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Why startups need to pivot toward ESG to weather economic uncertainty

Red umbrella protecting from storm

Leading a startup never has been easy. It’s even tougher under the bright glare of always-on social media and the 24-hour news cycle. As the world launches or moves into new phases of COVID-19 pandemic recovery, tech founders are finding out how much tougher the job can get in hard times.

The new era of innovation under a stressed global economy, and amid calls to boost corporate diversity, will require startups to focus on advancing environmental sustainability, reorient around social impact and adopt stronger corporate governance. Early-stage ventures that fail to embrace ESG initiatives risk prosperity and even survival. 

Navigating the public domain and the board room

In the near term, concerted efforts led by founders and shareholders to prove executive competency and paths to profitability will advance beyond a few companies to the broader tech and science innovation market. The reason: There’s little to no barrier between what happens in the boardroom and what happens on Main Street.

Social media-driven transparency and accountability forces shareholders and executives alike to move toward a more progressive and environmentally responsible approach to business. Social media companies themselves are within the range of public scrutiny.

Simply look at the case of Twitter, a SMS startup-turned-global company with Jack Dorsey at the helm facing very public calls for change from activist investor Elliott Management. While they reached a deal to quell the specific conflict, there’s no doubt Dorsey will need to spend more time split between Twitter and Square convincing stakeholders, in addition to shareholders, that he’s fit for either CEO position. Whether his recent decision to allow employees at both companies to work from home forever will help make the case remains to be seen.

Startups should begin acting on social impact and equity, environment and sustainability pledges authentically, backing them up with corporately aligned policies and practices.

The same is true for entrepreneurs building their very first pitch decks and executives who currently lead companies — namely the ventures evolving from early stage startups to established companies with demanding boards, vocal employees and activist consumer bases. 

Startups must be aware of this activism and act accordingly. For founders and executives, in particular, that means going beyond merely acknowledging the importance of ESG to defining and articulating what it means for a specific company’s purpose. In practice, startups should begin incorporating ESG actions and messaging into corporate operations, sharing consistent communications from boardroom agendas to social media posts. At the same time, startups should begin acting on social impact and equity, environment and sustainability pledges authentically, backing them up with corporately aligned policies and practices. 

Adapting to unpredictable market conditions

Several startup founders — especially younger ones with brilliant ideas launched out of college labs or tech incubators following the Great Recession — haven’t experienced major economic depression, or even had to accept a downround since launching their companies. But what happens when COVID-19, or an inevitable future public health or climate crisis, totally upends the economy and sends the market into a spiral? 

According to Startup Genome, worldwide VC funding dropped 20 percent between December and May. Meanwhile, the WHO reported the world’s biggest single-day increase in COVID-19 cases and an Australian wildfire blew smoke into the sky with the force of a nuclear blast in the same week. 

In order to adapt to new realities (and prepare for their first economic hardship, in some cases), early-stage ventures need to build resilience into their business models. Specifically, startup founders and executives need to prioritize pragmatic corporate governance, environmental sustainability and socially conscious executive leadership over gaudy growth-at-all-cost models that run on inflated private valuations that landed WeWork in hot water and shuttered unicorns such as Homepolish overnight.

Startups leaders need to take a hard look at their respective business models to determine if they will be sustainable as COVID persists and the next inevitable crisis hits. They need to answer important questions: Does my company need to make a pivot to get ahead of the trend, or help respond to the current crises? Is my company’s valuation defensible, or have I drunk my own Kool-Aid? Is it supported by a sustainable business model with positive economic prospects in the face of uncertainty?

As startup leaders work to answer tough questions, they should spend time with their critics, from in-house devil’s advocates to competitors to consumers, so they can understand their issues with current operations. Startup leaders aren’t doing themselves any favors by only interacting with those who agree with them. Moving forward with a strong pivot toward ESG requires gaining an understanding of both the positive and negative aspects of a company today in order to develop a bulletproof strategy informed by facts, diverse life experiences and real sentiment in the near future.

Disrupting entrepreneur culture in the name of ESG

Career entrepreneurs who built companies over the past few decades presented as rugged individualists who landed large investment rounds and negotiated exits despite everyone else, not because of everyone else. A focus on the "hero entrepreneur" is simply wrong. In truth, no one succeeds alone. In addition to engaged mentors and board members, founders also need to find coalitions of like-minded people who work together to reimagine success in this new, more visible and engaged era of innovation where leadership, science and earning consumer trust matters. 

Founders looking to inject resilience and sustainability into their business should study tech companies such as Google that invent the future and maintain a sustainable stream of revenue that adapts based on customer demand.

However, today’s startups face a uniquely difficult path to profit that calls that ethos into question. Fading are the days of large amounts of capital emanating from a small group of investors that set valuations and shiny checks from murky international sources landing in corporate accounts. Emerging is a trend grounded in heightened consumer skepticism and inflated valuations that cover fatal executives, strategies and operational flaws. In order to succeed moving forward, entrepreneurs not only will need to accept support from partners, advocates and board members, but request it. 

Early-stage startup founders, in particular, should proactively pursue board members and executives that bring experience, a mentor-like presence and a thirst to be involved in corporate governance that put social and environmental purpose at the core of their venture.

Leaders committed to ESG should work to find non-traditional corporate partners — from NGOs that have been working on the ground for years on a particular issue such as racial justice to policy-makers actively putting up regulatory barriers to success that might come down with some real world ESG proof points to academics who will offer a different, often historical, perspective on issues.

Adopting a sustainable model for uncertain times

There’s never been more stakeholder and public pressure on startup founders to increase corporate accountability, deliver social impact and address real challenges facing the world like finding a vaccine or medical cure for COVID-19.

Founders looking to inject resilience and sustainability into their business should study tech companies such as Google that invent the future and maintain a sustainable stream of revenue that adapts based on customer demand. As tech grows up, consumer calls for a new, authentic kind of corporate social responsibility grow louder and innovation begins to truly address issues plaguing society from climate change to homelessness, entrepreneurs need to reorient around corporate governance, environmental sustainability and social impact – and leave the high valuation-at-all-costs model behind. 

As Natura’s chairman Roberto Marques recently stated, "You can’t run a business on a dead planet."

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