BioCycle April 2004, Vol. 45, No. 4, p. 38
Recycling, remanufacturing, composting, and other green ventures have an even harder time than more “traditional” small companies in obtaining patient capital for start-up and expansion. So it’s critical for those firms to think creatively about their financing options. Friends, family, customers, suppliers and individual angel investors can all be important resources to tap for companies that may not qualify for conventional bank lending. Asset-based lending is another option, particularly for companies that are more capital intensive.
One alternative form of financing comes from community development financial institutions (CDFIs). Nationwide, over 600 CDFIs serve economically distressed communities by providing credit, capital and financial services that are often unavailable from mainstream financial institutions. To find out more about CDFIs in your area, go to www.cdfifund.gov/programs/cert/cert_cdfi.asp.
Community development venture capital (CDVC) is one type of CDFI. CDVC is similar to traditional venture capital (VC) in that it typically consists of an equity stake in companies that offer high growth potential. CDVC is also similar to traditional venture capital (VC) in that it is an engaged form of financing – the investors often sit on the board of the growing company and play an active role in advising top management on important business issues.
However, CDVC differs from traditional venture capital in that it focuses on a broader range of industries than information technology, biotechnology and “dot.com’s.” CDVC funds also look for social, in additional to financial, gains such as jobs (especially for low-income individuals), positive environmental impact, and inner city/rural economic development. It is important to realize that while CDVC funds have a different focus than traditional VC, they are still very selective – often investing in only one out of 100 companies that apply to them for financing. For more information on CDVC funds, go to www.cdvca.com.
SJF Ventures (previously Sustainable Jobs Fund) is a community development venture capital firm with offices in Durham, North Carolina and Philadelphia, Pennsylvania. Founded in 1999, SJF Ventures invests in growth enterprises that create quality jobs in the eastern U.S. and provides equity financing in rounds from $500,000 to $5 million with coinvestors. To date, SJF has invested $8.5 million in 16 companies and is still actively seeking investment opportunities. (See www.sjfund.com for additional information.)
SJF believes there is good potential to realize economic, social and environmental value by investing in sustainable enterprises, but one has to be extremely selective. SJF has learned some key lessons about attracting investment in conjunction with its 16 portfolio companies, including: Cultivate a seasoned management team; Develop market-valued products; and Don’t rely on a few big customers or corporate partners.
CULTIVATE A SEASONED MANAGEMENT TEAM
Venture capitalists put great importance on the abilities of the entrepreneur and his/her core management team. Salvage Direct, an on-line auto salvage company, is a good example of a company that has good senior management in addition to team development and training for all employees. Bob Joyce, the founder and CEO of Salvage Direct, had industry expertise in auto insurance and salvage prior to founding his company. He recruited another experienced colleague to join him and together they hired a Chief Technology Officer to help them with the on-line aspect of the business.
Bob Joyce wanted to grow Salvage Direct, based in his upstate Pennsylvania hometown of Titusville (pop. 4,000). Salvage Direct contracts with auto insurance companies to resell damaged vehicles to licensed auto dealers and dismantlers. A cash-intensive business, Joyce maxed out on loans from banks and turned to a state-sponsored economic development fund for additional debt. Joyce continued to gain customers and was successful a year later in raising his first round of venture capital financing round from a traditional venture capital firm. Salvage Direct continued to grow but Joyce was under pressure to move the headquarters out of Titusville.
Bob Joyce turned to SJF Ventures, which was enthusiastic about supporting employment in rural Pennsylvania. SJF Ventures also offered good financing terms and industry experience. SJF invested in Salvage Direct in September 2002 and since then the company has continued to grow and now employs 40 people. With its strong bench of talent, Salvage is well-positioned to attract additional capital investment and thus take advantage of opportunities for rapid expansion and growth. For more information, go to www.salvagedirect.com.
DEVELOP MARKET-VALUED PRODUCTS
While there is always the “immediate problem” that needs to be solved or deadline to meet, it’s vital that owners and managers focus on customers and markets to define the business, not raw material supply. Let customers know what problem your product or service will solve, with recycled or organic content thrown in as a “bonus.” At the same time, it’s necessary to assure customers about quality – of feedstock, process, and end products.
Another SJF portfolio company, SelecTech, provides an example of a shift from raw material-based thinking to market-valued products. Based in Taunton, Massachusetts, SelecTech turn out end products from carpet and plastic scrap, including planters, timbers, parking, and flooring materials. While it began as a recycling company that recovered waste plastics using a low-cost process, it is now focused as a commercial flooring company. FreeStyle, the SelecTech flooring product, is quick to install, requires no adhesives minimal subfloor preparation, and works well on floors with moisture problems. It uses 92 percent recycled material content as a cost advantage. For more information, go to www.selectech- inc.com.
DON’T RELY ON A FEW LARGE CUSTOMERS OR CORPORATE PARTNERS
Having large, well-known customers or corporate partners can be helpful when seeking financing, but too much reliance on a few major players will increase your risk. Make sure you retain core competencies and critical infrastructure in-house instead of relying on those of corporate partners.
EvCo, another SJF portfolio company, uses reclaimed plastic beverage bottles and food containers (PET) as raw materials to make liquid coatings sprayed onto cardboard, cartons, and paper used in packaging perishable foods. These waterproof coatings replace traditional, nonrecyclable wax coated packaging, and will eventually permit the recycling of over four billion pounds of currently wasted tree fibers. EvCo has realized the need to move beyond one or two large corporate partners. The company has diversified, established multiple product development and distribution channels, and is expanding its infrastructure to accommodate new opportunities. See www.evcoresearch.com.
There are many options for financing beyond traditional banks, including community development financial institutions, community development venture capital firms, suppliers, customers and angel investors. No matter whom you approach, the lessons above are useful. Having a strong team implementing an innovative business model in a receptive, growing market will be most attractive to financiers!
Janet Cowell is with SJF Ventures in Durham, North Carolina. (www.sjfund. com) SJF director David Kirkpatrick will discuss equity financing and capital management in the organics recycling industry at the 34th Annual BioCycle National Conference in Philadelphia, June 21-23, 2004. See pages 15-17 for complete agenda and registration details.