Venture Capital: How will the next generation of VCs invest?
Fledgling Gen Z investors have their own ideas about sustainable investments. Gen Z makes up 30 percent of the world population and will shape the future of investments with their requirements on work life and the labor market. If you look up young employees in venture capital companies, it quickly becomes evident that the future venture capital experts are primarily value-oriented. So how will Gen Z invest? How will they incorporate their values into business? And what tips do young VCs have for prospective founders on how to get funding?
VCs have increasingly gained visibility among the wider public in recent years, not only through prominent entrepreneurs and successful start-up stories on social media, but also through series like “Dragons´ Den” and “CreateF - The Female Founders Show.” This new ubiquity shows, above all, that the youngest candidates for the job market are capable of easily introducing into their career paths the habitus of generating impact. One of the most popular perceptions of Gen Z (born 1995 - 2012) is that its members are activists and strongly committed to their values. Issues like climate change and income equality are their priority. Post-millennials' sense of justice informs their worldview and puts impact first. In doing so, They represent a generation that will impact major changes in industries.
The course for value-oriented investing has been set
More and more investors are already showing interest in issues of social impact and thus on solutions for the climate crisis and values such as diversity, which post-millennials welcome. ESG ratings of new investments are also becoming increasingly popular.
Julian von Blücher is founder and CEO of Europe's leading impact HR consultancy for the scale-up and VC scene with a special focus on climate tech. In the last few months he noticed a clear transformation towards more diverse teams - which demonstrably have a higher probability of success than the average. Blücher predicts a bright prospect especially for tech start-ups with a focus on the climate:
“More and more funds from the US are pouring into Europes start-up ecosystem – especially into the cliamte tech sector. For example, Al Gore's generation, with their sights set on the booming climate tech ecosystem in Europe has established a new $1.7 billion fund. Furthermore, the European Ecosystem is also maturing. The switch as well as societal pressure to renewable energy, energy efficiency and the circular economy also gives hope. It turns out the climate tech sector is more resilient than other startup industries. According to a recent study, three quarters of investors assume that green and climate tech will play a bigger role in the future.”
In 2021, VCs invested 10 billion US dollars in sustainability-focused companies in Europe. For comparison: in the previous year it was “only” 5.4 billion US dollars. Gen Z is the generation that drives start-ups in the climatetech sector and equally welcomes and attracts investments in this direction, because this generation ponders the question of meaning much more fundamentally and more than any other generation, determines their career and makes their career choices based on such values.
What do young VCs see under the funding limelight in the future?
Generation Z offers VCs access to the particularly tech-savvy part of society. Some of the largest European VCs have not only opened their doors to issues of social impact, but also to these young investors. These include Earlybird, a venture capital investor that focuses on sustainable deep tech start-ups and university spin-offs with the UNI-X fund, thus addressing companies that raise their pre-seed or seed round.
Natalia Ahmadian (25) is part of the investment team at Earlybird UNI-X member of the 2hearts community and by definition a post-millennial. Natalia sees that climate and the associated changes in investment decisions continue to be a strong focus in the future. An example of such a concomitant change is the falling meat consumption, which is why there have been numerous investments for alternatives in the food tech sector (e.g. Formo or Perfeggt). In addition, Natalia sees great potential for Ed Tech and HR Tech, spawned by the Covid 19 pandemic. “The pandemic has left major gaps in the education system with regard to digitization and in relation to work and has also brought new demands to employers – following new technologies and requiring different approaches,” she explains. Natalia advices founders to consider the following:
“Our generation prefers short and uncomplicated communication channels as well as quick action – founders should definitely set to focus on that. I would also recommend that investors communicate openly and directly. It is very relevant for (prospective) founders to develop an understanding in this regard to ensure that Gen Z will primarily invest in ideas that benefit the planet and society."
Leon Sander (24), an investment associate at Christian Angermayer’s private investment firm, Apeiron Investment Group and its European VC arm Elevat3 Capital, also sees Gen Z embracing biotechnology and its potential for improvement in health and increasing attention being paid to mental well-being:
"In the next two decades, technology will transform the world. It's not just about the obvious things we're already seeing, like e-mobility, quantum computing, space travel and metaverse. Technology will also allow us to transform our bodies and redefine our minds, with synthetic biology standing at the forefront. New therapeutics are being developed that treat dementia and Alzheimer's (see Amyriad Therapeutics) and mental disorders will be cured (see atai Life Sciences). There will also be those who have intellectual abilities of young people and prolong health span (see Rejuveron). We're talking about scientific fact here, not fiction - and it will be very soon."
Leon Sander also sees that green business models in the prop tech and fin tech sector are developing rapidly. "Climate tech will continue to penetrate numerous industries and create interesting connections and new opportunities. I currently see many exciting points of contact between fin tech and climate tech (such as the clean-energy-as-a-service investment platform Bullfinch) as well as prop tech and climate tech (such as the sustainable housing developer Gropyus).” He identifies a growing number of investors who are placing an increased focus on climate tech, but at the same time still shy away from hardware components and focus exclusively on software products. “Hardware must play a central role in the climate tech movement in order to get to the root of the climate crisis. Founders should be careful to emphasize the importance of each and unique technical aspect of their idea and make it easy for investors to understand and access," says Leon.
Jan-Soeren Zinke (24) also sees the demands of his generation rising in the VC world. Jan is an associate at Iris Capital, a pan-European and stage-agnostic VC, co-founder of the InnovatorsRoom network and was a speaker at this year's TechChill Riga, VivaTech Paris, and Hub.Berlin among others on topics such as "Gen Z: The Way Forward for Venture Capital" and "The State of European Venture Capital." Jan explains:
“Gen Z is a “we” vs. “me” generation. Baby Boomers and Millennials are said to prioritize self-actualization and the pursuit of personal happiness. Post-millennials are all about values around community, diversity and inclusion.”
When it comes to investing in companies, Jan-Soeren Zinke is particularly interested in the business model of consumption behavior of the target group: while for previous generations, consumption was primarily about status, but also pure possession of goods, Gen Z consumers strive to also gain access to communities through their consumption. "The "we", the sense of community, will play a major role in numerous sectors in the future - we can already see this in shared mobility, in the communication area (see Slack or Discord, where brands build and maintain dedicated communities) or also in the fin tech sector. Young tech companies like Owwn focus on community aspects. We Gen Z investors want to see founders think along with or even think further about community-based models for their business in order to meet the requirements of young consumers,” says Jan-Soeren Zinke.
Sinah Mussmann (26) is an investment analyst at Cavalry Ventures, a Berlin-based pre-seed/seed VC fund that invests in European software start-ups. She senses that sectors such as climate, data security and dev tools, energy, infrastructure, and logistics are in the limelight for many investors, both for Gen Z and across all generations. She emphasizes: "We will have to cope with many structural challenges in the future, and I believe that these sectors, among others, may play key roles."
Sinah Mussmann is also a community member at Global Women in VC. When asked which topics will be particularly important, she replies:
“Diversity within the team and the influence of a business model on future generations cannot be a blind spot for companies anymore. I am convinced that there is a huge chance to learn from each other: the more senior colleagues have many years of invaluable experience, while the juniors come with a fresh perspective. Especially concerning the current, recessive mood in the market, it's great to exchange thoughts with investors who have already experienced 2000 and 2008."
The benefits of generational diversity
Gen Z will – by habitus – push for change, which can be a win for all of us, especially in terms of solutions for our ecosystem. The advantage of Gen Z investors: they can spot trends that fly under the radar (or that operate beyond intrinsic understanding) of older investors. At the same time, their counterparts from other generations can support the newcomers with their broader experiences.
A good example of such a collaboration is provided by Franziska Pohlmann, founder of createF - The Female Founders Show. In the first season of the successful series, the two founders Diana zur Löwen (27) and Karla Schönicke were coached by the show's investors to then expand their activities as successful business angels themselves. Franziska Pohlmann wants more of this in the future:
“With createF, we not only want to present role models for prospective founders, but also to teach first-hand how to invest and handle capital by working with experts such as Svenja Lassen from the Female Investors Network, or Bettine Schmitz from Auxxo, who will pass on their experiences to the next generation.”
Conclusion: a paradigm-shift leads to investment-shift
Young investors trust both in the values of their own generation and in the cooperation with more experienced colleagues. They will choose new industries as key sectors and will also align their due diligence (careful examination and analysis in the context of company acquisitions) as closely as possible to Gen Z’s societal demands.
The next generation of VCs are already in the process of turning the screws that are important to them and allowing their values to flow into future decision-making processes. Future founders should, therefore, already be on the lookout for inceptive issues and values that drive Gen Z, if they want to successfully score with investors.