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 Hardware
Cons
– 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 agreements
