Capital to Endure
By Nick Van Osdol
IT’S NOT ALL ABOUT VC
Even within the confines of this newsletter, we spend a lot of time thinking about venture capital funding for climate tech. It’s hard to ignore, especially when you see a weekly parade of nine-figure deals across climate verticals. Sometimes, it’s easy to feel like that’s all there is.
Of course, there’s much more to the world of climate finance. Beyond venture capital, there are plenty of other important sources of financing for climate tech businesses and projects. These include philanthropy and project-specific finance to international grants and grants from private foundations (e.g., we explored some of those a few weeks ago with the winners of the XPRIZE carbon removal competition). For a comprehensive overview (which the interview subject we’ll introduce soon helped write), check out Climate Tech VC’s “The Climate Capital Stack” here.
A critical avenue of financing we haven’t explored in Keep Cool? Revenue-based financing. Revenue-based financing (“RBF”) describes a model in which a lender provides capital to a growing business for a percentage of its future revenue. It’s not dissimilar to traditional debt financing with an interest payment, except that payments are tied to revenue instead of fixed. Some liken it to debt-based capital with an added growth focus.
One main reason RBF can be attractive for businesses? It’s non-dilutive; you’re not giving up a portion of the equity in your own business. It can also often be deployed faster to companies that need it than equity financing. Further, financiers can make it easy for companies to understand whether or not they qualify.
ENTER ENDURING PLANET
To better understand the concept and what types of climate tech firms benefit from integrating RBF into their business model, I spoke with Dimitry Gershenson, co-founder and CEO of Enduring Planet, a new climate-focused RBF lender that’s already inked some deals.
Enduring Planet came out the Enduring Ventures venture studio last year, and has since operated in a relatively ‘stealthy’ mode. Last week, they announced $5M in total pre-seed fundraising of its own, split equally across equity + debt financing. To supplement initial coverage of their raise and company formation, I’m excited to take you one step deeper to understand the role RBF will play in climate and Enduring Planet’s perspective on climate tech.
For a preview of some of the nuggets that are in store, here’s one quote that can’t wait:
We’re entering the new climate economy. And this is day one. If there’s ever been a time to lend against future revenue in climate, it’s now.”
Lots more in the rest of the interview 👇
Congrats on getting started with lending at Enduring Planet so quickly! What types of businesses will be modal clients for you?
We finance software, especially recurring SaaS software, recurring services, small hardware sold in volume, we like hardware + SaaS, consumer products, and more. In scope for our revenue-based financing are any businesses with consistent, growing monthly revenues and higher than 35% gross margins. Our model doesn’t work as well for companies with less predictable revenue.
Two deals we’ve done so far include a microgrid controls hardware and a SaaS business called New Sun Road. The second company is Aquaoso, which provides climate risk modeling for agricultural lenders, i.e., a SaaS product for banks and credit institutions.
The goal is to do 10-20 more deals in the next 6-12 months.
How did you personally land at the intersection of RBF + climate tech? Did you come at it more from a belief in RBF or a passion for climate?
More of the latter. I’ve been in climate and impact investing for 13 years. My co-founder, Erin Davis, did lending for cleantech in emerging markets and co-founded a fund that raised ~$200M for funding clean energy and microfinance businesses across Africa, India, and Pakistan. The formation of Enduring Planet came when I had the opportunity to start a company out of a venture studio. I knew that I wanted to accelerate investment in climate; much of my career has had that same focus.
Our first idea was similar to a few other startups, namely investing against future carbon revenue. I couldn’t get entirely comfortable with voluntary carbon offset market dynamics. Still, I thought if we’re not going to lend against carbon revenue, what if we lend against future revenue in climate because it will be this vast, growing sector with little competition in the early years. Typical constraints for businesses in more mature markets, like market saturation, aren’t as relevant here. We’re entering the new climate economy. And this is day one. If there’s ever been a time to lend against future revenue in climate, it’s now.
Our sector (climate) focus also lets us layer other products on top that bring value to our community. For example, we share deal flow with over 100 VCs in climate.
What does Enduring Planet’s ‘flavor’ of RBF look like?
For one, our terms are public. You can go to our website right now and download our term sheet!
- We lend on 2-year terms typically, with the flexibility to go as low as 1 and as long as 3.
- We will lend up to 10% of revenue, anywhere between $100,000 and $500,000.
- There’s a 1% origination fee; no other complicated covenants.
- We do term sheets in a week and fund within 30 days.
- There are no personal guarantees, collateral, or complex covenants.
Do you think most monetization long-term will come from financing or other layers on top of the capital?
Today, our revenue comes from two areas. We raise outside capital, deploy it, and charge a fee for the capital we manage. We take the delta between the cost of capital (“CAC”) and the return we make on any transaction. That delta is uncertain for now; it’ll be driven by how strong our underwriting model is. Over time the idea is to raise cheaper capital, better understand the risk profile for this asset, and ideally cut the cost of capital to entrepreneurs so that we make enough and entrepreneurs also get low-cost financing.
The other nice thing about our business is that we can raise capital from institutional investors focused on climate and willing to take a lower return in exchange for more significant social impact. I’m thinking of large pension funds and sovereign wealth funds with climate allocations that are ‘concessionary.’ In turn, we can pass those savings on to our customers and offer better terms as we scale. Plus, we’re already on par or cheaper than other RBF options.
Over time, we will expand to other forms of non-dilutive capital beyond revenue-based financing. Our long-term goal is that climate entrepreneurs can come to us for fast founder-friendly capital at any stage of their journey.
To close, how would you summarize your mission?
At our core, we want to help teams, especially those with underrepresented founders and leaders, raise money of any flavor for their climate tech businesses. We refer people to other lenders all the time. If you can get a better deal somewhere else, we’ll tell you.