This month, we look at a problem that many climate founders face - and which we have faced with our own Ezra portfolio companies. It is also a problem we are actively trying to solve. We would love to talk to you if you have either experienced the challenges of raising a first debt facility, or have thought about how to solve it.
Debt financing is a critical part of the climate transition. Many green technologies have high up-front costs for customers, even if they end up paying for themselves over time. Heat pumps, for example, cost up to $10,000 and can take an average of 12.5 years to generate power savings that offset their cost. Debt is a critical tool for green technologies with similar cost profiles, enabling customers to smooth outlays over time.
This is a significant component of the energy transition: ~80% of the emissions reductions required by 2030 come from technologies available today, many of which have a similar cost profile to heat pumps. This means that the speed at which debt financing can be deployed towards climate will be a critical driver of the global transition.
Companies that provide debt financing for green technologies will constantly have to raise debt capital, which is used to finance end-customer use of the relevant technologies. This is central to these companies’ ability to grow - a solar lender, for example, can only provide loans to new customers if it has enough debt capital to deploy in the first place.
In many cases, early-stage climate finance companies that are lending to customers either do not consider - or cannot raise - a first debt facility. This is the case even though a first asset-backed debt facility is generally preferable to other types of capital available. These are:
Despite the benefits of a first asset-backed debt facility for many climate finance companies, often they do not - or are unable to - raise one. There are a number of challenges that deter companies from building these sorts of facilities. These include the facts that asset-backed first debt facilities:
The problem of raising a debt facility remains a major hurdle for climate finance companies. To solve this, some companies leverage the in-house knowledge of studios or other accelerator networks.For example, at Ezra we have a Capital Markets team who works with our companies to meet and reach agreements with capital providers. This enables our companies to navigate the complexities of raising a first debt facility without directly incurring all of the costs of hiring experts in capital markets. Not all studios or accelerators have experience with asset-backed debt, however, so companies need to ensure they partner with those that do.
FinTech solutions are beginning to emerging - however none of these quite meet the needs of climate finance companies. Companies such as Sivo, Percent, and Lendable have begun to deploy venture debt and warehouse facilities to start-ups.
However, none of these are quite tailored to the specific needs of climate finance companies - i.e., for long-duration asset lending. For example, Sivo typically only offers debt with a <12 month tenor, which is hard for companies lending against solar, EVs, and other climate technology with longer payback periods.
In lieu of more solutions, we are actively exploring ways to improve opportunities to make the process of raising a first debt facility easier for early-stage climate companies. We are keen to talk with people in our network who have been asset-backed lenders to early stage companies and/or have borrowed at an early stage with more traditional project lending structures. Please reach out to us if this is you!