Project Expansion Capital, Catalytic Equity for First-of-A-Kind Commercial Projects
FullCycle 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)?
