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GBM Development Guide For Dissemination

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GBM Development Guide For Dissemination

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karima
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© © All Rights Reserved
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A SHORT GUIDE

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

Prepared by
Imola Antal, Project Manager
Brindusa Burrows, Director
The Ground_Up Centre

Reviewed by
Mark de Bel, Deltares
Frank Meissner, IASS

July 2018
A short guide to developing green business models –
for entrepreneurs, researchers and organisations that support entrepreneurs

Table of contents
1 Introduction 3
2 Defining concepts 4
3 GBM Snapshot Tool 4
4 Developing GBMs: Guiding steps 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 Green impact 11
4.8 Costs 12
4.9 Revenue 12
4.10 Risks and opportunities 13
4.11 Enabling environment 13
4.12 Summary: Business Model Canvas questions 15
5 Access to funding 16
5.1 Business development stages and funding 16
5.2 Funding sources explained 18
5.3 Investment-readiness 22
6 Conclusions 27
ANNEX 1 Investment Expert Workshop Summary 28

2 July 2018
A short guide to developing green business models –
for entrepreneurs, researchers and organisations that support entrepreneurs

1
INTRODUCTION

This paper is intended for those who work with, research, and support green entrepreneurs,
as well as for entrepreneurs who are starting a green business. It provides guidance in the pro-
cess of elaborating a business plan and presenting it to potential partners and investors, based
on the understanding of investors’ expectations.

The conclusions and recommendations gathered in the present guide rely on the study of Green
Business Models (GBMs) as part of the GREEN-WIN project, an international transdisciplinary
research collaboration that applied a solution-oriented approach, targeted at increasing the
understanding of the conditions under which win-win strategies and green business models work
in practice. To gather relevant insights on how entrepreneurs solve climate and sustainability
problems while securing a profitable business strategy, the following activities took place in the
project:

ºº Literature review on GBMs and the Green Finance Landscape;

ºº GBM assessment workshop with asset managers, impact investors, entrepreneurs,


green finance clusters, and other green business experts;

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

The study The study provided a better understanding of what works in the field of initiating and devel-
provided a better oping green businesses, how it works and why. Based on the conclusions of the first round
understanding of research, the first part of the guide provides an easy-to-use tool to think through, plan and
of what works analyse business plans, as well as understand the most important questions an investor may
in the field of pose to an entrepreneur.
initiating and
developing green The second part of the guide presents some of the financing sources that can be suitable for
businesses green enterprises. Funding is an essential topic for any green business. While the funding
sources are summarized based on the findings of the literature review, and aim to provide an
overview of available options, the list is non-exhaustive. Investment-readiness – what it means
and why it is important – is also addressed.

One of the main factors identified in the course of the research as being critical for the via-
bility of a green business is the level of preparation of the entrepreneur and of his team. We
hope that this guide will serve to inform entrepreneurs and those who support them define
and develop their businesses and present them in a comprehensive manner.

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

2
DEFINING CONCEPTS

The main notions and relevant concepts as defined in the guide are highlighted below for
research purposes:

ººA 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.

ººGreen 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.

ººThe 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.

ººA 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.

ººA 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.

3
GBM SNAPSHOT TOOL

The GREEN-WIN literature review aimed to identify the most effective methods available for
describing a GBM and the essential aspects that must be considered in order to understand the
way a business creates value and generates revenue.

To assess the GBMs, a tool is needed to describe how an enterprise creates, delivers and captures
economic, environmental, and social value/benefit. For purposes of this study, a simple canvas was
designed that captures the essentials of a green business model by combining two well-known tools:

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

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A short guide to developing green business models –
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ººFlourishing 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.

The following structure (Figure 1) was generated as a combination of both tools. Boxes number
7 and 11, Green Impact and Enabling Environment, respectively, were added specifically to
facilitate the understanding of green business models. The following canvas resulted:

1. 2. 3. 4.
VALUE CUSTOMERS ACTIVITIES RESOURCES
The bundle of products and The type of relationship a Most important actions Most important resources
services that create value for company establishes with a company must take to the company must acquire to
a specific Customer Segment specific Customer Segments operate successfully complete its actions
5. 6. 7. 8.
PARTNERS CHANNELS GREEN IMPACT RISKS & OPPORTUNITIES
The network of suppliers and How a company communicates Characteristics and metrics How the business will
partners that optimize the with and reaches its Customers that show the business overcome the challenges it’s
business model, reduce risk, Segments to deliver a Value has a lower impact on the facing and take advantage of
or acquire resources Proposition (communication, environment compared to a the opportunities
distribution and sales channels) traditional business.
9. 10.
COSTS REVENUE
All costs incurred to operate The cash a company generates from each Customer Segment
a business (costs must be subtracted from revenues to create earnings)
11.
ENABLING ENVIRONMENT
Social-institutional environment in terms of policy and regulatory context, including both formal and informal institutions, as
well as other available finance and incentive mechanisms that foster the discovery, uptake, and transfer of sustainability and
climate strategies.

Figure 1: Business Model Canvas for Green Businesses


Source: The Ground_Up Centre, based on A. Osterwalder, A. Upward

The basic structure of the canvas defines the main lines of GBM assessment. For the purposes
of this study, detailed information on green business models was acquired from participating
businesses in the GREEN-WIN research, through a survey form that addressed the canvas
domains through relevant questions. The next chapter follows the business model canvas
structure presented above and covers the most common aspects that entrepreneurs need to
master and be able to describe in a comprehensive manner when presenting their business to
potential partners and investors. For each building block of the canvas explanations are provided
and a number of guiding questions that were developed as part of the research methodology
in the GBM research.

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A short guide to developing green business models –
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Additional guidance and support questions on how to use the building blocks of the
traditional business model canvas developed by Alexander Osterwalder are available online at
www.strategyzer.com.

For a better understanding of the social and environmental aspects of a business model,
resources explaining the Flourishing Business Canvas for Strongly Sustainable Business Models
(SSBM) by Antony Upward can be accessed at www.flourishingbusiness.com.

4
DEVELOPING GBMS: GUIDING STEPS

During the GREEN-WIN research we developed a set of specific questions in order to guide
entrepreneurs in the reflection process and facilitate the development of GBMs according to the
canvas structure. Below we present these guiding questions and provide practical information
about the importance of responses and their assessment.

4.1 Value

A Green Business Model describes how the enterprise creates, delivers and captures environmental,
economic and social value or benefit. It is considered a value when any characteristic makes the
product or service preferred by customers over the (traditional) alternatives.

The following questions will help entrepreneurs identify and describe what specific value
distinguishes their business from competitors, and what motivates customers to purchase the
product/service. It will result in practical information on which the company can rely in the
future, e.g. when building a marketing strategy.

Knowing the value that the business provides is an essential first step in developing the business
model and it is necessary to be able to complete the next dimensions of the canvas. Moreover, it
represents the basic information that investors or partners will want to know not only in order to
assess the viability of the business model, i.e. whether there will be demand for the product/service
in the future, but also to estimate the entrepreneur’s capacity and preparation to sustain the activity.

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

A business model is defined by the value delivered to a specific segment of customers. Here, the
entrepreneur should explain the need they identified and whether and why target customers
would be motivated to acquire what the business offers.

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

ººDescribe how your products/services provide, or will provide, a solution to your


customers’ need.

ººHow is this problem/need being solved/addressed today? What product/service do


your customers currently use to address the problem/need?

Providing a clear description of the product and/or service that is offered by the business is
needed in order to distinguish it from similar products and understand what value it brings to
customers. The answer should explain how the product/service will respond to the customer’s
need, which is the first step in showing that customers may be inclined to buy it. Customers often
have other available solutions, either provided by other businesses, or free alternatives. The
answer to this question should cover these current alternatives. It must propose a comparison
to the solution offered by the business and an assessment of why customers would choose to
acquire your product/service instead of one of the alternatives.

Products and services may be offered in specific packages which act as incentives for customers
to purchase or commit to a long-term contract; these aspects should also be mentioned here.

ººWhat 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.

Market research elements include size of the current market, competitors, trends, any particular
regulation / taxation, price points and other relevant aspects that determine how the product/
service will be positioned on the market. In addition, it is important to be able to quantify the
Total Addressable Market (TAM) – the revenue opportunity available for the product/service.
This will reflect whether the business has niche or mass market potential.

ººWhy do customers value your product/service?

The response can refer for example to innovation, value for money, financing options,
uniqueness, customer support, environmental impact, social impact and other reasons which
show why customers appreciate the product and what distinctive aspect makes the product/
service preferred and acquired instead of other options.

ººWhat 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 the direct need of the customer. Some customers will appreciate
the product/service and choose it above other similar options because of the impact it has at
the outcome level. Other times, investors or funders will be looking to maximize outcome-level
impact in order to solve a social or environmental challenge.

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

In addition to economic benefits and solving environmental challenges, this type of impact can
distinguish the business model from others, provide added value to your business, and make it
more attractive to impact investors.

4.2 Customers

ººWho are your main customers? How will you reach them?

ººWhat is the spending capacity of your customers?

Defining your target customers and understanding their characteristics helps assessing whether
the product/service fits their values, lifestyle, income and spending capacity.

For individuals, consider looking at elements such as age, education, consumption habits, values
etc. In case the customer is a group, include a description (e.g. whether they are households,
small businesses, schools, etc.) and key characteristics, including their average spending capacity.

This information describes who you will target for your sales, explains the connection between
the target group and the solution you offer, providing arguments that demonstrate the potential
for revenue generation. It is recommended to also describe the research data and information
sources used to segment your customers.

4.3 Operations

ººWhat are your main operations?

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

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Operations include all activities such as designing the product/service, production or sourcing,
management, sales, distribution, customer service etc. At this point, you should also think of
how the different functions and people in the business are connected and how they contribute
to creating the final product/service and delivering it to the customer.

Knowing the way in which the product/service is made or sourced also shows potential technology,
green impact and output trade-offs. Consider and describe any type of innovation in products/
services, resources, input, technology, distribution channel and other. Any Intellectual Property
(e.g. patents etc.) is a plus in as much as it can be defended on the market. The value of IP as such
quickly deteriorates if the business is not capable of positioning itself and growing quickly.

4.4 Resources

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

Include all types of resources needed (e.g. location, materials, equipment, services, know-how,
human resources etc.). The list of resources needs to be commensurate with the business
operations and costs, and to prove that the company will have the capacity to acquire and
administrate the resources it needs. As a general rule, a young business needs a runway of at
least 12-16 months to avoid finding itself short on cash. Have a plan as to how you will acquire
the resources you need. Keeping an honest record of challenges to acquiring these resources
will allow for a better estimation and potential pre-emption of risks to operations.

ººHow many employees does your business have?

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

ººIf 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?

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

The team is your The team is your number one asset. Any investor or funder will assess the team’s track record and
number one decide on whether they believe the team can implement the operational plan and the revenue
asset. generation they are forecasting. The team must cover the main competences needed to realize
your operational plan and, if there are gaps, you must think of how to fill them. In addition, most
impact investors consider gender balance a key positive element in a green business. An advisory
board or a board of directors can enhance the credibility of the business and sometimes fill
some of the competence gaps that a young team might experience.

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ººHow 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

Here you should think about how much money your business needs to cover its operations for
12-16 months. Do you need to raise money to cover your costs, or can you already generate
revenue and grow organically? Have you already raised some money and if so from which
sources? What is the current composition of your shareholders, if you have shared equity?
What current debt financing do you already have on your books? What will you fund with the
money you raise and how will this help your business get to the next growth milestones? Do you
foresee there will be a need to raise more follow-on capital?

For a list of potential funders, look at Chapter 5 below.

One important element to consider is your investment-readiness and preparation for it. Every
step of the way, when you raise funds, you should budget for investment-readiness expenses
including preparing your financial statements, your modelling, your investment teaser and
others. You should also budget for legal and admin expenses which are all too often forgotten
but are quite important in the case of a fundraise. For more on investment-readiness, also see
Chapter 5 below.

4.5 Partners

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

Well-chosen partners can play an important role in expanding available resources, acquiring
knowledge, generating revenue and so on. They may also be important for credibility and
positioning. Think about your main partners and how they contribute to your business
operations. Partnerships can take many forms and they are reflective of the support system the
business has.

Stakeholders are equally important. Stakeholders are people or groups with an interest in your
business. They could be the local or national government, your customers, your investors, your
employees, peers in the market or other special groups. They can influence the business in
positive or negative ways. A clear stakeholder map demonstrates good management of risks
and opportunities.

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4.6 Channels

ººHow are you communicating the value of your product/service?

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

Options to communicate the value of your product/service include direct sales, local stores/
retail units, traditional advertising or digital marketing, exhibitions, fairs, demonstrations or other
means of communication that are most efficient and suitable for reaching your specific customer
segments. Communicating the value of the product/service and getting the message across is a
key element for revenue generation.

Your distribution channels will directly impact your costs and the potential of implementation of
your planned operations. Therefore, thinking them through and establishing which ones have
the highest potential will allow entrepreneurs to prioritize their spending efforts as a function of
potential for revenue generation.

4.7 Green impact

ººWhat 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?

A green business model creates and delivers a significant amount of environmental value along
with economic and social value. The way a business can create environmental value varies
depending on the product/service, technology, distribution and other characteristics. It is
important to be highlighted as it is the feature that defines the green identity of the business
model. Environmental impact can also have a role in attracting customers and could appeal to
funders who are focused on impact investment.

Types of positive environmental impact include: reduced GHG emissions, reduced energy
consumption, waste collection, recycling and upcycling, reduced raw material consumption
or replacement of scarce raw materials, decreased water consumption, water purification,
the distribution chain, positive impacts on biodiversity and conservation, changing patterns
of consumption and many others. The environmental impact of a green business has to be
significantly lower than that of a traditional business. You should think of using credible and
recognized measuring, monitoring and reporting tools or standards – wherever available.

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You should also be aware of and note any potential environmental trade-offs. For example, you
might help reduce GHG emissions but increase water consumption or reduce GHG emissions in the
production phase and increase GHG emissions in the distribution phase. A 360o assessment of your
environmental impacts and their inter-connection should help you spot potential trade-offs.

4.8 Costs

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

The easiest way to go about looking at your costs is to split them by type. People (staff) costs, operational
costs, marketing costs, other admin costs. You may also incur technology-related costs or partnership
costs, as the case may be. When designing your costs, take into account the resource allocation
towards achieving various milestones that will generate revenue and help your business grow.

Costs are obviously a key part of mastering your cash-flow, so being able to project 3-5 years ahead
may give your funders and yourself confidence over the resources you’ll need for the business to
develop. As a general rule, financial statements (income statement, cash-flow, balance sheet) for
3-5 years are crucial for fundraising. Audited accounts will be an absolute must for raising debt
funding. Grant funding will come with its own requirements and each grant-maker will provide a
list of required reporting and monitoring of costs. Be sure to understand them in advance.

4.9 Revenue

ººHow 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?

Revenue is what defines a business model. Understanding how the product/service generates revenue
is essential to assess the viability of the business, its potential for growth and for achieving the positive
impact you desire on people and the environment. Revenue is a direct indicator showing whether the
business is generating/will generate sufficient income from selling the product/service to operate and
self-sustain, or whether subsequent rounds of funding will be necessary. Revenue generation also
reflects the evolution of the business valuation over time, as well as the market capture and potential
for success of the business. If you are already in business, the response to this question should specify
how customers pay, when and how much for each type of product/service delivered, and the total
amount of revenue resulting each year. If the business is yet to generate revenue, you can provide an
estimate and say when you will achieve break-even and when you will achieve profitability.

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4.10 Risks and opportunities

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

Types of risk to consider include consumer and market related risks, competition, technological
risks, regulatory and other factors that may influence the economic and environmental viability
of the business. Each of these should be thought through at the level that is most relevant
to your business, on a short- to medium-term basis. A special mention should be made of
particular challenges related to setting up a business. You are expected to describe strategies to
mitigate each risk you are considering.

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

Opportunities are the other side of the coin to risks. When you start, envisage a few key strategic
directions that you assume will lead your business to success and the impact you are hoping
to realize. Think of them as assumptions you will need to verify as you go along. Think of why
they are important, and how you will capture these opportunities. If some of them don’t come
to fruition, what is your next set of opportunities to build on?

Opportunities can include favourable consumer trends and market development, technological,
regulatory and other opportunities, expansion to different geographical regions, key partnerships
etc. Some of these opportunities might help mitigate risks you identified.

4.11 Enabling environment

Many factors surrounding the business can act as enablers or barriers and have a significant
impact on its development. These factors may support or hinder the growth of the enterprise
and include aspects related to market, regulation, taxes, social and cultural behaviour, prices,
currency evolution, values and trends etc. Entrepreneurs must be aware of how the enabling
environment influences the business, what risks it poses and what opportunities it may create.

Questions to think about are:

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

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

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ººIn 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 in
some cases, it can also impede the level of autonomy and viability of the business model. The
question that arises in these circumstances is whether the business will remain viable in case the
incentives or the grant conditions change or cease to exist.

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4.12 Summary: Business Model Canvas questions

1. 2. 4. 5. 7.
VALUE CUSTOMERS RESOURCES PARTNERS GREEN IMPACT
What need do you Who are your What are the key resources you List the most What type of
aim to address main customers? need for your business? How important partners environmental impact
through your How will you reach will you acquire these resources? for your business does your business have?
business? Whose them? What are the main challenges in and describe their How do/will you measure
need is it? What is the acquiring these resources? role. Describe the this impact? How is this
How do you aim spending capacity How many employees does your extended circle of impact reflected in your
to address this of your customers? business have? stakeholders of your business? What are the
need? What is your What is the composition and business. potential environmental
product/service? track record of the company’s trade-offs of the
Describe how your management team? business?
products/services If you work in a different country
provide or will 3. than the one you are registered 6. 8. RISKS &
provide a solution ACTIVITIES in, do you employ nationals of the CHANNELS OPPORTUNITIES
to your customers’ What are your main country(ies) in which you operate? How are you What are the main
need. operations? What is your gender balance in your communicating risks to your business?
How is this problem/ Does your team, board, advisory board etc.? the value of your How do you plan to
need being solved/ business rely on/ How is or will your business be product/ service? address them?
addressed today? incorporate any financed? Did you already raise What are your 3 main What are current
What product/ type of innovation? funding? Does your business distribution channels and future strategic
service do your If yes, describe model currently require financing? (how do your opportunities for
customers currently the innovation If yes, please specify the amount customers acquire the growth? Have you got
use to address the element(s) from of financing needed and what type product)? a “plan B”?
problem/need? your business of costs the funds will cover

9. 10.
COSTS REVENUE
What are your business model’s recurring How is/will be your product/service generating revenue? Does your business
costs? What is the total value of these model already generate revenue? If yes, how much revenue does it generate each
costs each year? year? If not, when do you expect the business model to start generating revenue?
11.
ENABLING ENVIRONMENT
What are the factors that encourage your business? How likely are they to change over time?
Are there any factors that raise barriers to your business? How do they affect the development of your business? 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.

Figure 2: Business Model Canvas questions


Source: own arrangement

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5
ACCESS TO FUNDING

A major concern for green entrepreneurs is where to look for green business funding opportunities.
While it is recognized that funding for early stages of a green business development is hard to
come by, in the following chapter we present a few possible sources of funding that a green
business could turn to, based on the literature review made for the GREEN-WIN project.

5.1 Business development stages and funding

Financing actors and institutions interested in green businesses have specific criteria and
objectives when investing. Invested capital must match the development stage of a green
business as described by its size, capacity, funding needs or earnings. Thus, different financing
actors intervene in the life of a business at different stages of maturity.

A useful staging of a business maturity was defined by Churchill & Lewis (1983):

ººStage 1: Existence

The main problem of the business at this stage is to acquire customers and to deliver the
product or service they contracted. The goal of the company is to remain alive.

ººStage 2: Survival

At this stage, the business has already demonstrated that it is a workable business entity. It has enough
customers and keeps them by satisfying their needs sufficiently through its products or services. The key
problem becomes the relationship between revenues and costs. The business is in the phase of testing
whether revenues are sufficient to cover costs in the short term and to expand on the long term.

ººStage 3: Success

Here, the company has attained true financial health and earns average or above-average profits.
A key issue is whether to use the company as a platform for growth or as a means of support for
the owners as they completely or partially disengage from the company.

ººStage 4: Take-off (growth)

In the Take-off stage the key problem is finding out how to rapidly grow and how to finance that
growth. The owner and the company become more separated, however the company is still under
the influence of both the owner’s presence and stock control. If the owner can deal with the financial
and management challenges of the growing company, the next step will be maturity stage.

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ººStage 5: Maturity

The greatest concerns of a company that enters the Maturity stage are to consolidate and
control the financial gains brought on by rapid growth, and to retain the advantages of the small
size, including the flexibility of response and the entrepreneurial spirit.

The greatest The literature review showed that the main sources of funding for green businesses are
concerns of entrepreneurs (self-financing), microfinance institutions, peer-to-peer lending, family offices,
a company business angels, venture capital, private equity, banks (conventional banks, investment
that enters banks, public and private green banks), national and supranational initiatives (e.g. Multilateral
the Maturity Development Banks), grants, philanthropy, and crowd-funding. Each of them applies best at a
stage are to certain stage of the company’s development, according to their own strategy and constrains.
consolidate
and control the The following table (Figure 2) illustrates the diversity of types of financing actors available for
financial gains each business development stage:

Existence Survival Success Take-off Maturity


National and sub-national initiatives
Banks
Venture Capital
Private Equity
Business angels
Family offices
Crowd-funding
Peer-to-peer lending
Non-refundable grants
Microfinance
Self-financing
Figure 3: Sources of funding according to business development stage
Source: Own arrangement

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5.2 Funding sources explained

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

It is capital (debt or equity) raised within the entrepreneur’s personal and professional networks
and traditionally it is the first means available to green entrepreneurs. At this stage, funders invest
because they trust the person who is proposing a project. During this phase, the entrepreneur
seeks visibility for his/her project and reaches to the broader range of own contacts: social
media and Internet websites contribute to spreading the word (Green for All, 2010).

ººCrowdfunding

Crowd-funding is a way for businesses to raise money on the Internet in the form of either
donations or investments from multiple individuals. According to the World Bank and InfoDev
(2013), crowdfunding is expected to overtake venture capital in the financial markets within
10 years. In fact, a positive regulatory framework is spreading worldwide. It is an alternative to
traditional loans because banks invest less and less in small businesses and are highly risk-averse.

Green crowdfunding appeared around 2005 and is a niche for online fundraising that is
becoming more popular. Below are some examples of crowdfunding platforms focussed on
green initiatives:

ҽҽGreencrowd (Netherlands)
ҽҽBettervest (Germany)
ҽҽOneplanetcrowd (Netherlands)
ҽҽRepublic.co (USA)

ººMicrofinance Institutions

They provide financing to borrowers who cannot get a loan from a traditional bank. Micro-lending
is targeted toward businesses requiring less than $35,000 start-up capital and with five or fewer
employees (Green for All, 2010). Interest rates can be higher than with traditional banks, but the loan
is easier to obtain. There are MFIs specialized in environmental and social projects. Microfinance
private investment totalled $10 billion in 2014 (ResponsAbility, 2015).

ººPeer-to-peer lending

Peer-to-peer lending is a recently emerging way of financing green business. It connects entrepreneurs
with individual lenders who perceive an interest on committed capital. These funding systems can
come from social networks who attract people with a common interest and where green projects
are promoted. Peer-to-peer loans are more flexible in assessing solvability than bank loans (Glenn
Croston, 75 Green Businesses - you can start to make money and make a difference, 2008).

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ººFamily offices

Family offices are private wealth management advisory firms that serve ultra-high net worth families.
In contrast to traditional wealth management firms, family offices provide a complete suite of financial
and investment services for the family. These can include tax planning, budgeting, insurance, charitable
giving and philanthropy, property management, family-owned business advisory and wealth transfer
Family offices are services. Moreover, family offices may handle non-financial issues including travel, private schooling
private wealth and other household arrangements. Family offices are each structured differently from one another
management due to the particular needs of the families they serve. They will focus their investment strategies on
advisory firms specific types of environmental impact they would like to achieve. Often, they will also bring their
that serve ultra- skills and other non-financial support to businesses they invest in.
high net worth
families. ººBusiness angels

Business angels are private investors who invest in unquoted small and medium sized businesses.
They are often businessmen and women who have sold their business. They provide not only
finance, but also experience and business skills. Business angels invest in the early stage of
business development filling, in part, the equity gap (UK Business Angels Association).

Angel investors are keenly interested in helping selected businesses succeed, and while they do
expect to make profit, they also want to be involved in managing the business. That’s why it’s
important to find an angel investor the entrepreneur gets along with in terms of management.
Although they can open doors for the business and give practical advice on running the company,
angel investors are probably not the best option if the entrepreneur does not want those things.

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. There are also specialized
groups or individual angels who look at certain industries or certain types of financing like straight debt,
convertible debt or equity. For start-ups, the main option is to go for convertible debt, which ends up
Angel investors being equity if the company is successful or go directly for straight equity. Even when angel investors
tend to operate don’t provide the required funding, they might offer advice to entrepreneurs, which is useful in itself.
in networks
and follow a Below are a few resources where entrepreneurs can look for financing opportunities offered by
very structured angel investors:
procedure to ҽҽwww.angel.co
first verify if ҽҽwww.captable.io
the company ҽҽwww.crunchbase.com
and the funding
needed fits with ººVenture Capital
what they are
looking for. Venture Capital (VC) intervenes after the seed phase. VC firms are particularly close to the project
they invest in: they have a say about the management team and can make decisions regarding the

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company. VC plays a role in the development of a start-up company (Hellmann and Puri, 2000). Green
businesses are increasingly gaining the interest of VC firms, especially energy-related companies.

ººPrivate Equity

The majority of private equity investments are in unquoted companies. Private equity investment
is typically a transformational, value-added, active investment strategy. Private equity intervenes
once the company has reached the growth stage (Toniic, 2013).

ººBanks: conventional banks, investment banks, public & private green banks

Debt is a means of gathering funds that is more suitable for businesses that have already reached
the growth stage. In general, the high risk of failure deters conventional banks from financing
green ventures (European Private Equity and Venture Capital Association, 2007).

Recently, Green Investment Banks (GIBs) have emerged as a way to finance climate change
related businesses. GIBs are “domestically-focused public institutions that use limited public
capital to leverage or crowd-in private capital, including from institutional investors” (OECD,
2015). A number of these banks were created to boost investment in low climate-resilient
infrastructure for cities; by setting up these structures, governments anticipated a future
policy shift towards green economies. As of the end of 2015, 13 national and sub-national
governments have created GIBs (OECD, 2015) as reflected in the following table:

UK Green
Investment Bank
Green Energy Market
Securization, Hawaii
Technology Fund
Switzerland
Connecticut The Green Finance
Green Bank Organization Japan

New York
Green Bank Masdar
United Arab Emirates
Green Tech
New Jersey Energy Malaysia
Resilience Bank

California CLEEN
Center Clean Energy Finance
Corporation (CEFC)
Rhode Island Australia
Infrastructure Bank

Montgomery County
Green Bank

Figure 4: Green Investment Banks


Source: OECD, 2015

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GIBs measure and track their performance: emissions saved, job creation, private investment
mobilized per unit of GIB public spending, rate of return. GIBs offer loans, bonds and equity
financing instruments to their clients. They rarely invest in early-stage/seed projects, but some
are gaining interest in innovative technologies such as offshore wind energy.

Green Private Green Private Banks have emerged in response to the increasing need of green funding that
Banks have traditional banks cannot satisfy. They are banks providing banking services (loan, investment) to
emerged in green businesses. Because environmental issues are their core business, they understand the
response to the potential of green businesses and their challenges (Global Alliance for Banking on Values, 2015).
increasing need
of green funding The Global Alliance for Banking on Values (GABV) is a network gathering 28 Green Private
that traditional Banks with over $100 billion in total assets under management, operating across Asia, Africa,
banks cannot Latin America, North America and Europe. Green entrepreneurs can refer to the GABV to locate
satisfy. the nearest green bank: http://www.gabv.org/the-community/find-members

ººNational and sub-national initiatives

These initiatives include Multilateral Development Banks (MDBs) and national governments’
development finance. Multilateral Development Banks provide essentially loans to green
projects (83% according to the World Bank, 2014), the rest being grants, equity, guarantees and
other instruments. Examples of MDBs include the:

ҽҽEuropean Bank for Reconstruction and Development (EBRD)


ҽҽWorld Bank
ҽҽEuropean Investment Bank (EIB)
ҽҽAfrican Development Bank (AfDB)
ҽҽAsian Development Bank (ADB)
ҽҽInter-American Development Bank (IADB)

Development entities can also invest in funds dedicated to environmental issues. These funds
provide what is called “concessional financing” (loans that are less constraining than traditional loans:
longer grace periods and lower interest rates, OECD definition created in 2003). Examples include
the Climate Investment Funds, the Global Environment facility and the Green Climate Fund.

ººNon-refundable grants

Green growth and green business development are becoming a priority for policy makers, and
this is also reflected by the financing programmes of different institutions, governments and
foundations.

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In the European Union for example, there are several programs that aim at supporting green
businesses and eco-innovation:

ҽҽHorizon 2020
ҽҽEuropean Regional Development Fund (ERDF)
ҽҽEuropean Agricultural Fund for Rural Development (EAFRD)
ҽҽEuropean Maritime and Fisheries Fund (EMFF)
ҽҽInnovation Norway

Public charities Public charities and private foundations are also involved in supporting green initiatives. Examples
and private include Calvert Foundation, Acumen, W. K. Kellogg Foundation, Rockefeller Foundation, David
foundations are and Lucile Packard Foundation, Robert Wood Johnson Foundation, New Profit Inc.
also involved in
supporting green Private Foundations also offer grants, for example Grand Challenges (Bill & Melinda Gates
initiatives. Foundation). Usually the target of those grant programs is vast but remains in the scope of
tackling development problems and key global health issues. Similarly, corporations give away
grants to green projects (e.g. Walmart’s Evergreen Green Grants).

Other organizations, such as Ashoka, Echoing Green or the MacArthur Foundation, use fellowship
programs to find breakthroughs. They invest in innovative and entrepreneurial leaders, rather
than in specific ideas, and provide those leaders with relatively unrestricted support to pursue
their interests.

5.3 Investment-readiness

The preparation every entrepreneur needs to have in order to raise funding is often overlooked.
This refers to:

ººQuestions 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;

ººResearch 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;

ººDocumentation 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.

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The following questions represent guidance provided by investment experts during the GREEN-
WIN online dissemination workshop organised in collaboration with Green Cape, South African
Renewable Energy Business Incubator (SAREBI) and The Innovation Hub of South Africa in
May 2018. These questions address the most frequent topics concerning fundraising and
investment readiness, based on the work of The Ground_Up Project’s Investment Clinic (www.
groundupproject.net):

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

Concerning the amount to be raised, the advice is to raise as little as possible, but enough to
keep the business going. The entrepreneur should be prepared and know that there is a typical
type and range of funding applicable to certain business stages and going outside of that range
will question the credibility of the request for funding.

As an indicative benchmark the amount requested should cover 12 to 18-months runway, meaning
the amount of funds that are allowing the business to exist and continue to grow for the set period of
time, with revenue calculations according to the worst-case scenario. When looking at the amount
to be fundraised, the question investors usually ask is how much the company is valued, i.e. how
much equity is likely for the business to give for the funding that is requested. There is a benchmark
which says that the valuation is between 3 to 5 times the amount of requested funding.

Another aspect is that investors expect the company to be on a growing trend. In every
fundraising round the funds to be raised should increase compared to the previous round to
the extent of 3 to 5 times. These are average benchmarks, but often are the starting points of
negotiation for a particular deal.

The type of capital to be raised depends on the needs of the business. If only funding is needed,
debt would be an option. If the entrepreneur is looking for active investors, expertise and
connections, then probably equity investment is a better choice. For social enterprises and
NGOs, grants are the best and most likely choice.

When planning what to do with the capital once raised, priority goes to product development
and market development, building the sales capability, the sales organisation, the infrastructure
in terms of assets or people needed to grow the business at the given stage. The administration,
salaries, management and overheads in general should be the last to consider from these 3 areas.

ººWhat signals are the financial projections sending?

In the presentation of the financial projections, the minimum expectation is for entrepreneurs
to be using the language and the tools the investor is used to see; these must include an
income statement, a balance sheet and a cash flow. The financials have to be put together in a
professional way to earn the trust of the capital provider.

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Financial projections often overestimate growth and the market size potential without the
arguments to back these up, and that can indicate poor management. Investors apply their
market knowledge to screen businesses and they are experts in the field they decide to invest,
so they will know what is realistic. This applies for overestimating the social and environmental
impact, too, and these projections should also be credible and backed up with arguments.

The financials Financials in the preselection stage can be either at the summary level, or detailed level, whatever
have to be put the company feels comfortable to provide, and it has to be adapted to the company’s stage of
together in a development. A start-up in an early stage could probably go with a summary, but it would have
professional way to be backed up by data and the entrepreneur should be ready to answer questions. A company
to earn the trust that is in a growth stage needs to demonstrate that they know what financial management is,
of the capital and that they can master the financials to a higher level of detail.
provider.
Revenue projections are considered expectations and ambitions of the entrepreneur and
investors will apply their own expertise to assess the estimates made. On the other side, the
cost calculations made by the entrepreneurs have to be accurate. If the numbers are fuzzy, it
indicates that the management doesn’t understand the cost base, which signals to the investor
that there is a risk factor. Investors expect to see financial skills in the team, but the financial
projections are the responsibility of the management team, not of the financial expert. The
entrepreneur has to take ownership of these projections.

ººWhat should the entrepreneurs know about investors?

An entrepreneur needs to be clear on what an investment cycle means, because that’s the way to
estimate the type of effort involved and duration of the process. Also, this is the way to define the
funding strategy. The entrepreneur can start to prepare in more detail afterwards, looking at particular
investors he wants to target. Every investor is different and investment preferences are specific
regarding the sector, team and investment strategy. It’s essential for the entrepreneur to understand in
which sector, industry and subject the investor has defined his mission and vision to invest.

Research of public materials shared by the investor can highlight their expertise and what they
are looking to invest in. The entrepreneur should verify if the investor at that time is in a funding
stage, the size of funding, and the timeline, at the same time being aware that if the fund is
fully invested, then even if the entrepreneur has a great business case, they won’t receive
funding. It’s important to understand also the regional focus, because investors are particular on
a regional specialisation for reasons related to their mission, and the recommendation is not to
approach them if the business is not located in the country/region they aim to invest in.

ººWhat do investors expect to see from entrepreneurs?

Investors think in terms of risk, impact and return. The entrepreneur needs to minimize the risks
that investors could perceive regarding a potential investment in the business, to present the

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impact in detail and accurately, and describe the revenue potential by providing a track record
which demonstrates that the entrepreneur understands the implications of investment in their
company. If they received investment previously, it should be explained how it was used, how
they worked with the previous investors, how the investment helped achieve certain milestones
and explain what follows after the current funding stage, i.e. how the company will evolve on a
longer term. This will help investors position themselves, understand a potential exit and when
the return on the current investment will materialize.

The entrepreneur should think these aspects through well ahead of time, as they will pervade
through questions from investors at different moments and stages. However, be aware that the
investor has all these data points in mind already when the proposal gets on their table.

ººHow to reach out to investors?

Connections There is a tendency for entrepreneurs to reach out to as many investors in any kind of event or
from incubators, competition. However, more meetings don’t result in more funding. Results are more likely to be
personal obtained if quality introductions are made to investors who are identified to be a good match.
networks and
companies For this purpose, research is needed on the investors that can be approached, the businesses
that received they have previously funded and their current preferences. In this process, connections from
funding can incubators, personal networks and companies that received funding can provide valuable
provide valuable information. More effort in preparing and planning the fundraising approach will pay off in
information faster funding.

ººWhat should be the size of a pitch deck?

There are likely two possibilities of introducing the business to an investor.

When sending the business information to analysts for screening, it’s recommended to prepare
a one-pager, a summary with some visual representation of the business model canvas, which
should give an overview of the business in about 1 minute.

In case the entrepreneur is invited to have a personal presentation, the pitch deck should have a
manageable size and share only the most essential information, keeping it at maximum 10 slides.
Many businesses make it 30 - 40 slides, packed with details that are hard to manage.

The advice is to build the investment thesis using a sequence like: problem – solution –
opportunity - competition - business model – team – financials. It is also recommended to check
some of the top pitch decks that have been successful in raising capital in that specific industry.

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ººHow to articulate the opportunity and competitive advantage?

About ¼ of pitch decks lack the opportunity sizing. Everyone has competition and the pitch
deck should explain what makes the business a better alternative. Competition might consist
of lateral products, lateral businesses, but they still need to be revealed. If they are the best
alternative or the next best alternative for potential clients, that can cause problems.

Describing the market size is often ignored because it isn’t easy to evaluate the market. However,
being able to estimate the total market or use a proxy number, as well as set a realistic target
for the market share that the entrepreneur intends to capture is a key piece of preparing for
investment.

Everyone has Often, technology-driven businesses can mention partnerships as a competitive advantage or
competition and some intellectual property (IP) in the form of patents. IP defensibility can be quite low. IP is
the pitch deck costly, and solutions in the market can be easily overtaken by better solutions. The competitive
should explain advantage of the IP only materializes if the entrepreneur is able to capture the target market.
what makes the IPs and partnerships should not be emphasized, unless they are changing the financials of the
business a better business.
alternative
Additional expert advice and insights on investment readiness are available attached to this guide
as Annex 1, representing a workshop summary on how investors assess green business models.

A number of the issues presented above are being addressed via accelerators and incubators that
prepare entrepreneurs at various stages. Most accelerators will also be connected to a network of
mentors or investors so that entrepreneurs can access investors directly and get to try their pitch.

Some accelerators focusing on green businesses include:

ҽҽThe Impact Hub network worldwide


ҽҽTechstars and their recent partnership with The Nature Conservancy
ҽҽUnreasonable Institute
ҽҽThe Ground_Up Project
ҽҽThe Investment Clinic

Investment- Investment-readiness is essential, as it provides financial and fundraising capability to


readiness is entrepreneurs and brings them up to par with what investors and funders expect, thereby
essential, as significantly increasing their chances of being funded.
it provides
financial and
fundraising
capability to
entrepreneurs

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6
CONCLUSIONS

This paper has provided a short guide for entrepreneurs on how they can use the Business
Canvas Model to think through and prepare the development and funding of their green
business. No amount of theory will replace the reality of starting and doing green business in
countries around the world.

With the adoption of the Sustainable Development Goals and the extent of countless
global environmental challenges, these are exciting and urgent times for entrepreneurs and
for organisations who support entrepreneurs to realize long-lasting, deep, green impact via
sustainable, viable business models.

Having pre-qualified a pipeline worth US$200 million representing a variety of impact businesses from
around the world in 2017, The Ground_Up Project has found that only a very small fraction (between
2 - 5%) of impact ventures were ready to raise the capital they needed to obtain their impact.

Understanding how to plan key aspects of the business as laid out in this paper, along with
dedicating resources and time to preparing to become investor-ready, will be key to increasing
the number of successful green businesses that will create our better future.

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

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ANNEX 1

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

Participants included equity investors, asset managers, advisors and other green investment
experts. Discussions were held under Chatham House rules; individual opinions are not
attributed.

Most entrepreneurs will, at some point, reach out to find financing and/or financial partners to
grow and advance their work. Green businesses and environmentally responsible entrepreneurs
need to be aware of the perspective that investors have when they assess the financial and
economic viability and the environmental impact of a green business model.

Under the auspices of the GREEN-WIN research project, The Ground_Up Centre in Geneva
(http://www.groundupproject.org) and the Institute for Advanced Sustainability Studies (IASS)
in Potsdam (http://www.iass-potsdam.de), in collaboration with The Ground_Up Project (http://
www.groundupproject.net), organized a workshop dedicated to expert investors in the green
economy.

The discussion topics included experts’ point of view on how they assess a business model, the
impact of regulation and of the context in which a green business is developed and also, the
types of investment a business could access depending on its size and maturity.

The workshop was designed to inform the partner institutions in the GREEN-WIN project,
as well as green entrepreneurs themselves, on the key elements that investors analyse when
deciding whether to invest in a green business model.

For the purposes of the GREEN-WIN research, the summary below regroups some of the
comments made during the workshop by key topics discussed.

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LOOKING AT A GREEN BUSINESS MODEL

When reaching out to specialized investors who are interested in green projects, it is
understandable that the first filter is the green filter. It is immediately followed by the analysis of
the economic viability, and the decision is based on certain criteria, as is the case for any other
investment.

An important aspect, which is often overlooked, is that the description and presentation of a
green business model should fit with a certain audience. A government might agree to fund it, if
it falls in the line of the 2°C objective, but an investor cannot be approached in the same way.

IT IS ALL IN THE REVENUES. From an investor’s perspective, a business model is defined by


the revenue source of the enterprise or organisation. Therefore, the first question an investor is
trying to answer is “what is the revenue source?”. Going further in analysing a business model,
other important topics come under scrutiny:

ººWhere does the funding come from?

ººWhat is the revenue model? Is it economically viable?

For investors in the green economy, there is no longer a doubt that green growth is possible.
Nonetheless, the only condition that will make this a reality is that green businesses MUST be
economically viable; they have to have a sustainable model for generating revenues. This means
that they have to respond to a need that comes from the market. Being green is not sufficient.
If there is no economic viability, there will be neither demand, nor supply on green aspects. One
important step for green businesses is to try to get rid of opposition between green business
and not-so-green business and work on the idea of being green AND sustainable from an
economic point of view.

THE MARKET OUT THERE. In order to test the economic viability of a business model, one
needs to conduct market surveys. A lot of green growth has been achieved by reaching the
consumers and capitalising on their behavioural change: consumers think more and more about
the green aspects, which starts new markets and expands the already existing ones.

Investors will come where the market is.

Taking an academic view to business models can hamper the process of making a business
viable; in order to move ahead fast, the focus of the research must be put on investors’ and
entrepreneurs’ criteria and expectations.

Concerning the green impact, there is a trend to find and talk about projects with green impact
and lots of money goes into doing good deeds. But economic viability has to come from the

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market. And no matter how green you are, your product/service does not work on the market,
your business will not work in the long run.

MIND THE RISK. Entrepreneurs should ask themselves about the risk of their business. They
must act and behave the same way investors do and understand this notion of risk before
talking to any investor. This is a hard thing to do, but the business should take risk into account.
Understanding the entrepreneurs’ views of risk also gives the investor a perspective on the
team.

In their words: “If entrepreneurs come to you and have not thought about risks, it is a very bad sign”. Even at a
“Focus first very early stage, the advice would be to think thoroughly about risks, if maybe not so much of a
on defining a financial plan yet. Nine out of ten entrepreneurs have not done their homework in the investors’
solid business view.
model, otherwise
there will be no NON-PROFIT TURNED INTO BUSINESSES. Some philanthropic models may turn, in time, into
funding. The business models, for various reasons. Investors are not particularly attracted to philanthropic
project has to models adjusting themselves to green for-profit models. In their view, if an entrepreneur turns
be economically green, the reason should be an existing demand coming from the market.
viable in order
to attract If the project is not yet financially viable – but has a potential to be – it is better to find an
investors.” incubator or accelerator, than to go outside looking for investors.

ASSESSING THE “GREEN” IN A BUSINESS MODEL

Investors look at a green business model by applying a number of filters. In most cases these are
filters developed from the practice and can vary with the investor.

There is an agreement on the fact that standardized criteria could only be applied in the case of
a very narrow and well-defined field, in one sector or one technology. Otherwise, when working
with a diversified portfolio, it is impossible to standardize it (for investors). In the end, it all comes
down to personal feelings, experiences and personal assessment.

Some important aspects related to the assessment of GBM:

THE CASE FOR GREEN. Some companies do not define and promote themselves as green but
do fall into this category. They do not go for green, but for common business criteria. These
companies have green business models, not because of a conviction, but because it would be
costly for them not to do so and they integrated green considerations from an economic point
of view. It made sense. Those are the best deals, in the eyes of certain investors, especially
investment funds.

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There is mistrust about self-presented sustainable or green projects in the investors’ world
(because they made bad bets, they do not know how to invest in the notion of green and
consider it less profitable). This is one of the reasons why investors always assess the business
itself. And why they look for entrepreneurs who understand the fundamentals of a business
model.

AN “IN-HOUSE” PROCEDURE. Often the first filter is an environmental and/or social filter and,
for many investors, such criteria are often developed “in-house”. This step sieves the decision
regarding the time spent on a project: no time will be spent if the project does not pass the
filter. It is important to note that the filters could change as the investor gains experience and
knowledge. Standardized green criteria are only possible when the operation field of a business
is very narrow and specific. If the project has passed the filter, then comes the economic
analysis. An impact analysis may also be performed.

MEET THE TEAM. Investment decision will mostly flow from personal feelings, experiences
with people involved in the business and the quality of the team. Therefore, investors will most
of the time want to meet the team, as there is no other way to get an opinion of its quality.
In their words: This is an investment strategy often used by impact investors and venture capital. They follow
“For every a case-by-case approach.
investment
decision, the And the reason for this approach is that, in the case of early-stage investments or for
key is the team. unpredictable circumstances, everything with the business model could change: financials, the
Everything else is customers and also the impact. It is more important to go with a solid and knowledgeable
going to change, team that can weather highly uncertain and changing economic, social and/or environmental
but not them.” conditions.

REDUCE THE RISK. When operating in developing markets, the investors will prefer to go for
active investment and engagement with the entrepreneur.

In addition, they will prefer to engage other investors (even companies), with different expertise
In their words: and act together like engaged co-investors with complementary capacities.
“The business
model has to All investors will be actively involved in the company (joint ownership of the capital by
be successful in investors), by providing expertise and counselling, which are well needed for early-stage impact
impact, hand investments.
in hand with
the financial MIND THE TIME. For investment funds, the impact should usually be embedded in the business
sustainability model itself. And time horizon is a critical criterion. They will look for answers to questions like:
over the time how long is it necessary to invest, when can an exit be made, how long will it take to get back
horizon.” the invested capital?

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

CONTEXT AND IMPACT CRITERIA

In their words: Besides the business model itself and the strategies investors apply in choosing an investment
“The preferences and mitigating risks, a number of other considerations will be expected from an organization,
of the clients (of enterprise or project.
an investment
fund) come THE CONTEXT. There needs to be some knowledge of the competition, the environmental
first, before context for the specific market (for example, if we consider the idea of e-bikes in China, how
international does it work with the restriction of bikes in towns decided by the government of Shanghai?
agreements and Could it invalidate the whole business model?).
own preferences
on the ESGs. Life Cycle Analysis is also essential, specifically for businesses that claim to be green.
But there are no
compromises MEETING SDGs. Few investors take sustainable development goals into account when
on the financial making investment decisions. Usually because they are seen as complicated to implement and
side!” considered as a measure more suited for governments than for investment decisions.

Investors usually work with their own framework on filtering and reporting. The process is
refined and updated regularly: mapping, defining a framework, criteria for filtering and reporting
(asset class, geography, etc.). Some investors want to see selected SDGs in metrics in accordance
with their preferences among SDGs.

Investors mainly consider that, for young businesses, the SDGs are too burdensome and too expensive
to follow and meet, which is why they usually do not judge an investment according to SDGs.

Public funders and corporations can focus more on SDGs’ criteria (for example job creation,
carbon savings).

WHO IS THERE ALREADY? A critical question when looking at an investment in the broader
sense is “who is already in this market or type of investment?”.

Where is the money coming from? Is it social money or government money, are there private funds
from corporations or individuals? Do they believe in long-term investment return and impact?

LEVEL OF INVESTMENT GROWTH

The decision to invest or not and the amount of money involved will vary according to the
size of the company and its stage of life. There is a common understanding that some green
businesses are better staying small than thinking about scaling up. And that the growth model
of an enterprise could differ in the case of green business models.

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

INVESTMENT PATTERNS.

ººOver 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.

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

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

GROWTH ISSUES.

ººFuture 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.

ººScale. 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.

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

“Choose the FINDING AN INVESTOR. A large fund is not always the best idea for funding. Investors see
target wisely,” great benefits in some other approaches, such as getting some feedback from local investors
they say, and their feeling about the business using a crowd-funding platform, for example.
because some
funders are
only focused on
expansion, such THE ROLE OF GOVERNMENTS AND REGULATIONS
as the venture
funds. There is a common agreement among interviewed investors that many green businesses are
in the difficult quest of developing or uncovering new markets. As a consequence, the role of
government and regulations is of a great importance: they could encourage such a venture and
create the conditions for it. Or they could distort the conditions and hinder development in the
long run. Investors always pay attention to the larger environment of a specific business, before
making any decisions.

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

LAWS AND REGULATIONS. Investors will search for special regulations being in place and that
could influence a market. It can be a good or a bad thing: they will determine how the regulation
factor triggers new markets, new businesses.

If a company waits too long to act after new regulations are passed, the business may be killed
before it starts if it bets on being the only one to comply with the new regulation.

PUBLIC MONEY. Solar projects got public grants and were very successful. Public money helps
to fund research and also intervenes in co-investment. Investors can benefit from public-private
partnership as it helps them mitigating the risk.

There are some industries where public funding is the first thing you need, to get things going.
But the best use of public money is as equity or to attract other private funding.

34 July 2018
A short guide to developing green business models –
for entrepreneurs, researchers and organisations that support entrepreneurs

GREEN GROWTH AND WIN-WIN STRATEGIES FOR SUSTAINABLE CLIMATE


ACTION (GREEN-WIN)

The GREEN-WIN Project identifies, develops and critically assesses win-win strategies, green business models and
green growth pathways that bring short-term economic benefits, while also supporting mitigation and adaptation goals
within the broader sustainable development agenda.

Work programme

ººAt 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.

ººAt 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.

ººCutting 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.

ººAll 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, Oxford
University, UK | Ecole d’Economie de Paris, France | University College London, UK | The Ground_Up Association,
Switzerland | Stichting Deltares, The Netherlands | Institute for Advanced Sustainability Studies, Germany | Global
Green Growth Institute, Republic of Korea | Jill Jaeger, Austria | European Centre for Living Technology at Università
Ca’ Foscari Venezia, Italy | Institute of Environmental Sciences at Boğaziçi University, Turkey | Universtitas Udayana,
Udayana University, Indonesia | University of Cape Town, South Africa | 2º investing initiative, France | Sustainability
and Resilience, Indonesia

This project has received funding from the European


Union’s Horizon 2020 research and innovation
programme under grant agreement No 642018, Contact
and the Swiss State Secretariat for Education, Jochen Hinkel (project coordinator),
Research and Innovation (Project No 15.0216) Global Climate Forum (GCF), Germany
mail: [email protected]
Project duration: twitter: @greenwinproject
01.09.2015 – 31.12.2018 (40 months)
Project resources: 3.9 million Euros web: www.green-win-project.eu

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