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With Jennifer McFarlane

Fundraising Lessons from a Veteran Cleantech CFO

Veteran CFO Jen McFarlane shares lessons on fundraising, including guidance on how much to raise, who to raise from, and how to blend equity and debt.

As part of our “Raising your First Institutional Capital” series, we sat down with Jennifer McFarlane, a veteran operator with 20+ years of experience as a CEO, CFO (of not 1, not 2, but 3 cleantech companies), Board Director, and advisor to countless cleantech entrepreneurs.

How much 💰 do I really need?

Fundamentally, raising venture capital is a question of balancing dilution with enough runway to achieve a huge step up in valuation in a subsequent round (or exit). The common narrative from investors is to minimize dilution whenever possible, either by raising less capital or seeking a greater valuation. The thing is, entrepreneurs always need more capital than they expect. Product development, hiring key talent, executing on a key purchase order, all typically take longer than anticipated.

Practically speaking, if you're a pre-Series A company, you should add 25-50% to your budget for the next 12-18 months. If you think you need $1M to get to your next round on a 12 month timeline, you’re likely looking at a $1.25M/$1.5M raise and a 16-18 month trajectory.

If you raise less capital to optimize for dilution, without considering a margin of error in your budget, you run the risk of needing bridge financing. For founders who have never had to raise a bridge round before, know this: bridge rounds are inherently harder to raise. First, when you’re running tight on cash, your negotiation power as a founder drops significantly – this often leads to worse terms and pricing. Second, most VCs don’t do bridge financing for companies outside their existing portfolio, dramatically limiting your options.

Do your homework

So, as you fundraise, some key considerations for selecting your investors are (a) their financial capacity to back you in the long term and (b) their reputation for founder support during challenging times. Can the investor provide bridge financing? Have they done so before? If you’re able, speak to existing portfolio companies to understand how a prospective VC has handled the bad times and their attitudes to bridge financing. And be mindful of working with VCs whose fund is near the end of their investment life; even if they supported bridge rounds in the past, those days may be behind them.

The biggest cost of a raise? Your ⏱️

In Jennifer’s experience, the biggest cost of fundraising is the CEO’s time. This is often underappreciated by those who haven’t gone through the process before, but should be a key consideration of any founder.

Jennifer shared a cautionary tale of a cleantech entrepreneur whose laser focus on dilution came at a significant cost to the business. When the initial term sheets came in for their Series C, the valuation was below the expectations of the CEO. Without fully considering the impacts, the CEO spent the subsequent 4 months seeking alternatives, negotiating other term sheets, and eventually closing the round. Unfortunately in that time, the CEO’s focus was entirely on the raise, and the business suffered, leading to a number of missed key milestones. This then affected their runway and eventually their subsequent raise, with impacts that outweighed the benefits of the initial bump in valuation.

What About Debt?

When considering debt, entrepreneurs should have three priorities (in order): Runway, Terms, Pricing.

  • Runway: Consider not just how much runway you get in exchange, but whether or not the capital allows you to achieve milestones that have the valuation impact you seek. When calculating runway, don't look at the maturity date on the debt, and instead look at net cash flows. Rather, ask yourself: when will we pay back more cash to the investor than they gave us (after taking into account fees, cash interest, principal payments)? You will be surprised how quickly this happens. And be mindful of the time needed to execute a debt transaction, as spending 6 months negotiating 3 months of additional runway is not prudent.
  • Terms: Be wary of any loans that:
    • Require IP as collateral
    • Have complex restrictions on the use of funds
    • Conditions that limit your ability to draw cash (milestones/performance metrics/minimum cash balances, etc)
  • Pricing: A good loan is not as simple as the interest rate! Interest rates reflect a mix of security, term, and a host of other loan factors. Since not all loans are structured the same, be weary of comparing debt options purely on the cost of capital, and consider all of the various factors (covenants, collateral/security, dilutive elements like warrants, etc)

Additionally, keep in mind the following:

  1. Lenders typically don’t play well together. This is especially true when lenders have security or seniority requirements. Be mindful of this when taking on debt and thinking of future capitalization needs.
  2. Corporate debt is not your only option. Equipment financing, inventory financing, PO financing, are all strong and growing options. When exploring these types of credit instruments, make sure to limit the lender’s security to the equipment/inventory/PO they are financing. For a broader overview of debt options for climate startups, check out this great piece from Climate Tech VC on the Climate Capital Stack.
  3. Revenue-based financing is a growing and exciting product. Unlike traditional secured debt, revenue-based financing better shares risk among the parties to the transaction, aligns the lender to your revenue goals, and almost always works to maximize runway.
  4. Raising debt and equity in a fundraising round can add a LOT of complexity. You need to be asking yourself – is it worth the extra time? Does it add value to your next round? If you find a lender who makes this process easy, then the non-dilutive benefits of debt become way more valuable.

Jennifer McFarlane is a Partner with Asterra Partners which is developing innovative financing structures to fund new technology commercialization. In addition, she is an independent board member at three venture backed companies (Blue Planet Systems, TruTag Technologies and Betteries GmbH), and an advisor to several SaaS companies. Prior to Asterra Partners, Jennifer had a career as C-level executive at both public and venture-backed companies and as an international investment banker. Her experience spans multiple industries including climate tech (NEXTracker), synbio (LanzTech), medtech (Zyomyx) and energy (SPP). Ms. McFarlane is also a member of the Council on Foreign Relations, a C3E Ambassador (an appointment by the U.S. DoE) and a member of MCE Social Capital Loan Committee. She holds an MBA from Stanford Business School and LLB / BSc from the University of NSW, Australia.

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