Given intensive capital needs and the complexity of the technology they work on, deep tech and climate tech startups are highly reliant on guidance from investors on how to position and present their solutions in the market. Luckily, venture capital funds specialized in these niches are now springing in Central and Eastern Europe, bringing know-how and deploying funds.
In the upcoming interview, we get to hear first-hand from a deep tech and climate tech investor what VCs are looking for in startups in the space, how they evaluate and monitor the performance of portfolio companies, and what market trends they are following.
An active regional investor in the space is Karolina Wojtas, Investment Manager at ICOS Capital Management. The VC firm is based in the Netherlands and Poland, with a focus on deep tech, sustainability, and digitization.
At ICOS Capital, Karolina Wojtas is responsible for deep tech and sustainability investments in industry 4.0, foodtech, agritech and chemicals in Europe, as well as Israel. She is also a co-founder of a medtech startup and pre-accelerator, a speaker, trainer, mentor and judge at multiple startup programs.
Back in university, Karolina was in the top three winners at multiple student scientific conferences on engineering and renewable energy topics, receiving a Student Nobel Prize from the Ministry of Science and Higher Education. She carried on the passion for complex and high-impact technologies ever since.
The Recursive: How do you juggle your different hats, from investor, to ecosystem builder?
Karolina Wojtas, ICOS Capital Management: Time-wise, it can often be challenging, especially at peak times. Even so, it’s manageable.Two topics that I am passionate about – deep tech and sustainability are present in each of my roles. When you look, for example, at the investor role, I’m a deep tech investor. As a curator at Hello Tomorrow, which is also organizing the biggest contest in the world for deep tech startups, I can use the same expertise. The same goes with my role in the Poland Innovative Foundation, the organization that is trying to make Poland better networked internationally and to create the university of the future, where deep tech startups will emerge from. All these roles require similar sector knowledge and working with entrepreneurs.
Why do you invest in climate tech and deep tech? What are the synergies between the two fields?
I think nowadays the synergies between climate tech and deep tech are pretty much visible. Climate tech is a broad topic, concerning not only clean energy, but also sustainable food systems, mobility, carbon accounting, carbon fintech – anything that is trying to address the challenges that we face as humanity regarding the climate crisis.
When you think about deep tech, those are the technologies that are hyper-advanced, often coming out of universities, and are converted into complex IP-based products.
Humanity’s biggest challenges cannot be mitigated only with climate policies or software-based products. For instance, to reduce CO2 emissions or create more sustainable fuels, you need real, hardware technologies. This is where deep tech comes in. This is where climate tech and deep tech intersect – in addressing climate crisis related challenges with really advanced technologies. In this space, there are plenty of market opportunities for investors right now. It allows funds like ours, not only to deliver returns to our investors but also to support projects that aim to do something good for the world.
What are you looking for in the pitch of a climate tech startup?
It is not so much different for a sustainability-focused startup than for every other startup. I look among others at the market size, financials, the technology, the team. But at the same time, I really appreciate it if a startup puts in its pitch deck a clear description of what is the impact they are making. And in the case of sustainable startups, you usually see this on the problem and solution related slides.
It is good if a startup has metrics and goals set up for measuring its impact. The most common way of doing this is through ESG metrics. It helps us as investors to analyze the startup through our sustainability impact criteria.
How do you decide whether to invest in a target startup? What sustainability lenses do you use?
At a high level, it’s quite the same for every fund. Every VC is looking into the product, the market, the founding team, the technology.
While looking into the project at ICOS Capital, we also put a strong emphasis on the sustainability angle. We are investing in projects that are contributing to the sustainability of human beings and the environment, and because of it, every project that we invest in needs to have this angle. So, whenever we assess a startup, we also look at the impact that the startup is creating through its technology or products.
Operationally, it also translates to the way we scout for startups – attending and getting in touch with conferences and startup programs oriented towards sustainable topics.
As a lens, we use ESG or the triple bottom line model (people-planet-profit). We do a lot of work around measuring ESG metrics and parameters in our portfolio, or the new companies that we are planning to invest in, to make sure that they have a real impact.
How difficult is it to find the types of startups that you seek across different regions in Europe?
I must say that we see clear differences between Western Europe and Central and Eastern Europe. So, we see that usually in Western Europe, projects are more advanced, while in the CEE, they still need a few years to get to the same stage.
As a fund, we are focusing on Series A and Series B projects, which are the companies that already have revenues and a number of clients. Those are not very early-stage ideas where founders are still looking for their first market. Because of this it’s relatively easier to find startups fitting our thesis in Western Europe than in the CEE.
However, we are also identifying more and more of them in Central and Eastern Europe. They are very often just emerging, spinning out of universities. Luckily, on the market, you can see a lot of seed funds that can pick them up from where they are right now, and then have us as a potential future investor in the next round.
What is your approach to monitoring the performance of your portfolio companies?
It’s a cyclical process, we do it on a monthly, biannual or annual basis depending on the specific parameters. Here, we apply the ESG criteria – we define key environmental, social, and governmental indicators and targets and we monitor how the company is performing against them. We are also trying to assess what impact they can have in the longer term. For some companies, it’s relatively easy to measure, for instance, how much carbon dioxide they can capture in the next several years. For others, it requires developing a methodology.
What if the portfolio companies do not reach the targets you set?
It’s a part of the game, I would say. So, whenever you invest in a startup as a venture capitalist you know that maybe 1-2 out of 20 startups that you invested in will be a big success, maybe 10 others will do okay, and the rest will go bankrupt. Naturally, the ones that go down, won’t deliver on many metrics, including some of the sustainability targets.
But at the same time, the startups that we invest in usually have sustainability at the core of their vision. So, even if they are not performing as good as we would like them to, they still make progress on the sustainability indicators e.g. by capturing less than expected CO2 but still capturing it at the end and contributing to mitigating the climate changes
How do you spot greenwashing?
At the end of the day, it’s all about the data. You need to back up sustainability claims with reliable data. It’s easy to say that the company is trying to make the world a better place and is supporting green projects. But at the same time, you need clear data about the actual impact, for instance, that the company has offset 10,000 tonnes of CO2 emissions through their activities. You should also try to measure their scope 1, scope 2 and scope 3 emissions and see what are the real numbers there.
ICOS Capital is a collaborative type of venture capital firm. What does this mean for LPs and portfolio companies?
The collaborative venturing model that ICOS Capital is working in is something between a typical venture capital structure and corporate venture capital.
In a typical venture capital fund, you have a bunch of LPs who invest in your funds; they are mainly interested in financial returns. As a manager of the funds, you report to them, but you are not usually in very close contact. Corporate venture capital funds, on the other hand, are established by one corporation which sometimes gets really involved. They rather rely on some strategic value from the investments they make.
ICOS Capital is in between because we have the typical structure of a venture capital fund, however, our investors are corporations with whom we work in a partnership. Because of this model, we have the expertise of our corporate investors to better understand what is hot in the market and to better define our investment thesis.
The benefit that it brings to our portfolio companies is that startups also have many opportunities to talk to our investors directly and explore if there are any synergies in terms of partnerships.
In which verticals are you expecting high growth in the future?
Technologies around the decarbonization of different industries and sustainable food systems will definitely be hot topics.
As you can see right now, the food tech area is really picking up on the market. You see many new funds being created in this space and many new startups being founded. This is partly due to global trends. For instance, people care more about their health after the pandemic. The agriculture sector is experiencing challenges due to climate change and is looking for more sustainable ways of producing food.
When it comes to the decarbonisation of the industry, especially in the European Union, you have solid regulations, and you see that people are becoming more and more aware of the climate changes and their consequences. We see a market push and a regulatory push to implement solutions that will make industries cleaner and more resilient.