As the sands shift, the percentage of overall venture capital going to female founders and entrepreneurs of color remains woefully low. According to the latest statistics from PitchBook and CrunchBase that I was able to trace, only 2% of the total in 2021 went to women; around 1.2% 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 the one developed by financing start-ups Sustainable planet — offer an alternative model to bridge this gap with revenue-based funding.
In short, these programs focus on providing loans that are repaid as a percentage of the company’s sales, without requiring complex arrangements under which the founder might have to provide guarantees or personal guarantees. (The details 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.) This, of course, means that the business must generate some sort of sales. This wouldn’t work for an early-stage organization in the midst of research.
Indeed, the $6 million LACI Cleantech Debt Fund is for startups that need financing to deliver their first customer orders or need working capital to scale. It will provide loans ranging from $25,000 to $250,000 over the next five years to about 100 start-ups led by “underrepresented founders.” It focuses specifically on women entrepreneurs, black and brown – not just those working with LACI, but also with other US 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 piloted the funding concept through a research project with the Department of Energy, arranging $300,000 loans to nine startups, including SparkCharge, which is deploying mobile charging stations for electric vehicles in demand, and Envoy, which has created a company that provides shared, on-demand, community-based electric vehicles. Envoy used the funding to create a pilot program of its car-sharing service for residents of a public housing complex in Los Angeles. SparkCharge used its low-interest loan of $40,000 to help hire 40 employees.
This is a missing piece of the capital stack for early stage investors.
“To scale a business like ours and continue to create jobs, you need funding that is not easily acquired by minority-owned businesses,” said Black entrepreneur Josh Aviv, co- founder and CEO of SparkCharge. “LACI’s Cleantech Debt Fund helps level the playing field, reduce financial risk and truly enable businesses to thrive. »
The loan helped SparkCharge position itself to raise an additional $24 million in equity and debt financing.
LACI’s financial partners include Sobrato Philanthropies, which specializes in grantmaking and impact investing, and Homecoming Capital, a climate-focused investment firm; the Wells Fargo Foundation also injected money to help cover 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 head of Meta’s energy access program, and Erin Davis, who worked for cleantech and microfinance organization SIMA, is also focused on creating revenue-based debt financing for climate technology companies.
Its first fund plans to lend more than $5 million in its first 12 months, using an online platform that can fund a business in less than 30 days, according to Gershenson. This will probably represent 20 to 25 transactions. Enduring Planet considers the diversity of a company’s founders and their entire team during the loan application process, he said. Another thing he considers: whether the startup serves generally marginalized communities.
“Underrepresented founders are typically ignored by the money status quo,” Gershenson told me during a recent GreenBiz 350 podcast interview. “I think the one thing that people don’t talk about is that there’s this big pool of institutional capital that’s looking to participate in the climate, that wants a fixed income allocation, so they want to work in debt. It there’s money sitting on the sidelines that could be put to work, but that’s just not the case today.”
When I spoke with Gershenson about a month ago, more than half of the companies Enduring Planet considered met the fund’s diversity and inclusion criteria. The first two companies to receive funding are New route of the suna microgrid monitoring and control platform, and Aquaosoa climate risk and analysis dashboard used primarily by agricultural lenders to understand water and heat risks.
What are the benefits of revenue-based funding models such as the programs offered by LACI and Enduring Planet? I’ve already alluded to several, including the ability to raise money faster without having to post collateral. This opens the door to more companies than venture capitalists usually consider. Another advantage: this form of financing is non-dilutive, which means that the founders do not necessarily have to give up a large part of the equity. (According to LACI, the median founder only owns 15% of his company upon exit, when using dilutive financing such as venture capital.)
I’ve already mentioned the biggest downside: the startup must show early revenue or a track record of growth. According to Gershenson, it also requires fairly high margins of at least 35% and payback times are variable, which means it can be difficult to model cash flows. Additionally, silver can be more expensive, with higher interest rates than secured debt; and this may be more difficult to account for, based on current accounting and tax regulations.
The revenue-based model has become more prominent in e-commerce and for software-based service companies. “Revenue-based financiers have been operating in the United States for some time,” he said. “The model itself, the essence of it, is as old as any investment… From our perspective, the money should be structured to do the work that is needed.”