'The higher the impact, the higher investors’ return on investment'

No need to reinvent the wheel: in our regular column ‘The Expert’ impact investing pros share their lessons from the field. This week, Alexander Gangnus of Dennemeyer IP Consulting on assessing impact in company valuations.

Alexander Gangnus: “So far, we see that the sustainability index has consistently increased valuations." Private

Exploits potential of IP assets

  • Alexander Gangnus, a member of the Dennemeyer IP Consulting team in Munich, has over ten years of professional experience in IP consulting, covering strategy, due diligence, risk mitigation and valuation.
  • Dennemeyer IP Consulting helps organisations all over the world to identify and exploit the maximum potential of their intellectual property (IP) assets.
  • He speaks five languages.

Here’s what Gangnus has learnt after a decade in consulting on intellectual property:

1. Importance of sustainability factors in company valuations will continue to rise

“There has been a massive increase in demand to include impact in company valuations. Investors’ interest in sustainable and environmentally-friendly technology ventures is also rising.”

“For example, in 2013, the early-stage venture funding for climate-tech companies was about $418mn. By 2019, total venture funding had increased to $16.1bn.”

“Investors’ demand for sustainability factors in valuations will definitely increase further, not only because of the planned SDG (the UN's 17 sustainable delevelopent goals, ed) achievement in 2030. Impact and sustainability have become more important in the public perception.”

“An excellent example of an impact- and sustainability-influenced valuation project is our client Africa GreenTec. They provide rural areas in Africa with access to electricity, internet and water. With the help of solar energy, they contribute to reducing poverty and hunger.”

Their solar technology is not cutting edge, yet their main value driver is the impact they create.”

“The higher the sustainability and the impact, the higher investors’ return on investment.”

“Buyers need to be aware of the risks they could inherit when they acquire a company or invest in a business. Given the increased importance of the SDGs from a reporting standpoint, buyers and investors need to gain an accurate picture of a business’s SDG-related risks, goals and opportunities.”

2. The valuation of impact goals can’t be done by a computer.

“As you know, there are not only the overarching UN SDGs. Those 17 goals are further broken down into 169 targets. The main challenge is to assess how many of the goals and targets are addressed by a company, and to what extent they contribute to the company’s overall impact.”

"In the end, you form a sustainability index, which is embedded into the company valuation procedure.

This is manual work requiring diligence, knowledge and dedication. It’s not possible to ‘outsource’ this work to artificial intelligence or software.”

3. From the onset, a startup should think about its impact

“We usually accompany startups from a very early development stage. We encourage all of them to pay special attention to sustainability and impact.”

We are convinced that this will positively influence their value and development. And to be honest, we never had a case where a startup refused to consider impact and sustainability. It’s already deeply rooted in the founders’ mindsets, which is great.”

“Moreover, we keep a close eye on our clients’ online and offline activities before, during and after our projects. We also usually have access to their internal data, documents and plans.”

“We know whether their claims to impact and sustainability live up to their actual practice.”

“So far, we see that the sustainability index has consistently increased valuations. We hope that we will never have to decrease a company’s valuation due to a low sustainability index. However, we would do it if necessary.”