Where can green economy startups and SMEs turn when the VCs and bankers aren’t there? While conventional wisdom holds that VCs and angel investors are the lifeblood of startups, it hardly applies when those startups are green. In our initial look at why investors have been wary of green startups, we found that VCs and angel investors aren’t too keen on the startup pipeline scarcity and the lack of scalability and exit possibilities. So the question poses itself: without flashy valuations and sparkly exits, where can green economy startups and SMEs turn for financing? The bank? Well, that’s not much to go by either.
Actually, as it turns out, they have a few places to turn. These run the gamut from the altruist investing models of crowdfunding and philanthropy, to curious revenue sharing models, various stakeholders we spoke with tell us. But more can still be done, they say, adding that they would also still like to see more collaboration between the private and public sectors in helping lend credibility to green economy startups.
But first, a refresher: While startups have been seeing more interest from investors in the past months, the lack of a pipeline of startups and investors, exit and scalability options makes emerging green economy companies less attractive. Unlike tech startups, the startup pipeline in the green economy sector is scarce and does not provide enticing local success stories, in terms of impact, exits, scale and ROI, making it seem less profitable, Khaled Ismail, managing partner of early-stage fund HIMangel had told us. Additionally, these startups are mostly plagued by negative cashflow cycles that can take upto 6-8 months to recover and can be very asset-heavy.
Bank finance may sound like the next logical option, but strict loan eligibility criteria get in the way. “Bank finance comes with a lot of restrictions, especially when it comes to eligibility criteria, which makes it difficult for early-stage startups to obtain them,” Ismail says. These restrictions include a number of operation years and steady revenue inflow. Banks would need dedicated teams who look at the investment’s future instead of looking at startups’ bottom line, national program manager for small business support at the European Bank for Reconstruction and Development (EBRD) Reem El Saady says. However, getting to that point will take some time, she adds.
Revenue-based financing is part of the solution, chairman of the Cairo Angels Aly El Shalakany tells us. Locally, Beltone SME has already entered that space through financing SME growth in exchange for a percentage of revenue for a specific period of time, all while offering variable payment. Since the fund is self-liquidating, meaning that the investment is paid back using the income generated from the business invested in, it is de-risked to a certain extent, becoming attractive to investors. This involves no debt or equity, and focuses on development and impact, which comprises the green economy, CEO at Beltone SME Yehia Ashour tells us.
Beltone’s revenue-based financing arm is expecting to close an EGP 1 bn investment fund by the end of 2021. Companies that have proven their concept are eligible for the financing instrument. Currently, Beltone SME is looking to invest in a food and beverage company, as well as an oil recycling startup.
Impact investment funds and philanthropic investors would also add skin to the game, El Saady says. Impact investment — an investment strategy that aims to generate beneficial social or environmental effects, alongside financial gains — has been picking up some moderate steam in Egypt. Just recently, the UNDP and Catalyst Partners joined up to launch an EGP 500 mn impact investment fund to support local SMEs that have an impact angle. The same duo had partnered up earlier to create a toolkit for investment-ready SMEs to help them measure their environmental and social impact. This may be crucial to attract investors, as unlike philanthropists, impact investors are looking for measurable impact returns, Ashour says.
Crowdfunding may be up there, too. Popular crowdfunding websites allow early-stage companies to provide giveaways to these people, but sometimes equity is also distributed in marginal amounts. The EBRD has been consulting the Financial Regulatory Authority (FRA) on a bill to regulate crowdfunding in Egypt. This could help finance early-stage, impactful companies with not very scalable or conventional business models, El Saady says.
But despite this all, government initiatives are needed. If the government enters the game, it will make investors much more confident because the risk would be shared, El Saady says. She cites the UK’s Clean Growth Fund — a joint private sector-government VC fund that boasts GBP 40 mn to invest in UK-based companies driving green technology in power, transport, waste and building energy efficiency sectors — as an example of a successful government partnership program. “With GBP 20 mn of government investment matched GBP for GBP by CCLA, one of the UK’s largest charity fund managers, the fund could reach GBP 100 mn by autumn 2021 through private sector fundraising,” the government writes.
Private sector still has to lead: While such initiatives are essential for Egypt, Ashour believes that the government will definitely create supply and demand when entering the sector; however, one should not wait for the government to enter the scene in order to start investing.
Globally, alternative investment vehicles are on the rise, El Shalakany says, referring to markets and tools similar to the UK’s AIM. The Alternative Investment Market (AIM) is the LSE’s growth market, dedicated to help smaller companies — who cannot afford the formal listing — raise enough capital to scale. In return, investors receive tax reliefs. “While AIM investments are viewed as riskier than those on the Main Market, the tax incentives on offer can make them more attractive,” UK VC fund SyndicateRoom says.
And green companies can look forward to the ESG investing trend: Despite many global names in finance getting flak for not meeting their climate change investment commitments, it was the growing awareness of a need for these pledges that helped spur the aforementioned financial innovations. Listed companies set to benefit from the transition away from fossil fuels are worth a collective USD 6 tn, with investors getting behind green battery metals, sustainable aviation fuel, lab-produced meat, and low carbon concrete, amidst rising concerns that climate stocks are overheating. VCs have doled out over USD 16.3 bn on climate-tech investments in 2020, according to a PwC report. It stands to reason this will all trickle down here.
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