16 ways to finance your cleantech business
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Most cleantech entrepreneurs have ambitious goals: Solve major environmental challenges with new, often unproven technologies—all while making money for themselves and their shareholders.
But building a cleantech company can quickly get expensive, and capital markets have a limited appetite for writing big cheques and staying committed for the long haul.
Cleantechs tend to be hardware intensive, especially in capital-intensive cleantech sectors such as energy storage, advanced materials, waste-to-energy and bioproducts, where tens or hundreds of millions of dollars in investments may be required to build a commercial facility.
“While the high capital requirements and market complexity have scared off many cleantech investors, Canada has still emerged as a cleantech powerhouse and launched some of the most promising, globally competitive cleantech companies.” says Zoltan Tompa, Director, Innovation and Adoption in BDC’s Cleantech practice.
The 2017 Global Cleantech Innovation Index ranked Canada 4th out of 40 countries, ahead of the U.S. and Israel. Canadian companies also accounted for 13 of the top 100 companies in the prestigious Global Cleantech 100 list in 2018.
“Canada is fortunate to have several programs that support cleantech companies at all stages of their growth, but the landscape of support can be confusing to navigate for an entrepreneur who needs to remain focused on building and growing their business.” says Tompa.
Here’s an overview of 1 typical sources of financing for cleantech companies, by development stage.
The start-up phase is when you distill your vision into a compelling business plan that will orient your actions and help you pitch to potential investors or lenders. Many cleantech businesses start creating a working prototype of their technology at this stage.
What are my financing options?
Personal investment and love money
Your first investor should be yourself; usually through a combination of your own cash, collateral on your assets and sweat equity—the value of the work you put into the business. You can also turn to a spouse, parents, family or friends for loans and investment.
Business incubators and accelerators
Incubators and accelerators can provide financial and material support in the form of office space, administrative and logistical support, and technical resources, in exchange for equity participation in your start-up.
These business incubators and accelerators in Canada offer specialized services to cleantech entrepreneurs:
- Canadian technology accelerators for cleantech (international)
- Ecofuel (Montreal, QC.)
- Foresight cleantech accelerator centre (Surrey, B.C.)
- MaRS (Toronto, On.)
- Zone Startups (Calgary, Alb.)
BDC offers seed funding of up to $250,000 to companies that participate in the Foresight and Ecofuel acceleration programs. Terms of the investment vary depending on the nature of the financing round, and BDC can continue to follow on as the company grows and raises additional capital.
Commercial loans can be used to finance your business without giving up equity. Bankers are looking for companies with a sound track record and that have excellent credit. A good idea is not enough; it has to be backed up with a solid business plan. Start-up loans will also typically require a personal guarantee from entrepreneurs.
BDC offers start-up loans to entrepreneurs in the start-up phase or first 12 months of sales. You may also be able to postpone the principal payments for up to 12 months.
Venture capital can be a great source of funding for the right type of company and for entrepreneurs who are ready to give up equity. Venture capitalists are looking for companies that can scale quickly. They also expect a healthy return on their investment.
These Canadian venture capital funds have a dedicated or partial focus on cleantech:
The Industrial Research Assistance Program (IRAP)
Canada’s National Research Council (NRC) runs IRAP, which provides financing and advisory services to help small and medium-sized Canadian businesses develop and commercialize new technology. For instance, early cleantech companies can use this type of funding to develop prototypes.
Sustainable Development Technology Canada (SDTC)
SDTC supports pre-commercial projects that have the potential to demonstrate environmental and economic benefits relating to climate change, clean air, clean water and clean soil. SDTC funds are disbursed as grants and require matching funds from other investors.
“SDTC can be a great source of non-dilutive financing to help scale up a prototype to a pilot or demonstration facility. SDTC’s rigorous technical and market due diligence also provides comfort to downstream investors,” explains Tompa.
Cleantech companies in the development stage have shown that their technology works, but have not yet proven their commercial viability.
What are my financing options?
Corporate strategic partners
Large corporations are often willing to partner with smaller technology-driven firms developing technologies that present some strategic value to them. They can even enter into joint development agreements or occasionally have corporate venture capital groups that make equity investments.
Scientific Research and Experimental Development (SR&ED) Tax Credit program.
The SR&ED Tax Credit program is Canada’s largest R&D incentive. Canadian companies can earn an investment tax credit of 35% on the first $3 million in qualifying expenditures, including salaries, capital, consulting fees and materials. The tax credit stands at 15% for amounts above $3 million. For most companies, these credits take the form of a cash refund.
“There's potential to use SR&ED receivables to get access to money earlier and help manage your cash flow,” says Tompa.
Export Development Canada (EDC)
EDC provides direct loans, bonding, guarantees and export insurance to cleantech companies in early commercialization that are securing their first export contract or already exporting.
BDC’s Cleantech Practice
BDC’ Cleantech Practice offers various growth capital solutions to high-potential cleantech companies with proven technology, demonstrated market traction, and the potential and capability to scale to $100 M+ revenue. BDC is committing $600 million over the next five years (2018 - 2023) in both equity and debt.
“BDC’s new Cleantech Practice will provide more creative, flexible and patient capital solutions.” says Tompa. “This new capital will be used to finance high-potential cleantech companies that are outside our normal risk parameters with the objective of building large, global, commercially self-sustaining cleantech champions.”
Businesses at the expansion stage have achieved profitability. Some companies will have entered a period of intentional unprofitability to support a development program or acquire another company.
What are my financing options?
Growth & Transition Capital
BDC offers long-term financing, cash flow loans, mezzanine and quasi-equity financing with flexible terms and conditions, to pursue growth projects or to acquire another company.
Private equity and growth equity funds
These types of equity funds will be able to provide significant amounts of capital to companies to execute global expansion strategies. In return they will expect at least partial ownership of your business.
For example, BDC’s Growth Equity team provides minority equity investments to mid-market growth businesses looking to become leaders in their industry.
The Canadian Venture Capital & Private Equity Association’s member directory can be a good place to start looking for private equity funds.
Pension and infrastructure funds
These types of funds are looking for long-term, steady returns and might be a good fit for companies that are more infrastructure-like, such as renewable energy production or energy storage companies.
Syndicated financing and corporate financing
Established cleantech businesses can do an initial public offering to tap into public equity and debt markets to raise capital.