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Steering a VC Impact Portfolio Through COVID

Five takeaways

As much of the world returns to a more normal state – despite the Omicron variant and a still uncertain pandemic outlook — a lot of us have been processing what we’ve been living through for the past 18 months. I’ve been prone to lots of reflecting – not just as a father but also as the CEO of an investment firm located in South and Southeast Asia (SSEA), investing in growth-stage companies that are combating the plastic waste crisis. During this time, our team has been actively investing the second half of our capital from our first fund. It has been challenging, to say the least.

Below are five learnings our team has gleaned from running an investment fund during the pandemic:

1. Everybody has a plan until you get punched in the face

Even the most conservative of investors did not anticipate the pandemic. In fact, most investors we know resorted to a complete pause for most of their activity during 2020, as the severity of the pandemic became clearer. Our corporate backers and partners, however, did not want us to delay. In fact, they asked us to accelerate our work because they know time is of the essence when it comes to evolving supply chains to be more circular.

As a result, we chose to back entrepreneurs who know how to adapt. We can spend many weeks aligning on business plans (and believe me, we do), but truly successful entrepreneurs can pivot and react to the world as it changes around them. We sat down with each of our portfolio and pipeline companies to discuss what these delays and environmental changes meant for their business, and our investment returns.  Exits may take longer, but when you back the right kind of entrepreneur, the fundamentals remain strong.

Plastic Covid Trash

2. To transition to growth stage you need a growth mindset

Many of the companies we work with are small- to mid-size enterprises (SMEs) in India and across SSEA that are family-backed businesses that have never taken in outside capital. While they are already profitable today, many have been quite cautious about their growth plan. So we realize that there is something of a shift in mindset that has to take place for a business to be able to maximize the impact from a capital infusion and achieve the next level of growth. New skills, new talent, new systems, and new approaches are all needed in the transition and, while capital can unlock many of those things, it only works when the team is ready to evolve.

Investors can respond to this need with a greater focus on areas that might typically be considered the domain of human resources. For example, coaching to help the management team learn how they can develop the capabilities and capacities for the business. Also, introducing CEOs to other peer entrepreneurs who have successfully transitioned to the growth phase.

3. Being scrappy only gets you so far

Start-ups face a different set of challenges when it comes to scaling. Oftentimes, being scrappy is what got them to where they are. But scrappy won’t take them to where they want to be. The next stage of growth is all about focus and execution. For example, take plastic credits. Many see plastic credits as an opportunity to generate revenue, but for most early-stage enterprises they’re also a distraction. Sure, it’s great to juice your EBITDA with a quick million, but any minute you’re not focused on scaling your business plan is a minute that distracts you from how to make $50 million the following year.

4. The COVID aftershocks required hands-on management of portfolio investments

The worldwide shift of public attention to healthcare reduced the quality and quantity of feedstock for recycling, increased logistics prices, and created a shortage of plant workers, all of which negatively impacted collection and sorting businesses. What’s more, consumption patterns changed during the pandemic. For example, there have been increases in personal protective equipment (PPE) waste and more consumption at home, both contributing to the plastic waste challenge. Suddenly, otherwise healthy businesses found themselves with margin pressures and accounts receivable gaps. In addition to some of the crisis response trainings we held for management (I have written about this here), we responded by working with the companies to negotiate better working capital terms to reduce the pressure on the businesses.

Man in Covid mask behind plastic barrier

5. Investments in plastic waste directly affect people’s lives and it matters a lot to investors

Livelihood is a hugely relevant issue in South and Southeast Asia where we operate, particularly when it comes to the informal waste pickers. Plastic waste impacts at-risk populations both positively and negatively, and investors are looking at how portfolio companies are taking on this challenge, as it’s a pain point that institutional investors want to address but often can’t address by themselves.

The good news is that, assuming no additional COVID waves, the outlook for the next 36 months is positive. I’ve certainly learned a lot during COVID about what it takes to establish healthy, growth-stage businesses. I hope these learnings help you with yours!

Rob Kaplan is Founder and CEO of Circulate Capital. He established Circulate Capital to deploy catalytic capital in partnership with leading corporations and investors to scale solutions that advance the circular economy and prevent the flow of plastic waste into the ocean in South and Southeast Asia. Circulate Capital’s model ... Read more

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