The NatureBacked Podcast

Chasing Uncompromising Impact Unicorns with Norrsken VC

May 23, 2022 Single.Earth Season 1 Episode 13
The NatureBacked Podcast
Chasing Uncompromising Impact Unicorns with Norrsken VC
Show Notes Transcript

Stockholm-headquartered Norrsken VC is on a mission to find not just unicorns but impact unicorns, startups valued at over $1 billion which at the same time can impact the lives of more than 1 billion people, Agate S. Freimane said on the sidelines of TechChill startup conference in Riga. 
The VC firm was born out of Norrsken Foundation – a non-profit foundation founded in 2016 by Niklas Adalberth, co-founder of Klarna -  with the belief that entrepreneurs building rapidly scalable businesses are our best bet to solving the hardest and biggest problems of our time.
**
A few key takeaways from Agate S. Freimane:
**
"Why we coined the term unicorn was because it was so rare. And these days, it's not that rare anymore. The bar has lowered, though, I think, impact unicorn is still pretty rare ... it's a really high bar."
**
"Even if you have a very deep, meaningful impact, if you don't have a strong business model, you're not able to attract capital - you're not able to grow. So hence, you don't really scale your impact."
**
"Maybe someone says that there are just not enough startups in this space. It's also because a lot of entrepreneurs thought that there's no point starting these businesses, that there is no capital, and it's kind of what comes first, you know, exactly the chicken or egg. Do the startups come first or capital? Maybe at the moment, there is a lot of capital, but that's just going to inspire more entrepreneurs to dare to actually start businesses in these sectors."
**
"I think Europe is at the forefront of the climate tech movement globally. What I see right now is that Europe is at the forefront of the public sector and the regulatory environment for taxonomy. And so we see in Europe, more so than anywhere else in the world regulation pushing big old school businesses on the path of sustainability. But the reality is that a lot of these businesses don't have the tools to achieve this. And then, it's up to the startups to fill that gap to enable the industries to shift."
**

Tarmo Virki  
We are here at TechChill in Riga to record this episode, enjoying the cool spring weather. You're originally Latvian?

Agate S. Freimane  
Yes, that's right. So originally, Latvian, but at the moment based in Stockholm with NorrskenVC. So I'm always happy to come back here because it really speaks to my roots.

Tarmo Virki  
The first few words about Norrsken, how it was born? And, you know, what's the philosophy behind Norrsken VC?

Agate S. Freimane  
of course, we'd be happy to. So Norrsken was born maybe six or so years ago. And it was started by one of the co-founders, one of the three co-founders of Klarna. And the idea behind Norrsken is that we want we fundamentally believe that it's the entrepreneurs that are the solution to some of the world's most pressing problems. So Norrsken is all about helping and enabling these impact tech entrepreneurs; we're really building a thriving ecosystem that allows these entrepreneurs to succeed. And what that means in practice is today, we operate houses that are home to these entrepreneurs, we have now thriving places in Stockholm, as well as Rwanda, and more to be added soon, we run different kinds of programs such as accelerator program to really kickstart, help these entrepreneurs kickstart and we also, of course, invest. And I'm one of the general partners at Norrsken VC. And specifically, we're focused on investing in seed series A companies all across Europe, but we're really looking for this uncompromising focus on impact but equally uncompromising focus on generating top-tier financial returns because we really believe that impact and financial returns go hand in hand.

Tarmo Virki  
It's been a kind of discussion among many guests here at the show about how those two things go together or how well they go together. Some would say there's a slight difference of opinion; maybe some older school VCs are a little bit clearer in the fact that our, you know, our main target is to bring financial returns to LPs impact comes on top. That's nice. But it's not horribly necessary to do the other end, where somebody's saying that we are purely focused on impact. And we know that if we if it's, you know, great impact case, it usually actually makes good money also for the LPs.

Agate S. Freimane  
Yeah, and I mean, for us, it's sort of the angle from which we come. So when we first started to invest roughly five years ago, and in the beginning, we had our kind of sandbox vehicle where we really wanted to test out what the strategy was going to be. And we just knew that we wanted to back impact tech entrepreneurs. And in the beginning, we were open to doing both for-profit and non-for-profit because our ultimate goal was to maximize impact. And in the early days, we may be made some investments that were stronger, or if there is such thing, as you know, maybe in the short term stronger on the impact rather than the financial returns. But then we very quickly realized that those companies didn't scale. So even if you have a very deep, meaningful impact, if you don't have a strong business model, you're not able to attract capital - you're not able to grow. So hence, you don't really scale your impact. So today, we really don't think there is a trade-off between the two because we first-hand saw that, unless you have tremendous financial potential, there is a limit to how far you can scale the impact. It's only when you have this incredible financial potential and if you back businesses where impact is at the very core of the business. That's when you also get the scalable impact. So for us, it was kind of coming from it that way. And then today, the strategy is like uncompromising impact, uncompromising financial potential.

Tarmo Virki  
How do they find that uncompromising word? That sounds very strong, I would say?

Agate S. Freimane  
I would say, I mean, the uncompromising how, when it comes to impact where we are really careful about what investments we pursue, I mean, in a nutshell, we want to back solutions that have a positive impact on people and the planet. What that means one layer down is that they have to address at least one of the United Nations Sustainable Development Goals. So that's kind of our first filter. So once the company has gotten through that filter, then we really start our impact due diligence. We will really, really, you know, scratch beneath the surface; there have been cases where we're like, oh, this is impact company. Then you start to talk to researchers, people in the market, and then you realize, oh, we actually didn't think that, you know, there are these unintended side consequences that we actually didn't really think about. So we're very thorough in the due diligence process. 
And then the third step is also that we measure. It's very important for us to measure impact. And to the point where we're linking our carried interest in the fund with impact targets as well as financial targets. And that's the last step where it's uncompromising because we're taking it from the kind of one end to another. And when it comes to financial returns, it's probably similar things that you'll hear from all the other VCs, but how we measure ourselves on that is, you know, we look at the funds that come in next to us or after us, and we really aspire to be on the cap table alongside the top tier performing funds.

Tarmo Virki  
The impact then - what's the impact for you? How do you measure it?

Agate S. Freimane  
So it's a positive, positive impact on people and the planet, and the unit that you measure can differ from business to business. Climate is our biggest bucket, and in climate space, it tends to be easy because, ultimately, it all boils down to CO2 reductions. 
And for most of the cases in the people bucket, it probably has to be more defined for each individual company. Many of you take education as an example, EdTech. And then your impact KPIs become how many students have you reached? How many classrooms have you reached? But the real impact KPIs by what percentage have you, you know, improving the outcome of the education, by what percentage the results improved as a result of better tools?

Tarmo Virki  
In addition to climate and EdTech, are there any other big fields in your portfolio?

Agate S. Freimane  
So we have climate, EdTech, health, and wellbeing is a very big theme, also sort of transparency and accountability. Because sustainable decisions often start with also information and transparency, and traceability. So those are very big themes, to name a few, but we constantly keep adding more of those.

Tarmo Virki  
Looking from the climate sector overall, I'm hearing from many people that the sector has been over the last 12, 18, 24 months, so hot that, you know, getting hotter the planet can't really match the sector or that, to the level that there is more money in the sector than there are startups in the sector. Are you seeing something similar?

Agate S. Freimane  
Yeah, it's really interesting. I mean, I am, but I would say it's, it's a very positive development for all the planet and people.
Maybe just kind of sidetrack, it's really, you know, five years ago, as an impact investor, we were still seen as the kind of the exotic animal in this field. And, you know, we talked to all the usual suspects that sometimes, let's say, we were keen to make friends sometimes, then vice versa. And today, now that impact is trending, we're getting calls from people that we used to look up saying, like, hey, you know, you're the impact investor, we really want to pick your brain on this and this. 
So we've definitely seen how the rise in popularity of impact investors. There is a lot of money, but I would say that there's still a lot more room to deploy that. And I would not say that there is a lack of opportunities. I think we're just starting to scratch the surface of what's possible, and quite frankly, like, and the one thing is that also a lot of companies and climate tech are more hardware, more capital intensive. And maybe someone says that there are just not enough startups in the space. It's also because a lot of entrepreneurs thought that there's no point starting these businesses, that there is no capital, and it's kind of what comes first, you know, exactly the chicken egg. Do the startups come first or capital? Maybe at the moment, there is a lot of capital, but that's just going to inspire more entrepreneurs to dare to actually start businesses in those sectors.

Tarmo Virki  
Many people have been speaking about how climate is a kind of longer project often than the old school VCs timeframe of a 10-year fund where they need to get out before the ten years are over. Coming from the impact VC side -- do they also have a similar 10-year timeframe challenge?

Agate S. Freimane  
it's a really good question. I think it's a question that we're talking a lot about in the VC space where the VC investors know ultimately, what do we like to invest in? We'd like to invest in Huge opportunities, huge time. And you know, there is no better time than that, you know, bringing energy, sustainable energy to people globally or figuring out carbon removal solutions as some examples, so it ticks a lot of VC boxes except for the timeframe. But I really see that the market is changing. And I think more VCs are tapping into it. And that's naturally creating interest and starting to create new exit opportunities. We see secondary trading, and you know, we've seen projects that have a 20-year horizon. So, of course, it's way too long to be part of the whole ride for most commercial VCs, but we see that the secondary market is opening up. Maybe it's a bad time to talk about SPECs, given that they have been taking the beating in the market, and it's not necessarily the flavor of the month, but SPEC was also sort of, you know, kind of a new invention, to actually crystallize and realize returns within the VC timespan. So my personal take is that it's still really, really early days. But I think the VC universe recognizes the opportunity, but also the challenge of the timeframe, but it's slowly starting to be solved by new ways of sort of still realizing the liquidity or passing the baton - one phase of investors passing the baton on to the next wave, the second phase of investors,

Tarmo Virki  
Eventually, the logic is that if there is an opportunity, the money will find the way, right?

Agate S. Freimane  
Exactly. A really, really good point. And to be honest, ultimately, it should always be about the fundamentals. If you have really strong business fundamentals, as a shareholder, investor, or a founder, you'll always have options if you have a promising business with very strong fundamentals. The same also goes for these impressive, longer timeline projects.

Tarmo Virki  
You said that you are looking at the whole of Europe - if you need to describe what's significant in the climate field in Europe today? Any kind of big trends, big changes? How would you describe it?

Agate S. Freimane  
I think Europe is at the forefront of the climate tech movement globally. What I see right now is that Europe is at the forefront of, let's say, the public sector and the regulatory environment for taxonomy. And so we see in Europe, more so than anywhere else in the world regulation, pushing, you know, big old school businesses on the path of sustainability. But the reality is that a lot of these businesses, you know, don't have the tools to achieve these. And then, it's up to the startups to fill that gap to enable the industries to shift to more sustainable. So everything in that space is a result of regulation, so carbon accounting, carbon credits, etc. So big, big opportunity and say, in software, that's probably one of the most exciting things happening. There's a lot of very interesting momentum also in the hardware-software intersection; really excited about carbon removal. I think it's interesting how the market has grown that substantially. Electrification. I know, you know, Tesla was born in the US, but actually, there's a lot happening in Europe. We're one of the investors in Northvolt, Heart Airspace, and Einride, one of the frontiers in the European electrification movement.

Tarmo Virki  
Absolutely. The electrification movement sounds fascinating, sorting out the European electrification. Then it's interesting how, in many startup sectors, we've seen that Europe is somehow the laggard, the one running behind the US. This one is different.

Agate S. Freimane  
Yeah, it is different. And I mean, to be honest, I have to be aware of my own filters and bubble. I mean, I, you know, we're based in Stockholm. And also, I would say, I would go as far as saying that, you know, Europe is leading the sustainability trend globally. But I also think that at the forefront of Europe is Nordic, so of course, I'm biased, and you know, I obviously live and breathe that bubble every day.

Tarmo Virki  
But there will be some electrification of Europe trend is happening at the time when we have a kind of new Cold War, the new Iron Curtain being set up between the east and the west, Russia and the rest of Europe. How do you see this? I mean, how massive is the push for that electrification to be even faster?

Agate S. Freimane  
It is. If I can make bold, maybe naive predictions is I mean, there's really now, maybe it's the wrong way to say that, you know, there is no silver lining, lining to war wars, you know, the worst thing that could possibly happen to us, at the same time, like, I think, 10 years, 20 years from now, we're gonna look back at this moment in history. And I think we're gonna pinpoint by saying that, wow, you know, this was such a shock factor that really accelerated renewables electrification, more so than it would have by factors, compared to what would have happened, if kind of organically. So I think I really do think that we're gonna look back at this point in time and say, this was the year when, when things really accelerated.

Tarmo Virki  
Because I mean, the underlying trends have always been there. The oil and gas industry has always known that their end is coming; they will only know that, you know if they try to prolong it in a way, but yes, that's really interesting.

Agate S. Freimane  
Yeah. Oh, and it's interesting. I mean, it's in our human nature. The basics of human nature are to be extremely creative and actually extremely resourceful. And it's now is the time when we need to be resourceful; we need to innovate. And it's sometimes when you're truly pressed in the corner that's when some of the best innovations are born. Because in a nutshell, we're, we're problem solvers. So I have a lot of faith in us being able to solve it.

Tarmo Virki  
At the same time, this problem-solving - it's really in the human nature to solve also the problem of being able to continue "as is" to avoid any changes? I'm definitely, by nature, like that. So I think they're kind of looking back over the last few years. Or one could also say that the world has been really working on not changing anything for the oil and gas industry. So it needs an outside shock to move faster and actually change things.

Agate S. Freimane  
Yeah. And we have that. I mean, it's, it's, it's interesting. I mean, maybe not, not apple to apple comparison. But it's like now, and then you resist the change. But then you give in eventually.
Comparing it to phones - not everyone switched smartphones overnight. And even if you heard people saying no, I don't want a smartphone. I don't want to complicate things. At some point, you just had to switch. Otherwise, you can't pay your electricity bill because it's app-based these days. And you know, at some point, it just and let's hope that the same happens here that it's, even though we're resisting change, we have no choice. We just have to.

Tarmo Virki  
If we look forward from the Norrsken VC perspective? In the next 6-12 months timeframe, what's your biggest focus area? Or what will you be working on mostly?

Agate S. Freimane  
We're always focused, from NorrskenVC setup, we're always focused on finding the next impact unicorn, as we say; a company that has the $1 billion potential as well as a company that can positively affect 1 billion people. 
That always is going to remain the number one priority; just keep hunting for those impact unicorns. Or hunting sounds bad. I honestly think friending...

Tarmo Virki  
... unicorns don't exist, right. So they're not real.

Agate S. Freimane  
Yeah, exactly. You know, like, it's something I was - the other sidetrack. It's like, why have we coined the term unicorn was because it was so rare. And these days, it's not that rare anymore. You know, the bar has lowered, though, I think, impact unicorn is still pretty rare. And the way we see it, the company that can really change the lives of 1 billion people, that doesn't mean that we shouldn't aspire to, but it's a really high bar.

Tarmo Virki  
Do we have any of them?

Agate S. Freimane  
It depends. To give you an example, it's the way also we actually think about impact is that you have the immediate direct impact as a result of the company. But then you have the systematic change. I mean, one good example actually is Tesla. I mean, the short-term impact KPIs how many Tesla's did you sell, so how many diesel or petrol cars did you take out of circulation? But the long-term impact is the systematic change that now every automaker in the world is switching to electric fleets. So when we invest, we want to see that we call it the theory of change framework is like okay - in the short term, let's see how many people you can affect positively. But actually, is there a roadmap to that systematic change that's ultimately going to impact the lives of 1 billion people?

Tarmo Virki  
Tesla kind of could be one.

Agate S. Freimane  
Exactly because it's 7 billion people in the world, and they're all going electric.

Tarmo Virki  
Probably a few billion cars, right? 

Agate S. Freimane  
Yeah. Exactly. Exactly. 

Tarmo Virki  
Good. Thank you for this discussion here in sunny Riga, and good luck.

Agate S. Freimane  
Yeah. Thank you so much. I enjoyed the conversation.

Transcribed by https://otter.ai