June 25th by S. Smith, C. Smith & E. Emre - Bankers without Boundaries (

Accelerating investment and impact measurement in circular economy start-ups: a case study in transforming Amsterdam’s textiles sector

There is a clear and compelling need to rethink the shape and priorities of our economic growth models. The linear economy that now dominates has significantly contributed to growing resource scarcity, health-threatening levels of pollution, and the existential challenge of climate change. Inefficiencies in resource use and in the manufacturing of goods are having adverse economic, environmental and social impacts on communities across the world while increasing the wealth of a shrinking number of winners.

The circular economy represents a paradigm shift with the potential to drive transformational systems change. In addition to addressing key environmental and resource use issues, the circular economy has the potential to generate new sources of wealth, create new employment opportunities, boost innovation, and protect the ecological systems on which we all depend. Eurocities estimates that the circular economy in Europe could increase the EU’s GDP by an additional 0.5% by 2030 and result in 700,000 new jobs.

Introduction to the

Circular Innovation Collective

Cities account for more than 75% of global natural resource consumption, over 50% of waste production, and between 60-80% of greenhouse gas emissions. As such, cities and urban areas have a crucial role to play in accelerating the transition to the circular economy.

Facilitating the development and growth of circular economy start-ups is a powerful catalyst in this process. These businesses can help solve pressing societal challenges, encourage innovation, and serve as role models by pointing the way for wholesale change across all sectors of the economy.

At present, however, financing remains a major bottleneck in enabling these early-stage businesses to reach their potential and scale-up circular economy initiatives. A lack of data on circular economy enterprises and their relatively longer term return cycles compared to less innovative, more conventional companies has made traditional investment risk assessments difficult, causing many investors to refrain from investing in such enterprises.

Yet, providing funding mechanisms to support the growth of the circular economy represents a major opportunity for private finance, particularly the venture capital community, to help realise a more sustainable future while gaining early-mover advantage by tapping into a nascent area of investment. This article explores the barriers to greater investment flows into the circular economy and how to overcome them to develop a wider understanding of the available opportunities and create a larger pool of funds for the circular economy.

The Circular Innovation Collective (CIC) was formed with the ambition of creating and nurturing local circular innovation ecosystems within value chains in European cities and regions. Specifically, the CIC approach helps to support circular value chain transitions and find new ways to build an environment that will enable early-stage circular solutions to flourish and scale-up their impact. This includes finding solutions to remove or overcome existing obstacles to financing.

Priority areas for the Circular Innovation Collective (CIC)

  • Building connections between entrepreneurs, providers of financing, sector experts, and other stakeholders in the circular innovation ecosystem to unlock capital and collaborative partnerships.

  • Working with stakeholders to co-create innovative financing structures that encourage the development of high-value circular economy start-ups.

  • Addressing systemic, location, or industry-based obstacles and bridging innovation gaps that are preventing the expansion of circular innovation.

  • Working to create circular economy job opportunities.

Validation of our approach: The CIC Pilot Programme

Running from 2022 to 2024, the first CIC programme applied and validated the Collective’s groundbreaking approach to assist the Metropolitan Region of Amsterdam (MRA) in reaching its goal of achieving 70% circular textiles by 2030.

This has led to the creation and publication of the CIC Program Guide, which offers comprehensive guidance for planning, designing, and implementing innovation programmes that embed the CIC approach.

The first phase was to recruit 10 companies (CIC cohort – see box: The CIC cohort) that were in good alignment with the key objectives of CIC and its funding partners. These included enterprises that would fill identified innovation gaps and demonstrated a commitment to higher ‘R-strategies’ (see Figure 01: R-strategies). Other important considerations were factors such as job creation potential, the strength and experience of the management team, and the investment prospects of the company.

A key objective of the pilot programme was to support the 10 companies with their business development – in essence, operating an accelerator programme. This included helping them to define their mission, and their commercial and impact strategies; building robust financial models; developing marketing programmes; and advising on the hiring process. The final part of the programme focused on pitch deck creation and presentation. These efforts were geared towards the ultimate goal of ensuring the CIC cohort management teams were at a point where they could meet external investors with confidence and deliver a compelling case for investing in their company.

Publication start

Early Stage Circular Start-ups: Key Issues

Key Issue 01: Business Models

While circular economy enterprises have the potential to positively address a broad range of environmental and societal challenges, the level of impact will depend in significant part on whether they are using higher R-strategies: refuse, rethink, reduce, reuse, repair, refurbish, remanufacture, and repurpose. 

These enterprises, which include those in the CIC cohort, must be able to make a compelling business case to venture capital funds to attract investment. Such investors need to understand these new business models in order to evaluate whether they align with and have the ability to meet their investment risk, investment return, and impact thesis.

Figure 01

R-strategies defined

‘R-strategies’ encompasses a range of approaches for managing products throughout their lifecycle – from production to end-of-life treatment. Higher R-strategies generally reflect a more comprehensive application of circularity: prioritising practices such as reducing, reusing, or repairing; extending product lifespans; embedding circular design principles; and maximising the value of materials for as long as possible. The concept is widely discussed within the circular economy, with much debate over its definition and significance. 

The most widely used taxonomy for R-strategies places them in three broad categories:

  • Smarter use and manufacture: Refuse, Rethink, Reduce

  • Extend lifespan of products and their parts: Reuse, Repair, Refurbish

  • Useful application of materials: Repurpose, Recycle, Recover

The R-strategy framework can help categorise and position businesses within the circular economy value chain for a specific sector or geography, identify the problem they are trying to solve, and frame the ambition of their impact.

However, R-strategy categorisations are not currently used by investors to delineate different companies or guide them towards specific investments. None of the investors interviewed by CIC discussed the concept of higher or lower R-strategies and, based on these conversations, it is not a currently consideration. This is not to suggest that R-strategies are unimportant in terms of a company’s impact; but simply that they are not an area of focus for investors. CIC’s interviews suggest that, for now at least, describing a business as being part of the ‘circular economy’ is sufficient for interested investors to explore an opportunity.

A similar attitude exists on the other side of the investment equation. Most companies do not actively promote their R-strategy positioning or perceive it as a significant ‘selling point’. CIC cohort founders pitch their businesses by describing the problem they have identified and how they intend to deliver the solution. The narrative and key metrics are centred on the impact they aim to achieve and the deliverables for customers and investors.

R-strategies example: Martan

As an example, CIC cohort company Martan recycles hotel linen that would otherwise be discarded to make high-end fashion items. This puts Martan in the higher R-strategy segment of the taxonomy, but this fact was never referenced directly by the founder. This held true in broad communications across the CIC cohort, although all companies were implicitly highlighting the circular nature of their business propositions.

R-strategies is a useful way to categorise companies and think about circularity in a broader context but the significance of this framework in both investor and company priorities currently appears to weigh with a small rather than a capital ‘R’.

As the circular economy develops, it is possible that investors will begin to focus in on specific R-strategies, which could include offering preferential financing terms. However, elevating R-strategies to the position of key investment driver will require a significant shift in investor mindset.

Different flavours of corporate structures

In our discussions with investors, many identified the choice of corporate governance as a significant factor in how companies that prioritise positive social and environmental impact might execute their strategy. The ability of innovative company structures to attract investment interest could therefore help guide circular economy entrepreneurs at the earliest stages of business planning.

Alternative Ownership Enterprises (AOE)

Alternative ownership enterprises (AOE) includes a diverse range of structures for a founder to consider when creating a company that places positive impact on an equal or higher footing than maximising profit.

One option is to give ownership to non-investor shareholders, such as employees, which could include splitting economic and governance rights by issuing different share classes. Another option is to give rights to stakeholders irrespective of their ownership or create legal structures that limit the rights normally granted to outside investors. 

Steward Ownership

One well-known type of AOE employs ‘steward ownership’. This structure often involves the creation of a trust or foundation that oversees the company to ensure that positive impact is prioritised. Well known firms such as pharmaceuticals giant Novo Nordisk (the most valuable company in Europe) and outdoor clothing company Patagonia are based on this model.

Steward ownership has two key principles:

  • Self-determination - Control of the company is held by stewards who are directly connected to the company’s operations and not by distant absentee owners.

  • Purpose as the key driver - Profits are generated to serve the purpose and mission of the company.

Steward ownership-type structures lend themselves well to circular economy ventures by allowing companies to preserve their purpose-orientated focus and give this priority over short-term profit. It navigates the issue of founders recognising their need for outside capital but having concerns over retaining control over how their business operates.

One potential obstacle is the time and cost involved in establishing a trust or foundation. Making this process more streamlined could open up the steward ownership model to a larger number of aspiring circular economy enterprise founders. 

Benefit Corporations

Benefit corporations allow founders, directors and managers to pursue a public benefit as well as create shareholder value. This structure broadens out from the traditional strict fiduciary duty of the management to act solely to maximise shareholder value.  

The social or environmental mission is central to the company charter and there is a requirement for an annual benefit report to be produced to demonstrate that the company is acting in line with its mission.

This structure offers access to the full range of financing that traditional companies enjoy. A number of benefit corporations, for example ethical food company Vital Farms, are now listed on the US stock exchange. 

Purpose need not be a barrier to accessing funding or growth

There are many other alternative structures that circular economy companies could consider. The key takeaway is that having purpose as a primary business driver need not be a barrier to accessing funding or achieving growth.

However, for AOEs to develop a significant foothold will require investor perceptions to shift. Many investors will be uncomfortable with the lack of control or influence offered to them under some of these governance structures.

Investors need to be shown how prioritising purpose can offer potential additional benefits from an investment perspective. This systemic change will take time, but as impact investor firms gain greater voice and influence they can help bring the wider investment community into conversations about AOEs, valuing both financial and non-financial returns, and the wider topic of business governance.

Key Issue 02: Investment Landscape

The pace of progress towards the circular economy will be governed in large part by the level of financing that enters this space.

Although the interest rate environment saw investment flows into the Netherlands start-up ecosystem down sharply in 2022 compared with the previous three years, there are encouraging signs that things are picking up, with €525 million raised in venture capital during Q2 of 2023, representing a 25% increase on the first quarter of the year.

Start-up enterprises must usually contend with a lack of personnel, time and other resources when seeking to attract investment, and this is equally true for businesses in the circular economy. However, circular economy companies demonstrate great diversity even within a single industrial sector, offering investors a range of investment propositions. This is well illustrated by the companies in the CIC cohort.

Amsterdam Textiles Pilot Programme

The CIC Cohort

Atalye: A technology-driven fashion company, which uses a 3D body scanner to generate production-ready patterns for clothing that is unique to each individual. 

Atelier Made Here: Provides made-to-order clothing. The made-to-order model avoids surplus stock and helps to raise consumer awareness of the clothing industry’s environmental and social impacts with the aim of helping to drive behavioural changes regarding buying habits and making clothes last longer.

By Rockland:  Produces corporate clothing for hotels, museums, healthcare providers, and other sectors. The company uses sustainable materials and partners with suppliers that share their sustainability values. The company also collects old workwear for recycling or reuse. 

Byewaste: Recycles various goods, including clothing. Individuals use the Byewaste app  to prepare items to be recycled and initiate the collection process. The company collaborates with a network of partners to give these items a second life.

De Steek: Centred around a ‘sewing venue’, teaches individuals the skills necessary to make their own clothes, alongside broader crafting techniques to help create a more sustainable environment for textiles. 

Hollands Wol Collectief: Processes wool from Dutch sheep – which, historically, has been broadly neglected for producing clothes – into material that can be used to make high-quality products that reflect local as well as sustainable elements. 

Martan: Repurposes luxury hotel linen, which would typically be discarded due to minor flaws, which it upcycles to create high-end fashion clothing. This process produces 82% less CO2 and uses 98% less water to create its garments compared with the process of making garments from new organic or even recycled cotton. 

Mended: Extends the lifespan of clothing by offering mending services. The process is centred around Mended’s app, which helps users send clothes for mending rather than throwing them away. Mended is partnering with various brands to increase customer connectivity and loyalty, and support their circularity targets. 

Mumster: An advertising agency that provides a comprehensive array of marketing and advertising services, assisting circular fashion pioneers with custom-designed campaigns to create impactful sustainability brand identities and messaging.

Race Against Waste: Focused on youth education. The company engages with a group of schools in a region to raise awareness about the environmental impact of fast fashion. After an initial workshop, pupils will collect and repair old or damaged textiles, earning points for items that are given a second life. The school with the most points at the end of the programme wins a prize.

The diversity within the CIC cohort extends to the types of challenges each company had faced, ranging from securing premises to gaining traction with customers to developing technology.

The members of the group were also at different levels of development at the inception of the CIC pilot programme, with some yet to have hired any staff or generated any revenue, while others already had offices, employees, and customer contracts in place.

This resulted in a broad spectrum of capital requirements. A number of founders were keen to retain full control and had not sought any external capital. Some companies were at a very early stage in their development and therefore not in a position to engage with formal funding sources such as venture capital, while others were looking for advice on how best to present themselves to such investors.

Venture Capital (VC)

The investor landscape for circular economy companies is not materially different from that which exists for other start-ups and many of the challenges are similar.

Minimum investment thresholds set by VC funds were often in excess of the funding needed by the CIC cohort companies given their business activities and stages of development.

Many VC funds have a preference for tech-enabled enterprises, which they perceive as more capable of scaling-up at speed, with performance ambitions often set at 5-10x returns over the duration of the fund, which is commonly five to seven years. Enterprises with complex physical supply chains and unproven business models – such as many of the early-stage, textile-focused circular economy companies in the CIC cohort – can therefore face additional hurdles in seeking VC funding. Given the opportunities and positive impact potential that exists within the circular economy space, VC funds should look to take a more nuanced approach, which may include a willingness to accept a longer payback period. As discussed above in relation to AOEs, investors assessing enterprises for potential financial returns should be encouraged to do this through a lens which also recognises and values positive non-financial outcomes.

Impact funds mandates that require delivery of both financial and non-financial outcomes clearly provide an opportunity for more flexibility and may permit the consideration of investments that would not traditionally meet the requirements of a VC fund. CIC has seen this in action with the CIC cohort company Martan, which received financing from an impact-orientated funds, following unsuccessful engagement with VC investors.

Angel Investors

Five of the 10 CIC cohort enterprises had secured funding from the angel investor community – individuals who share the vision and passion of the company founder and often seek a return that is not just financial.

However, accessing angel investor communities can be challenging. They are diffuse, which can make them difficult to identify and access. They may also have a narrow range of investment interests that are specific to individual industries or sectors.

The support angel investors can provide is highly varied, but to give a few examples: an angel investor focused on female entrepreneurs can give insight into particular gender-based challenges, an angel investor with a background in retail could assist with ‘go-to-market’ strategies for a consumer-facing business, and an angel investor working in the fashion industry could provide valuable input on design. There are angel investor groups in Amsterdam and more broadly in the Netherlands, including the Netherlands Angel Investment Network and Operator Exchange.

The CIC cohort companies seeking funds were keen to find an investor who could be more than just a source of funds. Both Martan and Mended found angels who were able to help with specific aspects of business development. From the investors’ side, this level of engagement helped them to better monitor company performance in ‘real-time’ to ensure returns, both financial and non-financial, were on track to be delivered.

Some of the CIC cohort were seeking smaller sums of below €50,000, making a first funding round targeting family and friends investors a more appropriate initial strategy.

'Family and friends investors' usually refers to a small group of individuals, often as few as four or five, who each put in a ‘modest’ sum (in investment market terms) to provide a start-up with some capital that can help carry it through to a more substantial funding round at a later stage. This source of investment can provide essential ‘bridging finance’ for companies at a very early stage of development.

Public Funding

In addition to private capital, there are various avenues through which companies can seek public funds. Pools of public funds are available at various levels of government and from international organisations. Navigating this space can be complex but public bodies often have teams to help companies find appropriate sources of capital. Grants are often awarded to recipients whose objectives align with the grant provider. There are also subsidies available, and public funding in the form of loans, guarantees, and even equity, although, as with grants, companies will generally need to meet specific requirements.

Several companies in the CIC cohort made use of public funds: De Steek obtained a local municipality grant, Atelier Made Here was supported by a philanthropic grant, and both Byewaste and Hollands Wol Collectief gained financial support from a public foundation.

Linking private and public capital can be a powerful driver for raising funds. As an example, The Netherlands Enterprise Agency (RVO) provides several financial support mechanisms for business development and expansion. These include SME Innovation Credit, which offers loans with reduced interest rates to innovative smaller companies. The Dutch government offers start-ups certain tax advantages, such enabling foreign employees to benefit from a reduced tax rate on up to 30% of their salary.

Similar policies focused on circular innovations would further enhance the growth of circular economy start-ups. However, as will be discussed below, the difficulty of establishing, measuring, and standardising impact and performance metrics currently makes such initiatives challenging to implement and monitor.

Our exploration of the potential investor base as part of the pilot programme found that while there are funds that have pools of capital dedicated to the circular economy, these are small in number and, in the context of investment markets, small in size.

Takeaways from Interviews with Circular Investors

Discussions with several funds revealed a general belief that the pool of investment opportunities fully committed to circularity was limited in number and scale. In some cases, this had caused fund managers to widen their remit to a broader based ambition around impact.

Issues around investor focus are multi-faceted. For example, one investor that we spoke with is focused on three distinct areas in the textile value chain to help drive the circular economy: use, materials, and technology. While the CIC cohort companies are well aligned thematically, the investor’s remit is the growth equity part of the capital formation journey, so, at the time of assessment, the companies were viewed as being too immature. As the CIC cohort develops, more sources of financing might open up from this type of investor, underscoring the importance of maintaining connections and the benefits of a robust circular innovation ecosystem.

Another investor described their investment process as having a strong commitment to circular economy opportunities with ventures that can show exponential growth. However, they conceded that this had been proving a hard requirement to meet for most companies.

One family office with a heritage in textiles stated that they looked at potential opportunities in this area even if the size of investment would normally be too small for them to consider. This suggests that, similar to angel investors, finding a source of financing that has a connection to the companies’ activities can be helpful.

Policy Considerations

The policy and regulatory framework for circular economy issues is complex, varies between different locations, and is significantly better developed for some R-strategies versus others. For example, legislation governing recycling is well established across many countries. Municipal authorities in some locations have outsourced refuse collection to commercial businesses that have put recycling programmes in place, with different materials to be separated by the consumer before collection. However, this process of separation by residents is generally not mandated, it is merely encouraged.

For other R-strategies, however, there is little-to-no guidance for companies or consumers. Government policies will not change consumer behaviour on their own, but they can help raise awareness and encourage the wider adoption of circular economy practices. Policy changes, allied to shifts in consumer behaviour and expectations, can help drive demand for businesses to implement circular economy business models. This may ultimately lead to a ‘virtuous cycle’ of change that provides a more attractive circular economy investment landscape for investors of all kinds and grows circular innovation activity among the business community across all sectors of the economy.

Systemic change, supported or encouraged by governmental policy intervention, is required to create a framework that will encourage greater business development in the circular economy and engage investors in a deeper understanding and commitment to the area. For example, the Dutch government significantly contributes to nurturing the general start-up environment by offering financial assistance, tax incentives, and other benefits to entrepreneurs.

Behavioural Shifts

Policy implementation is just a first step in systemic change. For these policies to have a meaningful impact will require a mindset shift among business owners, investors, and consumers. Explicit targets or mandatory regulation around R-strategies is one route, but there is also evidence that suggests creating conditions that encourage or ‘nudge’ consumers and businesses to change their behavioural patterns is highly effective. A combination of these two pathways to change may prove the most successful approach.

CIC cohort company combination of education and competition to raise awareness among children about the environmental impacts of fast fashion is one example of how the nudge principle can be creatively applied.

By providing a framework for understanding the adverse impacts of fast fashion and a ‘throwaway culture’, and using gamification to encourage students to help reverse these trends, the programme is changing wasteful behaviours by making it fun. Interactions between the young participants and their parents is an added layer of spreading the environmental messages. The programme has proved very successful. It has been widely adopted across the Netherlands and has begun expanding into other countries.

Key Issue 03: Impact Measurement

While the potential benefits of transitioning to a circular economy seem clear, effectively measuring the impact of circular economy enterprises, particularly in the start-up stage, remains a major challenge. 

The Global Impact Investing Network (GIIN) notes that investors are becoming more sophisticated in their impact measurement and management approaches, with 46% of investors setting quantitative impact targets at various levels and assessing their impact performance at least once a year (see Figure 02: Measuring Investment Impact).

This trend holds true for investment management firms and, importantly, for end-investors into funds such as foundations, family offices, and endowments. In addition to impact measurement being used to inform investment decisions, investors are increasingly integrating impact targets into investment terms and using third-party verification to ensure compliance with agreed impact practices.

Investors take a variety of approaches to measuring the impact of companies in their portfolios. This lack of standardisation creates significant challenges: metrics are often unclear, terminology and definitions are inconsistent, and auditing the data is complex. An additional difficulty is how to create comparable performance indicators across vastly different fields of activity.

As the UK’s Impact Investing Institute points out, “there is no single way to measure impact - there are many helpful approaches, processes and frameworks, but no silver bullet. It is important to measure impact well, but almost impossible to measure it perfectly. Aim for good.”

Establishing Objectives

The first step is to establish clear targets that businesses can understand and that are realistic with respect to their development stage. This target setting can be an iterative process and might involve creating a series of intermediate goals on the path towards achieving a more ambitious one. 

There are likely to be several outcomes that an investor is seeking from a company, and these should also be clearly established between the parties at an early stage. Understanding how these outcomes might interlink or influence each other is crucial. For example, changing the materials used in the production process might result in lower transport costs and carbon emissions. There must be a willingness to employ dynamic prioritisation as circumstances change. Investors and businesses should clarify if certain business activities or operations are linked to particular outcomes. 

It is also important to consider how associated parties and other stakeholders could help or hinder the process of achieving the desired outcomes – for example, the impact of Scope 3 emissions related to a company’s supply chain. A report sponsored by the Dutch government explores some of the issues and solutions in addressing Scope 3, but similar issues exist in many other areas of impact measurement.

Measurement Challenges

In addition to clearly identifying and delineating outcomes, companies and investors must also grapple with the thorny issue of how to measure impact. This must include consideration of what is possible, what is practical, and what is meaningful. Cost, resource availability (including personnel and time), materiality, and assessment are just some of the factors that feed into these considerations. 

Cost and capability are particularly pertinent in the context of start-up companies. For example, one obvious metric is reducing carbon emissions through the setting of time-based targets. However, this requires a company to establish its baseline emissions, implement actions that will result in reductions, and regularly measure progress against targets.

To do this in a credible way involves, at a minimum, robust data collection and analysis and a carbon audit by an outside organisation. This will be prohibitively burdensome for many start-ups, which are generally operating with limited resources, and need to focus their time and attention on business development. Investors and enterprises should work together to identify realistic impact performance indicators and understand that these can evolve alongside business growth.

Investors and companies should also establish how the various impact metrics will be measured – for example, whether to adopt lagging or leading metrics or a combination of the two. 

CIC cohort enterprise Martan notes in various company materials that it uses 98% less water to produce its textiles compared with conventional processes. One alternative to comparing its performance to an industry-wide average would be to state its own water use per unit at the commencement of its operations and then compare its water use per unit over time to this baseline. Each approach has its merits and limitations, but the key is for those who wish to assess these performance indicators to understand how and why they have been adopted and what they show about the firm’s impact and performance.

While investors are generally more comfortable with quantitative metrics, the value of qualitative metrics should not be discounted. Provided a rigorous collection procedure is adopted, surveys or customer feedback channels to gather opinions on company operations or improvement initiatives can form a useful part of impact assessments. Such data can help to show investors and the company’s wider group of stakeholders, such as business partners and customers, that impact is being achieved. 

The use of technology for data collection and analysis, such as emissions measurement software, can facilitate better reporting, particularly for start-ups with limited resources and time. Impact measurement and reporting-related incentives or subsidies could also help make the process easier and more widespread. 

At a higher level, accelerating efforts to harmonise impact-related metrics, standards, and guidance within and across industry sectors and geographical boundaries will play a crucial part in encouraging greater private capital flows into circular economy and other sustainability-focused enterprises.

During the course of our research, one investor commented,

“investors committed to advancing the circular economy recognise the critical role of precise impact measurement in investment decisions.

Setting clear, quantitative impact goals and periodically assessing these through key metrics, not only enables us to understand the immediate benefits, but also to align our financial objectives with sustainable practices moving forward.

This approach aids in decision-making and ensures that our investments contribute in a tangible way to environmental and social goals, which can enhance our portfolio's value and appeal to a broad range of end-investors.”

Return Expectations

With a robust process for identifying outcomes, assessing initiatives designed to achieve these outcomes with the aim of continuously improving performance, and measuring impact using clear metrics, investors can evaluate whether and to what extent the funds they have deployed are resulting in positive change. 

A common key issue for investors is whether making impact the primary business objective will act as a drag on financial returns and, if this proves to be the case, the degree to which they are willing to compromise on financial performance in return for positive environmental and social impact. 

There is a large amount of academic research on the relationship between these two variables.

There is also useful research available on the performance of impact funds versus conventional VC funds and public markets. One recent study found that impact funds were less sensitive – in investment terms, had a lower beta – than VC funds to movements in public markets. The study also found that although impact funds modestly underperformed public markets over the 20-year analysis period, they almost exactly matched the performance of an appropriately comparable group of VC funds. In simple terms, the impact funds delivered a similar investment performance with a lower risk (volatility) profile than the VC funds.

While investors and fund managers will each have their own risk, return, and impact requirements, an important takeaway from this research is that prioritising impact does not have to come at the cost of lower financial returns. As the research suggests, it could even potentially have an overall positive effect on financial performance, particularly over the longer term. 

Inevitably, there will be cases where the desire to have a highly positive impact will see circular economy enterprises willing to accept a lower level of financial return (e.g., using higher cost materials or processing techniques to minimise their carbon footprint). Over time, wider awareness and understanding of the benefits and necessity of the circular economy should help grow the pool of investors that are willing to consider investing on this basis.

For now, however, this group of enterprises may need to step away from the VC-backed approach to funding, at least in part, and make use of grants or philanthropic capital as a cornerstone. There are also growing opportunities to pursue a ‘third way’ through blended finance and other innovative funding structures that bring together public and private sector capital.

Innovations in funding structures and choice of business models are well represented in the sustainability space.

Bridging the Gaps for a Brighter Future

This article has explored the dynamics of investing in circular economy enterprises, particularly start-ups and those in the early stages of development. 

For these companies to thrive and proliferate as part of the transition to a more sustainable future will require greater investment flows into the sector. There are growing opportunities for the VC community in this space, with good potential for early movers to realise benefits from tapping into new economic sectors with considerable future growth prospects. Of equal importance, investing in businesses that aim to have a positive impact, including through employing R-strategies, does not have to mean comprising on investment returns.    

For the CIC cohort, it is too early to determine the extent to which their business models and ‘purpose-led’ objectives are influencing their financial performance. Where the companies had sought or had already received external investment capital, no explicit return profiles had been established. The investors in the companies undertook their own assessments and drew their own conclusions as to expected and acceptable investment returns.  

There is still significant work to do in bridging the gaps in knowledge, capabilities and priorities that exist among and between circular innovation companies and the investment community. As the 10 companies in the CIC Amsterdam pilot programme illustrate, great diversity exists in terms of area of focus, strategies employed, and funding requirements within just one sector of the economy – in this instance, textiles.  CIC is building greater awareness and understanding of the value and importance of the circular economy to help close these gaps.

Bringing the financial and sustainable business communities together in innovative ways is growing in scale and ambition as environmental and social imperatives create greater urgency for change.

NetZeroCities is a groundbreaking, large-scale, EU-funded initiative to provide wide-ranging technical support to 112 cities across Europe, both within and outside the EU, to help ensure they achieve their 2030 net zero ambitions. 

Funding is a critical part of this process. The Climate City Capital Hub (Capital Hub) is a first-of-its-kind funding facility that will bring public and private funding sources together to provide capital for net zero projects in the participating cities. Funders can access the Capital Hub and identify specific projects they wish to support through investment. 

The Capital Hub will help catalyse financial support to SMEs and start-ups that are focused on net zero activities, with VC funds and other providers of early-stage capital accessing the Hub to explore potential investment opportunities in young companies. This could help create a ‘ripple effect’ that sees greater levels of interest and investment in circular economy ventures. VC funds should be encouraged to engage with such initiatives to gain a better understanding of the growing number of excellent opportunities in the sustainability and climate change-related space.

The circular economy has a crucial role to play in successfully tackling climate change and finding meaningful solutions to other environmental and social challenges. Greater engagement and investment by investors of all types can accelerate positive material change that will benefit people and the planet.