It has been a challenging few months for tech firms and start-ups in Australia and around the world, with daily headlines of company collapses and lay-offs.

One bright spot has been impact investing. At Dragonfly Enviro Capital we have seen unprecedented interest in impact investment from those who want to see positive and tangible impact beyond spreadsheets, results which are founded in the observable growth of companies addressing major social and environmental challenges at home and abroad.

According to a Giant Leap study earlier this year, nearly a quarter of all venture capital deals completed in Australia in 2022 funded impact companies, demonstrating the massive investor interest in the space. This aligns with one of the decades’ mega-trends of capital shifting to sustainable investing, with Responsible Investment Association Australasia finding that $1.54 trillion of Australian assets now being managed in line with sustainable principles.

Despite the increased interest, impact companies cannot be complacent and should learn the lessons from their tech counterparts. From hiring too quickly to ultimately having unviable business models, mistakes were made that burnt through piles of investor cash.

For impact firms examining the ashes, the most important lesson is that a laser focus on delivering returns is critical to success and positive impact and profit can, and should, go hand-in-hand. In some corners of the sustainability world, profit has been a somewhat dirty word but to effectively address climate change we need to attract as much investment as possible as quickly as possible and the best way to do that is deliver returns.

At Dragonfly Enviro Capital, we are currently raising capital for our Impact Growth Fund, which identifies and invests in profitable solutions to challenges affecting people, climate and the environment, with target returns of 20% pa net of fees for the first eight years after deployment. More important than the popularity and financial success of the fund thus far is the strength of the companies and ideas which the fund is made up of.

The fund’s current investments, include Pacific Bio, Downforce, Our Trace, the Water and Carbon Group and Red Earth Energy Storage, which are touted as the next generation of sustainable innovations set to put Australia on a clearer path to net zero. More importantly, each of these impact companies have demonstrated and sustainable models with real power to create profitable, positive difference.

By demonstrating success and strong, profitable business models, impact firms stand to attract further investment, building momentum and a snowball effect that in turn will allow those firms to have an even bigger impact.

Similarly, investors can be more balanced in their approach by allocating a higher proportion of their investment to growth capital, backing impact firms that are profitable or have a clear path to profitability. For too long, investors have been caught up in the hype.

There are some great businesses in Australia and around the world that are crying out for investment to fuel their growth and their impact, but they miss out as they are not flavour of the month. Investors should be discerning in their approach, backing those companies that are genuinely tackling the world’s problems and have a strong underlying business model that ensures they are set-up for long-term success.

Investors looking to ensure that their desire to create positive change does not come at the risk of profit should also be considerate that a multiple asset portfolio approach, run by a professional fund manager, is important to avoid ‘going all in’ on single deals. Many have tried to invest in singular innovations and ideas and lost out, driving many away from impact, where it is likely not the sector that is the problem, but rather the strategy.

By providing growth capital, investors enable businesses to optimise their sustainable business models, invest in clean technologies, expand their operations globally, and drive meaningful change across industries. This strategic investment approach not only generates attractive financial returns but also contributes to addressing pressing environmental and social challenges, making growth capital a vital tool to building a more resilient and equitable future.

Putting capital to work in this way has the potential to have a transformative effect on the climate and society. That has underpinned our approach at Dragonfly Enviro Capital where we are working to identify and invest in profitable solutions to challenges affecting people, climate and the environment. And we know it works with 13 early investments delivering a current weighted average IRR of 51%.

Every crisis presents and opportunity and the tech wreck is no different, offering important learnings that can help deliver a more sustainable future. A shift in focus by investors and impact firms has the potential to benefit both parties as well as the environment and society