Published on February 18th, 2008 | by Leah Edwards16
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, 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 about financing a green startup.
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 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.