Asset finance for a start-up
Discussion
I know there's a Finance section, but I imagine the people here probably have more experience in this area - I'm trying to help a start-up access asset finance. The start-up in question makes domestic battery storage solutions which it intends to lease out to domestic consumers. Each storage system will have its own long-term contract so I feel as though it should be possible to get debt finance secured by the asset and contractual cash flows rather than giving away equity. The business is currently pre-trading but in the process of planning the business model, it'll obviously be trading when the finance is sought albeit early-days. Any recommendations for companies to try please?
There is a well-proven model for financing consumer assets in this general way but it relies on some analysis defaults. I won't name any, but you would recognise some VERY big names who use or have used it.
Do you have any trading history at all? If not, it could well turn out to be the case that you need some pure debt or equity in order to prove the model before someone will touch it. In fact you'll probably want/need that anyway as the way the sort of thing I'd have in mind works you're looking at financing "blocks" of contracts rather than adding them one at a time to a facility.
The other obvious questions you'll probably get are around the traceability of the underlying asset, credit-worthiness of customers, and whether there are additional levers you can pull in the event of a default.
Do you have any trading history at all? If not, it could well turn out to be the case that you need some pure debt or equity in order to prove the model before someone will touch it. In fact you'll probably want/need that anyway as the way the sort of thing I'd have in mind works you're looking at financing "blocks" of contracts rather than adding them one at a time to a facility.
The other obvious questions you'll probably get are around the traceability of the underlying asset, credit-worthiness of customers, and whether there are additional levers you can pull in the event of a default.
LooneyTunes said:
There is a well-proven model for financing consumer assets in this general way but it relies on some analysis defaults. I won't name any, but you would recognise some VERY big names who use or have used it.
Do you have any trading history at all? If not, it could well turn out to be the case that you need some pure debt or equity in order to prove the model before someone will touch it. In fact you'll probably want/need that anyway as the way the sort of thing I'd have in mind works you're looking at financing "blocks" of contracts rather than adding them one at a time to a facility.
The other obvious questions you'll probably get are around the traceability of the underlying asset, credit-worthiness of customers, and whether there are additional levers you can pull in the event of a default.
Thanks. No trading history yet, the product is still being developed - the CEO has one successful business in a similar space and has exited that business and started this one.Do you have any trading history at all? If not, it could well turn out to be the case that you need some pure debt or equity in order to prove the model before someone will touch it. In fact you'll probably want/need that anyway as the way the sort of thing I'd have in mind works you're looking at financing "blocks" of contracts rather than adding them one at a time to a facility.
The other obvious questions you'll probably get are around the traceability of the underlying asset, credit-worthiness of customers, and whether there are additional levers you can pull in the event of a default.
In terms of traceability and levers for default, yes and it will be remotely switchable as well as removeable easily.
MustangGT said:
How would the overall plan work? Most domestic/commercial installers of renewable energy will provide their own kit as part of the deal. This ensures full compatibility between all the system parts.
Not sure I agree with you there - most installers will install the most cost effective kit, the kit they think is the best (or gives them the best kick-backs) or the kit they think will give them the least amount of headache having to return to site post install. A lot of kit is interoperable. The local company around me installs GivEnergy or Tesla.AyBee said:
The start-up in question makes domestic battery storage solutions which it intends to lease out to domestic consumers.
Unless someone puts significant share capital in the company I find it hard to see this getting off the ground. Lots of cost up front in exchange for an income stream which may or may not prove reliable. What's the expected break-even duration on the leasing?AyBee said:
MustangGT said:
How would the overall plan work? Most domestic/commercial installers of renewable energy will provide their own kit as part of the deal. This ensures full compatibility between all the system parts.
Not sure I agree with you there - most installers will install the most cost effective kit, the kit they think is the best (or gives them the best kick-backs) or the kit they think will give them the least amount of headache having to return to site post install. A lot of kit is interoperable. The local company around me installs GivEnergy or Tesla.There is a lot less interoperability than you may think. We need to carefully match kit (we are mostly commercial), particularly when using batteries for comms purposes.
Panamax said:
AyBee said:
The start-up in question makes domestic battery storage solutions which it intends to lease out to domestic consumers.
Unless someone puts significant share capital in the company I find it hard to see this getting off the ground. Lots of cost up front in exchange for an income stream which may or may not prove reliable. What's the expected break-even duration on the leasing?I invested in something similar (but not energy related) 2-3 years ago that required a fair amount of upfront money to validate the business model before being able to raise a significant amount of corporate debt. The third stage of financing will almost certainly involve dealing with the recurring cash flows in such a way as these can be used to accelerate expansion.
A major challenge is often that more innovative/bespoke financing carries a significant transaction cost due to the complexity of diligence and structuring. That makes small ticket sizes tricky, which feeds back to needing a decent amount of capital to get running.
The biggest challenge, if the founder doesn't have the money he needs, is that an equity raise can be tricky/emotional, particularly if the founder slips into the mindset that they're "giving away" a lot of equity in their business and forgets that without capital he won't be be able to grow at pace/beyond the limits of his own resources.
LooneyTunes said:
Panamax said:
AyBee said:
The start-up in question makes domestic battery storage solutions which it intends to lease out to domestic consumers.
Unless someone puts significant share capital in the company I find it hard to see this getting off the ground. Lots of cost up front in exchange for an income stream which may or may not prove reliable. What's the expected break-even duration on the leasing?I invested in something similar (but not energy related) 2-3 years ago that required a fair amount of upfront money to validate the business model before being able to raise a significant amount of corporate debt. The third stage of financing will almost certainly involve dealing with the recurring cash flows in such a way as these can be used to accelerate expansion.
A major challenge is often that more innovative/bespoke financing carries a significant transaction cost due to the complexity of diligence and structuring. That makes small ticket sizes tricky, which feeds back to needing a decent amount of capital to get running.
The biggest challenge, if the founder doesn't have the money he needs, is that an equity raise can be tricky/emotional, particularly if the founder slips into the mindset that they're "giving away" a lot of equity in their business and forgets that without capital he won't be be able to grow at pace/beyond the limits of his own resources.
AyBee said:
Oh, absolutely, he will either fund that himself or seek external investment having done that with his last business, I was just curious as to whether it would be possible to debt-fund the assets given the backing of the assets/security of cashflow to minimise the equity cheque required. The more innovative/bespoke stuff is my day job but that's in the hundreds of £m so I'm not familiar with the start-up end of the scale.
Have done both ends of the scale: for start-up it almost always comes down to personal resources (or borrowing against these) and/or additional equity (which, clearly, costs more the earlier you raise). The issue with doing it any other way is, as you'll appreciate if it's your day job, is that the security package is hard to quantity and the default rates as yet unknown. I know people who might do it as low as mid 7-figure ticket sizes but realistically you'd want to be at 8 and with decent flow/repeatability.Another option to get people interested is to tie in some warrants in exchange for lower costs/txn sizes.
JonPH said:
It's a good point to consider ABL. It will also help the equity story.
At its simplest, does the battery asset have a market value on the second hand market if it goes wrong?
If the founder has a demonstrable track record of an exit, this is great news.
And that's why I'm trying to step in. I think the business is much more solid with the assets on its own balance sheet than using third parties, but funding is likely to dictate the latter unless I can find something interesting. Probably only need a £0.5m facility to start with, just difficult without trading history to find someone who would be willing to lend against the assets.At its simplest, does the battery asset have a market value on the second hand market if it goes wrong?
If the founder has a demonstrable track record of an exit, this is great news.
Highest value upon failure of the company would be through leaving them within homes and continuing the contracts that were in place (home owners unlikely to not want it just because the company went under). Could be remotely switched off, collected and sold for secondary value if customer stopped paying though quite easily.
I can't imagine a lender wanting to underwrite the residual value of a battery (if that's what the asset is) that is controlled by a NewCo, with no secondary market if NewCo isn't around.
There are solar panel companies that retain ownership of the assets on domestic roofs and share earnings from generation with the householder. Might something like that be applicable to this?
There are solar panel companies that retain ownership of the assets on domestic roofs and share earnings from generation with the householder. Might something like that be applicable to this?
AyBee said:
And that's why I'm trying to step in. I think the business is much more solid with the assets on its own balance sheet than using third parties, but funding is likely to dictate the latter unless I can find something interesting. Probably only need a £0.5m facility to start with, just difficult without trading history to find someone who would be willing to lend against the assets.
Highest value upon failure of the company would be through leaving them within homes and continuing the contracts that were in place (home owners unlikely to not want it just because the company went under). Could be remotely switched off, collected and sold for secondary value if customer stopped paying though quite easily.
I doubt any lender is going to place much value on that: for it to work you have a heavy lift in terms of ensuring that the servicing/collections arrangements remain in place. Highest value upon failure of the company would be through leaving them within homes and continuing the contracts that were in place (home owners unlikely to not want it just because the company went under). Could be remotely switched off, collected and sold for secondary value if customer stopped paying though quite easily.
Genuinely think you’ll struggle to get anyone to look at it for a £0.5m facility. Too much work (cost) upfront to assess viability. He really should go down the equity route, prioritising investment from people who can add value to helping him scale and then go out and look when he has more adoption and (more importantly) default stats.
It is however the sort of opportunity that might get a sniff of interest if one or two members of an exec team were tempted to do it privately on an equity basis.
I've done this with B2B asset sales. The lender had visibility of the end customer and commercial contracts that allowed them to step in and take over. They were large deals with easily saleable assets from known brands - completely different assets.
The one confusion I have is that they are a manufacturer of battery storage, but haven't started trading. I'm assuming that they are already a manufacturer and are looking to enter the leasing market directly to their customers. Is that right?
The one confusion I have is that they are a manufacturer of battery storage, but haven't started trading. I'm assuming that they are already a manufacturer and are looking to enter the leasing market directly to their customers. Is that right?
Griffgrog said:
I've done this with B2B asset sales. The lender had visibility of the end customer and commercial contracts that allowed them to step in and take over. They were large deals with easily saleable assets from known brands - completely different assets.
The one confusion I have is that they are a manufacturer of battery storage, but haven't started trading. I'm assuming that they are already a manufacturer and are looking to enter the leasing market directly to their customers. Is that right?
They're at the prototype stage currently. They'll be looking to sell their kit in due course once market-ready as well as lease it out to customers who don't want the expense upfront.The one confusion I have is that they are a manufacturer of battery storage, but haven't started trading. I'm assuming that they are already a manufacturer and are looking to enter the leasing market directly to their customers. Is that right?
AyBee said:
They're at the prototype stage currently. They'll be looking to sell their kit in due course once market-ready as well as lease it out to customers who don't want the expense upfront.
You do realise the domestic householder is unlikely to be the customer? Consumers want a turn-key solution from a single provider.It is also not possible to upgrade a solar solution by simply adding batteries, because an on-grid solution uses cheaper, non-DC compatible inverters. The inverter would need replacing as a minimum. You would also need to go through a whole testing regime to prove compatibility with each individual inverter type.
Unless we are talking about a battery that connects to the mains AC through some kind of inverter and is simply used to buy cheap overnight electricity and use during the day. What kind of price differential and annual usage and battery capacity/price is necessary to make this a viable option?
Not entirely sure why you're making up scenarios in which this battery wouldn't work and then answering your own questions? Fairly sure I didn't mention anything about use cases, solar retrofit or otherwise?
And of course the domestic householder is the consumer, irrespective of who chooses what to install in their home, they are the ones paying for it.
And of course the domestic householder is the consumer, irrespective of who chooses what to install in their home, they are the ones paying for it.
Edited by AyBee on Thursday 13th March 19:49
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