As a startup, it can be difficult to know where to start when you’re seeking funding to speed up your company’s growth. Funding can allow startups to thrive — they’ll gain access to money for marketing, hiring, and purchasing of equipment to produce goods or services.
Greentech and other areas of ESG have hit speed bumps in the startup phase as their technology and market opportunities are often perceived by investors and lenders as higher risk. Tech companies in this space face unique challenges with fundraising, but with the right strategy in place, the capital is often there.
Understanding the funding routes available for greentech startups will help founders better develop a strategy that will carry them across the finish line to being funded.
Raising Venture Capital
Raising venture capital refers to financing given by investors or investment banks to startups that the venture capitalist believes has significant growth potential. Support from a venture capitalist can be obtained by companies that can show growth and potential that an investor would be attracted to.
To raise venture capital, you’ll need to approach potential investors. Before doing so, you’ll want to have a solid set of current financial statements (potentially audited or reviewed by a public accounting firm) and reasonable financial projections for the company.
The investors will need as much information about your company as possible, including sales and marketing efforts and customer information.
Securing a Conventional Bank Loan
Another avenue to pursue is a bank loan. Bank loans are given to businesses that can demonstrate solid financial performance.
Depending on how the business is structured, the owner may be required to provide their personal financial information to obtain the loan. They will also need to provide a set of business financial statements and projections for future performance.
Before applying for a bank loan, make sure that you can demonstrate a solid financial history and a good credit score. Bank loans are commonly issued with set repayment terms and interest rates. These will vary depending on the amount you borrow and your financial history.
If you don’t have a great credit history, you may be able to obtain a Small Business Administration loan. These types of loans can be used for various business purposes, but you must meet certain requirements to qualify.
How GreenTech Startups Use Insurance To Secure Funding
New businesses often won’t qualify for traditional commercial loans since they don’t have much financial history. An alternative that can allow businesses to qualify and potentially obtain a lower interest rate is obtaining what is known as performance guarantee insurance.
A business owner can purchase performance guarantee insurance to cover part of the loan repayment, should it come into default or should the business fail. This helps de-risk your business model in the eyes of lenders and makes your startup a safer credit risk.
“There are currently very few options for companies seeking to grow their businesses when risk-based capital is non-existent in both today’s marketplace and in the foreseeable economic future,” says Edge Management’s Nemo Perera. He says that founders should consider “using insurance as an alternative form of capital, to help mitigate risks associated with, for example, green technologies, which enables companies to raise debt without equity dilution.”
When to Bring in an Equity Partner as Co-Founder
If you find someone who believes in your business model and its products or services, they may be willing to join your company as a co-founder or equity partner by providing capital. This setup can be quite beneficial to new businesses since there will be no requirement to make monthly debt payments.
Instead, the equity partner or co-founder is usually entitled to a percentage of the company’s earned income or may decide to sell their equity shares to someone else down the line.
Before bringing on an equity partner or co-founder, make sure that their beliefs align with yours. You don’t want to choose a partner who doesn’t agree with your vision or who wants to take a different direction.
This miscommunication can lead to arguments or hostility down the road, and you may be forced to adopt a business model that is different from your intentions to meet your partner’s requirements.
Find a Customer Who Believes in Your Product Enough to Bring it to Market
Finally, if you have a customer who uses a significant amount of money to purchase your product, they may be interested in contributing to the success of your company by providing funds to support it.
This approach can be a win-win for both the customer and your business. For example, the customer may be allowed discounts that you provide them on your products. It also guarantees that they will have continued access to your company’s products down the line.
A business benefits from its customer investing in several ways. First, a customer who decides to invest is unlikely to leave your business. This investment guarantees a continued, ongoing relationship with your company.
Next, depending on the terms of the agreement, the customer may be rewarded through their stake in your company or through regular payments that you make.
The terms of your agreement don’t need to meet the stringent lending requirements of a bank. Instead, you’ll be able to negotiate the loan terms directly with your customer to come to an agreement that you are both satisfied with.