The ESG Napkin — A framework to help founders build human first companies
Much has already been written about ”why” the ESG focus will help companies create value: An increasing body of research shows a positive link between ESG performance and financial performance, recruiting and retaining talent is remarkably easier, regulations will growingly penalize ESG breaches on several parameters, consumers will choose brands who take their impact seriously, and investors both early- and later stage will look for ESG impact in pitches and formulate ESG goals for their portfolios. So, let’s just say the why is a given.
Yet, there is no gold standard or off-the-shelf framework for how and where to get started — especially for startups in the early stages of their growth as research tends to focus on later-stage and public companies.
Not least the number of ESG frameworks is growing by the day, and navigating the array of potential ESG-criteria is like getting through a Chinese menu as we concluded in our recent Panel debate. This is diluting efforts and making it hard for founders to direct their resources into the right focus areas while also trying to get a company off the ground.
At PreSeed Ventures we decided to do something about that.
With the ambition to help early-stage tech companies to get a grasp on how they can start working with different ESG factors, we decided to develop a tailor-made framework.
We started out by investigating our own experience from investing in +400 startups at the pre-seed/early seed stage and interviewed a series of founders in our portfolio about their experiences with implementing ESG practices and processes. Drawing from this combined with elements from existing frameworks and guides, we’ve developed The ESG Napkin.
The Napkin is an inspiration for where to start and what startup founders should focus on in their ESG efforts at the MVP, pre-seed, and seed stage.
How to use the ESG Napkin
The Napkin is on the left side split into four sections, which are all key areas to focus on while building a startup, thus also the areas where decisions have a direct correlation with both the negative and positive impacts of the startup. The four areas are:
How do you build the right team to succeed with your startups’ mission and what structures to put in place to ensure the best possible development and culture.
What product/service are you developing, what is your MVP and how does it grow from the early days to a full suite.
Which customers are you serving with your product at what market.
How is your company set up and how do you finance your company growth.
Further, the napkin is at the top divided into the first 3 maturity phases of startup growth. These are:
MVP and founder team formation
This is the early, early days when you’re gathering the founding team, still pivoting around to find the optimal solution fit to the problem you’re solving, and hustling and charming your way to some customer feedback. At this stage, you’re probably also bootstrapping your startup or maybe been lucky enough to receive an equity-free grant but either way, resources are very few.
By now you have a sellable product, have on-boarded the first couple of customers/users, and are probably excited to be hiring and extending your team. At this stage, you probably are or have already raised your first round be it from business angels or an early-stage fund like PSV and you’re putting the EUR 0,3–1m to good use growing your resources.
Now you have a proper product, a proper sales model, and multiple customers/users and you have likely also filled a couple of more seats in your C-level team, as you now need experienced and more senior competencies to handle your growing numbers. At this stage, you probably have or are raising your seed round of EUR 1–3m and the growing team gives you a lot more resources and bandwidth in the organisation.
Along these two axes, the napkin outlines 10 key ESG areas or themes within the team, product, market, and legal sections. These 10 ESG themes emerged during our interviews with startup founders and experts on ESG matters and they clearly stood out as the most vital to look at if you as an early-stage tech company want to move the needle on ESG matters.
Under each of the 10 themes, the napkin identifies the most important ESG factors and KPIs within each maturity stage. These are the essence of the Napkin and are individually addressed later in this article.
The ESG structure debt
Before diving into these we would like to share a few thoughts about the split into different maturity phases. The idea behind the different maturity stages is that the amount of resources you have available changes as your company develops and matures. It grows from being just the 2–3 founders that have to do everything to normally a 5–10 person team at pre-seed, where you can start to take on a bit more and up to a 10–20 person team at seed stage, which means a lot more hands on deck and as a founder you’re probably also starting to delegate work to a higher degree.
With the very high strain on resources in the really early days you could argue that the ESG work should wait to a later stage. But during our research, we found that the amount of work you need to put into fixing what we call ESG structure debt also increases dramatically as you’re growing your number of customers, users, employees, suppliers, etc. It’s just like technical debt — if you’re building and growing your software product on a crab code foundation, it becomes increasingly difficult to fix it at a later stage. It becomes too entangled. So waiting too long to begin the work with ESG factors at your startup is not recommendable, nor a viable strategy.
Rather our advice is, that you start early but you start small. That way you respect the extremely limited resources available in the early days but you still start building your company’s ESG foundation in the right way.
Remember, it’s not about being perfect. In fact, you’ll never build a tribe of excited fans that way. Is our ESG napkin perfect? Absolutely not. Is it static? No. We are constantly evolving and learning on the way. But we have to start somewhere. And we strongly advise founders to do the same.
At our PSV Academy, we get real-life founders on stage, who dish out of their experiences and expertise on urgent topics for tech startups. You might spare yourself the hassle of a few ESG fuck-ups, by listening to our ToolTalk, where Investment Director Alexander Viterbo-Horten is introducing you to ESG for tech startups and Chris Christiansen, is telling all about how they have worked actively with ESG from the beginning at Nøie.
Fact is, no matter how small the baby steps, newly founded tech companies, who take their impact seriously from the beginning, will flourish in the long run and make a huge difference to the future we’re all going to live in.