Sustainability is often disconnected from profit. Sustainable alternatives for products ranging from cotton to aviation fuel are significantly more expensive. Such solutions and their producers can usually only exist with support from governments or social/impact funds.
There are, however, exceptions to that trend. Byeagain, a Graz-based startup, estimates that around 680 million returned products are destroyed every year across Europe. Their solution is refurbishment and reselling on a commission basis, keeping the product under the client’s control.
“That is our business model. The faster we grow, the bigger we grow, the more impact we create, because our core business model is bringing wasted products back into the cycle again,” Wolfgang Weingraber, Co-Founder and CEO of Byeagain, told us.
Byeagain is a perfect example of a company that manages to be a successful business with a sustainability-related mission. It’s also a company that received funding from Erste Social Finance to scale operations and is now preparing a conventional seed round.
Erste Social Finance invested with quasi-equity, allowing founders to keep the ownership of the company. These funds were necessary for the company to build out a new warehouse, a proof-of-scale milestone. Without it, the conventional €3 million seed round again would be a bet on an idea.
What is impact capital today?
The term “impact investing” has changed significantly in recent years, and so have the companies that require that capital.
At one end, it describes funds that invest in instruments that accept below-market returns in exchange for social or environmental upside. At the other, it may describe a standard VC with an ESG slide in the pitch deck. The confusion stems from the fact that each impact fund ends up somewhere on the spectrum between mission and profitability, while companies that associate themselves with sustainability are becoming more mature and complete businesses.
Impact funds invest in ventures geared toward sustainability. Social banks have devised financial mechanisms for types of risk that regular investors are unwilling to bear. Public grant programs take on the first-loss risk that the private sector won’t take on. Each is different, but it’s safe to say that impact funds are somewhere between society-driven grants and profit-driven venture capital.
The issue is whether, when all are put together, they follow some form of procedure within a defined structure This structure, pulling together distinct organisations with differing goals, reliably makes sure that money goes where needed.
For many founders, it takes broad research to decide who to approach. Still, most founders who are busy dealing with logistics, efficiency, or the transition of agricultural problems are simply unprepared to address the issue..
Are social finance investors profitable?
Social banking is based on a different business logic than that of a venture capital company; in the former, not high returns but the capacity to sustain itself and support another batch of businesses making an impact defines the business model.
The social finance division of Erste Group Bank AG, called Erste Social Finance, has been working for 20 years in three important Central and Eastern European countries: Austria, Slovakia, and Romania.
Three key principles support the model. The first one is that the business needs to have a significant social impact. Secondly, the activity must be in addition to regular banking and should serve clients and customer groups that do not receive funds from commercial banking institutions, such as start-ups, non-governmental organizations, and socially deprived individuals. Finally, the activity must achieve profits or at least break even.
As Peter Surek, CEO at Erste Social Finance Holding, says: “This should not be a charity, so we need to at least cover our costs. It is not the return which is the main trigger or the objective, but it is more actually to be able to recover the costs and maybe have some kind of a small markup to be able to reinvest and develop new projects. The returns should be at least zero.”
This approach to returns is the defining financial feature of Erste Social Finance. Unlike venture capital, which seeks multiples on invested capital, social banking aims for a stable financial position to sustain investing and driving impact. The instruments range from €50,000 working capital loans to €500,000 for impact businesses, and up to € 2 million for social real estate projects.
Social finance deals with ticket sizes and risk profiles that are unprofitable for traditional VC or private equity funds to pursue. The transactions are relatively small, the due diligence is costly relative to the ticket size, and many of the underlying businesses may not be as scalable as a software startup.
Most social impact enterprises do not deliver high returns because they primarily pursue their social mission. Many lack scalable business models and are unable to deliver competitive market returns or offer exit potential, which, of course, is a very important milestone in venture capital logic.
“The last few years have not been easy for the whole SME sector in Austria,” Peter Surek notes. “There have been many insolvencies also in the area of impact organizations, impact companies. From that perspective, the years are challenging because many of them are still to some extent depending on public subsidies which are being cut. Also many are producing goods or services which are more expensive than the market products because they are, for example, produced by people with disabilities.”
In some cases, national governments and the EU are the main sources of support for social funds. European Investment Fund guarantees have helped reduce risk costs and enable more lending to riskier organizations, but the future of this support depends on how well the EU does financially. There are guarantees from the fund, but there’s no guarantees for the fund to stay supported.
So are social finance investments profitable? In plain terms, they aim to break even.
Strategically, they are essential for the growth of impact businesses as well as for the development of the impact investing market. Without Erste Social Finance, projects like Byeagain would never reach the point where a EUR 3 million seed round becomes possible.
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Venture capital and projects with sustainable missions
Conventional venture capital does not aim to fund sustainability. It sets out to make returns, and the sector is often secondary. Despite that, VCs have started investing in sustainability — but the convergence is rarely deliberate.
For Elevator Ventures — Raiffeisen Bank International’s corporate venture arm — a financial success story in sustainability was Klim. It is a company focused on implementing regenerative agriculture practices, so it was not acquired simply on the basis of its declared mission. It was acquired because Raiffeisen’s agricultural lending book — heavily concentrated in Central European food production — needed a tool to measure farmers’ sustainability performance.
As Maximilian Schausberger, Managing Director of Elevator Ventures, explains: “The bank colleagues were interested because, with the green financing initiatives, they will be able to incentivize food producers by adjusting financing terms based on their progress in the transition. In other words, the more a producer invests in regenerative agriculture – reducing emissions and decreasing dependency on fertilizers – the better their financing terms will become.”
The climate is one of the business’s focus points. The investment motive for venture capital, however, is broader and generally connected with a parent company.
Elevator Ventures is not an impact fund. Multiple factors ensure that outliers from the field of sustainability end up in their portfolio. Such companies not only focus on impact, but also on financial returns, and, in the case of Klim, the parent company’s mission.
The investment logic is credit risk management with a green mission as an addition that does not influence the final decision.
The field of sustainability is thus becoming more competitive and less dependent on non-profit-driven funds. Sustainability is gradually becoming a self-sufficient field capable of generating significant returns.
The progress is slow, and there are still many fields where sustainable practices are much more expensive, such as aviation fuel. Still, the overall direction is clear, and it can soon become the market reality, especially as technological progress continues to bring costs down
When does a project with a sustainability mission become VC-ready?
Social banks finance a wide range of impact organizations, including those working with marginalized groups, people with disabilities, and social inclusion projects that are deeply valuable but tend to be structurally difficult to scale. In such cases, it’s much harder to have a scalable organizational model.
As Peter Surek reminds us, talking about such projects: “Many of them actually are not suitable for the typical VC or private equity logic because many of them don’t have scalable business models and are also basically not able to deliver market returns and also then offer a perspective or an exit which is of course in the venture capital logic the very important milestone. And this means you are less attractive for any kind of more traditional funders.”
The companies that cross over into VC territory tend to cluster in specific sectors: climate tech, health tech, and education tech. They have technological solutions that can scale across markets and eventually deliver the returns that venture investors require. The project must offer competitive returns or be specifically relevant. Elevator Ventures invested in Klim because it had something to offer, besides impact: returns and support for Raiffeisen’s agricultural lending portfolio.
“We spent a lot of time exploring ways to support the food value chain in becoming more sustainable.” Maximilian Schausberger notes. “Our goal was to identify how to finance the necessary transition effectively, helping to reduce risks driven by climate change and the growing volatility of key input factors like fertilizers.”
But even in these sectors with great upside, it is not always easy. The fragmented markets in Central Europe, each with its own regulatory system, make it harder to expand across borders than in larger, more integrated markets.
What makes a particular example like Klim different and gives it an added advantage is that it addresses a problem that the large parent company can solve at scale. The business idea is based on the bank’s needs for managing risks related to its agricultural lending operations.
Founders’ positioning game
It’s easy to see how founders adjust their pitches for different audiences, based on Wolfgang Weingraber’s experience fundraising for his latest seed investment round.
Impact-oriented venture capital funds consider the impact mission of byeagain the most compelling feature. Meanwhile, logistics-focused venture capitalists consider the mission a minor factor, since they view byeagain as a tool to address their operational challenges in handling returns.
Having the mission does not mean ignoring unit economics or traction. Once you have a solid foundation in place, your mission will become your unique selling point rather than a disadvantage, since customers are no longer willing to overpay for sustainability.
As Wolfgang Weingraber said,“It strongly depends on which venture capital funds you’re addressing. There are certain impact VCs. For them, the strongest angle is the impact. On the other hand, there are VCs, for example, from the logistics industry. They see the impact, but it’s not the main thing they care about. For sure, we will stay with the impact because it’s our mission, but they see other benefits in our solution — helping their customers, doing something with the return products, dealing with the operational issue.”
Byeagain’s business model operates in a way that absorbs all potential risk factors rather than passing them on to brand clients. The company gets a commission if its product is successfully resold. The brand remains in control of its products, as it can’t end up in the hands of large second-hand resellers.
Moreover, the byagain’s system integrates alongside preexisting operations of its clients; therefore, large corporations are not required to reconfigure their businesses to accommodate an emerging startup.
The combination of mutual benefits for each participating party is the company’s real value. Impact and a great mission at the foundation were a great tool to secure the first funding to get the company running, while its later successes came from the main idea that actually generates profits.
The direction of the field of sustainability
Impact today is a sector that stops normalizing unprofitable ventures. The best sustainability companies should be able to compete with any other companies.
As Maximilian Schausberger points out: “An impact fund is similar to a fund that targets a specific sector, industry, or investment thesis. In this case, the thesis is generating positive impact, which I believe can also lead to financial returns.”
The trend toward profitable impact is becoming a reality across Europe. Partially because energy costs are rising, climate risks are increasing, and the cost of ignorance is on the rise; partially because Europe is hit with rising fossil fuel prices the worst; partially, because businesses in Europe are more focused on driving sustainable solutions than in any other part of the world, hence now is the point where returns and mission come together.
Peter Surek concludes: “We see, of course, the companies focused on in the area of climate tech, focus on the area of health tech, maybe educational tech, who can basically have scalable technological solutions that could be interesting for different kinds of impact fund vehicles or also more traditional tech fund vehicles.”
Still, some impact-driven ideas cannot exist without subsidies. There will always be technological gaps. It’s up to grants, social banking, and subsidies to advance such ideas towards becoming profitable through research and scaling.
Editor’s Note: The opinions expressed here by the authors are their own, not those of impakter.com — In the Cover Photo: A Drone above a Field Cover Photo Credit: Filip Živaljić
