Green entrepreneurship can go by other names; ecopreneurship, greenpreneurship, the clunky sustainopreneurship or just plain sustainability entrepreneurship – but they all connote that special class of entrepreneurs who attempt to solve environmental problems and address sustainability related social issues. A core principle of green entrepreneurship is to be financially viable – through the solution offered, the business model being established, and if there is a market big and consistent enough to be served to ensure financial health.
This principle precludes government subsidies and philanthropy to keep the “green” businesses going, even though they may be needed in the start-up phase and be recouped with revenue later on. How then do green entrepreneurs ensure the viability of their businesses and assure investors that they will succeed ?
I have long used a simple qualitative rule of thumb advised by A David Silver in his book “The Entrepreneurial Life”, founder of Sante Fe Capital, first published in 1983. Since then many further iterations, refinements and quantitative models have emerged to assess valuations for new business ventures and to evaluate if the entrepreneur is indeed able to lead the enterprise from startup to exit.
David Silver’s formula is simple: V = P x S x E. V stands for valuation of a company, while P stands for the size of the problem the entrepreneur has identified. S stands for the elegance of the solution being offered and E stands for the entrepreneurial team that has been assembled. Valuation is the multiple of these factors.
Every entrepreneur at heart, even if not mindful of it, seeks to improve the world by providing solutions to existing problems. The personal drive to do this is the essence of the entrepreneurial life; the reward may simply be to see the change that has come about, the creation of value in the product or service in demand or in in the profits and capital gains realized. In applying this rule of thumb to green enterprises and green entrepreneurs we can see that new considerations are required in comparison with other business ventures.
First, in stating the size of the problem green entrepreneurs set out to solve, they are actually staking out the market they wish to serve. It could be as simple as waste management in a particular local community, reducing or eliminating fossil fuel usage through biofuels or renewables nationally or preserving biodiversity that would otherwise be lost from this world. Size determines valuation; scaling up is of course the buzz phrase these days, but it must be recognized that small localized entrepreneurs also have their place.
Embedded in the statement of the problem is the question of how many others also see it as a problem. The size of the problem is naturally reduced if the market place for instance see climate change as not urgent enough an issue or that plastic waste is not as pressing as other matters such as food security or affordable transportation. The fact that most consumers may not rank sustainability as very high in their life’s priorities, but prefer to consume as usual, discounts the potential valuation of any company the green entrepreneur establishes.
Paraphrasing an old business adage: what if no one wants to beat a path to your door for that “greener” mousetrap because it is too expensive or that no one is willing to pay for it?
The second aspect in the valuation of a green business venture is the elegance of the solution being offered; in how the innovation, technology or business model is creatively conceived to solve the problem, preferably at lower economic, environmental and social cost demonstrating systems thinking and ecologically adapted design. Meeting a need, for instance, simply through a green business exchange for eco-friendly products at a community level can itself be an elegant solution if presented in an attractive and user friendly manner.
A novel biofuel chemical process or an innovation for faster microalgae growth can each be regarded as elegant as well. The same goes for more efficient solar cells, energy storage systems or any other renewable energy solutions that rely on better engineering. Such technologies are usually disruptive, breaking up and re-ordering traditional value chains, creating new business models and markets. An elegant solution would embody appeal, uniqueness, competitiveness, a first-to-market advantage and pre-eminent positioning.
Digital platforms have been the source of most recent elegant entrepreneurial solutions. They have been making their mark solving environmental and sustainability related problems and allow the entrepreneur to scale up the business from a local pilot to the level of global dominance. The application of drone technology is one such example. Its integration with satellite based remote sensing allows gathering data at speed and scale in multiple areas of application from infrastructure and facilities inspection, construction monitoring, agriculture, security surveillance and logistics. Big data analytics, artificial intelligence, robotics and blockchain will increasingly become affordable and be incorporated into elegant solutions.
The green entrepreneur hungrily searches for innovations, especially those utilising green technology. Indeed, some commentators have recognized that sustainability is now the key driver of innovation. The convergence of technologies, from digital to biotechnology and material science among others, promise to offer new radical pathways and opportunities. Overall and collectively, they may help whole industries reduce their carbon footprint, address climate change, reduce biodiversity loss and also contribute to addressing sustainability related social issues.
The third factor in V = P x S x E is the entrepreneurial team: the capacity to make it all happen, to deliver the solution as planned, becomes the most important determinant of valuation. The first test of entrepreneurial leadership is to bring the core team into place and to maintain its organizational robustness and focus. The entrepreneurial team must seize the immediacy of the problem, assess that the technologies have converged sufficiently and the market is ready for their offered solution. Most of all they have to exhibit a bias for execution.
David Silver’s early framework can be adapted to help us assess if green entrepreneurs have properly premised their business strategies and plans. However, no business school can prepare an entrepreneur for the intuition, gumption and rigour required to pursue an entrepreneurial life. Similarly, there are no courses or programmes that can make one a green entrepreneur.
The motivation to be one comes from within the person, who is usually possessed of an eco-centric or earth-centric worldview and the belief in the notion that profits can yet be made without costing the planet and all those who depend on it.