The Flexible Capital Fund (Flex Fund) offers Vermont growth-stage companies in sustainable agriculture and food systems, forest products, and clean technology sectors loans that have “equity like” features but are often in smaller amounts and at lower returns than traditional venture capital financing.
Investment Structure
The Flex Fund team balances our loan structure with equity features and returns with the realities of small business in Vermont. We offer flexible risk capital (often referred to as near equity capital or mezzanine financing) along with technical assistance, without diluting ownership, to fit growing companies in Vermont’s green economy.
Near equity capital includes a range of financing instruments such as royalty financing, subordinated debt, warrants or some combination thereof. Near equity is not start-up capital but fuel for existing businesses that need to augment traditional sources of financing in order to produce new sales, enter new markets, and create new products.
Royalty Financing and Subordinated Debt
Royalty financing is based on selling a piece of the revenue stream instead of selling ownership. The royalty payments can be structured over a fixed time period or until the investor reaches the negotiated rate of return. Royalty financing allows for flexible repayment that adjusts to a growth company’s actual revenue, and offers a “natural” way to exit the deal.
Subordinated debt works essentially as a bank loan that is subordinated to other senior debt and is repayable only after other debts have been repaid. This structure is typical when a company has some collateral available, a strong management team and a solid growth plan.
Flexible Financing Options
We work with a portfolio company to structure a deal (using subordinated debt and/or royalty financing) that is flexible and meets the cash flow needs of the business. Pricing and structure depends on the risk level of the deal, amount of collateral available, strength of the management team, and purpose of the loan. In general, less risky loans (priced lower) will consist of subordinated debt, riskier loans will have both a sub-debt and royalty component, and high risk loans will be in the form of pure royalty. Pricing is significantly less expensive than equity or venture investments but more than traditional secured bank debt.
Investment Criteria
In keeping with the Flex Fund Mission, investment priority will be given to companies that:
- Fill a gap, or strengthen the supply chain, in our market sectors to ensure our investments have the biggest bang for the buck and leverage additional resources (i.e. food processing capacity);
- Demonstrate a positive impact on environmental conservation, preservation of the working landscape, renewable energy or energy efficiency through their business activity or direct financial benefits accrued to local environmental, non-profit or community organizations;
- Commit to include a racial and social equity lens in their organizations. This may include:
- ensuring gender and racial diversity, equity, and inclusion in leadership, ownership, governance and advisory boards;
in hiring, promotion, and compensation at all levels; - engaging with stakeholders of women, transgender and BIPOC (Black, Indigenous and People of Color) groups to inform their work;
- with vendor relationships prioritize hiring women, transgender and BIPOC financial managers and consultants, as well as ingredient / material vendors as
appropriate; and - ending business relationships with entities that further white supremacy and gender inequity;
- ensuring gender and racial diversity, equity, and inclusion in leadership, ownership, governance and advisory boards;
- Provide employees with livable wage jobs, promote employee engagement and reward, or otherwise provide a lasting, positive impact on the local community; and
- Demonstrate a motivation for learning such that the provision of risk capital and technical assistance will enable them to grow a sustainable business.
The Flex Fund invests throughout Vermont in early and growth stage businesses within the following industry sectors:
- Sustainable agriculture and value-added food production, infrastructure and systems;
- Sustainable forestry and forest products, including green building;
- Clean technology, including renewable energy and energy efficiency;
- Environmental technologies and services;
- Waste reduction and pollution abatement services and products
The Flex Fund’s investments range from $100,000 to $400,000, typically with co-investors, and include the flexibility to provide additional funding as needed. A typical portfolio company will have:
- Established sales, usually greater than $500,000 per year
- Sales growth forecast of at least 15-20% per year & profit margins that will support a revenue-share payment
- Strong management team and a well-supported growth strategy with market opportunity
- A mission that advances the Flex Fund’s work
What Makes Us Different?
Flex Fund capital offers a way to help companies grow that won’t force an exit strategy (avoids a “cash-out” scenario) or tamper with ownership structure. We remain flexible with the cash flow needs of a business and offer reward to the Flex Fund for the risk taken. The cost of our capital will adapt to a company’s performance. Repayment schedules can match revenues, allowing the company to grow at a strategic rate rather than harried pace that other sources of risk capital might require.
With Flex Fund capital comes instant access to our networks and business assistance. We are a trusted partner in Vermont’s natural resource sectors. As we lend our capital, we lend our expertise, and leverage our networks to instantly link our borrowers to people and places that can help them grow the business. As a certified Community Development Financial Institution, we have access to grant funds to support business advisory services for our borrowers.
