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Community Event: Bankability in Climate Tech
This is now Enduring Planet, Planeteer, & Friends’ third of our monthly “Financing Your Climate Startup” Digital Series. If you missed our first two, we highly encourage you to go back and read the teardowns on the Enduring Planet Insights page.
In our first session, we talked about the macro contexts that brought us here over the last 4 years; i.e. how a zero-interest-rate-policy environment led to an influx of private venture dollars that took big swings at moonshot climate technologies. Unfortunately, building moonshots often means pouring concrete and putting steel in the ground, and for some of the most revolutionary technologies, this can come at eye-watering capital expenditure costs in the billions of dollars.
Even the deepest-pocketed venture and growth investors can’t shell out this quantum of capital for their broad portfolios, and frankly, their investors (Limited Partners, LPs) can’t tolerate the low potential returns that come from funding real-world assets. Turns out it’s hard to find 100x on some steel - especially if it doesn’t yet perform as predictably as a solar panel or lithium battery.
So, where do climate founders go from here? This session on Bankability tackled foundational questions and the current market’s point-in-time reflections on:
- What does bankability mean, and why is it the goal?
- What are founders up against as they seek new capital from private credit, corporates and philanthropic investors on their pathway to bankable?
- What business models are or aren’t considered bankable, and how might founders adapt their businesses models over time?
- How can founders start to breakdown the colloquial monolith of “credit” and find the debt that’s right for them?
- What are all the other variables founders have to consider along the way outside of the dollars they raise in their capital stack as they work toward bankability?
Unfortunately, Zoom had a hiccup and this event was not recorded, but we've made sure to provide a comprehensive summary below. Thanks for reading, and stay tuned for future sessions on breaking down debt and the capacity & talent gaps for project development.
Speakers:
- Hannah Friedman, Venture Partner at Planeteer and Head of Partnerships at Mark1 (moderator)
- Dimitry Gershenson, CEO, Enduring Planet
- Corissa Steiner, Credit Investor, Almavest
- Mitch Rubin, Senior Director of Innovation, Elemental Impact
- Susan Su, Partner, Toba Capital
Notes:
- Q: What is bankability? A: Bankability is generally defined as the ability of a project to attract debt financing from risk-averse lenders, such as banks, by de-risking the project and demonstrating its viability and profitability. It involves creating a solid financial and operational foundation that instills confidence in investors and lenders.
- Q: How do you build a pathway that's durable on the path toward bankability? A: Clearly articulating and mitigating risks, demonstrating a strong business model, and establishing credibility with potential investors. Founders need to show a clear path to both revenue generation near-term and profitability long-term.
- Q: What are some of the lessons that we have from early clean tech 1.0 and the early days of renewable energy that got bankable in a very specific formula? A: The definition of bankability shifts with the capital environment. Current shifts emphasize profitability earlier in companies seeking investment. Private credit has exploded in the last five years, providing new ways to get debt and fund companies and projects.
- Q: What are some of the deal-killing things that come up when investors think about the long term pathway of bankability? A: It’s incredibly important for founders to know their audience and investor type. Failure happens from not understanding the investor's business model, not tailoring the message or approach to fit the broader structure around the investor, and not considering the stakeholders (i.e. Investment Committee) involved in the decision-making process. Some investors are vibe-based, while others, like Toba, invest in a multi-stage approach as part of a family office. Understanding the investor's business model and where the startup fits in is crucial for tailoring the approach and message.
- Q: What are the types of flavors of the capital stack, and how can blended or creative finance be deployed in emerging markets where those capital stacks are less developed? A: Several types of capital stack flavors have helped companies reach scale, such as friends and family funding, equity financing, equipment financing, venture debt, government grants, private credit, distributed or asset-backed financing and project financing. In the climate tech space, companies (often in early stages) may not qualify for project financing yet. Revenue predictability, proven technology with an interesting twist, and guaranteed offtake situations are crucial elements to securing the more risk-averse segments of the capital stack. Blended finance, or combining concessionary and commercial capital, can be used effectively in emerging markets and elsewhere. Creative debt financing approaches, such as accepting lower advance rates with an equity cushion or funding guarantee, help make projects more bankable. Building relationships with institutions like the USDFC or USAID is also critical in securing financing. Networking and cultivating trust with investors are key; credit evaluation is based not only on financial metrics but also personal relationships and trust. It's essential to make lenders feel safe and secure in their investment. The number one underwriting criteria is whether lenders feel confident in the company seeking funding. Providing accurate, reliable information, maintaining transparency, and ensuring a positive, trustworthy relationship are crucial factors.
- Q: Where do companies successfully scale and leverage credit, but may not be considered bankable in some of the ways we've been talking about it today? A: The panelists emphasize the importance of planning ahead, having a strong financial foundation, and leveraging the right tranches of capital at the right time to control the company's destiny. It was mentioned that companies with short runway and seeking financing last minute often struggle to secure funding, highlighting the importance of proactive financial planning and leveraging debt for predictable outcomes before the equity dollars run out.
- Q: What intentional choices can founders make early on to make their business more bankable? A: Founders can make intentional choices early on to make their business more bankable. This includes building in processes to communicate good financial controls, structuring preceding deals to make future deals more bankable, and making operational decisions today that improve optionality for bankability. Companies can shape their business models and narratives to attract an alternative stack that can include equipment financing, government receivable loans, and venture debt. Companies build out their capital stack by bringing in various capital providers to play together, addressing the scale gap where traditional infrastructure financiers may not consider <$100M financings. This involves working with experts, hiring consultants, and making intentional choices to shape the business in a way that attracts the right investors and tranches risk meets investors’ return needs.
- Q: Where does strategic finance talent come from to actually engineer bankability? A: Strategic finance talent should be specialized to your business model and come in as early as possible to start thinking creatively about meeting capital gaps. It is important to hire individuals who have experience in the industry, stage and business model relevant to the company, rather than just general startup experience. Specialists will know the importance of building good financial practices internally, such as exceptional accounting, FP&A, understanding runway & burn, and predicting project costs. Hiring individuals who can connect to important capital sources and investors is an added plus. Before founders can afford a person full-time, they should look to get fractional help, but do so early.
- Q: How is the fractional workforce coming to bear for those companies? A: Hiring senior talent with previous investing/CFO experience and individuals who have battle scars from previous failures can help predict what investors may need and how to think about protecting for their downside risk. Unfortunately, these senior, seasoned experts are expensive, and often will not do the day to day work to maintain accurate books, update KPIs/dashboards, etc. Fractional resources, especially from specialized firms, can get you a long way towards the right foundations for bankability.
- Q: What are the other variables that founders might consider along the way in and out of the capital stack? A: Other variables in and out of the capital stack include regulatory compliance, market demand and strategic partnerships for offtake, scalability and technical oversight through partners and service providers like EPCs and capital project managers. Founders also need to consider the impact of external factors such as economic conditions and industry trends on their project's bankability.
- Q: What is the D-SAFE and what’s its role in unlocking investors? A: The Development-SAFE was created to provide capital for development activities pre-FEED where it is hard to get and to help entrepreneurs complete pre-project steps. It provides an ability for investors to come into specific development activities and take on more risk and offer more flexibility and patience. This can allows for a more diverse group of risk-averse investors to participate in subsequent funding rounds, supporting companies in addressing the scale gap and secure financing for projects that traditional financiers may not consider.
- Q: How does the D-SAFE differ from a convertible note typically used by venture investors? A: The D-SAFE allows for repayment with interest and conversion events into shares just like a convertible note, though it’s funded specifically to allocate towards the project development like a development services agreement. The D-SAFE helps lower project risks, and alongside Elemental’s platform, comes with expertise and coaching. VCs investing in convertible notes don’t typically underwrite to get paid back low single digit interest and don’t see high potential upside returns by investing in development activities, even though it’s a critical part of success for their portfolio’s technology deployment.
- Q: Can you provide examples of successful investments made using the D-SAFE? A: A successful example included a $500,000 D-SAFE investment that helped a critical mineral company secure a $7.2M project with an ag company to build their next facility in collaboration with a USDA loan and a commercial lender.
- Q: What are some of the business models that are considered more bankable than others? A: Companies often face the challenge of building large facilities on their balance sheet just to prove technical and operating credibility to creditors and investors. Many must take on the responsibility of developing, owning, and operating these facilities to demonstrate their capabilities, even if their long-term business model involves transitioning to a different role in the value chain, like being a component part provider or an equipment OEM. Finding a balance between minimum on-balance sheet development and spend, alongside maximizing the funding optionality and customer willingness to pay is incredibly difficult. Identifying and working with trustworthy partners and investors can help navigate this decision-making process and align the company to best-fit, long-term industry goals
- Q: What might contraindicate certain forms of credit? A: Credit providers look for predictable returns. Even creative lenders generally expect a 14-15% minimal return with no (or very limited) upside. They operate very differently than the rest of the capital stack. Eliminating risk is essential for making lenders feel safe. Lenders want information that instills confidence, not a pitch. For example, at Enduring Planet, underwriters focus on two main risks when lending to climate companies with government contracts: the risk of the government failing to pay on time and the risk of the company not being solvent throughout the loan term. For any creditor, customer contracts like offtake agreements are the cornerstone of their underwriting. Evaluating the bankability of an offtake agreement requires a specialized skill set. Challenges for lenders often arise when expected receivables are far into the future (around year four or five), with material risks that could extend those timelines even further, dramatically impacting the IRR of the transaction. Projects with assets that have clear resale value—like solar assets, vehicles, and large-scale equipment—are more attractive. Credit investors prefer projects with turnover every three to four months, as they provide more data and stability.
- Q: What’s an example of binary risk within offtake agreements? A: A company recently secured construction financing for a large solar project through a guaranteed offtake agreement with Occidental Petroleum for a direct air capture facility. The potential binary risk here is tied to the 45Q tax credit, which could influence demand for Occidental's product, thereby jeopardizing the offtake agreement for the solar PPA feeding into the direct air capture facility. Companies will continue to win offtake agreements and therefore credit by earning demand and creating real value. With Big Tech and data centers, for example, renewable energy is the most cost-effective form of power for these centers, and despite some sequencing challenges, companies are unlikely to stop purchasing renewable energy. Corporate giants like Google are standing up to support offtake agreements, like their partnership with Fervo Energy.