Small businesses are the economic engine of Vermont. Yet some of these businesses in the natural resource and green economy sectors are still finding it difficult to secure flexible working capital to grow and keep their business in Vermont. Many don’t have high enough growth rates or margins for equity investment. Or, they don’t have sufficient collateral or operating history for traditional debt. On the other hand, some can secure equity financing, but opt not to as they don’t want to give up ownership control or have to force an exit strategy that could mean moving out of Vermont. These same businesses often have a good business plan, are selling in healthy, growing markets, and have the foundation of a strong management team to execute. So where can they go to find the working capital they need to grow?
The VSJF Flexible Capital Fund invests in Vermont's early and growth stage businesses that need more risk-tolerant capital or creative financing, and have an identifiable gap in their financing package.
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What We’re Looking For
We’re looking to invest in growth companies that strengthen existing natural resource markets across the value chain, link existing enterprises to new markets and distributions channels, and build new markets that contribute to environmental, social and economic health of Vermont and the region - now and for future generations.
In keeping with the Vermont Sustainable Jobs Fund mission of accelerating the development of Vermont’s green economy, investment priority will be given to companies or entrepreneurs that:
- Fill a gap, or strengthen the supply chain, in our market sectors to ensure our investments have the biggest bang for the buck and leverage additional resources (i.e. food processing capacity).
- Demonstrate a positive impact on environmental conservation, renewable energy or energy efficiency through their business activity or direct financial benefits accrued to local environmental, non-profit or community organizations;
- Provide Vermonters with livable wage jobs, promote employee engagement and reward, or otherwise provide a lasting, positive impact on the local community; and
- Demonstrate a motivation for learning such that the provision of risk capital and technical assistance will enable them to grow a sustainable business.
Geographic and Industry Focus
The Fund invests throughout Vermont in early and growth stage businesses that fit with the following industry sectors:
- Sustainable agriculture
- Value-added food production, infrastructure and systems
- Sustainable forestry and forest products, including green building
- Renewable energy and energy efficiency
- Next generation biofuels such as algae, grass pellets, biodiesel
- Environmental technologies and services
- Waste reduction and pollution abatement services and products
Investment Targets and Size
The Fund’s investments range between $100,000 and $300,000, typically with co-investors, with the flexibility to provide follow on funding as needed. A typical Fund portfolio company will have:
- Established sales, usually > $1,000,000 per year
- Sales growth forecast of at least 10-20% per year
- Profit margins that will support a revenue-share payment
- Strong management team
- A well-supported, written growth strategy with market opportunity
- A mission that advances the work of the VSJF
We are looking to develop a pipeline of interested businesses that might be a good fit for near equity financing. If you are a business who needs working capital to grow, or know of a business that does, please contact us to let us know about your financing needs.
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What We’ll Offer
Flexible risk capital for Vermont’s sustainable markets…
What is Near Equity Capital?
Near equity capital, also know as mezzanine financing, includes a range of financing instruments such as subordinated debt, royalty financing, warrants or some combination thereof. Near equity is not start-up capital but fuel for existing businesses that need to augment traditional sources of financing in order to produce new sales, enter new markets and create new products.
Subordinated debt (“sub-debt”) works essentially as a bank loan that is subordinated to other senior debt and is repayable only after other debts have been repaid. This structure is typical when a company has some collateral available, a strong management team and solid growth plan.
Royalty financing has traditionally been used in industries such as publishing (i.e. book deals) and mining, but has recently gained momentum as an alternative debt instrument for growing businesses. Royalty financing is based on selling a piece of the revenue stream instead of selling ownership. In exchange for a loan, the company will share a percentage of its revenues with the Fund until the Fund has received back its principal plus the additional return that it negotiated with the portfolio company. The royalty payments can be structured over a fixed time period or until the investor reaches the negotiated rate of return. Royalty financing allows for flexbile repayment that adjusts to a growth company’s actual revenue, and offers a “natural” way to exit the deal. Royalty financing is distinctly different from equity where an investor owns a percentage of the company, and will need a sale, merger or public offering to exit and get the financial reward.
We work with a company to structure a deal - using subordinated debt and/or royalty financing - that is flexible and meets the cash flow needs of the business. Pricing and structure will depend upon the risk level of the deal, amount of collateral available, strength of the management team, and purpose of the loan. In general, less risky loans (and lower priced) will consist of subordinated debt, while riskier loans will have both a sub-debt and royalty component, and high risk loans will be in the form of a pure royalty payment. Pricing is less expensive (significantly) than equity investment and more than traditional secured bank debt.
If you're interested in learning more about mezzanine financing, we suggest you visit our friends at Vested for Growth (a New Hampshire Community Loan Fund program) to see some first-hand some examples of how royalty financing is working for small business.
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Why We’re Different
It’s not just about the money – it’s the kind of money and what comes with it that counts!
In a time when risk capital is scarce, access to networks is critical and, according to Harvard Business Review, “there’s no alternative to sustainable development,” the Fund offers a new kind of flexible risk capital that brings with it instant access to our Peer networks, mentorship and technical assistance.
Our capital offers a way to help companies grow that won’t force an exit strategy (avoids a “cash-out” scenario) or tamper with ownership structure, remains flexible with cash flow needs of a business, and offers reward to the Fund for the risk taken. The cost of our capital will adapt to a company’s performance. Repayment schedules can match revenues, allowing the company to grow at a strategic rather than harried pace that other sources of risk capital might require.
With our capital comes instant access to our networks. The Peer to Peer Collaborative, a program of the Vermont Sustainable Jobs Fund, offers CEO advisory services and paves the way for building a true advisory board that can help continue success. Peer to Peer Advisors can help accelerate company and leadership growth by sharing their experiences, triumphs, and failures, and by offering an “outside looking-in” perspective on the challenges and opportunities you face as you grow your business in Vermont.
The VSJF has built strong networks and positive relationships over the last 13 years of grant making in Vermont’s natural resource sectors. As we lend our capital, we lend our expertise, and leverage our networks, to instantly link our borrowers to people and places that can help them grow.
To view the Capital Continuum and see where the Flex Fund fits among Vermont’s risk capital offerings, click here.
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How to Apply
Not unlike a venture firm, the Fund will conduct due diligence on prospective client companies only after we have determined through an initial interview, site visit and review of company financials, that the company is judged to have a strong management team, with integrity and otherwise appropriate character, and whose projects fit with our basic minimum criteria.
We'll focus our initial analysis and due diligence primarily on the business opportunity (i.e. market-led analysis) and the personal qualities of you and your management team — namely character, integrity, drive and know-how. We are a high-touch lender and quality of the management team is a key driver in our decision making. If we determine that your business is a good mission fit, is led by a strong and ethical entrepreneurs, with a compelling business plan in a growing market, then we will then move on to financial analysis of the project to be financed in preparation for presentation to the Fund’s Investment Committee. The Investment Committee will then make recommendations to the Fund's Board of Managers for deal approval or denial.
Because we are a small and nimble organization, we can move quickly on getting to "yes or no" upon receipt of all required information from our prospective borrowers.
If you'd like us to consider an application, or better understand our process, please contact us at email@example.com or call (802) 828-0398.
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