Business

Published on February 18th, 2008 | by Leah Edwards

16

How to Finance a Green Business

We received an email last week from an inventor in upstate New York, who has designed a green product that she wants to bring to market, and she would like some ideas of how she can raise money to manufacture and market the product.

I am going to present several ideas for financing a green business startup, not all of which may be perfect for her situation, but which are generally options for ecoentrepreneurs. Please comment on this post if you have additional ideas or questions.

This will be a relatively long post, so here is a summary of potential sources of cash for green businesses:

  • SBA loans
  • Social-venture venture capital funds
  • Friends-and-Family financing
  • Partnering with a nonprofit organization

Another option, which would not work for this inventor, would be to bootstrap a company, as I described in a previous post.

And another option that is off the table is licensing: This inventor looked into licensing the product to a larger company, which would put up the money for both production and marketing and would then pay the inventor a licensing fee, presumably based on the volume of sales. The downside of the arrangement would be a loss of control over the production and marketing, as well as the fact that the company who is willing to license the product would have the production done in China. Because the inventor lives in upstate New York, where there is significant unemployment, the inventor wants to find some way to raise the money to manufacture the product in a factory within her community.

SBA Loans

SBA Loans are not actually given out by the Small Business Administration. Applicants work with local banks to secure loans, which are guaranteed by the SBA and are offered at favorable interest rates and often with better terms than would be available elsewhere. These loans may not be appropriate for startups, but I would encourage all entrepreneurs to at least be aware of what is available. In addition, the SBA runs Small Business Development Centers, which can be helpful in writing a business plan.

Social-Venture Venture Capital (or Angel) Funds

There are now a number of venture capital funds and angel investors who are looking for companies with a double bottom line—both a potentially high financial return and a social, environmental, or economic benefit to a particular community. Often these investors will fund companies with smaller capital needs than they would consider for investments that do not have a social-benefit mission. I know about a number, many of which are focused on Northern California, so consider this list only an example to show that these funds exist. You may need to do some research to find similar investors in your area:

DBL Investors’ Bay Area Equity Fund, supports businesses with many social missions, including environmental ones but is focused on the San Francisco Bay Area.

The Omidyar Network funds both nonprofit organizations and businesses. This sentence from their About Page, sounds like the inventor who emailed us: “Omidyar Network believes that all individuals have the innate potential to make life better for themselves and their communities.”

Khosla Ventures funds microfinance ventures and health projects in addition to environmental concerns all over the world.

Friends and Family Financing

Many startups, green or otherwise, are initially funded by accredited investors that know the founder or who are friends of friends. Oftentimes the initial funding is in the form of convertible debt, which is converted to equity when the Company goes through another round of funding, with angels or venture capitalists. Although not all entrepreneurs may not know accredited investors or be comfortable raising money, I think this is the most common way to start a business. Sometimes a small amount of money will get a company off the ground and prove to SBA lendors or other investors that the company is worth financing at higher level.

Partnering With a Nonprofit Organization

Some nonprofit organizations have as part of their mission the goal of providing job training or employment for disadvantaged workers, so they operate a business as one of their programs. I think this option could be particularly interesting for this inventor (and other ecoentrepreneurs). The inventor can still receive royalties for her invention, but the business can be run with goals other than maximizing profits.

Now you might think I am crazy to suggest a nonprofit organization as a funding source, given that such groups are always in need of money themselves. However, there are venture capital-like funds set up for nonprofits, such as REDF (Formerly the Roberts Development Fund), to start up or expand business ventures run under the auspices of a nonprofit. Another option is Social Venture Partners, which has chapters in many locations around the world and provides what they call venture philanthropy–both cash and management expertise to nonprofit organizations.

If any of you know of sources of funding specific to upstate New York, please comment below.

Photo credit: Ian Britton, from freefoto.com



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About the Author

A strategy and marketing consultant, Leah enjoys highlighting the efforts of, and providing information for, social entrepreneurs. In her consulting practice, she works with cause-related businesses and enlightened investors--to see people succeed at doing good for the planet and local communities while doing good for themselves. Leah has a B.S. in business from UC Berkeley and an MBA and Certificate of Public Management from Stanford University. More information at www.leahedwards.com



  • http://www.personalfinanceblogarticles.com Susan Kishner

    I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.

    Susan Kishner

  • http://greenleah.greenoptions.com/ Leah Edwards

    I just received an email reminder about RSF Social Finance, which invests in and loans to social ventures. See http://www.rsfsocialfinance.org/

    And, here’s a good article from Inc. that lists more social venture funds:
    http://www.inc.com/magazine/20080201/do-gooder-finance.html

  • http://healpain.blogspot.com Jennifer Mannion

    Hi Leah, Thank you so much for this post and the additional resource. I just came back from an awesome meeting with the President of my local Chamber of Commerce and think that should be listed as a resource as well. I meet with the SBA next week and am also pursuing your resources. Feels good to finally have a bunch of avenues to go down. Gratefully, Jenny

  • http://chrissoderquist.blogspot.com/ Chris

    Great post, Leah. A few additional avenues:
    – SBIR/STTR grants.
    – Micro-enterprise loans (up to $50k).
    – Crowd-funding (http://chrissoderquist.blogspot.com/2008/01/potw-ii-crowdfounding-eco-clothing.html) and/or affinity angels.
    – Collaborative alliances (financing and/or partnerships with beneficiary organizations: suppliers, manufacturers, distributors, complementary products/services, etc.).
    – HELOC, particularly given the rates (prime -1); personal tax benies, and you can loan the money to the company.
    – Convertible debentures (individual/angel investors): Debt with an option to convert to equity, perhaps with warrant coverage too.

    Thanks again for the post.

  • http://www.countrywide-refi.com Tina Anderson

    I think especially with this type of business, friends and family financing would be a great way to go. But all four methods have good potential.

  • http://www.swirlspace.com Gustavo

    Another new way to fund is thru P2P (peer-to-Peer) lending sites such as Prosper.com or chipin.com.

    They rate your credit-worthiness and allow you to post your request for a loan and desired interest rate, up to $25k. Multiple individuals/lenders in the online community then bid on your loan and interest rate ($50-100+ at a time). It becomes a legit loan with rates better than most credit cards.

    Tip: It helps if you have a couple of friends who will post testimonials and get the bidding process rolling.

  • Pingback: Ecopreneurist: How to Approach a Venture Capital Firm with a Cleantech Business Idea : CleanTechnica

  • http://environmentalassociates.web.officelive.com Milagros Blanco

    Very helpful. There is so much competition these days specially in green projects. A project must be exceptional to attract any interest.

  • Pingback: More on Creative Financing for Green Businesses : Ecopreneurist

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  • http://www.lawent.com James

    I am in need of funding for my business which is erosion control for construction sites. We protect undisturbed land surrounding construction sites.. Anyone have any ideas on how I find some “green” assistance? I think my business would qualify but not sure. Any help would be greatly appreciated….

  • http://www.gecommercial.com.au/products/insurance Premium Finance

    Nice Article…

  • http://ecosector.com Mark Winstein

    http://www.EcoSector.com provides capital guidance, coaching, and related services to green entrepreneurs at any stage of development, including a free initial working session which often is sufficient to get ecopreneurs on the right funding track.

    I believe there should be far more caution when recommending friends and family rounds. 90% of all businesses fail within 10 years. Without a deep understanding of the root of these failures, most people who do FFA rounds will lose the money of the people who matter the most to them.

    Same with debt financing of startups – this is an exceptionally risky strategy which can lead to loss of vital assets such as retirement savings or homes.

    VC’s and angels provide capital primarily to entrepreneurs who have already met certain success criteria. Most green entrepreneurs have no idea what those criteria are, so as a result only 1 in 100, and perhaps as few as 1 in 500 succeed with that approach.

    The answers are quite simply and straightforward just not so obvious. We bring over 27 years of experience in all aspects of green business and NGO development to the green business movement, including a decade focused exclusively on the proper techniques for raising early-stage capital.

    Mark Winstein
    Founder
    http://www.EcoSector.com
    208-596-6500

  • http://paradigmshiftenterprises.com Competitive Advantage

    Really good post. I have a business in mind (though not green) and I was thinking about what is the best way of financing it. Your post gave me lots of options and idea. thanks.

  • http://speedyloansearch.com/ Thomas Speedy

    If you have an existing business that provides green products or services and have what it takes to grow, an Accion Green Business Loan can help. We bring 20 years of lending experience to our green business loan program and will work with you one-on-one to help you reach your eco-friendly business goals.

  • Patrick Shibata

    I do water conditioning without the use of chemicals or a external power source
    Documentation is available
    Driscoll farms saved 30 percent on there water bill
    22 percent higher yield on there stawberries
    I make water thinner for 15 minutes
    I am currently purchasing the patents and need financial assistance to mass produce these units.

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