Financing The New Climate Economy - A Chat With Enduring Planet's Dimitry Gershenson

In this Climate 21 podcast, I will showcase best practices and thought leadership by SAP, by our customers, by our partners and, by our competitors, if they're game, in climate emissions reductions. Don't forget to subscribe to this podcast in your podcast app of choice, to be sure you don't miss any episodes. Hi, everyone. Welcome to the climate 21 podcast. My name is Tom Raftery with SAP and with me on the show today, I have my special guests, Dimitri, Dimitri, welcome to the podcast.

Would you like to introduce yourself?

You know, we need to see probably a seven to 10 X increase in the amount of annual investment into the space. Today we're probably looking at around six, 700 billion a year, total flowing into climate solutions. And that number needs to be somewhere around four or 5 trillion, according to the various models that have been built

It's also often even if your venture backable, but you don't look like me and I'm a white guy, that means that capital is often not available to you because a venture capital ecosystem generally just has a lot of bias baked in. And then for folks that are not venture backable, there are really aren't any capital options for them to grow, to get to a point where they could access, call it bank finance or other forms of later stage finance.

The third problem is that the credit, options that are available to entrepreneurs today are basically just late stage. And if they are available early they're often, they often have a lot of the same kind of exclusionary problems because they require personal guarantees and a lot of collateral. And, most founders struggle with the idea of like putting their house up to back their business.

If they even have a house, you know, a lot of founders don't have those kinds of resources in their personal asset base. And then last but not least, there's a fairly substantial community of institutional investors that want to do more in climate, but require a fixed income allocation. So they need to put their money into more liquid debt opportunities because they've already, let's say committed all of their LP capital to VC funds.

Well, if those opportunities don't exist and they just won't allocate the money. And so on the one hand, the market has demand. And on the other hand, there's supply and there's nobody in the middle serving to enable those two to connect. And so we said, okay, well, why don't we?

And that means that if we're starting at the beginning of that process, the call it economic opportunity of that shift is incredible. And so being call it, the first dedicated FinTech lender in climate means it gives us a pretty incredible advantage to capture a lot of that opportunity. I don't know. Does that answer your question?

I think there's been a lot of cultural pressure, a lot of status quo thinking around, well, you know, if you can raise venture, why raise anything else? Or we actually had a VC recently say, well, you know, we sometimes think that if our startups raised debt, then they're not going to be able to raise a follow on round. And I said, well, that's not true.

Where is that coming from, I don't know, a single startup that was venture backable that went and raised debt, which is often a much more rigorous, challenging process, typically not in our case, but typically who then was not able to go raise VC. If anything, it helps VCs because now there's, non-dilutive growth capital driving that business forward. And that means that they get, a proportionately better deal than if that growth had been funded with venture makes no sense to me.

So it's that, that education element is probably where we call it, do the market making work, but otherwise, I mean, it's, you know, you talked to, to the founders in this space and you say, Hey well, You used to think this was your only option and now you have these options. Everybody's like, oh man, how do I sign up?

It doesn't have to be recurring, but we do like to see a consistent growing monthly revenue, at least over six to 12 months. And so, in your case, if you were doing this already and you had a bunch of contracts with, you know, whole foods buying your fish and maybe an agreement from Stripe or Meta to buy all of your offsets your credits or whatever, however, you're registering them.

And then, you know, there could definitely be an option here to do some revenue based financing and you could then use that capital to support marketing expenses direct to consumer sales, because maybe now you want to start shipping your fish through Facebook, whatever it is, right, it could work. Uh, we will be offering other products, other instruments, pretty soon. We've already tested one that I'm kind of keeping close to my, keeping the cards close to my that's for now.

But, we eventually want to offer climate entrepreneurs non-dilutive growth capital at any stage of their journey, whether they're pre-revenue seed stage late stage. We don't care. We want them to be able to come onto our platform, apply through a fairly simple, quick application process. Right now, the application process for revenue based financing takes about 10 minutes. And then get capital very quickly. So today it takes us about a week to cut a term sheet and about 30 days to fund.

And we'd like to cut that process down dramatically so that folks can get a term sheet in 24 hours and funding ideally in less than a week. So we'll see how, how long it takes us to get there. But that's the, that's the vision.

And then we validate that you meet baseline lending criteria. And then we issue a term sheet. That term sheet is usually somewhere between call it one and 10% revenue share. That's gross cash receipts share over some fixed term, typically around two years.

Now we create, we we've created a structure whereby if you truly over-perform, then the rev share kind of comes down a little bit to allow you to retain more upside. And we offer entrepreneurs, buyout provisions throughout the lifetime of their loan that allows them to exit early if they feel like it's kind of too expensive. And so we we've tried to do our best to create kind of a more founder friendly version of, of revenue based financing. And we also there's no, there's no warrants.

There's no, there's a 1% origination fee up front, but there's no other fees. There's no like success fees. There's no weirdness that could, that makes it even harder to understand your cost of capital. We try to make it really, really simple. And then also if a company is performing well then because we kind of created the structure, we're actually incentivized to double down.

As often as we can, because if the company can just exit by paying us, then, you know, while the, the relative return of the IRR in that moment might be good. But the absolute return is pretty small. And, you know, we still have a cost of actually deploying capital. And so I think coming back to your original question, you know, what's the sort of IRR, it kind of depends. It's a contingent loan instrument.

We have a target of around call it 20 to 25% and that's commensurate with the fact that we are an unsecured lender. So we take no collateral. There's no personal guarantees. There's. if a company's revenue goes to zero, we're left holding the bag.

Is it in the context of climate or is it in the context of something else? but in the case of burning natural gas, I think probably we would not consider that in scope. We, we've looked at a couple of cases where people like flare methane to create Bitcoin, Not really not really in scope. I think, uh, although there's a big debate in the industry around, okay, well, if methane isn't flared, you know, it has greater potential for warming.

And so it's better that it's burned and we're going to make Bitcoin anyway. I think that's a whole separate debate. We, we also, you know, we have, because we raised outside capital to then lend. We have an obligation to our lenders to maintain pretty consistent thesis fit. Uh, and we also, you know, we've entrenched climate in our corporate governance. So we're a public benefit corporation. We have to work on climate and we have to work on diversity and inclusion.

That's another big piece of our effort is this support underrepresented founders. And so, you know, for now it's, every time we just kind of look at it and we say, okay, do we, does this feel right? And if we have concerns, we can reach out to our board who, you know, we have an investment committee. Kind of lots of checks and balances for this process, but eventually the goal is to make that decision automated.

And so I think it'll probably involve some mix of natural language processing, looking at secondary data, looking at other lists and trying to say, Okay. is this company showing up, you know, in the diligence of these other folks? And if it is there then fine, we'll support them.

Typically in like remote power systems. So they work on community micro grids, they work on telecom, they work on, like kind of secondary power systems that might turn on when there's a large outage on a, on a bigger grid. Uh they're in 20 countries. And, uh, it's a really incredible team and they, they have a very sharp financial, what do I call it? What's the word I'm looking for?

Like their finance team really thinks about capital efficiency well, and so when we came on the market, they said, oh, Hey, we want, we want your product. And they had actually done some kind of similar work before. And then the second team is, um, A company called Aqua Oso out of Colorado. They do climate risk modeling for lenders, primarily in the agricultural lending space. So like foreign banks and really also exceptional track record, really awesome growth, super talented leadership team.

And I think a very compelling product, which is that, you know, obviously as we transition to this call it like post climate universe, if farmers want to access capital, they need to be able to demonstrate that they're bankable. And today there are very few systems to allow that to happen. And so there's actually an access to credit component to this deal. Like there's a social impact story around financial inclusion as well.

Uh, but also a very strong climate alignment around adaptation and resilience.

So the goal is to do about $5 million worth of lending in this space over the next six to 12 months, just to really show that there's call it product market fit with this revenue based financing instrument. We'll also test out a couple other products. We also have, a, partnership with a fairly large corporate in the US clean energy space where we're doing some additional experimentation with lending to small businesses around the U S that are in the climate economy.

And so between those three major initiatives, we'll then decide which kind of move forward, how we layer that the three instruments together. What else we add on to the offering as we go to raise our next larger fund.

I don't want to be a naysayer, but, um, I mean, I I'm in, in general terms, I'm very optimistic because I think in general, as a, as a species, we, we do tend to kind of procrastinate and then get it right.

Yeah. so, and you know, in the context of being pretty proper fucked, there's two options, right? You can kind of crawl into a physical or metaphorical hole. And just kind of resolved. Yeah. You just you're like, okay, well, I can't do anything. So why bother? Or you can take that existential dread and channel it into action, because if you don't, you'll look back on it 30 years later, 50 years later and say, my God, I could have done something. And I didn't.

And. I've sort of oscillated between the metaphorical hole and the optimism, but I think generally, I'm fortunate enough, I'm privileged enough to have the experience, the resources, the community, the network, et cetera, to, to really dive into this problem headfirst and. I'm really excited to also support all of our peers that are working in adjacent spaces. This problem will take like community action. And so we can't, I, I'm not really worried about competition.

Like we send deals to other lenders that are sort of close, because in the end, if we can't do it, but somebody else can then awesome like We need all hands on And so if there's a hundred Enduring Planets tomorrow, like great, the more the merrier.

And there's so much work to do in adaptation and resilience and removal, even if we get the mitigation piece wrong, even if we can't, you know, reduce emissions fast enough. This problem is I think often people really struggle with the scope of the problem. And I think that's, that makes a lot of sense, but for me, it's, it's weirdly exciting. I'm like, oh, there's so much, there's so many cool ideas.

And every day we talk to entrepreneurs who are doing something that I, my brain has never even touched. And I'm like, oh, Well, that's awesome. How can I help you? Can we, we can't lend to you right now, but can we introduce you to, to these VCs? Can we connect you with these partners? Like, can we help you get your first customer? This is the coolest thing I've heard. And then like 20 minutes later, I have the same conversation.

Then we'll go and raise quite a bit more money because you know, one, the space demands it, but two we're also a venture backed company. And so you got to go big always. And so we'll, we'll go pretty big and then we'll put that money to work and, you know, we'll probably launch our second offering another instrument, in compliment to the RBF I'm hoping this fall, and then we'll add a third and a fourth and the fifth.

And eventually, you know, the goal is to have a menu of options for entrepreneurs to choose from where they can sort of come to us as early as they want and as late as they want, and get a product that works for them. And, you know, eventually we will also expand beyond the U S. So today we just lend here and then eventually I'd like to be lending in Europe and Canada. I want to say eventually we'll go emerging market because that's where Aaron and I both built our careers. but it's a difficult.

I mean, it's many, many environments they're all difficult to lend in. And also interestingly enough, there's actually quite a substantial community of lenders for clean tech in emerging markets because the venture ecosystem is so underdeveloped. And so there's companies and I supported them in a previous life, lendable, sun funder, SEMA, responsibilities, a massive institution that I think got bought by someone last year, but there's just, there's so many capital providers.

And so to some degree, emerging markets aren't as high a priority because there are these alternative options.

If you're not a privileged white guy, the likelihood that you raise capital is, is much, much lower it's disproportionate to the distribution of entrepreneurs. And, you know, obviously that leads to all sorts of problems in the market.

Not only do I call it, I'm going to use this label even though it's broken, but, not only do diverse founders tend to perform better on average than their counterparts but also, uh, that creates further inequity down the line because if you have largely white guy led teams getting capital they, then hire largely white guys. And so you create this like anti diversity cascade. And so, you know, we believe in a transition to a new climate economy that is equitable and inclusive.

And so we've created mechanisms within our underwriting, our origination, our, our sort of pipeline development processes that stack the deck

Thanks catch you all next time.