Boosting your impact with blended capital

Not all money is created equal. Every source of capital is looking for different outcomes and has a different measure of success - while a VC will be solely interested in financial returns, a foundation’s goal is to spur environmental or social benefits. But since climate startups are inherently impactful, you can leverage your position to bring these disparate parties to the same table when the funding from one isn’t enough - meaning you won’t have to solely rely on venture funding or take on a lot of debt.

Todd Khozein is co-founder and CEO of SecondMuse, which supports businesses and markets that drive social and environmental benefits. We sat down with him to discuss when founders should consider blended capital, where to look for it, and tips for pulling off these unique transactions.

Types of blended capital

1. Corporate financing
Blended capital can help you meet a corporate financing need - maybe your business needs $4M for the next 24 months of operations, but VCs will only invest $2M at this stage. If your business has an environmental and/or social component - say you’re helping marginalized communities clean up plastic waste - a private foundation who cares about plastics might give you a $1m grant, and an alternative lender who focuses on low-income households could supply another $1m. 

You’ll need to be sure to align capital with spend - you can’t use a research and development grant to market your product, for instance. Whenever possible, grants and VC funding should go towards high-risk efforts that don’t yield immediate results: product development, team growth, etc.  Debt, on the other hand, should be used to support more predictable outcomes, i.e. funding marketing to grow revenue, investing in new equipment, purchasing inventory, or as an advance against future POs.   

2. Project financing
Another context in which you might harness blended capital is on a project basis. Say you’re deploying new heat pumps or EV chargers - you’ll need a pool of off-balance sheet capital to finance these assets, which can be incredibly difficult to secure as an early-stage startup. But you can go to another party, such as a philanthropic or a government actor, who’ll take on some risk and provide a loan guarantee, first-loss capital, or a grant to the project, helping to bring other forms of funding to the table.

Who to approach when seeking blended capital

Catalytic investors care deeply about impact, and are comfortable funding high risk projects while receiving concessionary returns, as long as the effort advances key social goals. Providers of this type of capital include impact investors, development finance institutions, governments, social impact funds, foundations, and some corporate responsibility programs. 

Make it clear to these parties that by participating in this transaction, they’ll unlock private finance in an impact area. It’ll be very persuasive if you can demonstrate that - for example - for every dollar they put into a project, five other parties will put in another dollar, effectively making the impact 5X. Plus, from the return-focused investor’s perspective, you’re derisking their investment. Leveraging all of these contradictory interests and making them work harmoniously will be incredibly powerful.

Tactics when finding and working with blended capital

1. Fine-tune your financial model 
Before you start looking for blended capital, you’ll need to build a comprehensive pro forma that considers the various sources of funding you’ll take on and the outcomes it will generate, as well as how it’ll be paid back, if needed.

2. Use your network 
To arrange all the pieces of the blended capital puzzle, you’ll need to look for investors in different places. Doing so successfully will depend on your ability to harness your network - you’ll need to ask around and look for second degree connections.  This is where family offices, private foundations, and impact collectives like Toniic and CREO can play a major role.

3. Weave a cohesive narrative
While different factors (returns, impact, leverage, etc) will resonate with different investors in play, weaving together a single cohesive story can be incredibly powerful, as long as you know what to highlight for each audience. 

Just bear in mind that you can’t dilute one value for the sake of another - each of the pillars needs to be strong enough to stand on their own. And if you’re trying to fund one project in a very specific vertical, but your company is active across a variety of sectors, be careful with the story you’re telling. 

4. Outsource outcome measurement
Each pool of capital comes with a distinct set of outcomes you’ll need to measure and report on. Building the capacities to do so in-house will require time, effort, and expertise, taking resources away from your core business. In some cases, it will be impossible - you can’t become an expert in emissions monitoring or impact reporting overnight. Instead, look for existing tools and products, or partner with another organization. This is a far cheaper and more effective route than procuring this data yourself, and will instill more confidence in an investor. 

5. Avoid dogma
People can be dogmatic when it comes to finance - they might tell you that venture capital is a must, to avoid VCs at all costs, or that you should never take on debt. But this black and white thinking will only hinder your ability to keep your business running. Every source of capital has its own advantages and drawbacks - it’s just a matter of deciding which one suits your needs at this specific point in time. 

6. Hire clued-up legal counsel 
By complicating your financial stack, you’re opening a can of worms in terms of potential legal issues. Most generalist corporate attorneys will be worse than useless when it comes to blended finance, and bad advice will cost you, so seek out expert counsel from the get-go. Firms like RPCK or Morrison Foerster have deep backgrounds in catalytic and blended finance.

Todd Khozein is the CEO and Co-Founder of SecondMuse, an organization which brings communities together to build sustainable economies that benefit people and heal the planet. He was born in Iran and raised in Ecuador, and is passionate about creating positive and long-lasting change in systems by working with communities on climate, equity, tech, and related solutions to help solve climate change and its effects.