According to the latest Crunchbase data, U.S. startup funding is on the rise, up from $18 billion in the last quarter of 2016 to $21 billion in the first quarter of this year. While hefty recent IPOs like Snap’s and Instacart’s grab headlines, smaller companies in quieter industries are snagging a lot of investment right now. These startups are chipping away at problems like cancer screening, zero-emission mass transit, and deadly infectious diseases. To do that, they’ve all had to find investors willing to back innovation in difficult, often slow-moving, not-so-flashy fields. I recently asked a few of them to share why they prefer to invest in the tough stuff.
Because Everyone Deserves A Decent Tech Education
Reach Capital invests in companies that are trying to democratize educational access, according to the firm’s cofounder and general partner, Jennifer Carolan. “Given today’s high-tech, globalized economy, it seems obvious that high school kids from low-income backgrounds ought to have access to computer science courses,” she told me. “Yet, that’s not the case–access to coursework is often correlated to family income level. We invest in companies that make access to coding more equitable. The change is needed for our collective future, and that’s why I’m this kind of investor.”
Carolan says that 53% of children served by Reach Capital’s portfolio currently come from low-income backgrounds. A former U.S. history teacher, she says the investment community seems reluctant to tackle this problem. “The hard part is counteracting this outdated notion by some that the business world is binary–either high-impact, mission-driven companies or great, profitable businesses.”
“This is a false dichotomy,” Carolan says, “and in fact, companies without a soul will be the ones that miss out on business opportunities and recruiting the next generation of talent that cares deeply about social issues.”
Because Construction Needs To Be Safer And More Sustainable
Darren Bechtel, founder and managing partner of Brick & Mortar Ventures, grew up on construction sites in his family’s business. “Historically, construction has ranked in dead last on the list of IT spend per industry,” he says, “despite topping the list of industries when it comes to the sheer amount of data handled and exchanged–both internally and externally with third parties.” To Bechtel, “this is shocking,” not least because “society needs better ways to make construction much safer for workers and much better for the environment.”
As an investor in the space, Bechtel is excited by the “opportunity financially to bring construction out of the dark and save lives and the environment.” Globally, construction is a $10 trillion sector, according to McKinsey researchers, yet its productivity has remained flat for decades. Worse, the industry is right up there with fashion as a polluter. By one recent estimate, construction accounts for a sixth of global freshwater consumption and a quarter of wood consumption, and contributes a quarter of global waste. Bechtel adds that the rates of death in the sector’s labor force are widely underreported.
“Only very recently, with the proliferation of mobile devices, connectivity, and industrial-scale IoT [internet of things] has it even been possible to bring technology to a construction job site,” he says. But Bechtel says this has enormous potential to change things for the better, including “increased efficiency of resource deployment, safety, and overall productivity”–all reasons why he’s as excited as ever about the space.
Because Governments Need The Tools To Get Things Done
Guess who commissions a lot of construction? The government. Ron Bouganim, founder and managing partner of Govtech Fund, says there are three reasons why his early-stage fund focuses on software built for government agencies to do seemingly drab work–from health inspections to municipal bond issuance.
“First, regardless of whether one thinks we should have more government or less government, the fact is we have one,” Bouganim points out. “We just think it should be more efficient and effective. Second, he says, the software products he backs are “mission critical,” not just entertaining apps that people can afford to live without. “As a society, we simply can’t have our police officers, for example, use software that is outdated or broken–literally people’s lives are at risk.”
Bouganim knows as well as anyone that government agencies are typically beset by red tape, slow sales cycles, and legacy vendors–all of which make it a tough industry in which to make an impact. But “a whole new wave of startups has emerged in the past few years that leverage the cloud, build products–not contracted custom services–and are an order of magnitude less expensive than these legacy vendors. And,” he adds, “that’s the third reason: We can make money.”
Bouganim estimates that governments around the world together spend $400 billion a year on technology. “That’s trillions in custom-built legacy systems over the past few decades that need to be replaced,” he says. And in his view, “startups are the best vehicle we have as a society to deliver innovation at scale, so why not tackle the glue at the very center of it all: government.”
Because So Many Diseases Still Need Curing
Developing new medicines is another “glacier-pace,” capital-intensive enterprise. According to Tracy Saxton, managing partner at Pivotal bioVenture Partners, it typically takes “12-15 years and $2.6 billion to confirm the hypothesis [and] to understand whether you have a viable drug that you can take to the FDA for approval.” But even after that’s secured, it “doesn’t make the drug successful–you have to educate physicians, sometimes change the practice of medicine, do real-world studies,” she explains. “Last–and definitely not least in our current environment–you have to figure out who will pay for it.”
Biotech may be booming, but these barriers to entry still loom large. Even for someone like Saxton, who holds a holds a PhD in molecular and medical genetics, there’s no guarantee of success in such a difficult, long-tail industry. But she doesn’t hesitate when I ask her why she’s so passionate about the sector.
“[When] scientists and physicians bring a drug to the market, we are helping patients and their families. I don’t wake up in the morning and ask myself if what I do is important or if it makes a difference in the world. I know it.”
Beck Bamberger founded BAM Communications in 2008 and writes regularly for Forbes, Inc., and The Huffington Post about entrepreneurship, public relations, and culture.