While the sands are shifting, the percentage of overall venture capital flowing to female founders and entrepreneurs of color remains woefully low. According to the latest PitchBook and CrunchBase stats I could dredge up, just 2 percent of the total in 2021 went to women; about 1.2 percent in the first half of last year went to Black founders.
Two new programs aimed specifically at climate tech startups — including an initiative launched by the Los Angeles Cleantech Incubator (LACI), and one developed by financing startup Enduring Planet — offer an alternative blueprint for how to address that gap with revenue-based financing.
In short, these programs are focused on providing loans that are paid back as a percentage of the venture’s sales, without requiring complex arrangements under which the founder might have to put up collateral or personal guarantees. (The particulars of the two programs differ, but the net effect is that founders don’t have to put as much of their personal wealth at risk.) That means, of course, that the company has to be generating some sort of sales. It wouldn’t work for an early-stage organization deep in the research phase.
Indeed, the $6 million LACI Cleantech Debt Fund is targeted at startups that need financing to deliver on their first customer orders or that need working capital to scale. It will provide loans of between $25,000 to $250,000 over the next five years to an estimated 100 early-stage ventures fronted by “underrepresented founders.” It has a specific focus on female, Black and Brown entrepreneurs — not just those working with LACI but also with other U.S. climate tech incubators including Greentown Labs, Evergreen Climate Innovations and New Energy Nexus.
“This is a missing piece of the capital stack for early-stage investors,” LACI CEO Matt Petersen told me.
LACI has been piloting the funding concept as part of a research project with the Department of Energy, organizing loans of $300,000 to nine startups, including SparkCharge, which is deploying on-demand mobile electric vehicle charging stations, and Envoy, which has created a business that provides shared, on-demand, community based EVs. Envoy used the financing to create a pilot program of its car-share service for residents of a public housing complex in Los Angeles. SparkCharge used its $40,000 low-interest loan to help hire 40 employees.
This is a missing piece of the capital stack for early-stage investors.
“To scale a company like ours and keep creating jobs, you need funding that isn’t easily acquired by minority-owned businesses,” said Black entrepreneur Josh Aviv, SparkCharge’s co-founder and CEO. “LACI’s Cleantech Debt Fund helps level the playing field, reducing the financial risks and truly enabling businesses to thrive.”
The loan helped SparkCharge position itself to raise an additional $24 million in equity and debt funding.
LACI’s funding partners include Sobrato Philanthropies, focused on grantmaking and impact investing, and Homecoming Capital, a climate-focused investment firm; the Wells Fargo Foundation has also kicked in money, to help with initial operating costs and to cover loan loss reserves.
A lending startup for climate tech startups
Enduring Planet, a company co-founded by Dimitry Gershenson, former lead of Meta’s Energy Access program, and Erin Davis, who worked at the cleantech and microfinance organization SIMA, is also focused on creating revenue-based debt financing to climate tech ventures.
Its first fund plans to lend more than $5 million in its first 12 months, using an online platform that can finance a business in less than 30 days, according to Gershenson. That will probably represent 20 to 25 transactions. Enduring Planet considers the diversity of a company’s founders and of its entire team during the loan application process, he said. Another thing it considers: whether the startup serves typically marginalized communities.
“Underrepresented founders are generally overlooked by the status quo of money,” Gershenson told me during a recent GreenBiz 350 podcast interview. “I think the one piece that people don’t talk about is there’s this large pool of institutional capital that’s looking to participate in climate, that wants a fixed income allocation, so they want to work in debt. There’s money sitting on the sidelines that could be put to work, but just isn’t today.”
When I spoke with Gershenson about a month ago, more than half of the companies that Enduring Planet was considering met the fund’s diversity and inclusion criteria. The first two companies to receive funding are New Sun Road, a microgrid monitoring and control platform, and Aquaoso, a climate risk and analytics dashboard used primarily by agricultural lenders to understand water and heat risks.
What are the benefits of revenue-based financing models such as the programs offered by LACI and Enduring Planet? I’ve already hinted at several, including the ability to raise money more quickly without having to put up collateral. That opens the door to more companies than are usually considered by venture capitalists. Another plus: This form of funding is non-dilutive, meaning that founders don’t necessarily have to give up a big chunk of equity. (According to LACI, the median founder owns just 15 percent of their company at exit, when using dilutive funding such as venture capital.)
I’ve already mentioned the biggest downside: The startup needs to show revenue or some track record of early growth. According to Gershenson, it also requires pretty high margins of at least 35 percent and the payback time frames are variable, which means that it can be tricky to model cash flow. What’s more, the money can be more expensive, with higher interest rates than secured debt; and it can be more difficult to account for, based on current accounting and taxation regulations.
The revenue-based model has become more prominent in e-commerce and for software-based service companies. “There have been revenue-based financiers operating in the U.S. for quite some time,” he said. “The model in and of itself, the essence of it, is as old as any investment … From our perspective, money should be structured to do the work that is necessary.”
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June 8, 2022 at 03:12PM