform for renting recreational vehicles, Spotawheel, a Greek used car sales platform, or the German FreewayCamper platform.

However, within a short time the mood in the economy and on the market has changed radically. The war in Ukraine, energy dependence on Russia, rapidly increasing inflation – these are all critical factors affecting the entire venture capital ecosystem, and much more. The global economy is almost certainly facing stagflation, and so it’s obvious that after the “gold rush” of the last two years, were in for a very unpleasant sobering experience.

FEET BACK ON THE GROUND

This isn’t the first time venture capital has been in such situation. Many of us still vividly remember when the internet bubble burst in 2000, or the mortgage crisis of 2008. So it’s definitely not hard to find historical parallels. Almost ten years later we’re once again experiencing significant economic decline and limited access to liquidity on the market. The generally expected low degree of public consumption indicates that new start-ups will have increasing problems obtaining finances.

With increasing frequency we’re encountering the term “down round”, describing a situation where a company is offering additional shares for sale at a price lower than in the previous round of financing. A shining example is the story of the until recently most highly valued European start-up, Klarna. The valuation of this Swedish fintech company plummeted from 46 billion to 6.7 billion dollars, hence a hard-to-believe 85 %. That’s truly a gigantic drop and I think that we’ll hear more such stories in the near future.

It’s no wonder: tech companies are in a very difficult environment. While when the venture capital market was booming, investors looked primarily at rate of growth, now they’re mainly interested in sustainability and cash flow optimization. Plans for expansion or product development have to be put on hold in many cases, and not only European funds are taking a wait and see attitude that may last until the end of the year and maybe even longer. Nobody knows how far markets may still drop, and companies that were relying on obtaining financing for future growth are suddenly in a situation where they may not get it, and if they do, it will be on different terms than they were used to up to now.

IT’S NOT AS BAD AS IT MAY SEEM

However, from the perspective of a well-prepared investor, this can be an ideal opportunity. Thanks to the general decline in valuation, large European VC funds, including the Rockaway Ventures Fund, have the opportunity to negotiate better terms for new investments and to put together more interesting deals. It’s of course good to be careful, but experienced investors will still be looking for top start-ups, and if they come across a company with a convincing product and a sustainable business plan, from a long-term perspective there’s a great likelihood of high growth.

History tells us that VC funds that achieved up to a tenfold return in their portfolio made their most significant investments during a recession. Venture capital involves betting on the market’s future and smart investors see a decline as an opportunity. Plus if investors remains active even during a recession, through new investments they can help hire top-notch talent while the job market is in turmoil, which in the end lets funds play a more prominent role in directing their portfolio companies.

There are usually two types of university students. There are those who try to fly through their semesters as quickly as possible and give a wide berth to anything else university-related, and then there are those who take advantage of every opportunity their studies offer them. Anna Kreml, who has been working for Rockaway since January as an Investment Associate, was without a doubt the second type – and about ten times over. But, as she says, work terms, competitions, Erasmus programmes, and other opportunities gradually opened doors to the world of investment. Today, at the age of 28, Anna is responsible for helping Rockaway find and analyze new start-ups that have market-changing potential.

“At the University of Economics in Prague, I studied international trade because I was interested in the essence of an education in economics, its international aspects, and economics as a science, as well as how companies work,” says Anna. On top of that, in her fourth year she also started taking law courses. “I liked the fact that there we delved into history and politics, and that I was able to get to know new people. But I didn’t want to spread myself too thin, so after one semester I stopped.”

Thanks to her excellent results in student competitions put on by McKinsey or Ernst&Young, for example, Anna attended several summer schools and work terms abroad, where she gradually gained experience in the area of M&A. Another important programme for her was Erasmus, in which she participated both during her bachelor’s and her master’s studies: “Right from first year I focused on getting into the University of Edinburgh, which is one of the best schools. Then, when I was doing my Master’s degree, I actually didn’t have to participate in another one – I ‘boned up’ on all the subjects in advance and was prepared to study law, plus at that time I was already working full time at EY in mergers and acquisitions. But I did it anyway,” she smiles. At the Erasmus School of Economics in Rotterdam she thus started exploring the technological part of the business and also had the opportunity to participate in several start-up summits abroad, such as the START Summit put on by the University of St. Gallen in Switzerland.

STARTUP–BANK–ROCKAWAY
Soon she was offered a job at Swiss start-up Viso.ai, where for several months she was able to work closely with both founders. She then returned to Prague to join the investment banking team at WOOD & Company as an analyst. “It was a higher goal for me than EY, because we were taking companies to the stock market. They’re transactions with greater orders of magnitude, and I was thus able to get to know another transaction banking spectrum,” she says.

After some time, however, Anna felt the desire to move on, and when at last year’s Forbes Next Big Thing conference she heard the keynote speech given by Rockaway investment partner Dušan Zábrodský, her mind was made up. “I realized that this was exactly what I wanted. I wrote the team, saying that I had experience they might find useful. I then had several meetings with Andrea Lauren (note: a Rockaway investment partner) and other members of the team, and that was that.”

Today, as one of Rockaway’s Investment Associates, Anna ensures the team knows about opportunities on the market they should pay closer attention to and that it will understand well, analyzes new start-ups, and explores their potential. In her view, it’s also one of the greatest challenges for anyone in the ventures field: to find relevant opportunities quickly and at the right time. “Working at Rockaway Ventures doesn’t mean ending at 5 p.m. You basically have to rub shoulders with founders, attend events and conferences, and desktop research is important too, where you need to investigate various regulatory changes, read through various technical documents, and contact the right companies that are doing fund-raising,” she explains.

TAKING CARE OF INVESTMENTS AS A NEVER-ENDING PROCESS
Fresh proof of Anna’s hard work and talent, and of the whole team, is the recent investment into Spotawheel, a Greek platform for buying and selling used cars that last year the Financial Times ranked as one of the fastest-growing specialized shops in Europe.

In addition, Anna manages the whole investment process, from the initial stage of getting to know the founder to the investment as such, and any subsequent help with growth or additional rounds of fund-raising. “It’s basically a never-ending process,” she laughs. But this ventures team member says that there’s always great support to be had. “The Rockaway team is incredibly varied, and everyone has various experiences and skills – from London banks, private equity, or from building their own companies. And you won’t find a similar digital portfolio anywhere in the Czech Republic, Slovakia, or Poland. As opposed to the world of transaction consulting, here the dominant mindset is that of company builders and business drive, but there’s also a friendly atmosphere. And I’m really glad that I can be a part of it all.

The Rockaway Ventures Fund (RVF), with a target value of EUR 100 million, has received roughly a quarter of this amount from investors in the first round, about 600 milion CZK. Its current portfolio, with recently completed investments in Germany’s Viviere and Estonia’s Lingvist, now also includes Spotawheel, a Greek used-car sales platform, which was ranked last year by the Financial Times as one of the fastest-growing specialized shops in Europe. Simultaneously, RVF is launching a Czech fund for qualified investors, which will allow even more investors to invest into tech start-ups. Starting in April of this year, it will also be possible to invest in the fund via AMISTA and J&T Bank.

Rockaway Ventures Fund SICAV (RVF SICAV) is being created for one single purpose – for investment into the Rockaway Ventures Fund. Its structure and investment amount will allow investors to invest in Czech korunas, with a minimum investment amount of CZK 1 million, making investment possible for more investors.

RVF is focusing on investment in the broad Central European and DACH region, with a maximum investment horizon of ten years. The Rockaway Ventures team has one of the best venture capital track records in the CEE region, with an annual IRR of 46 % and EUR 41.6 million in returned capital.

Its latest investment is in the Spotawheel platform operating in Greece, Germany, Poland, and Romania, which focuses on the purchase and re-sale of used cars. The tech start-up, founded seven years ago in Athens, is among the fastest-growing companies in Europe and takes pride in its innovative and entirely transparent approach to customers. RVF invested during the Series B round, during prominent European VC investors invested a total of EUR 25 million.

“We’re thrilled that Spotawheel is our next investment. This start-up has incredible drive and we’re certain that it’s an excellent opportunity for us,” says one of the fund’s general partners, Dušan Zábrodský.

RVF has invested in several promising start-ups: the rapidly growing Estonia start-up Lingvist, which is developing a language platform that effectively reduces the time needed to learn a new language, or for example a share in German company Viviere, which based on client demand and comprehensive data analysis designs, develops, manufactures, and sells innovative products in the area of FMCG (fast-moving consumer goods).

The investment team behind the Rockaway Capital’s successful investments in start-ups like Productboard, Brand Embassy, Gjirafa, or Storyous is launching a new venture capital fund, the Rockaway Ventures Fund. It will focus primarily on start-ups in Central and Eastern Europe that are digitalizing traditional industries while following ESG (Environmental, Social, Governance) principles. Its first two investments, where Rockaway Ventures Fund invests several million EUR, are Estonian start-up Lingvist and German Vivere platform.

Rockaway Ventures is one of the first venture capital funds in the Czech Republic, as well as in Central Europe, to assess investments in start-ups based both on their future revenues and whether they have a positive environmental and social impact and responsible and transparent corporate governance. It was one of the first venture capital investors to implement formal ESG rules in the CEE region and this year it will subscribe to the UN’s Principles for Responsible Investment (UN PRI).

“We pay great attention to economic, environmental, and social sustainability. We’re firmly convinced that an active ESG approach to investments is not only socially responsible but also increases value for investors in the long term. In Central and Eastern Europe we see many young innovative companies, and the role of our new fund is to help innovators grow,” says General Partner Andrea Lauren who together with Dušan Zábrodský heads the Rockaway Ventures Fund.

The fund’s ESG approach is also closely related to the theme of digitalization, which not only allows society to operate more efficiently, but also to grow sustainably. In selecting its investments, Rockaway Ventures focuses primarily on areas such as e-tailing, logistics, media, fintech, digital medicine and education, or cyber-security. “We’re looking for start-ups that disrupt the established order in traditional industries through digitalization, which in our opinion means speed, accuracy, efficiency, and finally progress. Its successful implementation is the key to success,” says Dušan Zábrodský.

The new fund follows in the track record of venture investing done by Rockaway Capital and its founder, Jakub Havrlant. Since 2014 Rockaway invested more than CZK 675 million in 22 venture capital investments, with 11 of them already fully exited and more than 100 % of invested capital returned. In mid-2021, the total worth of Rockaway’s venture portfolio was CZK 2.4 billion.

Building upon the foundation laid by previous investments, the Rockaway Ventures Fund will continue to focus much of its activities on Central and Eastern Europe, including the Baltics and Balkans but also DACH, where the Rockaway Capital Group has a growing presence. “In recent years we have been watching the Central European start-up scene mature – venture capital investments in 2016-2019 recorded a combined annual growth rate (CAGR) of 65 %, which is double the European average. This facilitates larger investment rounds and exits, and the region is thus becoming more attractive for leading global VC investors as well,” says Lauren.

This is also underscored by the fund’s first two investments – the first is the fast-growing Estonian start-up Lingvist, which has developed a language learning platform that effectively reduces the time needed to learn a new language. The project, founded in 2013 by former CERN nuclear physicist Mait Müntel, allows the same technology to be used in other areas of education too. With its investment, Rockaway Ventures has participated in the Series A+ investment round alongside Dutch fund Rubio Impact Ventures and Metaplanet Holdings of Jaan Talinn, the co-founder of Skype.

The second investment is in Vivere, a German company that incubates, develops, produces and sells innovative FMCG products based on comprehensive demand and trend data analysis. Vivere currently markets roughly 200 products under ten brands. In Vivere’s latest investment round, Rockaway Ventures invested alongside prominent Swiss investor and tech entrepreneur Daniel Aegerter and leading Swiss VC fund Redalpine.

“With Lingvist and Vivere we are commencing investment by the Rockaway Ventures Fund, which will focus on slightly larger, European projects with an interesting product proposition and dynamically growing revenues. We’re glad that in both cases we can co-invest with renowned European VC investors,” says Andrea Lauren, General Partner of the Rockaway Ventures Fund.

The new fund has an active management style, offering founders assistance in creating and testing business strategies and building the teams that will help implement them. “We want to focus our investments primarily on start-ups that have already developed and launched their products and services to market and generate dynamically growing revenues,” adds Zábrodský. “We are prepared to invest up to EUR 15 million into each company. We want to build lasting partnerships with companies and their founders that are about more than just money, and actively help them manage growth and achieve their visions.”

About Rockaway Ventures Fund
A venture capital investment fund with a target value of EUR 100 million that focuses on investing in the digital economy according to ESG principles in Europe, especially the Central and Eastern European region. The fund is headed by its General Partners, Andrea Lauren and Dušan Zábrodský, and Rockaway Capital of Jakub Havrlant is one of the fund’s main investors.