The Power of Debt — Tips From a Serial Climate Entrepreneur

For many early stage climate entrepreneurs, securing a facility from a public or private lender is towards the bottom of their priority list. Maybe their venture isn’t profitable, their list of customers is short, or their technology is unproven; whatever the case may be, in their eyes, debt is a conversation for the future.

We sat down with Xavier Helgesen to understand an alternative perspective. As founder of Enduring Ventures — and, previously, Better World Books and ZOLA Electric — Helgesen has a proven track record of building successful climate-positive ventures and counts debt amongst the invaluable financing tools that enabled him to do so. Even when a venture is in its infant stages with minimal traction, Xavier believes that there is a role for debt to play.

Note: this guidance in this piece mostly focuses on companies with revenue generating assets (think EV financing, hardware-as-a-service, etc) that can be moved off-balance sheet.  However, many of the insights also apply to revolving credit facilities, inventory financing, revenue-based financing, etc.

🐢 or 🐇

When it comes to debt, it pays to be patient. No matter how game-changing a climate entrepreneur’s idea is, Bank of America won’t be handing them a billion dollars on day one without significant traction (and likely collateral, etc). On the contrary, founders can expect to raise debt incrementally and should be prepared to swallow suboptimal terms in their first deal. The price of your earliest debt will inevitably be high (expect mid-teens to mid-twenties for asset backed loans) and founders may receive ten offers from ten lenders that have completely different structures.

Don’t sweat it; by proving that you can grow your business and successfully repay your lenders on time, you will earn better terms for subsequent facilities. Most debt can also be quickly refinanced as your underlying portfolio demonstrates successful repayment (called seasoning), so don’t assume the cost you get today will be your final cost of capital in 2-3 years.

Finding the right lender(s)

To locate the ideal debt providers for your climate venture, focus on reputation. Which lenders have a proven track record of catalyzing social impact startups? Which have the risk tolerance to give your venture a shot? You’ll find them listed in press releases issued by like-minded (and well-funded) startups, and talked about in dynamic online climate communities like My Climate Journey and Work on Climate. Make a list and speak to the whole lot. Here’s who they might be:

• Small, private family foundations
• Investor networks (e.g. Toniic)
• Individual investors with private wealth
• Institutional impact lenders (less accessible for early stage startups)

Notably absent: banks and mainstream commercial lenders. They’re probably not interested in being part of your first facility.

Sizing your facility: go too big, and you’ll go home 😞

One of the most common questions that climate entrepreneurs ask when preparing to raise debt is: what’s my number? $5 million? $20 million? $75 million? From the outset, it’s important for founders to recognize that lenders will do a lot of this sizing work for them. Debt providers are more risk-averse than VCs, and because they can’t afford to suffer too many significant losses in their portfolios, they will fixate on the potential downsides of your venture and set financing caps. Expect to play by their conservative rules for your first facility.

That said, market feedback isn’t a one way street. Climate entrepreneurs will be wise to proactively determine what they and their team can reasonably deploy in, say, ~18 months and generate an ideal funding target based on the size and scope of that deployment. This protects a founder against raising too large of a facility and locking up money that they are not prepared to spend. It’s important to note that the capital you don’t use can be quite expensive (almost paradoxically), as most early lenders will have fees on undrawn capital baked into their terms.

Secure the 💰

Your reasonable expectations are set, your potential lenders are identified, your optimal deal terms and debt amounts are mapped out; now, it’s time to land the money. As you craft your approach, keep a few things in mind:

• An unprofitable venture can have profitable parts. If, for example, you run a climate tech startup that generates recurring revenue from assets (EV leasing, sensors/controllers with recurring revenue, etc), you can wall off those steady cash flows in a separate company, called a Special Purpose Vehicle (or SPV). You can then raise debt against those revenues, without having to account for your (likely) high operating expenses at the parent company.
• Data is 👑. Many of the lenders you may approach for your first facility will have significant impact measurement requirements. Make sure you start tracking your impact early and leverage trusted methodologies. Try to collect qualitative customer stories as well. Those types of personal case studies can go a long way towards communicating the impact of the solutions you’re deploying.

• Debt can beget equity, and vice versa. The more track record you can demonstrate, the better the terms you can secure from various investors. A simple framework to consider for the capitalization of your recurring revenue business:
  • Raise an equity round. Keep this small, but enough to demonstrate sufficient track record to your early lenders. Ask them what this needs to look like before you raise.
  • Use a portion of the equity round to get your tech into the hands of initial customers, and get some recurring revenue contracts in place.
  • Take your new customer data to lenders, who will now be able to underwrite a small facility secured against the revenue generating assets in the field. Your SPV may even be able to “buy out” the initial customer contracts from the parent company, freeing up expensive equity to spend on hiring or R&D.
  • Use that facility to grow your business further. Leverage your growth to raise another equity round.
  • Rinse and repeat.

Xavier Helgesen is the Founder & Office Librarian of Enduring Ventures, a post-modern conglomerate. A lifelong impact-focused entrepreneur, he co-founded ZOLA Electric (solar in Africa), Better World Books (social impact online bookstore) and Ecosafi (clean cooking for Africa). He helped incubate Enduring Planet and sits on its board.

(Full Disclosure: Xavier Helgesen is on the Board of Enduring Planet, and Enduring Ventures is a shareholder)