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Research from our 2024 Private Capital Investment Predictions Report shows that 30% of investors view deal sourcing as their main focus for 2024–and it’s a task that has become more nuanced and time-intensive than before.
This is especially true when you consider additional factors like sustainability.
In a recent webinar, we spoke with Jonah Surkes, a Growth Equity Investor at Generation Investment Management, to discuss his approach to deal sourcing, incorporating AI in key workflows, the intricacies of sustainable investing, and its relevance to the wider private capital community.
Watch the full conversation or keep reading for the highlights, marked with timestamps so you can dive deeper at key moments.
Sustainability can drive impact and return
Positive financial outcomes and sustainable investing are more than compatible. Surkes notes, “A deeper understanding of sustainability allows us, as investors, to see value headwinds and tailwinds where other investors can’t.”
He highlights two aspects of assessing sustainability that differ from traditional investing:
- A sustainability assessment provides more comprehensive insights into a company’s strengths and risks than traditional analyses
- Companies built with sustainability in mind are set up to operate over the long term, meaning they deliver products or services that are beneficial to current and future generations
In many cases, companies that positively impact the environment and society through their operations are positioned to outperform their competitors and drive returns for stakeholders in the long run.
A top-down approach to deal sourcing
For Surkes, deal sourcing begins with understanding big-picture sustainability objectives and issues. He and his team create research-led sustainability theses around the three pillars his firm invests in: planetary health, people health, and financial inclusion.
From there, the team creates 15-20 roadmaps each year, isolating large themes from these pillars and thinking about how to solve their key issues.
“If we could redesign the system in five to ten years, how would we do it to be most sustainable for the planet, people, and the economy? And then what companies and business models are actually driving us towards that sustainable end state, or are preventing a really bad end state in that particular issue?”
Surkes highlights that sustainability involves thinking more holistically about a company–considering its broader impact on the industry it operates in and evaluating the second-, third-, and fourth-order effects of the business it conducts.
This process results in a list of select investment opportunities that are on track to solve key sustainability issues and transform their respective industries in the process.
The double-edged sword of capital efficiency
Surkes is also seeing sustainability and social risks crop up in market trends. In recent years, the VC market has shifted its focus from growth-at-all-costs dealmaking to driving capital efficiency–often through layoffs and reducing operating expenses.
He shares his perspective on how these reductions affect companies disproportionately, so it’s important to evaluate longer-term impacts on a case-by-case basis: “We're seeing companies cut hard to get to profitability. Many of those companies will cut quite hard in terms of expenses, and we'll also see that growth rates come down significantly. Other companies might cut significantly in expenses, and actually, their growth rates are less impacted.”
Given the risk of cutting expenses too quickly and sacrificing long-term growth, Surkes advises his portfolio companies to consider impacts on revenue growth. Prioritizing capital efficiency above everything else can have ramifications beyond financial outcomes, including a worse environment for employees and losing out on top talent.
The lockstep relationship between sustainability and financial outcomes
To capture a company’s growth potential, Surkes and his team place a particular emphasis on governance, culture, and operations. They track Glassdoor reviews and job satisfaction data for the companies they diligence, recognizing that the treatment of employees is a significant investment factor.
“A company that treats its employees well or has some kind of cultural advantage can actually be part of your [investment] thesis.”
They also focus on improving company and industry-specific sustainability metrics, which can, in turn, benefit financial outcomes. Surkes shares an example of this with an international home care and home health EMR (electronic medical records) platform he worked with:
“If you think about nurses driving hundreds of miles a week across cities to reach their clients–if actually, you can schedule your visits in a more distance-efficient way–we found that you could end up reducing miles driven by 30 to 40%. And when they're scheduling a billion visits a year, the numbers really add up.”
Delayed IPOs mean portcos should shift their focus
Surkes anticipates fewer IPOs in 2024 than people may expect, given lingering macroeconomic uncertainty and market hesitancy surrounding US election years.
To reassure portfolio companies that were expecting to IPO in 2024, Surkes encourages executive teams to focus on three main points:
- Demonstrate profitability (or near profitability) and free cash flow break-even for several quarters before going public
- Think through their sustainability story and crafting a strong impact report, which provides alternative non-financial data around their operations that can be helpful for public investors
- Seek liquidity and financing opportunities in secondary markets if needed
Integrating AI streamlines workflows
Surkes and his team use AI in their deal sourcing process to facilitate workflows and help create a comprehensive picture of companies’ growth intentions. Specifically, they use it to:
- Identify companies that match their investment theses
- Get alerted when there are significant changes in companies they track
- Enable knowledge-sharing and determine the right contacts to make deals
Advanced dealmaking tools like Affinity can help identify deals that match your investment criteria and determine the warmest path of introduction to founders in your firm’s network–allowing you to spend less time on data analysis and more on closing deals.
Surkes notes, “Affinity has allowed us to do a few really important things. The first is to be proactive. We're now able to see around corners a lot more, whether it be someone's meeting with somebody next week or actually, someone's flagged a company as ‘I need to unlock this and someone else on my team knows somebody on the board.’ These are all things that are automated and have made the proactivity of our team a lot better.”
A broader perspective on sustainability
A common misconception about sustainable investing is that it limits your investment opportunities. Instead, Surkes encourages other investors to view sustainability more broadly and think about issues that need to be changed in the world and the kinds of companies that can influence those changes.
“It's not just about looking at narrow companies that call themselves climate technology [companies]. It’s trying to think more broadly and about second and third-order effects, which I think really helps when you're thinking about markets, durability, moats, and impact.”
To learn more about comprehensive deal sourcing, incorporating AI, and sustainability, watch the full webinar. You can expect to hear more about:
- Strategies for improving deal sourcing processes
- Managing risks in investments
- Using Affinity to review progress with analytics
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