On 21st October we hosted the second instalment in our series of roundtables for the Green Entrepreneurship Forum: a new policy initiative we are running with Mishcon de Reya that brings together the UK’s most successful sustainability driven entrepreneurs to help support their growth and inform us on the policies they need to flourish.
Great ideas should not cost the earth. Many traditional funding routes focus on the monetary value, which can make it challenging for sustainability-focused businesses to raise the funds needed to grow. However, there are ways to raise the necessary capital. At this online roundtable we discussed how sustainable businesses and businesses working for social good can scale through debt and equity fundraising. We also considered whether any additional government support should be offered to the UK’s sustainability driven startups.
To open the discussion Simon Daniel from Moixa shared his experiences and learnings from raising capital over the last 15 years. He shared a fantastic analogy using an hourglass - the early stages of fundraising can be quite easy - it becomes much harder as companies try to raise Stage A and B funding because of the high risk, and then becomes much easier once the company seed Stage C and D funding or reaches an international level. He shared an experience where he went to find investment for a new technology invention and was told by the CEO of a large computer company that he would rather buy it for $50m once it had been proven than buy it for $1 mil when it had no traction. He also highlighted the importance of timing - his company developed a smart battery and tried to raise funding, but it was only after Tesla had proven the importance of the technology. He finished off by explaining the importance of carefully managing share options, as getting this right in the early stages can influence the ability to raise more money later on.
Next we heard some thoughts from the investment side of the table from Vish Srivastava, Managing Partner of Future Business Partnership, a new investment fund with the overarching goal to use traditional investment discipline can be used to make the world a better place. He shared that his investors are looking for businesses that have proven their profitability model and scalability, with the infrastructure and experience to scale a business. Investors who are committed to investing in companies with environmental and social advantages want to see solid KPIs, measurements and targets around their impact. They want to see the same level of commitment to the social benefits as well as the business growth.
We then asked Mischon de Reya to provide a few words of advice from their legal experience. Alison Keyse and Emma Miller from the Private Equity department spoke about the importance of getting the right investors involved who can bring money but also sector expertise and strategic thinking, and being careful not to have too many investors with different priorities. For green entrepreneurs it is important to allow for longer lead times into businesses becoming revenue generating, as well as choosing the right partners who are prepared to help on that journey. There is also an opportunity for policy to increase support for green entrepreneurship through changes to schemes such as SEIS and EIS , for example investors could be rewarded for holding onto their investments for longer. Sarah Spurling from the Finance department focuses on domestic and cross-border debt financings. She shared the importance of collecting KPI’s and sustainable evidence about the impact of the business to help not only secure the right lenders but also satisfy the regulatory requirements.
A number of ideas were shared during the ongoing discussion, including the following:
If the Treasury were to increase the current threshold for international investment from €8m to €20m during the current Prospectus Regime review, it would unlock additional international investments. The current threshold is stopping businesses from gaining the support because many platforms are looking to work with sums between 8 - 20 million. The Prospectus Regime review may open a number of other opportunities.
Getting good evidence of sustainability is a huge challenge when businesses are part of a supply chain, so making sure you are clear on your own performance and work with organisations with equally rigorous reporting will help in securing funding.
The short term nature of private equity and treating companies as commodities is fundamentally incompatible with long term purpose driven businesses. One way to address this is moving to a stewarding structure which separates out control and economics. This is more prevalent in North West Europe and is emerging in the UK.
Some investment funds are moving in the direction of providing financial incentives to investors by linking their profits to successfully achieving the social benefit promised to long term investors.
Certain industries, particularly within the industrial sector, do not currently qualify for EIS support. If the scheme was revised to prioritise decarbonisation it would allow more heavy industry companies to focus on this goal.
Private debt financing can often come with crippling terms - a return of 18% per annum is not viable to company growth. Even in an asset holding company there is still a requirement for some level of director liability. There are very few people who can absorb this level of risk. One idea raised was that the government could provide the guarantee rather than the individual to make debt access more favourable.
The Loan Market Association is currently developing a structure for Green Loan Principles and sustainability linked loans where there are benefits linked to evidencing sustainability, but this is mainly for larger scale businesses.
While putting figures on impact reporting can be challenging, it can be easier to tell stories and provide case studies. In some instances this can be enough evidence, particularly with crowdfunding rather than going through traditional funding routes. This also allows the company to keep its managerial control.
The US and Europe are easier places to raise money for green technologies. For scalable businesses it is a good idea to think internationally from the beginning.
Our next roundtable is on 18th November, where we will be exploring ‘ Ecosystem Economics - how natural resources are the future of capitalism’ . If you would like to get involved in the Green Entrepreneurship Forum and contribute to this roundtable please email katrina@tenentrepreneurs.org.