When you talk to Israeli venture capitalists, many of them love to say that they “invest only in things that do good,” or declare: “We’ll never invest in cyber attackers or in porn.” Some advertising technology is also viewed poorly.
But slowly, Israel is becoming home to investors who understand that good intentions aren’t enough, and who are defining themselves as “impact investors.” These investors make investments that are supposed to make money but are also supposed to contribute to society or the environment on the way.
Several funds in Israel have been quietly operating based on impact principles. These funds choose to invest in entrepreneurs who are focused on improving the world, and make their choices not just based on feeling but on clear, measurable criteria. In parallel, established funds are also looking to shift toward impact investments.
The Global Impact Investing Network estimates that impact investing totaled $715 billion in 2019, a sharp increase from 2018, when the figure was $502 billion. The nature of impact investing doesn’t leave much room for technology investments. Most investments are in capital-heavy infrastructure projects in fields such as energy, waste purification, hospitals or housing. Technology plays a small part in impact investing, only $5 billion a year. Here, however, Israel has a chance to stand out.
Israel’s largest impact tech fund is Bridges Israel, which was founded in 2018. It manages some $80 million, which it raised from Israeli institutional investors, among others.
Bridges Israel is a reincarnation of the European Bridges fund, which was founded by Sir Ronald Cohen in 2002 and engaged in more traditional impact investments. “When we looked at Israel, we saw that there was definitely room for impact investments, with the story of two separate economies, the highest poverty rate in the OECD and the rest of the well-known challenges,” says Sandrine Montsma, a partner in Bridges Israel. “We couldn’t ignore the entrepreneurial community that exists here, and we saw a clear competitive advantage in fields such as precision agriculture or technology serving disabled people or the elderly. These are places where Israeli technology could make a global impact.”
Montsma says the impact component was considered a disadvantage among classic VC investors, but Bridges considers it a competitive advantage. “It’s an advantage when it comes to hiring workers and growth over time,” she says. “Some of our companies start using our impact report as a marketing tool.”
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Investors also prefer the ethical component of impact investing, says Montsma. So far the fund has reviewed 400 companies a year, and has invested in 10 of them.
One such company is XR Health, which makes physical therapy more accessible through augmented reality. Its product suits western consumers and not the developing world, but Montsma notes that even in the West, there are plenty of people who cannot receive appropriate care, such as seniors, people who live far from clinics or people who can’t afford it. “This enables making health services accessible to weaker populations.”
As for what’s more important in an investment — the return or the impact, Montsma says: “We don’t want there to be a dilemma, so from the start we look for companies where business success and impact go together. The more good the company does, the more it succeeds,” she says, noting that the fund’s model calculates how much these two factors go together. Another company in Bridges' portfolio, N-Drip, developed a water-saving irrigation technology, for instance. “They’ll have a greater impact the more irrigation systems they sell.”
Another impact fund in Israel is ARC, a family fund led by Nicky Newfield. Over the past two years the fund has invested in 12 technology startups, most of them in very early stages. Newfield cites one of the fund’s companies, explaining, “There’s a problem of mass bee deaths in the world. The company BeeWise, which we invested in, makes a robotic beehive. The beehive can, among other things, remove the pest that is harming bees and thus harming their mobility, pollination and honey output. BeeWise developed a laser that destroys the pest, and has received orders from around the world. The more they succeed, the more bees they’ll save,” she says.
BeeWise, like all the other companies mentioned here, raised money from both an impact fund as well as from more traditional investors who simply thought it was a good investment. “We’ve brought on a traditional investor for every company we’ve invested in,” notes Newfield. “It also works the other way, that a regular fund invites us to join an investment in order to build an impact strategy.”
Israel also has a third impact fund, Zora, focused on technology, and another four groups are working to raise funds for their own technology-focused impact funds.
Another model is existing funds shifting toward impact investment. This is the task of Cecile Blilious, who was named head of sustainable investments at the Pitango Fund in April. “Pitango is an entirely standard fund, so instead of marking the impact money and then acting as if it’s business as usual with everything else, we thought about how to implement impact ideas in funds that didn’t start out that way,” says Blilious. “We have more than 60 companies in our portfolio that have never heard of impact, so first we have to start with staff training.”
Blilious’ first goal is a more basic level of social responsibility, known as environmental, social and corporate governance.
Then there is an effort to set sustainable development goals, a reference to 17 goals that the United Nations defined, including preventing poverty, minimizing hunger, and contributing to health, quality education, gender equality, access to clean water and energy, fair economies, and environmental protection.
“We carried out this process at three companies, and suddenly they discovered that their product serves one of the UN development goals, and this becomes something deep within the company’s identity and impacts employee hiring, marketing and more,” says Blilious.
Impact investment has been around for over a decade, and the debate is whether it constitutes greenwashing – creating a green image for companies with not particularly green operations – and also whether it constitutes a good investment.
Blackrock’s Shares ESG index of impact companies underperformed the Dow Jones over the past five years. But green energy companies are outperforming global indexes, including in Tel Aviv.
The Tel Aviv Stock Exchange joined the global trend, unveiling a new index in November, the Tel Aviv-125 without fossil fuel investments. The new index would have outperformed the Tel Aviv-125 over the past year, three years and five years.
Start-Up Nation Central notes that there are some 477 Israeli startups that theoretically could be called impact companies, even though they don’t define themselves this way. If they did, they could raise more money, Newfield says. “In the world, impact is a big thing, and there’s a lot of money looking for investments.”