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Featured: ImpactAlpha Original
As unicorns stumble, investors warm to revenue-based financing for ‘zebras’ and ‘Clydesdales.’ In a note to venture capitalists last week, CBInsights slammed terms like “zebras” that describe the sustainable growth-oriented alternative to buzzy, billion-dollar unicorns. “Zebras, rhinos, narwhals, gazelles, velociraptors, etc.,” the research firm riffed. “None of these have ever or will ever stick.” Maybe not, but for companies betting on “revenues, not rounds,” revenue-based financing may make more sense than the standard Series A. And an increasing number of investors are doing deals in the expectation of getting paid back, perhaps three times their capital, from revenues generated by real customers, rather than waiting for the proverbial 10X payout from a sky high IPO or acquisition based on fantasies of endless growth.
Founders First Capital Partners last week closed $100 million in debt financing from San Francisco-based Community Investment Management to provide revenue-based financing for service and manufacturing companies generating recurring revenues, especially those led by women, people of color and other often overlooked founders. “There is a clear opportunity and interest in offering revenue-based investment to support positive outcomes for service-based, social-impact companies,” Founders First’s Kim Folsom told ImpactAlpha. The debt capital will help Founders First expand lending to businesses with $1 million to $5 million in revenue (Folsom calls them “Clydesdales”). Other investors doing revenue-based deals include Decathlon Partners, VilCap Investments, Earnest Capital and O’Reilly AlphaTech Ventures (which has pioneered an approach it calls “indie.vc”). A key attraction: Companies do not have to sell or go public for their investors to earn a return, enabling mission-driven founders to preserve their independence and mission.
Keep reading, “As unicorns stumble, investors warm to revenue-based financing for ‘zebras’ and ‘Clydesdales’,” by Amy Cortese on ImpactAlpha.
Dealflow: Follow the Money
CloudFactory raises $65 million, providing a partial exit for Dolma Impact. Dolma Impact Fund has a partial exit two years after raising its $37 million first fund for companies having a positive impact in Nepal. CloudFactory, a U.K.-based startup that hires Nepalese workers to “train” data for artificial intelligence applications for large companies, raised $65 million from FTV Capital and Weatherford Capital. Dolma invested in CloudFactory’s $7.3 million round in 2017 and earned a 56% internal rate of return, Dolma’s Tim Gocher told ImpactAlpha.
- Nepal’s market. Private investors have been wary of Nepal’s history of political turbulence. Several years of stability, coupled with the global tech boom, have spurred entrepreneurship and investment. The land-locked South Asian country ranks among the poorest in the world; average income is less than $1,000 per year. “CloudFactory was a small company when we invested in 2017. Now it has global venture capital firms coming in,” Gocher says. “The poorest country in South Asia’s workforce enabled that.”
- Data for impact. CloudFactory is among a raft of data companies fueling artificial intelligence and machine learning with an army of human workers to cull and annotate large volumes of data. It differentiates itself with a mission to create “meaningful” and well-paying jobs for emerging market workers (see, “Samasource raises $14.8 million to connect tech giants with Africa’s data talent”).
- Scaling with integrity. Communicating the link between impact mission and business success is crucial as companies grow and secure non-impact funding. “Impact capital has to come into contact with mainstream capital in order for social enterprises to scale,” Gocher says. “We have to be able to defend our impact positions in commercial terms as that happens.” (See, “Managing mission drift and driving impact in emerging markets“.)
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Community bank Woodforest launches $20 million Opportunity Zone Fund. Texas-based Woodforest National Bank is partnering with Coastal Enterprises Inc., a community development financial institution, and The Boulos Company, a real estate firm, to invest in properties supporting low- and moderate-income communities. The fund adopted the Opportunity Zone Impact Reporting Framework (see, “Pushing for community engagement and impact reporting in Opportunity Zone investing”).
Big Society Capital seeds real estate impact fund with a gender lens. The U.K. impact investor committed £10 million to WISH Fund, which aims to raise £100 million to invest in affordable housing for women who are homeless, formerly incarcerated or victims of domestic violence.
Signals: Ahead of the Curve
Financing ‘climate-smart’ rice. Production of the staple commodity that feeds 3.5 billion people needs a radical overhaul to reduce emissions and build resiliency to climate change. A “rice bond” could help rice processors, traders and retailers provide farmers with capital to transition to sustainable agriculture, improve resiliency and boost yields. The proposed financing mechanism is part of Financing Sustainable Rice for a Secure Future from Earth Security Group. “The challenge of putting rice on a sustainable footing is undoubtedly large, but the price of inaction is significantly larger,” writes Alejandro Litovsky. Rice, he says, offers investors a chance to “address poverty and put food systems on a sustainable and resilient track.” Share this post.
Agents of Impact: Follow the Talent
Matt Mulrennan, ex- of XPrize Oceans, joins EnVest as chief executive officer… The Equality Fund seeks an investment operations specialist in Toronto or Ottawa… Y Analytics is hiring an analytics associate in Washington D.C.
Thank you for reading.
– Nov. 26, 2019