Climate Capital Stack
Learn about alternative sources of capital for startups.
Fundraising for Climate Startups
Perspectives on the Selection Criteria for Climate Tech Venture Capital
Su$tainable Mobility: The Founder's Guide to Hacking Debt
The Case for Structured Capital
The $60B global climate finance startup
The bridge to bankability is still under construction
Who are the climate tech VCs?
Unlocking alternative climate asset classes with Keyframe Capital
Buckle up, it’s time to scale: a CAPEX financing guide for hardware climate tech companies
How much Venture Debt a startup can get?
Buckle up, it’s time to scale: a CAPEX financing guide for hardware climate tech companies
Breaking down IRA’s tax (credit) breaks
Banking on green financing
The Traditional Funding Cycle Doesn't Work for Climate Tech
Non-dilutive funding (NDF) is financing that startups can leverage to receive money without giving equity in return, making this an attractive tool for risky or hardware-based solutions. For climate tech startups, this usually takes the form of grants or debt (often concessional), but also includes incentives or private contributions.I connected with Joel Armin-Hoiland, CEO and Founder of Climate Finance Solutions, to dive deeper into NDF, when startups should consider NDF, and what startups should think about when looking at NDF.When should startups consider NDF?NDF will be appropriate for most climate tech startups. However, before pursuing NDF sources, startups should create an integrated funding strategy that will enable them to understand how to most effectively leverage both equity and non-dilutive funding.In order to develop the NDF portion of an integrated funding strategy, startups need to:- Understand the funding needs and priorities implicated in their technology roadmap and commercialization plan.
- Map the non-dilutive funding ecosystem by: (1) understanding all of the different funding buckets from which they can secure funding; (2) doing a comprehensive survey of the NDF ecosystem; (3) assessing the highest priority opportunities; and (4) downselecting opportunities based on fit with technology and commercialization funding priorities.
- Compare the available non-dilutive funding opportunities to their roadmap and assess where there is available NDF and where equity investment may be needed, and use that to create an integrated funding strategy and comprehensive business plan.Startups may look towards NDF for a variety of reasons:- NDF provides patient, risk-tolerant capital. In many cases, NDF may be a better fit for climate tech hardware companies’ timelines than equity.
- NDF assists startups that are equity fundraising, helping startups attract investors, securing better terms, and decreasing the amount of equity financing needed. On the investor side, NDF provides key technical validation and risk mitigation.
- Higher risk technologies can leverage non-dilutive funding to support R&D.
- NDF can help startups bridge climate tech’s four valleys of death where equity investment may not be available.
- Startups are more likely to succeed when they secure NDF.Who is eligible?Most climate startups are eligible for non-dilutive funding. Different opportunities and funders have varying eligibility requirements, from the type of entity that can apply, the technology or sector focus, stage of technology development or commercialization, and geographic region. This wide range of requirements one of the reasons that it is so important to take a comprehensive view of the NDF ecosystem before pursuing funding.Generally speaking, public funding (i.e., government funding) is more accessible to startups and private sector companies. It is also by far the largest source of funding. The biggest trend in NDF for climate in the past few years has been the dramatic increase in the availability of public funding for climate startups and climate solutions. Philanthropic funding has historically been directed more toward nonprofit and academic entities, but is starting to become more available to startups, particularly at early stages.What are the different types or stages of NDF?There are different types and sources of NDF that are available at various stages of a company’s or technology’s development. Below is an overview of the different types of grants available at each stage, what they are used for, and some examples of funders that offer those types of grants:- Basic or foundational research. Key sources include federal grants and philanthropy.
- Early company creation/spinouts. Key sources include federal and state grants, philanthropy, and non-profits like Breakthrough Energy Fellows.
- Applied R&D, stages of proving technical feasibility. Key sources include state grants (e.g., California Energy Commission) and federal grants (e.g., US Dept of Energy, National Science Foundation, ARPA-E, USDA, and others – including SBIR programs).
- Technology demonstration and deployment (early pilots). Key sources include state grants and (to a lesser, but growing, degree) federal grants.
- Commercialization funding. Key sources include state programs (e.g., CEC BRIDGE), Federal grants (e.g., ARPA-E SCALEUP), public loan guarantees (e.g., DOE Loan Programs Office), and blended finance (e.g., Breakthrough Energy Catalyst).What should startups think about when pursuing NDF?NDF can be an incredibly valuable source of funding for climate tech startups. However, pursuing NDF, specifically grant funding, can be complex and time consuming. It’s easy to get disqualified and it takes some experience to really understand exactly what the funders are looking for. All of the context that you need to submit the best application not not always be in the RFP or solicitation. It’s also difficult to simply navigate the NDF ecosystem, understand what’s out there, and identify the right opportunities. Post-award management can also be complicated. Carefully budgeting and scoping out the work can make post-award management and reporting easier. With all of this complexity, it can be helpful to secure knowledgeable support in developing strategy, identifying opportunities, and pursuing funding.If a startup develops a NDF ecosystem map and an integrated funding strategy, ensures that the funding opportunities that it applies to are well-aligned with its technology roadmap and commercialization plan, it can both give itself the best chance of securing funding and ensure that its implementation of the project will be successful.For more info on Climate Finance Solutions.Other Resources:
- Supercharging Climate Tech by Unifying Equity Investment and Non-Dilutive Funding
- Should My Climate Tech Company Apply for a SBIR?
Climate Tech Finance (CTF) seeks to reduce greenhouse gases by accelerating climate technology commercialization.The program offers a loan guarantee that increases access to capital for climate entrepreneurs and decreases risk for climate lenders. This financial product is provided through a partnership between the Bay Area Air Quality Management District (BAAQMD) and the California Infrastructure and Economic Development Bank (IBank), with close collaboration with Financial Development Corporations (FDCs) throughout California.I connected with Tamara Kohne, Project Lead at Climate Tech Finance, to dive deeper into loan guarantees, when startups should consider loan guarantees, and what startups should consider when looking at loan guarantees.When should startups come to you and why?TK: Climate Tech Finance helps startups and early-stage companies successfully transition from demonstration and pilot projects into customer-building and market growth.If a startup or early-stage company is interested in exploring debt financing, we encourage them to reach out to discuss the Climate Tech Finance loan guarantee.Generally, startup clients will already have completed one or more equity investment rounds and are looking for non-dilutive financing to complement the equity infusions.What is the use of this capital?TK: The Climate Tech Finance Loan Guarantee can support a variety of loans. Financing may be used for start-up costs, construction, inventory, working capital, business expansion, agriculture, lines of credit, and more.During the application process, it is important to clearly state the financing request amount, the requested structure (i.e., term loan, line of credit), use of funds (i.e., acquire equipment, provide working capital, etc.), and what the project will do for the company (i.e., increase production, complete project, etc.)Who is eligible?TK: Climate Tech Finance provides loan guarantees to climate tech companies that are doing business in the State of California.The company must be a small business of 1-750 employees with some operations in California.Climate technology is defined as a product or service that has or supports one or more of the following actions:- Reduce or eliminate greenhouse gas emissions
- Sequester carbon to prevent it from entering the atmosphere
- Remove greenhouse gases from the atmosphereWhat is the process like?TK: To be approved for a Climate Tech Finance Loan Guarantee, works with BAAQMD to complete an Impact Evaluation that reviews the proposed technology, its greenhouse gas reduction potential, and its racial and social equity impacts. Applicants that complete the Impact Evaluation receive an accompanying Letter of Qualification that signifies approval of a Climate Tech Finance Loan Guarantee.The Climate Tech Finance team works actively with the startup to find appropriate lenders and assist with the financing process.Once a loan is ready for funding, a Financial Development Corporation (FDC) reviews the proposed loan through its internal loan committee. It prepares a request for loan approval, summarizing the loan information, the proposed use of proceeds, and fee information. IBank verifies this request, once approved by the FDC, to ensure the loan guarantee’s compliance.What is the fee structure like? What is the cost of capital? How should startups think about pricing? What are the additional terms that are noteworthy?- Maximum guarantee amount: $5 million
- Maximum loan amount: $20 million
- Up to 80% of a loan can be guaranteed
- Guarantee term: Up to 7 years
- Interest rate and qualifications determined by each lender
- One-time origination fee of 2.5-3% of the loan guarantee amount at closingWhat are the pros/cons?Pros:
- Easier to secure a loan: IBank’s loan guarantees can pay lenders up to 80% of a small business’s outstanding loan if a small business is unable to pay. By guaranteeing loans, IBank gives lenders the confidence they need to issue loans to small businesses that otherwise struggle to access capital.
- De-risk climate loans: BAAQMD’s Impact Evaluation for each company assesses the technology readiness, maintenance, and risks and validates anticipated emissions reduction.Cons:
- Need to satisfy lender criteria: Credit qualifications are based on individual lender criteria.For more info on loan guarantees with ClimateTech Finance.
Revenue Based Financing
Revenue Based Financing (RBF) is a corporate finance product (as opposed to project finance) used to assist business growth. RBF provides debt capital to a business in exchange for a share of revenue for either a fixed term or until a cap is met. Borrowers often make monthly payments based on a proportion of gross cash receipts.I connected with Dimitry Gershenson, CEO and Co-Founder of Enduring Planet, to dive deeper into RBF, when startups should consider RBF, and what startups should consider when looking at RBF.When should startups consider RBF?A startup might look at RBF in 3 scenarios:- If actively raising a venture round and trying to minimize dilution.
- In between rounds, as a means of increasing growth and thus getting a higher valuation later.
- Outside of the VC dynamic, for funding to support demand/growth.Generally, RBF is used to directly impact near-term revenue (sales, marketing, BD, etc.) but can be used by early-stage companies to purchase inventory, invest in new equipment, etc.What are the benefits of RBF?RBF, compared to other financings, is:- Entirely Non-Dilutive: Typically RBF loans do NOT include any dilutive provisions (warrants, etc.)
- (Typically) Unsecured: RBF loans generally do not require collateral or personal guarantees, and don’t include other complex forms of security or complex covenants (like traditional collateralized loans).
- Faster: With Enduring Planet, founders can receive term sheets within a week and investment in as little as 30 days. These timelines vary by lender but are generally much faster than other forms of business debt/credit.
- Streamlined: The legal documents and the underwriting process are simpler, making it easier on founders (less time spent in diligence) and reducing the overall cost of raising (lower legal fees).
- Flexible: Payments are directly related to topline revenue, meaning that a company pays less during a bad month.Who is eligible?Eligibility varies depending on the lender, but common criteria lenders pay attention to include:- Consistent + growing revenue
- Strong gross margins
- RunwayRBF is generally limited to post-revenue companies with healthy gross margins (> 30%).What is the process for a startup to apply for RBF?The process varies depending on the lender, but generally, lenders will ask for financial documentation and access to banking (and sometimes accounting/commerce platforms as well) before receiving a term sheet, if eligible. If the financier uses automation in their underwriting, the whole process should take a few weeks. Otherwise, it can take up to 2 months – and in this case, businesses should be mindful of how much time this can take compared to the amount of runway they will receive.When talking to RBF providers, what should a startup pay attention to?The question every startup should be trying to figure out is: how is the lender projecting future revenue and how does that compare to internal projections? To answer this question, there is nothing to lose, but everything to gain by asking the lender for their model, such that one can understand the lender’s assumptions, business performance expectations, and IRR.Other than assessing a lender’s model, below are questions businesses should ask of their prospective lender:- How long does the process take to receive a term sheet?
- What other value is provided, outside of capital (network, operations support, etc.)?
- Is there mission/vision alignment?
- Are there easy buy-out provisions or refinancing provisions?
- Is there a cap on repayments or a term on the RBF, or both?
- What is the fee structure (origination, legal, etc.)? Is the fee structure transparent?
- What is the effective cost of capital? What is this based on?
- Is there downside protection for lender?Who else is providing RBF?In addition to Enduring Planet, some other RBF lenders include Lighter Capital, Decathlon Capital, and Calm Capital Fund.One thing to note is that while Pipe looks similar to RBF, Pipe is actually a different product, Factoring. Unlike RBF, which provides debt against revenue, Factoring entails pre-buying contracts. The risk involved in this is that if a contract is cancelled, the borrower is expected to replace it with another contract (or multiple contracts) of equal value.For more info on RBF with Enduring Planet.
LACI Cleantech Debt Fund
Launching a first-of-its-kind green loan program to help scale early-stage cleantech firms and speed up equitable climate action, the Los Angeles Cleantech Incubator (LACI) debuted their scaled debt fund earlier in 2022. For startups that require funding to support their first client orders or working capital to scale their operations, the debt fund will offer loans as a non-dilutive substitute for venture capital. The LACI Cleantech Debt Fund will not need founders’ personal collateral or their personal credit scores for underwriting, in contrast to most conventional bank loans.I connected with Hyder Shuja, Senior Manager of the LACI Cleantech Debt Fund, to dive deeper into eligibility, when this capital should be leveraged, offerings, and considerations to think about.Who is eligible?HS: Startups who are alumni (or have completed six months of curriculum) of LACI’s Incubator or Market Access Programs are eligible through LACI. Additionally, portfolio companies of partner incubators (Greentown, Evergreen, and New Energy Nexus), as well as CalSeed or CalTestBed participants will also be eligible. However, anyone coming from a partner incubator must be nominated by their respective incubators first.What is the use of this capital?HS: We have two products that we’re offering. 1) Our First Customer Financing loan is designed for startups with an executed pilot or project agreement for which they need bridge financing. This is for startups that are pre-revenue or find themselves in gap periods between grant programs or their first round of customers. 2) Our Working Capital loan is for startups that are a little further along in their development, making $100,000/year or averaging $10K/month revenue, or at least showing strong signs of traction towards those milestones. The Working Capital loan can cover payroll, inventory, supplies, and a wide variety of business expenses.When should startups come to you, and why?HS: Startups should come to us if they’re participating (or have participated) in our Incubation or Market access programs; or if they’ve been nominated by one of our incubator partners. We are looking for businesses involved in these programs because they tend to be de-risked through a wide variety of support services and resources.What is the process like?HS: Applicants will start by contacting their respective incubator points of contact (Hyder Shuja with LACI, Jackie Firsty with Greentown Labs, Ian Adams with Evergreen Climate Innovations, and Christina Borsum with New Energy Nexus). They will then undergo an initial screening to determine if they align with our impact goals and are financially ready to pay back a loan in the projected time period. If there is a potential fit, they will begin the application process and be introduced to our lending partner. The due diligence process can go as quickly or slowly as the applicant chooses. If there is a well-established data room, we can move much faster to secure the loan. The process takes 4-6 weeks from the beginning to a final decision. Once due diligence is completed, we’ll collect closing documentation and move to fund.What is the fee structure like? What is the cost of capital? How should startups think about pricing? What are the additional terms that are noteworthy?HS: The interest rate of both loans is 9%, and there is a 1.5% closing cost for the loan. It’s essential to recognize that debt sits on the balance sheet and is a more concrete payback structure than equity. However, loans are non-dilutive and allow founders to maintain more ownership of their companies. Most startups cannot access cheaper bank capital, so compared to other products out there, this tends to be more affordable.What are the pros/cons?Pros
- No founder dilution
- No prepayment penalty
- No credit requirements/minimum credit score
- No personal guarantee requirements
- Allows project-based financing without taking on large raise cyclesCons
- It sits on the balance sheet as a liability
- Will be liquidated before equity if the business files for bankruptcy
- Smaller check sizes compared to equity raisesFor more info on LACI.
Asset Backed Lending
Asset Backed Lending (ABL) provides capital backed by revenue-creating assets, such as hardware or receivables. Unlike traditional venture debt, asset-backed lending is differentiated by the nature of its security. Since the assets that back the lending can be sold or transferred should a business be unable to pay its obligations, ABL can provide more capital than traditional venture debt, in some cases. And, of course, like all forms of debt, ABL requires only warrants for equity in most cases – far less than is ever required in traditional equity financing.I connected with Mark Paris, Managing Partner of Third Sphere’s credit platform, to dive deeper into ABL, when startups should consider ABL, and what startups should consider when looking at ABL.When should startups consider ABL, and what can ABL be used for?MP: ABL is typically used to help solve cash flow problems. That said, ABL can be used for a variety of things:- Acquiring assets
- Inventory or equipment finance
- Solving supply chain problems
- Stand-alone financing for specific uses – such as project financeWhat are the benefits of ABL?MP: ABL, when compared to other debt, is:- Cheaper: Cost of capital is cheaper when compared to equity (which was the only game in town for early-stage startups for decades) when looking at the implied return rate (10%-20%) and is adjusted according to the risk of the actual investment.
- Flexible: Loans can be used for a variety of things.
- Structure: Loans can range from six months to five years, typically and there are many different ways to reduce stress on a startup’s liquidity – from delaying initial payments for a period of time (known as PIK), to creating aligned structures where the lender takes risk for upside benefit, incentivizing refinancings for a lower cost of capital, etcSince ABL is tied to assets as much as anything, as assets grow (or are expected to grow) the ABL facility can grow with the startup – thereby increasing the amount of capital available and saving time and trouble of doing a new search for capital.ABL can often be used to unlock specific types of growth, like Buy Now, Pay Later (BNPL). When it comes to climate action, ABL can help startup customers to avoid technology or cash flow risks by getting access to emerging climate solutions now, while sharing risk with lenders and/or the startup.Who is eligible?MP: Eligibility varies depending on the lender, but common criteria lenders pay attention to include:- Revenue (consistency and growth)
- Contracts (pipeline and length)
- Balance Sheet (financial history and organization)
- Asset Type (and how liquid is it)
- Customer/counterparty quality of revenue sourceWhat has your experience been like working with startups in ABL?MP: One of the primary advantages of working with Third Sphere is that we are early-stage investors, first and foremost, and that ethos informs us, as lenders. As such, all of us have spent at least a decade (and much more) in venture capital and credit capital. We provide financing for early-stage startups because early access provides the highest probability of catalyzing positive movement for the startup and returns for our investors.We have seen it all in regards to the startup interface when it comes to lending. Many startups are not sophisticated in capital markets, and many founders are intimidated by lenders. Our job is to do everything we can to reduce anxiety about the process.When we started, founders and their boards were suspicious of what might happen if things go wrong. It’s quite common for founders to believe that lenders will do everything to take control of their companies while believing that VCs are much better aligned. We find that we’re able to work with founders on initial terms, but also as they encounter surprises which are the only predictable part of early-stage startups.What is the process for a startup to apply for ABL?MP: Although there are several steps to finalizing an ABL transaction – including structuring of the transaction, term sheet, due diligence, and documentation – the process is quite deliberate and clear. We start with a conversation and questions, followed by discussing terms and structure for a transaction, if appropriate. This is not to say you won’t need a lawyer before you close a transaction, but our job is to make this easy, not painful.Because of the potential for financial surprises during a startup’s journey, it is good to build relationships early – so both the lender and the borrower can conduct early due diligence.When talking to ABL providers, what should a startup pay attention to?MP: Startups should pay attention to the terms a lender is providing. One of the early mistakes startups make is that they don’t read the fine print and they agree to terms that are strict and inflexible.A few terms to specifically look for are:- Guarantees – Which party is responsible to pay back the lender. NOTE: Some lenders require personal guarantees – just make sure that requirement is “market” relative to the risk.
- Payment in Kind (PIK) Period – A way of delaying the payment of interest until later. NOTE: The cash flows that would have happened and the interest that would have been paid during PIK Period is embedded in the loan on the backend
- Interest Rates – The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage of the outstanding loan.
- Time Frame – How long the loan is for and when it needs to be paid back.
- Upfront Fee – Paid at the start of the contract
- Exit Fee – Should the transaction be prepaid or not, the lender usually seeks to have a minimum rate of return and this is where the Exit Fee may come into play, if applicable.
- Multiple on Invested Capital (MOIC) – The measure of the current value compared to the amount of money invested. MOIC is simply a measure of total net benefit to the lender divided by the original loan.
- Internal Rate of Return (IRR) – An estimate of the rate of return that an investment is expected to provide. IRR captures some of the time value of money – the longer it takes the lender to get paid, all things being equal, the lower the IRR.
- Amortization – How the loan decreases over time.Other than scrutinizing the terms, when looking at different lenders, below are questions businesses should ask about the lender:- Is there mission/vision alignment? Are there terms that grant the lender warrants for equity? Can the lender grow with your business (as you grow)?
- What have been other business’ experiences (reference checks)?
- What happens when things go wrong? Do lenders more to take control or do they work with teams to get to adjust terms? Do lenders scrutinize legal terms or focus on the bigger picture path to getting the best result, which often requires some uncertainty and patience which is not a hallmark of most lendingThe takeaway is to look beyond what the loan amount and the interest is, as lender flexibility is more important, especially when things go badly.What happens when a startup can’t repay debt?MP: Ideally, you don’t get to this stage. However, if a payment is missed, this will trigger the cure period, which is the time between when a payment is missed versus when you are actually in default and lose control of your options.Depending on the lender, at this point, debt can be restructured. Often, this will be in the form of extending the payback time. This is where the rubber meets the road – reputable lenders should not only do all they can to protect their investors but also figure out how they can preserve the startup.If a business defaults and can’t pay back the loan, lenders can take possession of the collateral to recover their capital. As a result, one thing you will notice is that the borrowing base (the value of the collateral) will always be more than the loan amount. Just like a home mortgage, where the primary mortgage is never more than 80-90% loan-to-value, ABL adheres to a similar ratio, depending on the type of collateral and structure.About Third SphereMP: Third Sphere is, first and foremost, an investor in very early-stage startups providing climate-focused solutions. For first investments, 70% of teams have no revenue and main their interaction with customers is to understand their needs. Third Sphere invests in software and hardware-based companies that can deliver climate impact in the next decade. While VC investments focus on pre-seed and seed, asset-backed lending is for Seed+, Series A, and Series B startups. Third Sphere also serves a community of over 12,000 startup founders, investors, end-users, and influencers, so that great companies can have access to an open and transparent network to solve various problems unique to climate-focused startups. Today, we are going to discuss the less understood world of asset-backed lending for early-stage companies.There are many more things about ABL to discuss that I would be happy to share should people have questions. firstname.lastname@example.org is the best way to reach me.For more info on ABL with Third Sphere.
Venture leasing is a sale-and-leaseback (SALB) investment structure that Kineo has created for novel hardware. In a SALB contract, an asset (e.g., a mobile pyrolysis plant, a rapid charge battery system, a novel water purification system, an indoor farming robot, etc.) is sold by its creator (the “seller” here) to Kineo (the “buyer”) and leased back to the original owner. With this approach, the company receives capital for its assets upfront and ‘rents’ out to its customers regularly. This enables the company to more widely and rapidly deploy. Because of the company risk profiles in these deals, venture leasing is a simple, flexible SALB structure that includes warrant coverage.I connected with Chuck Sellman, U.S. President at Kineo, to dive deeper into venture leasing, when startups should consider venture leasing, and what startups should think about when looking at venture leasing.What type of company is Kineo?Kineo is a Swiss and SF-based investment firm that has built its thesis on providing targeted capital to finance the building and placement of hardware through “Venture Leasing.” Kineo believes that enabling HaaS (Hardware-as-a-Service) will help hardware startups compete alongside SaaS businesses in the venture model and overcome the working capital challenges associated with scaling hardware. By combining the principles of traditional equity investment, venture debt, and equipment leasing, Kineo can minimize dilution, narrow collateral, and provide access to working capital.When should startups consider venture leasing?Startups should consider venture leasing in the early commercialization stage of their business. The hardware is ready for deployment with customers, and ideally, the company is establishing a track record of early wins in its market.Businesses with high-cost hardware and other fixed assets are the most frequent users of sale-and-leaseback agreements. Traditionally, businesses use leasebacks when they need to use the money they invested in an asset for other parts of the business but still need the asset in question to run their operations. Kineo has modified this SALB structure to suit novel assets and the startups creating them broadly for markets in climatetech, healthcare, and robotics.Sale-and-leasebacks may be a desirable alternative to traditional capital raising strategies, especially when entering commercialization with a novel hardware solution. This is because when a business wants to borrow money, it usually obtains a loan or completes equity financing; however, the implied cost of equity capital* can be high and often difficult to obtain for hardware companies, many debt structures have strict covenants, and other SALB structures generally require a ‘run-of-the-mill’ asset with a predictable resale value. Kineo’s venture leasing is built to fit these novel assets and the risk profile associated with these startups to fund the acceleration of their commercialization.*Although equity is not “repaid,” shareholders are entitled to a percentage of a company’s value based on the number of shares they own. At the exit, this dilution has substantial value (hopefully), and this is where the cost of equity can be calculated.Who is eligible?Venture leasing has a niche target. Eligible startups should:- Have created something novel with a hardware component
- Be entering the commercial stage, ready to go to market
- Typically, between Seed through Series C
- Actively implement, or actively plan to offer, their solutions on a recurring revenue model (e.g., Hardware-as-a-Service, Pay-per-use, rental, subscription, etc.)If a business is significantly more mature (e.g., raising a Series D+, public, etc.), it is likely to have a lower cost of capital financing options for working capital. As a result, venture leasing is most suitable at the beginning of a startup’s commercialization journey, where there is higher risk. On the other hand, since the model requires the ‘sale-and-leaseback’ of an asset, the company does need assets ready for the market – at least when they are ready to begin drawing capital.What is the process to receive venture leasing?Obtaining venture leasing is like raising venture equity or venture debt. The diligence process includes, but is not limited to, multiple calls with leadership, a review of financial plans (with an emphasis on unit economics), a discussion of the customer relationship, and, ideally, a site visit to check out the assets. At the end of the process, a framework agreement is agreed upon, which is the contract that defines the partnership, the leases, and the steps for drawing down capital. After that, the company can actively utilize Kineo’s facility.What should a startup pay attention to when considering venture leasing?Businesses should keep in mind a few terms when looking at venture leasing, especially relative to other financing options:- Exclusivity (for providing financing): Determines the boundaries of who can and cannot provide additional financing for other parts of the business.
- Warrant Coverage: Stock warrants or stock options provided to a financing partner to help manage the buyer’s risk exposure.
- Claims to IP: A business’s intellectual property can be used as collateral to secure financing.
- Personal Guarantees: Personal capital from the management, board, or others can be used as collateral to secure financing.
- Interest or Lease Rate: An amount above the initial capital provided, or the interest rate on lease payments, made over an agreed-upon term, to repay debt or other financing
- Tranche Fees: Fees charged for drawing down a debt facility in parts or tranches.
- Commitment Fees: Fees charged for legal work, setting up facilities, etc.
- Takedown Fees: Similar to tranche fees, lenders use these fees and many other tools to lower the ‘face rate’ of interest on deals by layering mandatory fees throughout deals.Kineo has a unique model when it comes to the terms of their contracts:- Exclusivity: Kineo’s primary ask is to be the only financing partner for HaaS during the agreement.
- Claims to IP: Kineo does not make IP claims, unlike many similar debt structures.
- Personal Guarantees: Kineo does not ask for these guarantees of founders, investors, or management – their collateral is specific to the assets they buy.
- Tranche Fees: Kineo does not charge these standard fees, which are small fees charged by lenders for allocating capital in smaller portions or tranches.
- Commitment Fees: Kineo pays for legal costs.
- Takedown Fees: Kineo prefers simplicity and transparency – i.e., one structure, one lease rate.What are the pros and cons of Kineo’s Venture Leasing?Pros
- Covenant light (few restrictions on capital)
- Narrow collateral (only our assets)
- Simple, clear, and straightforward terms (no hidden fees)
- Can work quickly
- SALB can enhance the company’s balance sheet
- Enables Hardware-as-a-Service/Recurring revenue models for HardwareCons
- Simplicity implies that there is a higher ‘sticker cost’ of capital
- Capital is not disbursed all at once (drawn down by asset)
- Will add a lease expense/debt load to the business
-Not everyone is familiar with Venture Leasing/Asset financing agreementsFor more info on Kineo.
Project Expansion Capital
Project Expansion Capital, Catalytic Equity for First-of-A-Kind Commercial ProjectsFullCycle Climate Partners (FullCycle) provides a unique flavor of “expansion capital” needed for financing first-of-a-kind (“FOAK”) infrastructure-scale deployments of new climate technologies. FullCycle provides equity capital to businesses and business projects. When financing developments with project equity, each development is treated as a distinct project financeable entity (separate P&L/off-balance-sheet and non-dilutive). As a result, investors in the independent subsidiary generate returns principally via the project cashflows.I connected with Kyle Adkins, Partner at FullCycle, to dive deeper into project expansion capital, when startups should consider project expansion capital, and what startups should consider when their potential options for financing expansion.What type of company is FullCycle?FullCycle is purpose-built to provide critically needed expansion capital to accelerate the deployment of the next gigaton-scale climate technology solutions. They are targeting opportunities with proven technical and economic viability that are ready for large-scale commercialization but need a better-tailored solution for crossing the deployment gap between venture capital and infrastructure private equity. FullCycle’s model uniquely combines project capital for building out the pipelines of emerging sustainable infrastructure assets with the necessary minority growth capital to support the companies driving the development and deployment of these solutions towards widespread market adoption across the circular economy, industrial decarbonization, agriculture, and the energy transition.When should startups consider expansion capital?At a certain point, venture capital is no longer the best option for scaling capital-intensive businesses.Project equity is used for facility construction and commissioning. For projects to be funded off-balance sheet, the technologies being built typically have to have been proven and validated at a smaller sub-commercial scale.What are the benefits of project expansion capital?Project expansion capital, when compared to other approaches for financing FOAK projects, is:- Non-Dilutive: Other than the initial investment, capital for funding projects usually is non-dilutive to the technology company.
- Repeatable: The SPV structure sets the groundwork for creating a repeatable model for building more projects faster at the end of the day.
- Easily Accessible: Project expansion capital can help startups become attractive bankable targets faster. As more projects are financed, the loan-to-value ratio increases with the successful completion of tasks (the balance between the debt and the asset value).
- Cheaper: Because the risk profile is different (de-risked), the cost of capital is cheaper than raising additional equity capital onto the corporate balance sheet.
- Flexible: The amount of capital provided is based on the company’s need for working capital.Who is eligible?Eligibility varies depending on the capital provider, but standard criteria lenders pay attention to include:- Offtake (customers and demand)
- Feedstock (access to inputs)
- Site (locations scoped out, location relative to supply chain)
- Technology/manufacturing readiness
- Supply chain established
- Regulatory compliance (zoning, permits, etc.)What should a startup pay attention to when talking to project capital providers?The universe of project finance is large. There are many capital providers. However, finding sources that will finance first-of-a-kind projects will vary widely, where each provider has a different structure/model. As such, it is always helpful to clarify the terms and conditions of the contract.A few terms startups should specifically look for are:- Technology licensing arrangement/fees: Business model arrangement, including royalties
- Right of First Refusal: The capital provider has the option to invest in future opportunities with the business before others can.
- Performance Guarantees: What happens when the project finishes construction, but the technology doesn’t perform to certain specifications – typically either the parent company or the EPC partner depending on the contract.
- Warranties: What warranties (if any) are available for commercial-off-the-shelf equipment procured from their manufacturers and would equipment’s deployment into this project invalidate the warranty.Some questions the contract should address include:- What role will the capital provider play? What does the relationship look like?
- Who is the developer?
- Who operates the facility?
- What if it doesn’t work? Who is responsible?Other than scrutinizing the terms, when looking at different sources of capital, below are questions businesses should ask about the lender:-Is there mission/vision alignment?
- Can the capital provider grow with your business (as you grow)?For more info on FullCycle.
Crowdfunding is a way to raise capital from an audience of people. By leveraging Regulation Crowdfunding (Reg CF), organizations can use platforms like Wefunder, to raise equity, debt, or other types of capital backed by multiple non-accredited investors.I connected with Adam Roberts, Founder In Residence and Head of Scout Program as Wefunder, to dive deeper into crowdfunding, when startups should consider crowdfunding, and what startups should think about when looking at crowdfunding.When should startups consider crowdfunding?Startups can and should be thinking about crowdfunding from day one. The idea behind crowdfunding is to raise capital from a community of followers. Crowdfunding essentially enables potential customers to become investors, which means they also care about the success of the company. This also means that startups can lean on supporters for anything, whether advice or hiring.Who is eligible?For crowdfunding platforms based in the US, startups must be incorporated in the US (as an LLC or C Corporation). The one exception is that Wefunder will not do initial coin offerings (ICOs). Because Wefunder does not take equity, anyone can access crowdfunding through their platform.What should a startup pay attention to when talking to crowdfunding platforms?A big overall misconception is that crowdfunding platforms bring in 90% of your round, but the truth is that the startup will bring in a lot of the investment. That said, average participation from investors on the platform is 40% of the raise, so it’s essential to look at audience size, average check size, and overall platform activity.Some other pieces to consider include:- Setup fees
- Transaction fees
- Form C filing fees
- EquityWefunder only takes a 7.5% commission (there are no other fees).What are the pros and cons of crowdfunding?Setting expectations is essential when pursuing crowdfunding, as some types of business models will work better than others (B2C vs.B2B).Pros:
- Your own family and friends can invest
- Clean cap table
- Investor and customer acquisition
- Public solicitation (no disclosing terms)Cons:
- Need to convince retail investors
- Form C is publicly available through the SEC website (includes business details and financial information), but this is top-level info for the previous two yearsWhat is the key to success when using crowdfunding?It is all about building and maintaining momentum. This means collecting investments before a startup’s page is live so that when the page goes live, others see that there is already a significant enough investment. Ideally, a startup raises $50K or 25% of its target investment before going live, which triggers Wefunder’s marketing promotions and algorithms.About WefunderWefunder is a crowdfunding platform built by former founders. Wefunder’s goal as a Public Benefit Corporation is to revive capitalism and preserve the American ideal. By providing funding to more eligible companies across the entire country, not just Silicon Valley tech startups, Wefunder is reversing these trends.For more about Wefunder.Other Resources:
- A Food Entrepreneur’s Advice For Equity Crowdfunding
Venture debt is a form of non-dilutive capital that is designed specifically for venture capital-backed technology and life science companies. These companies typically do not have the cash flow or assets to use as collateral for traditional debt financing, and thus use venture debt to fund working capital, operating expenses, and various other growth initiatives. Venture debt is designed to be less restrictive and far more customizable than traditional bank debt, but with that flexibility comes a higher cost of capital.I connected with Eddie Lopez, Vice President at Hercules Capital, to dive deeper into venture debt.When should startups consider venture debt?EL: A startup should always consider venture debt as a financing vehicle to increase technical/business model validation and enterprise value growth. That said, its scale, the time in which it is considering raising, and the use case for the capital can impact the terms and structure of a potential venture debt facility.For early-stage companies with minimal operating history, venture debt facilities are smaller and typically most appropriate after an equity raise, as lenders will underwrite to the quality of the investors and their recent support in the business.Growth- and late-stage companies with more commercial traction have more flexibility in the timing of raising venture debt as lenders will prioritize the scale and fundamentals of the business over any previous or future equity support. These facilities are larger and serve a more strategic use case beyond extending cash runway.What can venture debt be used for?EL: Venture debt covers the entire spectrum of strategic debt financing, including cash runway extension, working capital support, purchasing equipment, and acquisition financing. As is the case with raising equity, management should consult with its board to ensure the type of debt financing and structure it is looking for aligns with the company’s capital strategy.Who is eligible?EL: Venture debt has traditionally catered to sponsor-backed technology and life science startups that prioritize growth over profitability. Over the years, several venture debt providers have emerged to address the debt needs of startups at various stages (from Series A to Pre-IPO), and as mentioned previously, the structural configurations of a facility can vary depending on the existing commercial traction of the business.What is the process for receiving venture debt?EL: Typically, after the initial introductory call, a venture debt lender will ask for a list of diligence materials, which includes, among other things, a company overview presentation, a detailed capitalization table highlighting a company’s fundraising history, and historical/projected financials. These materials, along with a follow-up discussion with management to address any diligence questions, should be enough information to help a venture debt lender not only qualify a potential debt investment but what that debt would look like. Timelines can vary depending on the size of the transaction and use case.What is the fee structure like? What is the cost of capital? How should startups think about pricing? What are the additional terms that are noteworthy?EL: The cost of capital for venture debt varies amongst lenders. Traditional commercial banks can offer venture debt at a lower cost of capital (in exchange for mandating the company’s banking business) but is more restrictive (lower commitment amount, financial covenants, depository requirements, etc.). Venture debt from a non-bank provider comes at a higher cost but can offer more flexibility, i.e. large debt facility with longer commitment periods and little to no financial covenants.
Beyond the cost of capital, it is important for startups, before signing off on a debt facility, to confirm the amount of capital that is being made available to them and when. It is common for venture debt providers (both bank and non-bank) to tranche their commitment and, in certain instances, make it available only upon achievement of certain performance milestones or lender approval. While tranching the commitment can help reduce upfront costs (paying only for what you have available on Day 1), it could potentially hinder a startup from accessing the remaining amount if the agreed-upon milestones cannot be achieved.
How Inergy Leveraged Revenue Based Financing
Sean Luangrath is the Founder of Inergy, a hardware startup that produces solar-powered chargers and portable solar panels that makes renewable power available to everyone, everywhere.For Sean, who fled Vietnam during the war, scaling Inergy is personal. It’s part of his mission to bring electricity to the over 700 million people in the world who live without it.To scale Inergy, Sean secured loans from Enduring Planet, which provides working capital for climate entrepreneurs via revenue based financing (RBF). As the name suggests, businesses pay back RBF loans with a share of their revenue.I chatted with Sean about and why he decided to pursue revenue-based financing (RBF) and what it enabled him to achieve.What made you decide to pursue revenue-based financing?SL: We became acquainted with RBF through Shopify, our ecommerce software platform. RBF was user-friendly — it didn't involve the formal procedures commonly used by banks and traditional lenders. We chose Enduring Planet as our RBF partner because of their cleantech industry background and understanding of our business. Moreover, their lending terms offered considerable flexibility.What advantages and disadvantages did RBF have for you over equity-based/dilutive financing?SL: The most significant advantage of an RBF lender lies in the straightforward and adaptable lending process and terms. With no need for collateral or equity commitment, these terms aid our revenue growth, and enable us to repay the loan sooner. On the flip side, RBF lending amounts tend to be lower than those of venture capital or debt lenders.What were you able to achieve as a result of securing this financing?SL: With the funding, we were able to secure healthy levels of inventory so we can more aggressively grow our sales. With products in-stock, our marketing campaigns resulted in higher conversion rates because we could fulfill orders faster. Otherwise, we would continue to order smaller batches of products that resulted in lower conversion rates and slower sales growth.What should startups interested in pursuing RBF keep in mind?SL: For startups considering RBF, a comprehensive understanding of repayment conditions, particularly in scenarios deviating from projections, is crucial. Also, understanding the calculation of repayment amounts is vital, to enable precise repayment forecasts.What were one or two things that surprised you in using RBF?SL: The most astonishing aspect was the non-monetary support from our RBF partner. Beyond financial assistance, Enduring Planet regularly shared our story on social media and amplified our marketing endeavors. They also facilitated introductions to potential partners, investors, and customers.Another eye-opener was realizing that our RBF partners operated their investment company akin to a startup. They actively sought promising investment avenues and valued our referrals. Their vested interest in our growth propelled us to succeed and promptly repay the financing.For more info on RBF with Enduring Planet.
How New Frontier Aerospace Leveraged Grants
Bill Bruner is the CEO of New Frontier Aerospace, which is building a hypersonic, vertical landing aircraft powered by renewable fuels. His mission is to deliver passengers and urgent cargo at ten times the speed of today's jets, with net zero greenhouse gas emissions.Bill is wading into uncharted territory and needs lots of capital to do it. At this stage of his business, financiers would have to be willing to invest in a capital-intensive, early-stage venture, which can be prohibitively risky. So he turned to grants to develop this urgently needed technology.Grants can be complex and laborious, but they’re a crucial first step in financing a climate tech startup, especially for hardware companies like Bill’s.I spoke to Bill about how to make the time investments in grants worthwhile.His main takeaways? Cast a wide net – as big as the climate finance world has become, don’t limit yourself to it; and skip the expensive consultants – those dollars are better spent searching for new grants to apply to.What role did grants play in the financing of New Frontier Aerospace?
BB: If you use the broadest definition of grants, most of our funding has come from state and federal government grants – programs such as the New York State Research and Development Authority (NYSERDA)’s Venture for ClimateTech Accelerator ($133,000), the Department of Defense (DOD)’s National Security Innovation Capital ($2,250,000) and NASA ($150,000). If grants include all sources of governmental non-dilutive funding, they have financed almost one hundred percent of our company's operations.The NYSERDA climate grant was key - it made it possible for us to produce some of the early metal 3D printed demos that attracted pre-seed investment and eventually, the DOD award. The NASA grant will allow us to produce a "space" or "vacuum" version of our engine that will open up a whole new market.What are one or two things you wish you knew before pursuing these grants?
BB: There are other grants, from both climate and defense funders, that we failed to win. What do I wish I had known? Here's a partial list:1) don't hire expensive consultants to write proposals - we have lost a lot of money this way
2) apply for every government grant you qualify for and have a good chance of winning – climate grants, grants from every agency at all levels (defense, space, energy, homeland security, USDA, state, local)
3) apply for diversity grants if you're in a diverse group, including veterans' grants if you're a vet (we won a $5,000 USAA grant in a vets' pitch competition)How did the process of applying for climate tech grants versus other types differ?
BB: The NYSERDA Venture for Climate Tech application process focused on potential climate impact of the idea and quality of the team, and less on product-market fit (PMF). I think they calculated that they could help companies find PMF, and we benefited from this approach.Our technology is feasible, but capital-intensive, so raising other climate grant funds has been a challenge. While reducing aviation’s carbon footprint is still very important to us, our focus has shifted a little towards government funding for our revolutionary hypersonic VTOL and space propulsion technologies.For more info on grants with Climate Finance Solutions.