A SHORT GUIDE TO DEVELOPING GREEN BUSINESS MODELS€¦ · traditionalbusiness model canvas...

Prepared byImola Antal, Project ManagerBrindusa Burrows, Director

The Ground_Up Centre

Reviewed byMark de Bel, DeltaresFrank Meissner, IASS

July 2018

A SHORT GUIDE TO DEVELOPING GREEN BUSINESS MODELS FOR ENTREPRENEURS, RESEARCHERS AND ORGANISATIONS THAT SUPPORT ENTREPRENEURS

A short guide to developing green business models – for entrepreneurs, researchers and organisations that support entrepreneurs

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1 Introduction 3

2 Definingconcepts 4

3 GBMSnapshotTool 4

4 DevelopingGBMs:Guidingsteps 6

4.1 Value 6

4.2 Customers 8

4.3 Operations 8

4.4 Resources 9

4.5 Partners 10

4.6 Channels 11

4.7 Greenimpact 11

4.8 Costs 12

4.9 Revenue 12

4.10 Risksandopportunities 13

4.11 Enabling environment 13

4.12 Summary:BusinessModelCanvasquestions 15

5 Access to funding 16

5.1 Businessdevelopmentstagesandfunding 16

5.2 Fundingsourcesexplained 18

5.3 Investment-readiness 22

6 Conclusions 27

ANNEX 1InvestmentExpertWorkshopSummary 28

Table of contents


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INTRODUCTION

Thispaperisintendedforthosewhoworkwith,research,andsupportgreenentrepreneurs,aswellasforentrepreneurswhoarestartingagreenbusiness.Itprovidesguidanceinthepro-cessofelaboratingabusinessplanandpresentingittopotentialpartnersandinvestors,basedontheunderstandingofinvestors’expectations.

TheconclusionsandrecommendationsgatheredinthepresentguiderelyonthestudyofGreenBusinessModels(GBMs)aspartoftheGREEN-WINproject,aninternationaltransdisciplinaryresearch collaboration that applied a solution-oriented approach, targeted at increasing theunderstandingoftheconditionsunderwhichwin-winstrategiesandgreenbusinessmodelsworkinpractice.Togatherrelevant insightsonhowentrepreneurssolveclimateandsustainabilityproblemswhilesecuringaprofitablebusinessstrategy,thefollowingactivitiestookplaceintheproject:

º Literature review on GBMs and the Green Finance Landscape;

º GBM assessment workshop with asset managers, impact investors, entrepreneurs, green finance clusters, and other green business experts;

º Assessment of green projects and businesses that are part of the GREEN-WIN research project via a survey and desk analysis.

Thestudyprovidedabetterunderstandingofwhatworksinthefieldofinitiatinganddevel-opinggreenbusinesses,howitworksandwhy.Basedontheconclusionsofthefirstroundofresearch,thefirstpartoftheguideprovidesaneasy-to-usetooltothinkthrough,planandanalysebusinessplans,aswellasunderstandthemostimportantquestionsaninvestormayposetoanentrepreneur.

Thesecondpartoftheguidepresentssomeofthefinancingsourcesthatcanbesuitableforgreenenterprises.Fundingisanessentialtopicforanygreenbusiness.Whilethefundingsourcesaresummarizedbasedonthefindingsoftheliteraturereview,andaimtoprovideanoverviewofavailableoptions,thelistisnon-exhaustive.Investment-readiness–whatitmeansandwhyitisimportant–isalsoaddressed.

Oneofthemainfactorsidentifiedinthecourseoftheresearchasbeingcriticalforthevia-bilityofagreenbusinessisthelevelofpreparationoftheentrepreneurandofhisteam.Wehopethatthisguidewillservetoinformentrepreneursandthosewhosupportthemdefineanddeveloptheirbusinessesandpresenttheminacomprehensivemanner.

The study provided a better

understanding of what works in the field of initiating and

developing green businesses

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DEFINING CONCEPTS

Themainnotionsandrelevantconceptsasdefinedintheguidearehighlightedbelowforresearchpurposes:

ºA business is an organization or enterprise engaged in commercial, industrial or professional activities. A company transacts business activities through the production of a good, offering of a service or retailing of already manufactured products. A business can be a for-profit entity or a not-for-profit organization that operates to fulfil a charitable mission.

º Green Business is an enterprise that has a significantly lower impact on the environment (“1% is not enough”) than a similar traditional business, supports the development of products and services with environmental benefits in addition to being economically viable, and does not involve significant environmental trade-offs.

º The business is considered economically viable if it generates or will be able to generate revenues in the future and demonstrates potential for the income to exceed the costs on a long term.

º A Green Business Model describes how an enterprise, alongside or through its primary business activity, creates, delivers and captures environmental, economic and social value or benefit. It is considered value any characteristic that makes the product or service preferred by customers over the alternatives.

ºA win-win-strategy is an approach used by a socioeconomic or political actor that describes an undertaking in which, along with creating economic benefits from the primary undertaking, environmental benefits for the actor himself and/or for society in general are created.

GBM SNAPSHOT TOOL

TheGREEN-WINliteraturereviewaimedtoidentifythemosteffectivemethodsavailablefordescribingaGBMandtheessentialaspectsthatmustbeconsideredinordertounderstandthewayabusinesscreatesvalueandgeneratesrevenue.

ToassesstheGBMs,atoolisneededtodescribehowanenterprisecreates,deliversandcaptureseconomic,environmental,andsocialvalue/benefit.Forpurposesofthisstudy,asimplecanvaswasdesignedthatcapturestheessentialsofagreenbusinessmodelbycombiningtwowell-knowntools:

º Business Model Canvas (BMC) by Alexander Osterwalder: widely used for mapping out the business model concept;

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º Flourishing Business Canvas for Strongly Sustainable Business Models (SSBM) by Antony Upward: a tool extending the BMC to highlight the green factor within the business model. Its goal is to describe a “strongly sustainable” business model: one that is sufficiently profitable, while simultaneously creating social and environmental benefits.

Thefollowingstructure(Figure1)wasgeneratedasacombinationofbothtools.Boxesnumber7 and11,Green Impact andEnablingEnvironment, respectively,were added specifically tofacilitatetheunderstandingofgreenbusinessmodels.Thefollowingcanvasresulted:

1. VALUE

2. CUSTOMERS

3. ACTIVITIES

4. RESOURCES

ThebundleofproductsandservicesthatcreatevalueforaspecificCustomerSegment

ThetypeofrelationshipacompanyestablisheswithspecificCustomerSegments

Mostimportantactionsacompanymusttaketooperatesuccessfully

Mostimportantresourcesthecompanymustacquiretocompleteitsactions

5. PARTNERS

6. CHANNELS

7. GREEN IMPACT

8. RISKS & OPPORTUNITIES

Thenetworkofsuppliersandpartnersthatoptimizethebusinessmodel,reducerisk,oracquireresources

HowacompanycommunicateswithandreachesitsCustomersSegments to deliver a Value Proposition(communication,distributionandsaleschannels)

Characteristicsandmetricsthatshowthebusinesshasalowerimpactontheenvironmentcomparedtoatraditionalbusiness.

Howthebusinesswillovercomethechallengesit’sfacing and take advantage of theopportunities

9. COSTS

10. REVENUE

Allcostsincurredtooperate a business

ThecashacompanygeneratesfromeachCustomerSegment(costs must be subtracted from revenues to create earnings)

11. ENABLING ENVIRONMENT

Social-institutionalenvironmentintermsofpolicyandregulatorycontext,includingbothformalandinformalinstitutions,aswellasotheravailablefinanceandincentivemechanismsthatfosterthediscovery,uptake,andtransferofsustainabilityandclimatestrategies.

Figure 1: Business Model Canvas for Green Businesses Source: The Ground_Up Centre, based on A. Osterwalder, A. Upward

ThebasicstructureofthecanvasdefinesthemainlinesofGBMassessment.Forthepurposesofthisstudy,detailedinformationongreenbusinessmodelswasacquiredfromparticipatingbusinesses in theGREEN-WIN research, through a survey form that addressed the canvasdomains through relevant questions. The next chapter follows the business model canvasstructurepresentedaboveandcoversthemostcommonaspectsthatentrepreneursneedtomasterandbeabletodescribeinacomprehensivemannerwhenpresentingtheirbusinesstopotentialpartnersandinvestors.ForeachbuildingblockofthecanvasexplanationsareprovidedandanumberofguidingquestionsthatweredevelopedaspartoftheresearchmethodologyintheGBMresearch.


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Additional guidance and support questions on how to use the building blocks of thetraditionalbusinessmodelcanvasdevelopedbyAlexanderOsterwalderareavailableonlineat www.strategyzer.com.

For a better understanding of the social and environmental aspects of a business model,resourcesexplainingtheFlourishingBusinessCanvasforStronglySustainableBusinessModels(SSBM)byAntonyUpwardcanbeaccessedatwww.flourishingbusiness.com.

DEVELOPING GBMS: GUIDING STEPS

DuringtheGREEN-WINresearchwedevelopedasetofspecificquestionsinordertoguideentrepreneursinthereflectionprocessandfacilitatethedevelopmentofGBMsaccordingtothecanvasstructure.Belowwepresenttheseguidingquestionsandprovidepracticalinformationabouttheimportanceofresponsesandtheirassessment.

Value

AGreenBusinessModeldescribeshowtheenterprisecreates,deliversandcapturesenvironmental,economicandsocialvalueorbenefit.Itisconsideredavaluewhenanycharacteristicmakestheproductorservicepreferredbycustomersoverthe(traditional)alternatives.

The following questions will help entrepreneurs identify and describe what specific valuedistinguishestheirbusinessfromcompetitors,andwhatmotivatescustomerstopurchasetheproduct/service. Itwill result inpractical informationonwhich the company can rely in thefuture,e.g.whenbuildingamarketingstrategy.

Knowingthevaluethatthebusinessprovidesisanessentialfirststepindevelopingthebusinessmodelanditisnecessarytobeabletocompletethenextdimensionsofthecanvas.Moreover,itrepresentsthebasicinformationthatinvestorsorpartnerswillwanttoknownotonlyinordertoassesstheviabilityofthebusinessmodel,i.e.whethertherewillbedemandfortheproduct/serviceinthefuture,butalsotoestimatetheentrepreneur’scapacityandpreparationtosustaintheactivity.

º What need do you aim to address through your business? Whose need is it?

Abusinessmodelisdefinedbythevaluedeliveredtoaspecificsegmentofcustomers.Here,theentrepreneurshouldexplaintheneedtheyidentifiedandwhetherandwhytargetcustomerswouldbemotivatedtoacquirewhatthebusinessoffers.

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º How do you aim to address this need? What is your product/service?

º Describe how your products/services provide, or will provide, a solution to your customers’ need.

º How is this problem/need being solved/addressed today? What product/service do your customers currently use to address the problem/need?

Providingacleardescriptionoftheproductand/orservicethat isofferedbythebusiness isneededinordertodistinguishitfromsimilarproductsandunderstandwhatvalueitbringstocustomers.Theanswershouldexplainhowtheproduct/servicewillrespondtothecustomer’sneed,whichisthefirststepinshowingthatcustomersmaybeinclinedtobuyit.Customersoftenhaveotheravailablesolutions,eitherprovidedbyotherbusinesses,or freealternatives.Theanswertothisquestionshouldcoverthesecurrentalternatives.Itmustproposeacomparisontothesolutionofferedbythebusinessandanassessmentofwhycustomerswouldchoosetoacquireyourproduct/serviceinsteadofoneofthealternatives.

Productsandservicesmaybeofferedinspecificpackageswhichactasincentivesforcustomerstopurchaseorcommittoalong-termcontract;theseaspectsshouldalsobementionedhere.

º What is the market potential for your product / service? Describe your market research or any other resource that helped you learn about the needs of your customers, the potential for your product/service and about the market in general.

Marketresearchelementsincludesizeofthecurrentmarket,competitors,trends,anyparticularregulation/taxation,pricepointsandotherrelevantaspectsthatdeterminehowtheproduct/servicewillbepositionedonthemarket.Inaddition,itisimportanttobeabletoquantifytheTotalAddressableMarket(TAM)–therevenueopportunityavailablefortheproduct/service.Thiswillreflectwhetherthebusinesshasnicheormassmarketpotential.

º Why do customers value your product/service?

The response can refer for example to innovation, value for money, financing options,uniqueness,customersupport,environmental impact,social impactandotherreasonswhichshowwhycustomersappreciatetheproductandwhatdistinctiveaspectmakestheproduct/servicepreferredandacquiredinsteadofotheroptions.

ºWhat is/will be the impact of your business at the outcome level? Describe the impact of your business beyond delivering the product/service (e.g. number of households provided with electricity, number of children with access to education etc.)

The extended impact of the business means to identify the additional value the business


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brings beyond addressing thedirect needof the customer. Some customerswill appreciatetheproduct/serviceandchooseitaboveothersimilaroptionsbecauseoftheimpactithasattheoutcomelevel.Othertimes,investorsorfunderswillbelookingtomaximizeoutcome-levelimpactinordertosolveasocialorenvironmentalchallenge.

º What is the social impact of your business? Describe any social impact your business has (e.g. equal opportunity, CSR activities, diversity etc.)

Inadditiontoeconomicbenefitsandsolvingenvironmentalchallenges,thistypeofimpactcandistinguishthebusinessmodelfromothers,provideaddedvaluetoyourbusiness,andmakeitmoreattractivetoimpactinvestors.

Customers

º Who are your main customers? How will you reach them?

º What is the spending capacity of your customers?

Definingyourtargetcustomersandunderstandingtheircharacteristicshelpsassessingwhethertheproduct/servicefitstheirvalues,lifestyle,incomeandspendingcapacity.

Forindividuals,considerlookingatelementssuchasage,education,consumptionhabits,valuesetc.Incasethecustomerisagroup,includeadescription(e.g.whethertheyarehouseholds,smallbusinesses,schools,etc.)andkeycharacteristics,includingtheiraveragespendingcapacity.

Thisinformationdescribeswhoyouwilltargetforyoursales,explainstheconnectionbetweenthetargetgroupandthesolutionyouoffer,providingargumentsthatdemonstratethepotentialforrevenuegeneration.Itisrecommendedtoalsodescribetheresearchdataandinformationsourcesusedtosegmentyourcustomers.

Operations

º What are your main operations?

º Does your business rely on/incorporate any type of innovation? If yes, describe the innovation element(s) from your business

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Operationsincludeallactivitiessuchasdesigningtheproduct/service,productionorsourcing,management,sales,distribution,customerserviceetc.Atthispoint,youshouldalsothinkofhowthedifferentfunctionsandpeopleinthebusinessareconnectedandhowtheycontributetocreatingthefinalproduct/serviceanddeliveringittothecustomer.

Knowingthewayinwhichtheproduct/serviceismadeorsourcedalsoshowspotentialtechnology,greenimpactandoutputtrade-offs.Consideranddescribeanytypeofinnovationinproducts/services,resources, input,technology,distributionchannelandother.AnyIntellectualProperty(e.g.patentsetc.)isaplusinasmuchasitcanbedefendedonthemarket.ThevalueofIPassuchquicklydeterioratesifthebusinessisnotcapableofpositioningitselfandgrowingquickly.

Resources

º What are the key resources you need for your business? How will you acquire these resources? What are the main challenges in acquiring these resources?

Includealltypesofresourcesneeded(e.g.location,materials,equipment,services,know-how,human resources etc.). The list of resources needs to be commensuratewith the businessoperations and costs, and toprove that the companywill have the capacity to acquire andadministratetheresourcesitneeds.Asageneralrule,ayoungbusinessneedsarunwayofatleast12-16monthstoavoidfindingitselfshortoncash.Haveaplanastohowyouwillacquiretheresourcesyouneed.Keepinganhonestrecordofchallengestoacquiringtheseresourceswillallowforabetterestimationandpotentialpre-emptionofriskstooperations.

º How many employees does your business have?

º What is the composition and track record of the company’s management team?

º If you work in a different country than the one you are registered in, do you employ nationals of the country(ies) in which you operate?

º What is your gender balance in your team, board, advisory board etc.?

Theteamisyournumberoneasset.Anyinvestororfunderwillassesstheteam’strackrecordanddecideonwhethertheybelievetheteamcanimplementtheoperationalplanandtherevenuegenerationtheyareforecasting.Theteammustcoverthemaincompetencesneededtorealizeyouroperationalplanand,iftherearegaps,youmustthinkofhowtofillthem.Inaddition,mostimpactinvestorsconsidergenderbalanceakeypositiveelementinagreenbusiness.Anadvisoryboardoraboardofdirectorscanenhance thecredibilityof thebusinessandsometimesfillsomeofthecompetencegapsthatayoungteammightexperience.

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º How is or will your business be financed? Did you already raise funding? Does your business model currently require financing? If yes, please specify the amount of financing needed and what type of costs the funds will cover

Hereyoushouldthinkabouthowmuchmoneyyourbusinessneedstocoveritsoperationsfor12-16months.Doyouneedtoraisemoneytocoveryourcosts,orcanyoualreadygeneraterevenue and grow organically?Have you already raised somemoney and if so fromwhichsources?What is the current composition ofyour shareholders, if you have shared equity?Whatcurrentdebtfinancingdoyoualreadyhaveonyourbooks?Whatwillyoufundwiththemoneyyouraiseandhowwillthishelpyourbusinessgettothenextgrowthmilestones?Doyouforeseetherewillbeaneedtoraisemorefollow-oncapital?

Foralistofpotentialfunders,lookatChapter5below.

Oneimportantelementtoconsiderisyourinvestment-readinessandpreparationforit.Everystepoftheway,whenyouraisefunds,youshouldbudgetforinvestment-readinessexpensesincluding preparing your financial statements, your modelling, your investment teaser andothers.Youshouldalsobudgetforlegalandadminexpenseswhicharealltoooftenforgottenbutarequiteimportantinthecaseofafundraise.Formoreoninvestment-readiness,alsoseeChapter5below.

Partners

º List the most important partners for your business and describe their role. Describe the extended circle of stakeholders of your business.

Well-chosenpartners canplay an important role in expanding available resources, acquiringknowledge, generating revenue and so on. They may also be important for credibility andpositioning. Think about your main partners and how they contribute to your businessoperations.Partnershipscantakemanyformsandtheyarereflectiveofthesupportsystemthebusinesshas.

Stakeholdersareequallyimportant.Stakeholdersarepeopleorgroupswithaninterestinyourbusiness.Theycouldbethelocalornationalgovernment,yourcustomers,yourinvestors,youremployees, peers in themarketorother special groups.They can influence thebusiness inpositiveornegativeways.Aclearstakeholdermapdemonstratesgoodmanagementof risksandopportunities.

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Channels

º How are you communicating the value of your product/service?

º What are your 3 main distribution channels (how do your customers acquire the product)?

Optionstocommunicatethevalueofyourproduct/service includedirectsales, localstores/retailunits,traditionaladvertisingordigitalmarketing,exhibitions,fairs,demonstrationsorothermeansofcommunicationthataremostefficientandsuitableforreachingyourspecificcustomersegments.Communicatingthevalueoftheproduct/serviceandgettingthemessageacrossisakeyelementforrevenuegeneration.

Yourdistributionchannelswilldirectlyimpactyourcostsandthepotentialofimplementationofyourplannedoperations.Therefore,thinkingthemthroughandestablishingwhichoneshavethehighestpotentialwillallowentrepreneurstoprioritizetheirspendingeffortsasafunctionofpotentialforrevenuegeneration.

Green impact

º What type of environmental impact does your business have? How do/will you measure this impact? How is this impact reflected in your business? What are the potential environmental trade-offs of the business?

Agreenbusinessmodelcreatesanddeliversasignificantamountofenvironmentalvaluealongwith economic and social value.Theway a business can create environmental value variesdepending on the product/service, technology, distribution and other characteristics. It isimportanttobehighlightedasitisthefeaturethatdefinesthegreenidentityofthebusinessmodel.Environmentalimpactcanalsohavearoleinattractingcustomersandcouldappealtofunderswhoarefocusedonimpactinvestment.

Types of positive environmental impact include: reduced GHG emissions, reduced energyconsumption, waste collection, recycling and upcycling, reduced raw material consumptionor replacement of scarce raw materials, decreased water consumption, water purification,the distribution chain, positive impacts on biodiversity and conservation, changing patternsof consumption andmanyothers.The environmental impact of a greenbusiness has tobesignificantly lowerthanthatofa traditionalbusiness.Youshouldthinkofusingcredibleandrecognizedmeasuring,monitoringandreportingtoolsorstandards–whereveravailable.

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Youshouldalsobeawareofandnoteanypotentialenvironmental trade-offs.Forexample,youmighthelpreduceGHGemissionsbutincreasewaterconsumptionorreduceGHGemissionsintheproductionphaseandincreaseGHGemissionsinthedistributionphase.A360oassessmentofyourenvironmentalimpactsandtheirinter-connectionshouldhelpyouspotpotentialtrade-offs.

Costs

º What are your business model’s recurring costs? What is the total value of these costs each year?

Theeasiestwaytogoaboutlookingatyourcostsistosplitthembytype.People(staff)costs,operationalcosts,marketingcosts,otheradmincosts.Youmayalsoincurtechnology-relatedcostsorpartnershipcosts,as thecasemaybe. Whendesigningyourcosts, take intoaccount theresourceallocationtowardsachievingvariousmilestonesthatwillgeneraterevenueandhelpyourbusinessgrow.

Costsareobviouslyakeypartofmasteringyourcash-flow,sobeingabletoproject3-5yearsaheadmaygiveyourfundersandyourselfconfidenceovertheresourcesyou’llneedforthebusinesstodevelop.Asageneralrule,financialstatements(incomestatement,cash-flow,balancesheet)for3-5yearsarecrucialforfundraising.Auditedaccountswillbeanabsolutemustforraisingdebtfunding.Grantfundingwillcomewithitsownrequirementsandeachgrant-makerwillprovidealistofrequiredreportingandmonitoringofcosts.Besuretounderstandtheminadvance.

Revenue

º How is/will your product/service generate revenue? Does your business model already generate revenue? If yes, how much revenue does it generate each year? If not, when do you expect the business model to start generating revenue?

Revenueiswhatdefinesabusinessmodel.Understandinghowtheproduct/servicegeneratesrevenueisessentialtoassesstheviabilityofthebusiness,itspotentialforgrowthandforachievingthepositiveimpactyoudesireonpeopleandtheenvironment.Revenueisadirectindicatorshowingwhetherthebusinessisgenerating/willgeneratesufficientincomefromsellingtheproduct/servicetooperateandself-sustain,orwhethersubsequentroundsoffundingwillbenecessary.Revenuegenerationalsoreflectstheevolutionofthebusinessvaluationovertime,aswellasthemarketcaptureandpotentialforsuccessofthebusiness.Ifyouarealreadyinbusiness,theresponsetothisquestionshouldspecifyhowcustomerspay,whenandhowmuchforeachtypeofproduct/servicedelivered,andthetotalamountofrevenueresultingeachyear.Ifthebusinessisyettogeneraterevenue,youcanprovideanestimateandsaywhenyouwillachievebreak-evenandwhenyouwillachieveprofitability.

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Risks and opportunities

º What are the main risks to your business? How do you plan to address them?

Typesofrisktoconsiderincludeconsumerandmarketrelatedrisks,competition,technologicalrisks,regulatoryandotherfactorsthatmayinfluencetheeconomicandenvironmentalviabilityof thebusiness.Eachof theseshouldbe thought throughat the level that ismost relevanttoyour business, on a short- tomedium-term basis.A specialmention should bemade ofparticularchallengesrelatedtosettingupabusiness.Youareexpectedtodescribestrategiestomitigateeachriskyouareconsidering.

º What are current and future strategic opportunities for growth? Have you got a “plan B”?

Opportunitiesaretheothersideofthecointorisks.Whenyoustart,envisageafewkeystrategicdirectionsthatyouassumewill leadyourbusinesstosuccessandtheimpactyouarehopingtorealize.Thinkofthemasassumptionsyouwillneedtoverifyasyougoalong.Thinkofwhytheyareimportant,andhowyouwillcapturetheseopportunities.Ifsomeofthemdon’tcometofruition,whatisyournextsetofopportunitiestobuildon?

Opportunitiescanincludefavourableconsumertrendsandmarketdevelopment,technological,regulatoryandotheropportunities,expansiontodifferentgeographicalregions,keypartnershipsetc.Someoftheseopportunitiesmighthelpmitigaterisksyouidentified.

Enabling environment

Manyfactorssurroundingthebusinesscanactasenablersorbarriersandhaveasignificantimpactonitsdevelopment.Thesefactorsmaysupportorhinderthegrowthoftheenterpriseandincludeaspectsrelatedtomarket,regulation,taxes,socialandculturalbehaviour,prices,currencyevolution,valuesandtrendsetc.Entrepreneursmustbeawareofhowtheenablingenvironmentinfluencesthebusiness,whatrisksitposesandwhatopportunitiesitmaycreate.

Questionstothinkaboutare:

º What are the factors that encourage your business? How likely are they to change over time?

º Are there any factors that raise barriers to your business? How do they affect the development of your business?

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º In developing your business, are you motivated by any external factors controlled by government or local authorities (regulation, taxation, rising prices etc.)? If yes, please describe these factors and the degree to which your business is dependent on them.

The impact of external incentives can be highly beneficial on business development, but insomecases,itcanalsoimpedethelevelofautonomyandviabilityofthebusinessmodel.Thequestionthatarisesinthesecircumstancesiswhetherthebusinesswillremainviableincasetheincentivesorthegrantconditionschangeorceasetoexist.


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9. COSTS

10. REVENUE

Whatareyourbusinessmodel’srecurringcosts?Whatisthetotalvalueofthesecostseachyear?

Howis/willbeyourproduct/servicegeneratingrevenue?Doesyourbusinessmodelalreadygeneraterevenue?Ifyes,howmuchrevenuedoesitgenerateeachyear?Ifnot,whendoyouexpectthebusinessmodeltostartgeneratingrevenue?

11. ENABLING ENVIRONMENT

Whatarethefactorsthatencourageyourbusiness?Howlikelyaretheytochangeovertime?Arethereanyfactorsthatraisebarrierstoyourbusiness?Howdotheyaffectthedevelopmentofyourbusiness?Indevelopingyourbusinessareyoumotivatedbyanyexternalfactorscontrolledbygovernmentorlocalauthorities(regulation,taxation,risingpricesetc.)?Ifyes,pleasedescribethesefactorsandthedegreetowhichyourbusinessisdependentonthem.

1. VALUE

2. CUSTOMERS

4. RESOURCES

5. PARTNERS

7. GREEN IMPACT

Whatneeddoyouaim to address throughyourbusiness?Whoseneedisit?Howdoyouaimtoaddressthisneed?Whatisyourproduct/service?Describehowyourproducts/servicesprovideorwillprovideasolutiontoyourcustomers’need.Howisthisproblem/needbeingsolved/addressedtoday?Whatproduct/service do your customers currently usetoaddresstheproblem/need?

Whoareyourmaincustomers?Howwillyoureachthem?Whatisthespendingcapacityofyourcustomers?

Whatarethekeyresourcesyouneedforyourbusiness?Howwillyouacquiretheseresources?Whatarethemainchallengesinacquiringtheseresources?Howmanyemployeesdoesyourbusinesshave?Whatisthecompositionandtrackrecordofthecompany’smanagementteam?Ifyouworkinadifferentcountrythantheoneyouareregisteredin,doyouemploynationalsofthecountry(ies)inwhichyouoperate?Whatisyourgenderbalanceinyourteam,board,advisoryboardetc.?Howisorwillyourbusinessbefinanced?Didyoualreadyraisefunding?Doesyourbusinessmodelcurrentlyrequirefinancing?Ifyes,pleasespecifytheamountoffinancingneededandwhattypeofcoststhefundswillcover

Listthemostimportantpartnersfor your business anddescribetheirrole.Describetheextended circle of stakeholdersofyourbusiness.

Whattypeofenvironmentalimpactdoesyourbusinesshave?Howdo/willyoumeasurethisimpact?Howisthisimpactreflectedinyourbusiness?Whatarethepotentialenvironmentaltrade-offsofthebusiness?

3. ACTIVITIES

6. CHANNELS

8. RISKS & OPPORTUNITIES

Whatareyourmainoperations?Does your businessrelyon/incorporateanytypeofinnovation?Ifyes,describetheinnovationelement(s) from your business

Howareyoucommunicatingthevalueofyourproduct/service?Whatareyour3maindistributionchannels(howdoyourcustomersacquiretheproduct)?

Whatarethemainriskstoyourbusiness?Howdoyouplantoaddressthem?Whatarecurrentand future strategic opportunitiesforgrowth?Haveyougota“planB”?

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Figure 2: Business Model Canvas questions Source: own arrangement

Summary: Business Model Canvas questions


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ACCESS TO FUNDING

Amajorconcernforgreenentrepreneursiswheretolookforgreenbusinessfundingopportunities.Whileitisrecognizedthatfundingforearlystagesofagreenbusinessdevelopmentishardtocomeby,inthefollowingchapterwepresentafewpossiblesourcesoffundingthatagreenbusinesscouldturnto,basedontheliteraturereviewmadefortheGREEN-WINproject.

Business development stages and funding

Financing actors and institutions interested in green businesses have specific criteria andobjectiveswhen investing. Invested capital must match the development stage of a greenbusinessasdescribedbyitssize,capacity,fundingneedsorearnings.Thus,differentfinancingactorsinterveneinthelifeofabusinessatdifferentstagesofmaturity.

AusefulstagingofabusinessmaturitywasdefinedbyChurchill&Lewis(1983):

º Stage 1: Existence

Themain problem of the business at this stage is to acquire customers and to deliver theproductorservicetheycontracted.Thegoalofthecompanyistoremainalive.

º Stage 2: Survival

Atthisstage,thebusinesshasalreadydemonstratedthatitisaworkablebusinessentity.Ithasenoughcustomersandkeepsthembysatisfyingtheirneedssufficientlythroughitsproductsorservices.Thekeyproblembecomestherelationshipbetweenrevenuesandcosts.Thebusinessisinthephaseoftestingwhetherrevenuesaresufficienttocovercostsintheshorttermandtoexpandonthelongterm.

º Stage 3: Success

Here,thecompanyhasattainedtruefinancialhealthandearnsaverageorabove-averageprofits.Akeyissueiswhethertousethecompanyasaplatformforgrowthorasameansofsupportfortheownersastheycompletelyorpartiallydisengagefromthecompany.

º Stage 4: Take-off (growth)

IntheTake-offstagethekeyproblemisfindingouthowtorapidlygrowandhowtofinancethatgrowth.Theownerandthecompanybecomemoreseparated,howeverthecompanyisstillundertheinfluenceofboththeowner’spresenceandstockcontrol.Iftheownercandealwiththefinancialandmanagementchallengesofthegrowingcompany,thenextstepwillbematuritystage.

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º Stage 5: Maturity

The greatest concerns of a company that enters theMaturity stage are to consolidate andcontrolthefinancialgainsbroughtonbyrapidgrowth,andtoretaintheadvantagesofthesmallsize,includingtheflexibilityofresponseandtheentrepreneurialspirit.

The literature review showed that the main sources of funding for green businesses areentrepreneurs (self-financing), microfinance institutions, peer-to-peer lending, family offices,business angels, venture capital, private equity, banks (conventional banks, investmentbanks,publicandprivategreenbanks),nationalandsupranational initiatives(e.g.MultilateralDevelopmentBanks),grants,philanthropy,andcrowd-funding.Eachofthemappliesbestatacertainstageofthecompany’sdevelopment,accordingtotheirownstrategyandconstrains.

Thefollowingtable(Figure2)illustratesthediversityoftypesoffinancingactorsavailableforeachbusinessdevelopmentstage:

Existence Survival Success Take-off MaturityNational and sub-national initiatives

BanksVenture Capital

Private EquityBusiness angelsFamily offices

Crowd-fundingPeer-to-peer lending

Non-refundable grantsMicrofinance

Self-financing

Figure 3: Sources of funding according to business development stage Source: Own arrangement

The greatest concerns of a company that enters

the Maturity stage are to consolidate

and control the financial gains


July 201818

Funding sources explained

º Self-financing: the so-called “family, friends and fools”

Itiscapital(debtorequity)raisedwithintheentrepreneur’spersonalandprofessionalnetworksandtraditionallyitisthefirstmeansavailabletogreenentrepreneurs.Atthisstage,fundersinvestbecausetheytrustthepersonwhoisproposingaproject.Duringthisphase,theentrepreneurseeksvisibility forhis/herproject and reaches to thebroader rangeofowncontacts: socialmediaandInternetwebsitescontributetospreadingtheword(GreenforAll,2010).

º Crowdfunding

Crowd-funding is away for businesses to raisemoney on the Internet in the form of eitherdonationsor investmentsfrommultiple individuals.AccordingtotheWorldBankand InfoDev(2013), crowdfunding is expected to overtake venture capital in the financial marketswithin10years.Infact,apositiveregulatoryframeworkisspreadingworldwide.Itisanalternativetotraditionalloansbecausebanksinvestlessandlessinsmallbusinessesandarehighlyrisk-averse.

Green crowdfunding appeared around 2005 and is a niche for online fundraising that isbecomingmore popular. Below are some examples of crowdfunding platforms focussed ongreeninitiatives:

ҽ Greencrowd(Netherlands) ҽ Bettervest(Germany) ҽ Oneplanetcrowd(Netherlands) ҽ Republic.co(USA)

º Microfinance Institutions

Theyprovidefinancingtoborrowerswhocannotgetaloanfromatraditionalbank.Micro-lendingistargetedtowardbusinessesrequiringlessthan$35,000start-upcapitalandwithfiveorfeweremployees(GreenforAll,2010).Interestratescanbehigherthanwithtraditionalbanks,buttheloaniseasiertoobtain.ThereareMFIsspecializedinenvironmentalandsocialprojects.Microfinanceprivateinvestmenttotalled$10billionin2014(ResponsAbility,2015).

º Peer-to-peer lending

Peer-to-peerlendingisarecentlyemergingwayoffinancinggreenbusiness.Itconnectsentrepreneurswithindividuallenderswhoperceiveaninterestoncommittedcapital.Thesefundingsystemscancomefromsocialnetworkswhoattractpeoplewithacommoninterestandwheregreenprojectsarepromoted.Peer-to-peerloansaremoreflexibleinassessingsolvabilitythanbankloans(GlennCroston,75GreenBusinesses-youcanstarttomakemoneyandmakeadifference,2008).

5.2


July 2018 19

º Family offices

Familyofficesareprivatewealthmanagementadvisoryfirmsthatserveultra-highnetworthfamilies.Incontrasttotraditionalwealthmanagementfirms,familyofficesprovideacompletesuiteoffinancialandinvestmentservicesforthefamily.Thesecanincludetaxplanning,budgeting,insurance,charitablegivingandphilanthropy,propertymanagement,family-ownedbusinessadvisoryandwealthtransferservices.Moreover,familyofficesmayhandlenon-financialissuesincludingtravel,privateschoolingandotherhouseholdarrangements.Familyofficesareeachstructureddifferentlyfromoneanotherduetotheparticularneedsofthefamiliestheyserve.Theywillfocustheirinvestmentstrategiesonspecifictypesofenvironmentalimpacttheywouldliketoachieve.Often,theywillalsobringtheirskillsandothernon-financialsupporttobusinessestheyinvestin.

º Business angels

Businessangelsareprivateinvestorswhoinvestinunquotedsmallandmediumsizedbusinesses.Theyareoftenbusinessmenandwomenwhohavesoldtheirbusiness.Theyprovidenotonlyfinance,but alsoexperienceandbusiness skills.Business angels invest in theearly stageofbusinessdevelopmentfilling,inpart,theequitygap(UKBusinessAngelsAssociation).

Angelinvestorsarekeenlyinterestedinhelpingselectedbusinessessucceed,andwhiletheydoexpecttomakeprofit,theyalsowanttobeinvolvedinmanagingthebusiness.That’swhyit’simportanttofindanangelinvestortheentrepreneurgetsalongwithintermsofmanagement.Althoughtheycanopendoorsforthebusinessandgivepracticaladviceonrunningthecompany,angelinvestorsareprobablynotthebestoptioniftheentrepreneurdoesnotwantthosethings.

Angelinvestorstendtooperateinnetworksandfollowaverystructuredproceduretofirstverifyifthecompanyandthefundingneededfitswithwhattheyarelookingfor.Therearealsospecializedgroupsorindividualangelswholookatcertainindustriesorcertaintypesoffinancinglikestraightdebt,convertibledebtorequity.Forstart-ups,themainoptionistogoforconvertibledebt,whichendsupbeingequityifthecompanyissuccessfulorgodirectlyforstraightequity.Evenwhenangelinvestorsdon’tprovidetherequiredfunding,theymightofferadvicetoentrepreneurs,whichisusefulinitself.

Belowareafewresourceswhereentrepreneurscanlookforfinancingopportunitiesofferedbyangelinvestors:

ҽ www.angel.co ҽ www.captable.io ҽ www.crunchbase.com

º Venture Capital

VentureCapital(VC)intervenesaftertheseedphase.VCfirmsareparticularlyclosetotheprojecttheyinvestin:theyhaveasayaboutthemanagementteamandcanmakedecisionsregardingthe

Family offices are private wealth

management advisory firms

that serve ultra-high net worth

families.

Angel investors tend to operate

in networks and follow a

very structured procedure to first verify if

the company and the funding needed fits with

what they are looking for.

http://www.angel.co

http://www.captable.io

http://www.crunchbase.com


July 201820

company.VCplaysaroleinthedevelopmentofastart-upcompany(HellmannandPuri,2000).GreenbusinessesareincreasinglygainingtheinterestofVCfirms,especiallyenergy-relatedcompanies.

º Private Equity

Themajorityofprivateequityinvestmentsareinunquotedcompanies.Privateequityinvestmentistypicallyatransformational,value-added,activeinvestmentstrategy.Privateequityintervenesoncethecompanyhasreachedthegrowthstage(Toniic,2013).

º Banks: conventional banks, investment banks, public & private green banks

Debtisameansofgatheringfundsthatismoresuitableforbusinessesthathavealreadyreachedthegrowthstage.Ingeneral,thehighriskoffailuredetersconventionalbanksfromfinancinggreenventures(EuropeanPrivateEquityandVentureCapitalAssociation,2007).

Recently,Green InvestmentBanks (GIBs)haveemergedasaway tofinanceclimatechangerelatedbusinesses.GIBsare “domestically-focusedpublic institutions thatuse limitedpubliccapital to leverageorcrowd-inprivatecapital, including from institutional investors” (OECD,2015).A number of these bankswere created to boost investment in low climate-resilientinfrastructure for cities; by setting up these structures, governments anticipated a futurepolicy shift towardsgreeneconomies.Asof theendof2015,13national and sub-nationalgovernmentshavecreatedGIBs(OECD,2015)asreflectedinthefollowingtable:

Green Energy MarketSecurization, Hawaii

UK Green Investment Bank

ConnecticutGreen Bank

New YorkGreen Bank

New Jersey EnergyResilience Bank

MasdarUnited Arab Emirates

California CLEENCenter

Rhode IslandInfrastructure Bank

Montgomery CountyGreen Bank

Green TechMalaysia

Technology FundSwitzerland

The Green Finance Organization Japan

Clean Energy FinanceCorporation (CEFC)Australia

Figure 4: Green Investment Banks Source: OECD, 2015


July 2018 21

GIBsmeasureandtracktheirperformance:emissionssaved, jobcreation,privateinvestmentmobilizedperunitofGIBpublicspending,rateofreturn.GIBsoffer loans,bondsandequityfinancinginstrumentstotheirclients.Theyrarelyinvestinearly-stage/seedprojects,butsomearegaininginterestininnovativetechnologiessuchasoffshorewindenergy.

GreenPrivateBankshaveemergedinresponsetotheincreasingneedofgreenfundingthattraditionalbankscannotsatisfy.Theyarebanksprovidingbankingservices(loan,investment)togreenbusinesses.Becauseenvironmentalissuesaretheircorebusiness,theyunderstandthepotentialofgreenbusinessesandtheirchallenges(GlobalAllianceforBankingonValues,2015).

TheGlobalAlliance forBankingonValues (GABV) is a network gathering28GreenPrivateBankswithover$100billionintotalassetsundermanagement,operatingacrossAsia,Africa,LatinAmerica,NorthAmericaandEurope.GreenentrepreneurscanrefertotheGABVtolocatethenearestgreenbank:http://www.gabv.org/the-community/find-members

º National and sub-national initiatives

These initiatives includeMultilateralDevelopmentBanks (MDBs) andnational governments’development finance. Multilateral Development Banks provide essentially loans to greenprojects(83%accordingtotheWorldBank,2014),therestbeinggrants,equity,guaranteesandotherinstruments.ExamplesofMDBsincludethe:

ҽ EuropeanBankforReconstructionandDevelopment(EBRD) ҽ WorldBank ҽ EuropeanInvestmentBank(EIB) ҽ AfricanDevelopmentBank(AfDB) ҽ AsianDevelopmentBank(ADB) ҽ Inter-AmericanDevelopmentBank(IADB)

Development entities can also invest in funds dedicated to environmental issues.These fundsprovidewhatiscalled“concessionalfinancing”(loansthatarelessconstrainingthantraditionalloans:longergraceperiodsandlowerinterestrates,OECDdefinitioncreatedin2003).ExamplesincludetheClimateInvestmentFunds,theGlobalEnvironmentfacilityandtheGreenClimateFund.

º Non-refundable grants

Greengrowthandgreenbusinessdevelopmentarebecomingapriorityforpolicymakers,andthis isalsoreflectedbythefinancingprogrammesofdifferent institutions,governmentsandfoundations.

Green Private Banks have emerged in

response to the increasing need

of green funding that traditional

banks cannot satisfy.

http://www.gabv.org/the-community/find-members


July 201822

IntheEuropeanUnionforexample,thereareseveralprogramsthataimatsupportinggreenbusinessesandeco-innovation:

ҽ Horizon2020 ҽ EuropeanRegionalDevelopmentFund(ERDF) ҽ EuropeanAgriculturalFundforRuralDevelopment(EAFRD) ҽ EuropeanMaritimeandFisheriesFund(EMFF) ҽ InnovationNorway

Publiccharitiesandprivatefoundationsarealsoinvolvedinsupportinggreeninitiatives.ExamplesincludeCalvertFoundation,Acumen,W.K.KelloggFoundation,RockefellerFoundation,DavidandLucilePackardFoundation,RobertWoodJohnsonFoundation,NewProfitInc.

Private Foundations also offer grants, for example Grand Challenges (Bill &Melinda GatesFoundation).Usually the targetof thosegrantprograms isvastbut remains in the scopeoftacklingdevelopmentproblemsandkeyglobalhealthissues.Similarly,corporationsgiveawaygrantstogreenprojects(e.g.Walmart’sEvergreenGreenGrants).

Otherorganizations,suchasAshoka,EchoingGreenortheMacArthurFoundation,usefellowshipprogramstofindbreakthroughs.Theyinvestininnovativeandentrepreneurialleaders,ratherthaninspecificideas,andprovidethoseleaderswithrelativelyunrestrictedsupporttopursuetheirinterests.

Investment-readiness

Thepreparationeveryentrepreneurneedstohaveinordertoraisefundingisoftenoverlooked.Thisrefersto:

º Questions the entrepreneur needs to be prepared to answer. Most of these questions have been covered in this guide, others will be specific to various investors;

º Research on specific investors, their strategies and understanding whether they are or not a fit. This can be easily achieved by speaking to other companies who have raised money with your target funder / investor;

º Documentation that needs to be prepared: be it proposals, pitches, term sheets, investor teasers, financial modelling, statements etc. This preparation requires a specific effort, cost and expertise.

5.3

Public charities and private

foundations are also involved in

supporting green initiatives.


July 2018 23

ThefollowingquestionsrepresentguidanceprovidedbyinvestmentexpertsduringtheGREEN-WINonlinedisseminationworkshoporganisedincollaborationwithGreenCape,SouthAfricanRenewable EnergyBusiness Incubator (SAREBI) andThe InnovationHub of SouthAfrica inMay 2018. These questions address the most frequent topics concerning fundraising andinvestmentreadiness,basedontheworkofTheGround_UpProject’sInvestmentClinic(www.groundupproject.net):

º How much funding should entrepreneurs raise and what should it be used for?

Concerningtheamounttoberaised,theadviceistoraiseaslittleaspossible,butenoughtokeepthebusinessgoing.Theentrepreneurshouldbepreparedandknowthatthereisatypicaltypeandrangeoffundingapplicabletocertainbusinessstagesandgoingoutsideofthatrangewillquestionthecredibilityoftherequestforfunding.

Asanindicativebenchmarktheamountrequestedshouldcover12to18-monthsrunway,meaningtheamountoffundsthatareallowingthebusinesstoexistandcontinuetogrowforthesetperiodoftime,withrevenuecalculationsaccordingtotheworst-casescenario.Whenlookingattheamounttobefundraised,thequestioninvestorsusuallyaskishowmuchthecompanyisvalued,i.e.howmuchequityislikelyforthebusinesstogiveforthefundingthatisrequested.Thereisabenchmarkwhichsaysthatthevaluationisbetween3to5timestheamountofrequestedfunding.

Another aspect is that investors expect the company to be on a growing trend. In everyfundraisingroundthefundstoberaisedshouldincreasecomparedtothepreviousroundtotheextentof3to5times.Theseareaveragebenchmarks,butoftenarethestartingpointsofnegotiationforaparticulardeal.

Thetypeofcapitaltoberaiseddependsontheneedsofthebusiness.Ifonlyfundingisneeded,debtwould be an option. If the entrepreneur is looking for active investors, expertise andconnections, then probably equity investment is a better choice. For social enterprises andNGOs,grantsarethebestandmostlikelychoice.

Whenplanningwhattodowiththecapitalonceraised,prioritygoestoproductdevelopmentandmarketdevelopment,buildingthesalescapability,thesalesorganisation,theinfrastructureintermsofassetsorpeopleneededtogrowthebusinessatthegivenstage.Theadministration,salaries,managementandoverheadsingeneralshouldbethelasttoconsiderfromthese3areas.

º What signals are the financial projections sending?

Inthepresentationofthefinancialprojections,theminimumexpectationisforentrepreneursto be using the language and the tools the investor is used to see; thesemust include anincomestatement,abalancesheetandacashflow.Thefinancialshavetobeputtogetherinaprofessionalwaytoearnthetrustofthecapitalprovider.

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July 201824

Financial projections often overestimate growth and the market size potential without thearguments to back these up, and that can indicate poormanagement. Investors apply theirmarketknowledgetoscreenbusinessesandtheyareexpertsinthefieldtheydecidetoinvest,sotheywillknowwhatisrealistic.Thisappliesforoverestimatingthesocialandenvironmentalimpact,too,andtheseprojectionsshouldalsobecredibleandbackedupwitharguments.

Financialsinthepreselectionstagecanbeeitheratthesummarylevel,ordetailedlevel,whateverthecompanyfeelscomfortabletoprovide,andithastobeadaptedtothecompany’sstageofdevelopment.Astart-upinanearlystagecouldprobablygowithasummary,butitwouldhavetobebackedupbydataandtheentrepreneurshouldbereadytoanswerquestions.Acompanythatisinagrowthstageneedstodemonstratethattheyknowwhatfinancialmanagementis,andthattheycanmasterthefinancialstoahigherlevelofdetail.

Revenue projections are considered expectations and ambitions of the entrepreneur andinvestorswillapplytheirownexpertisetoassesstheestimatesmade.Ontheotherside,thecostcalculationsmadebytheentrepreneurshavetobeaccurate.Ifthenumbersarefuzzy,itindicatesthatthemanagementdoesn’tunderstandthecostbase,whichsignalstotheinvestorthatthereisariskfactor.Investorsexpecttoseefinancialskillsintheteam,butthefinancialprojections are the responsibility of themanagement team, not of the financial expert.Theentrepreneurhastotakeownershipoftheseprojections.

º What should the entrepreneurs know about investors?

Anentrepreneurneedstobeclearonwhataninvestmentcyclemeans,becausethat’sthewaytoestimatethetypeofeffortinvolvedanddurationoftheprocess.Also,thisisthewaytodefinethefundingstrategy.Theentrepreneurcanstarttoprepareinmoredetailafterwards,lookingatparticularinvestors hewants to target. Every investor is different and investment preferences are specificregardingthesector,teamandinvestmentstrategy.It’sessentialfortheentrepreneurtounderstandinwhichsector,industryandsubjecttheinvestorhasdefinedhismissionandvisiontoinvest.

Researchofpublicmaterialssharedbytheinvestorcanhighlighttheirexpertiseandwhattheyarelookingtoinvestin.Theentrepreneurshouldverifyiftheinvestoratthattimeisinafundingstage,thesizeoffunding,andthetimeline,atthesametimebeingawarethat ifthefundisfully invested, then even if the entrepreneur has a great business case, theywon’t receivefunding.It’simportanttounderstandalsotheregionalfocus,becauseinvestorsareparticularonaregionalspecialisationforreasonsrelatedtotheirmission,andtherecommendationisnottoapproachthemifthebusinessisnotlocatedinthecountry/regiontheyaimtoinvestin.

º What do investors expect to see from entrepreneurs?

Investorsthinkintermsofrisk,impactandreturn.Theentrepreneurneedstominimizetherisksthatinvestorscouldperceiveregardingapotentialinvestmentinthebusiness,topresentthe

The financials have to be put

together in a professional way to earn the trust

of the capital provider.


July 2018 25

impactindetailandaccurately,anddescribetherevenuepotentialbyprovidingatrackrecordwhichdemonstratesthattheentrepreneurunderstandstheimplicationsofinvestmentintheircompany.Iftheyreceivedinvestmentpreviously,itshouldbeexplainedhowitwasused,howtheyworkedwiththepreviousinvestors,howtheinvestmenthelpedachievecertainmilestonesandexplainwhatfollowsafterthecurrentfundingstage,i.e.howthecompanywillevolveonalongerterm.Thiswillhelpinvestorspositionthemselves,understandapotentialexitandwhenthereturnonthecurrentinvestmentwillmaterialize.

Theentrepreneurshouldthinktheseaspectsthroughwellaheadoftime,astheywillpervadethroughquestionsfrominvestorsatdifferentmomentsandstages.However,beawarethattheinvestorhasallthesedatapointsinmindalreadywhentheproposalgetsontheirtable.

º How to reach out to investors?

Thereisatendencyforentrepreneurstoreachouttoasmanyinvestorsinanykindofeventorcompetition.However,moremeetingsdon’tresultinmorefunding.Resultsaremorelikelytobeobtainedifqualityintroductionsaremadetoinvestorswhoareidentifiedtobeagoodmatch.

Forthispurpose,researchisneededontheinvestorsthatcanbeapproached,thebusinessestheyhavepreviouslyfundedandtheircurrentpreferences.Inthisprocess,connectionsfromincubators, personal networks and companies that received funding can provide valuableinformation.More effort in preparing and planning the fundraising approachwill pay off infasterfunding.

º What should be the size of a pitch deck?

Therearelikelytwopossibilitiesofintroducingthebusinesstoaninvestor.

Whensendingthebusinessinformationtoanalystsforscreening,it’srecommendedtoprepareaone-pager,asummarywithsomevisualrepresentationofthebusinessmodelcanvas,whichshouldgiveanoverviewofthebusinessinabout1minute.

Incasetheentrepreneurisinvitedtohaveapersonalpresentation,thepitchdeckshouldhaveamanageablesizeandshareonlythemostessentialinformation,keepingitatmaximum10slides.Manybusinessesmakeit30-40slides,packedwithdetailsthatarehardtomanage.

The advice is to build the investment thesis using a sequence like: problem – solution –opportunity-competition-businessmodel–team–financials.Itisalsorecommendedtochecksomeofthetoppitchdecksthathavebeensuccessfulinraisingcapitalinthatspecificindustry.

Connections from incubators,

personal networks and

companies that received

funding can provide valuable

information


July 201826

º How to articulate the opportunity and competitive advantage?

About¼ofpitchdecks lacktheopportunitysizing.Everyonehascompetitionandthepitchdeckshouldexplainwhatmakesthebusinessabetteralternative.Competitionmightconsistof lateralproducts, lateralbusinesses,buttheystillneedtoberevealed. Iftheyarethebestalternativeorthenextbestalternativeforpotentialclients,thatcancauseproblems.

Describingthemarketsizeisoftenignoredbecauseitisn’teasytoevaluatethemarket.However,beingabletoestimatethetotalmarketoruseaproxynumber,aswellassetarealistictargetforthemarketsharethattheentrepreneurintendstocaptureisakeypieceofpreparingforinvestment.

Often,technology-drivenbusinessescanmentionpartnershipsasacompetitiveadvantageorsome intellectualproperty (IP) in the formofpatents. IPdefensibilitycanbequite low. IP iscostly,andsolutionsinthemarketcanbeeasilyovertakenbybettersolutions.ThecompetitiveadvantageoftheIPonlymaterializesiftheentrepreneurisabletocapturethetargetmarket.IPsandpartnershipsshouldnotbeemphasized,unlesstheyarechangingthefinancialsofthebusiness.

AdditionalexpertadviceandinsightsoninvestmentreadinessareavailableattachedtothisguideasAnnex1,representingaworkshopsummaryonhowinvestorsassessgreenbusinessmodels.

Anumberoftheissuespresentedabovearebeingaddressedviaacceleratorsandincubatorsthatprepareentrepreneursatvariousstages.Mostacceleratorswillalsobeconnectedtoanetworkofmentorsorinvestorssothatentrepreneurscanaccessinvestorsdirectlyandgettotrytheirpitch.

Someacceleratorsfocusingongreenbusinessesinclude:

ҽ TheImpactHubnetworkworldwide ҽ TechstarsandtheirrecentpartnershipwithTheNatureConservancy ҽ UnreasonableInstitute ҽ TheGround_UpProject ҽ TheInvestmentClinic

Investment-readiness is essential, as it provides financial and fundraising capability toentrepreneurs and brings them up to parwithwhat investors and funders expect, therebysignificantlyincreasingtheirchancesofbeingfunded.

Everyone has competition and

the pitch deck should explain

what makes the business a better

alternative

Investment-readiness is essential, as

it provides financial and

fundraising capability to

entrepreneurs


July 2018 27

CONCLUSIONS

Thispaperhasprovidedashortguide forentrepreneursonhowtheycanuse theBusinessCanvas Model to think through and prepare the development and funding of their greenbusiness.Noamountoftheorywillreplacetherealityofstartinganddoinggreenbusinessincountriesaroundtheworld.

With the adoption of the Sustainable Development Goals and the extent of countlessglobal environmental challenges, these are exciting and urgent times for entrepreneurs andfor organisationswho support entrepreneurs to realize long-lasting, deep, green impact viasustainable,viablebusinessmodels.

Havingpre-qualifiedapipelineworthUS$200millionrepresentingavarietyofimpactbusinessesfromaroundtheworldin2017,TheGround_UpProjecthasfoundthatonlyaverysmallfraction(between2-5%)ofimpactventureswerereadytoraisethecapitaltheyneededtoobtaintheirimpact.

Understandinghowtoplankeyaspectsof thebusinessas laidout in thispaper,alongwithdedicatingresourcesandtimetopreparingtobecomeinvestor-ready,willbekeytoincreasingthenumberofsuccessfulgreenbusinessesthatwillcreateourbetterfuture.

Have we forgotten something? Let us know at www.groundupproject.org.

6

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July 201828

ANNEX1

THE INVESTORS’ PERSPECTIVE

Summary of the Impact Investment Expert Workshop on Assessing Green Business Models

organized by The Ground_Up Project with The Ground_Up Centre, IASS and GREEN-WIN

Geneva, 27 October 2016

Participantsincludedequityinvestors,assetmanagers,advisorsandothergreeninvestmentexperts.DiscussionswereheldunderChathamHouserules;individualopinionsarenot

attributed.

Mostentrepreneurswill,atsomepoint,reachouttofindfinancingand/orfinancialpartnerstogrowandadvancetheirwork.Greenbusinessesandenvironmentallyresponsibleentrepreneursneedtobeawareoftheperspectivethat investorshavewhentheyassessthefinancialandeconomicviabilityandtheenvironmentalimpactofagreenbusinessmodel.

Undertheauspicesof theGREEN-WINresearchproject,TheGround_UpCentre inGeneva(http://www.groundupproject.org)andtheInstituteforAdvancedSustainabilityStudies(IASS)inPotsdam(http://www.iass-potsdam.de),incollaborationwithTheGround_UpProject(http://www.groundupproject.net),organizedaworkshopdedicatedtoexpert investorsinthegreeneconomy.

Thediscussiontopicsincludedexperts’pointofviewonhowtheyassessabusinessmodel,theimpactofregulationandofthecontextinwhichagreenbusinessisdevelopedandalso,thetypesofinvestmentabusinesscouldaccessdependingonitssizeandmaturity.

Theworkshopwas designed to inform the partner institutions in theGREEN-WIN project,aswellasgreenentrepreneursthemselves,onthekeyelementsthatinvestorsanalysewhendecidingwhethertoinvestinagreenbusinessmodel.

For the purposes of the GREEN-WIN research, the summary below regroups some of thecommentsmadeduringtheworkshopbykeytopicsdiscussed.

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LOOKING AT A GREEN BUSINESS MODEL

When reaching out to specialized investors who are interested in green projects, it isunderstandablethatthefirstfilteristhegreenfilter.Itisimmediatelyfollowedbytheanalysisoftheeconomicviability,andthedecisionisbasedoncertaincriteria,asisthecaseforanyotherinvestment.

Animportantaspect,whichisoftenoverlooked,isthatthedescriptionandpresentationofagreenbusinessmodelshouldfitwithacertainaudience.Agovernmentmightagreetofundit,ifitfallsinthelineofthe2°Cobjective,butaninvestorcannotbeapproachedinthesameway.

IT IS ALL IN THE REVENUES. Fromaninvestor’sperspective,abusinessmodelisdefinedbytherevenuesourceoftheenterpriseororganisation.Therefore,thefirstquestionaninvestoristryingtoansweris“whatistherevenuesource?”.Goingfurtherinanalysingabusinessmodel,otherimportanttopicscomeunderscrutiny:

º Where does the funding come from?

º What is the revenue model? Is it economically viable?

Forinvestorsinthegreeneconomy,thereisnolongeradoubtthatgreengrowthispossible.Nonetheless,theonlyconditionthatwillmakethisarealityisthatgreenbusinessesMUSTbeeconomicallyviable;theyhavetohaveasustainablemodelforgeneratingrevenues.Thismeansthattheyhavetorespondtoaneedthatcomesfromthemarket.Beinggreenisnotsufficient.Ifthereisnoeconomicviability,therewillbeneitherdemand,norsupplyongreenaspects.Oneimportantstepforgreenbusinessesistotrytogetridofoppositionbetweengreenbusinessand not-so-green business andwork on the idea of being greenAND sustainable from aneconomicpointofview.

THE MARKET OUT THERE.Inordertotesttheeconomicviabilityofabusinessmodel,oneneedstoconductmarketsurveys.A lotofgreengrowthhasbeenachievedbyreachingtheconsumersandcapitalisingontheirbehaviouralchange:consumersthinkmoreandmoreaboutthegreenaspects,whichstartsnewmarketsandexpandsthealreadyexistingones.

Investorswillcomewherethemarketis.

Taking an academicview tobusinessmodels canhamper theprocessofmaking abusinessviable; inordertomoveaheadfast,thefocusoftheresearchmustbeputoninvestors’andentrepreneurs’criteriaandexpectations.

Concerningthegreenimpact,thereisatrendtofindandtalkaboutprojectswithgreenimpactandlotsofmoneygoesintodoinggooddeeds.Buteconomicviabilityhastocomefromthe


July 201830

market.Andnomatterhowgreenyouare,yourproduct/servicedoesnotworkonthemarket,yourbusinesswillnotworkinthelongrun.

MIND THE RISK. Entrepreneursshouldaskthemselvesabouttheriskoftheirbusiness.Theymust act andbehave the sameway investors do andunderstand this notionof risk beforetalkingtoanyinvestor.Thisisahardthingtodo,butthebusinessshouldtakeriskintoaccount.Understanding theentrepreneurs’viewsof riskalsogives the investoraperspectiveon theteam.

“Ifentrepreneurscometoyouandhavenotthoughtaboutrisks,itisaverybadsign”.Evenataveryearlystage,theadvicewouldbetothinkthoroughlyaboutrisks,ifmaybenotsomuchofafinancialplanyet.Nineoutoftenentrepreneurshavenotdonetheirhomeworkintheinvestors’view.

NON-PROFIT TURNED INTO BUSINESSES. Somephilanthropicmodelsmayturn,intime,intobusinessmodels,forvariousreasons. Investorsarenotparticularlyattractedtophilanthropicmodelsadjustingthemselvestogreenfor-profitmodels.Intheirview,ifanentrepreneurturnsgreen,thereasonshouldbeanexistingdemandcomingfromthemarket.

If theproject isnotyetfinanciallyviable–buthasapotentialtobe– it isbettertofindanincubatororaccelerator,thantogooutsidelookingforinvestors.

ASSESSING THE “GREEN” IN A BUSINESS MODEL

Investorslookatagreenbusinessmodelbyapplyinganumberoffilters.Inmostcasesthesearefiltersdevelopedfromthepracticeandcanvarywiththeinvestor.

Thereisanagreementonthefactthatstandardizedcriteriacouldonlybeappliedinthecaseofaverynarrowandwell-definedfield,inonesectororonetechnology.Otherwise,whenworkingwithadiversifiedportfolio,itisimpossibletostandardizeit(forinvestors).Intheend,itallcomesdowntopersonalfeelings,experiencesandpersonalassessment.

SomeimportantaspectsrelatedtotheassessmentofGBM:

THE CASE FOR GREEN.Somecompaniesdonotdefineandpromotethemselvesasgreenbutdofall intothiscategory.Theydonotgoforgreen,butforcommonbusinesscriteria.Thesecompanieshavegreenbusinessmodels,notbecauseofaconviction,butbecauseitwouldbecostlyforthemnottodosoandtheyintegratedgreenconsiderationsfromaneconomicpointofview. Itmadesense.Thoseare thebestdeals, in theeyesofcertain investors,especiallyinvestmentfunds.

In their words: “Focus first

on defining a solid business

model, otherwise there will be no

funding. The project has to

be economically viable in order

to attract investors.”


July 2018 31

There ismistrust about self-presented sustainable or green projects in the investors’world(because theymadebadbets, theydonot knowhow to invest in the notionof green andconsideritlessprofitable).Thisisoneofthereasonswhyinvestorsalwaysassessthebusinessitself.Andwhythey lookforentrepreneurswhounderstandthefundamentalsofabusinessmodel.

AN “IN-HOUSE” PROCEDURE. Oftenthefirstfilterisanenvironmentaland/orsocialfilterand,formanyinvestors,suchcriteriaareoftendeveloped“in-house”.Thisstepsievesthedecisionregardingthetimespentonaproject:notimewillbespentiftheprojectdoesnotpassthefilter.Itisimportanttonotethatthefilterscouldchangeastheinvestorgainsexperienceandknowledge.Standardizedgreencriteriaareonlypossiblewhentheoperationfieldofabusinessis very narrow and specific. If the project has passed the filter, then comes the economicanalysis.Animpactanalysismayalsobeperformed.

MEET THE TEAM. Investmentdecisionwillmostlyflow frompersonal feelings,experienceswithpeopleinvolvedinthebusinessandthequalityoftheteam.Therefore,investorswillmostofthetimewanttomeettheteam,asthereisnootherwaytogetanopinionofitsquality.Thisisaninvestmentstrategyoftenusedbyimpactinvestorsandventurecapital.Theyfollowacase-by-caseapproach.

And the reason for this approach is that, in the case of early-stage investments or forunpredictablecircumstances,everythingwiththebusinessmodelcouldchange:financials,thecustomers and also the impact. It ismore important to gowith a solid and knowledgeableteamthatcanweatherhighlyuncertainandchangingeconomic,socialand/orenvironmentalconditions.

REDUCE THE RISK. Whenoperatingindevelopingmarkets,theinvestorswillprefertogoforactiveinvestmentandengagementwiththeentrepreneur.

Inaddition,theywillprefertoengageotherinvestors(evencompanies),withdifferentexpertiseandacttogetherlikeengagedco-investorswithcomplementarycapacities.

All investors will be actively involved in the company (joint ownership of the capital byinvestors),byprovidingexpertiseandcounselling,whicharewellneededforearly-stageimpactinvestments.

MIND THE TIME. Forinvestmentfunds,theimpactshouldusuallybeembeddedinthebusinessmodelitself.Andtimehorizonisacriticalcriterion.Theywilllookforanswerstoquestionslike:howlongisitnecessarytoinvest,whencananexitbemade,howlongwillittaketogetbacktheinvestedcapital?

In their words: “For every

investment decision, the

key is the team. Everything else is going to change,

but not them.”

In their words: “The business model has to

be successful in impact, hand in hand with the financial

sustainability over the time

horizon.”


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CONTEXT AND IMPACT CRITERIA

Besidesthebusinessmodelitselfandthestrategiesinvestorsapplyinchoosinganinvestmentandmitigatingrisks,anumberofotherconsiderationswillbeexpectedfromanorganization,enterpriseorproject.

THE CONTEXT.Thereneeds tobesomeknowledgeof thecompetition, theenvironmentalcontextforthespecificmarket(forexample,ifweconsidertheideaofe-bikesinChina,howdoes itworkwiththerestrictionofbikes intownsdecidedbythegovernmentofShanghai?Coulditinvalidatethewholebusinessmodel?).

LifeCycleAnalysisisalsoessential,specificallyforbusinessesthatclaimtobegreen.

MEETING SDGs. Few investors take sustainable development goals into account whenmakinginvestmentdecisions.Usuallybecausetheyareseenascomplicatedtoimplementandconsideredasameasuremoresuitedforgovernmentsthanforinvestmentdecisions.

Investors usuallyworkwith their own framework on filtering and reporting.The process isrefinedandupdatedregularly:mapping,definingaframework,criteriaforfilteringandreporting(assetclass,geography,etc.).SomeinvestorswanttoseeselectedSDGsinmetricsinaccordancewiththeirpreferencesamongSDGs.

Investorsmainlyconsiderthat,foryoungbusinesses,theSDGsaretooburdensomeandtooexpensivetofollowandmeet,whichiswhytheyusuallydonotjudgeaninvestmentaccordingtoSDGs.

Public fundersandcorporationscanfocusmoreonSDGs’criteria (forexample jobcreation,carbonsavings).

WHO IS THERE ALREADY?Acriticalquestionwhenlookingataninvestmentinthebroadersenseis“whoisalreadyinthismarketortypeofinvestment?”.

Whereisthemoneycomingfrom?Isitsocialmoneyorgovernmentmoney,arethereprivatefundsfromcorporationsorindividuals?Dotheybelieveinlong-terminvestmentreturnandimpact?

LEVEL OF INVESTMENT GROWTH

Thedecision to investornotand theamountofmoney involvedwillvaryaccording to thesizeofthecompanyanditsstageoflife.Thereisacommonunderstandingthatsomegreenbusinessesarebetterstayingsmallthanthinkingaboutscalingup.Andthatthegrowthmodelofanenterprisecoulddifferinthecaseofgreenbusinessmodels.

In their words: “The preferences of the clients (of

an investment fund) come first, before

international agreements and own preferences

on the ESGs. But there are no

compromises on the financial

side!”


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INVESTMENT PATTERNS.

º Over 5 million. The business must better be scalable, with a lot of room for the company to grow, the board level should be sound and there should be three or four investors with different backgrounds.

º Less than 5 million. Anything smaller means too much time for analysis from the point of view of an investment fund.

º Under 500.000. There must be chemistry between entrepreneurs and investors for them to feel comfortable with investing.

GROWTH ISSUES.

º Future projections. When talking about future growth, investors expect projects to have an idea regarding not only how much money is needed and for what, but also some financial projections for the long run.

º Scale. Scalability of green metrics could also be an issue. Sometime scalability does not make sense for a green business. For example, a distribution model may make sense in a local context. Scale must be a target only if there is a benefit streaming from economies of scale.

º Replicability. Not really. There could be lots of adjustments needed for the business model to work in a different country/region/context.

FINDING AN INVESTOR. Alargefundisnotalwaysthebestideaforfunding.Investorsseegreatbenefitsinsomeotherapproaches,suchasgettingsomefeedbackfromlocalinvestorsandtheirfeelingaboutthebusinessusingacrowd-fundingplatform,forexample.

THE ROLE OF GOVERNMENTS AND REGULATIONS

There isacommonagreementamonginterviewedinvestorsthatmanygreenbusinessesareinthedifficultquestofdevelopingoruncoveringnewmarkets.Asaconsequence,theroleofgovernmentandregulationsisofagreatimportance:theycouldencouragesuchaventureandcreatetheconditionsforit.Ortheycoulddistorttheconditionsandhinderdevelopmentinthelongrun.Investorsalwayspayattentiontothelargerenvironmentofaspecificbusiness,beforemakinganydecisions.

“Choose the target wisely,”

they say, because some

funders are only focused on expansion, such

as the venture funds.


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LAWS AND REGULATIONS.Investorswillsearchforspecialregulationsbeinginplaceandthatcouldinfluenceamarket.Itcanbeagoodorabadthing:theywilldeterminehowtheregulationfactortriggersnewmarkets,newbusinesses.

Ifacompanywaitstoolongtoactafternewregulationsarepassed,thebusinessmaybekilledbeforeitstartsifitbetsonbeingtheonlyonetocomplywiththenewregulation.

PUBLIC MONEY. Solarprojectsgotpublicgrantsandwereverysuccessful.Publicmoneyhelpstofundresearchandalsointervenesinco-investment.Investorscanbenefitfrompublic-privatepartnershipasithelpsthemmitigatingtherisk.

Therearesomeindustrieswherepublicfundingisthefirstthingyouneed,togetthingsgoing.Butthebestuseofpublicmoneyisasequityortoattractotherprivatefunding.


July 2018 35

GREEN GROWTH AND WIN-WIN STRATEGIES FOR SUSTAINABLE CLIMATE ACTION (GREEN-WIN)

TheGREEN-WINProject identifies,developsandcriticallyassesseswin-win strategies, greenbusinessmodelsandgreengrowthpathwaysthatbringshort-termeconomicbenefits,whilealsosupportingmitigationandadaptationgoalswithinthebroadersustainabledevelopmentagenda.

Work programme

º At national levels, GREEN-WIN analyses win-win opportunities that arise through integrating policies across different sectors, and advances state-of-the-art macro-economic models in order to identify green growth pathways.

º At local levels, GREEN-WIN carries out action research case studies to develop green business models and enabling environments in the following three areas: i) coastal flood risk management in Jakarta, Kiel, Rotterdam and Shanghai; ii) transformations in urban systems in Barcelona, Istanbul, Shanghai and Venice; and iii) energy poverty and climate-resilient livelihoods with case studies in India, Indonesia and South Africa.

º Cutting across both levels, GREEN-WIN investigates financial products and policies, as well as financial system reforms that redirect financial flows towards sustainability and climate action.

º All of these activities are embedded in an open dialogue between research institutes, international organisations, business, and civil society that co-develops shared narratives around win-win strategies, business opportunities and green growth pathways

Project partners

Global Climate Forum (GCF), Germany (coordinator) | The Institute of Environmental Sciences and Technology,Autonomous University of Barcelona, Spain | E3-Modelling, Greece | Environmental Change Institute, OxfordUniversity,UK|Ecoled’EconomiedeParis,France|UniversityCollegeLondon,UK|TheGround_UpAssociation,Switzerland|StichtingDeltares,TheNetherlands|InstituteforAdvancedSustainabilityStudies,Germany|GlobalGreenGrowthInstitute,RepublicofKorea|JillJaeger,Austria|EuropeanCentreforLivingTechnologyatUniversitàCa’FoscariVenezia,Italy|InstituteofEnvironmentalSciencesatBoğaziçiUniversity,Turkey|UniverstitasUdayana,UdayanaUniversity,Indonesia|UniversityofCapeTown,SouthAfrica|2ºinvestinginitiative,France|SustainabilityandResilience,Indonesia

ThisprojecthasreceivedfundingfromtheEuropeanUnion’s Horizon 2020 research and innovationprogrammeundergrantagreementNo642018,and the Swiss State Secretariat for Education,ResearchandInnovation(ProjectNo15.0216)

Projectduration:01.09.2015–31.12.2018(40months)Projectresources:3.9millionEuros

ContactJochen Hinkel(projectcoordinator),GlobalClimateForum(GCF),Germanymail:[email protected]

twitter: @greenwinproject

web: www.green-win-project.eu

mailto:greenwin%40globalclimateforum.org?subject=

https://twitter.com/search?q=greenwinproject&src=typd

http://www.green-win-project.eu

July 2018

A SHORT GUIDE TO DEVELOPING GREEN BUSINESS MODELS€¦ · traditionalbusiness model canvas...

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