Financing Firms in the Recycling Industry

by Janet Cowell

Recycling, remanufacturing, composting and other green ventures have an even harder time than more traditional small companies in obtaining “patient” capital for start-up and expansion. It’s critical for those firms to think creatively about their financing options. Friends, family, customers, suppliers and angel investors can all be important resources to tap for companies that may not qualify for conventional bank lending. Asset-based lending is another option, particularly for companies that are more capital intensive.

One alternative form of financing comes from community development financial institutions (CDFIs). Nationwide, over 600 CDFIs serve economically distressed communities by providing credit, capital and financial services that are often unavailable from mainstream financial institutions.

Community development venture capital (CDVC) is one type of CDFI. CDVC is similar to traditional venture capital in that it typically consists of an equity stake in companies that offer high growth potential. It is also similar to traditional venture capital in that it is an engaged form of financing – investors often sit on the board of a growing company and play an active role in advising top management on important business issues.

It differs from traditional venture capital in that it focuses on a broader range of industries than information technology, biotechnology and others. CDVC funds, in addition to looking for companies with high rates of financial return within fairly short time periods, also look for companies that bring social returns, such as jobs for low income individuals, positive environmental impact, and inner city/rural economic development. CDVC funds are very selective – often investing in only one of 100 companies that apply.

SJF Ventures
Previously called the Sustainable Jobs Fund, SJF Ventures is a community development venture capital firm with offices in Durham, North Carolina and Philadelphia, Pennsylvania. Founded in 1999, SJF Ventures invests in growth enterprises that create quality jobs in the eastern U.S. and provides equity financing in rounds from $500,000 – $5 million with co-investors. To date, they have invested $8.5 million in 16 companies are actively seeking new investment opportunities.

SJF has learned some lessons about the kinds of companies that make good investments: a seasoned management team; market-valued products; and a diversified group of customers (don’t rely on a few big customers or corporate partners).

Cultivate a Seasoned Management Team
Investors place great importance on the abilities of the entrepreneur and his/her core management team. Bob Joyce, the founder and CEO of Salvage Direct, an on-line auto salvage company and one of SJF’s portfolio companies, had extensive experience in auto insurance and salvage. The company contracts with auto insurance firms to resell damaged vehicles to licensed auto dealers and dismantlers. A cash-intensive business, Joyce maxed out on loans from banks and turned to a state-sponsored economic development fund for additional debt. He continued to gain customers and was successful a year later in raising his first round of equity financing form a traditional venture capital firm. The company continued to grow but Joyce was pressure to move it from his hometown of Titusville, PA. (population 4000).

He turned to SJF Ventures, which was enthusiastic about supporting employment in rural Pennsylvania.
They offered good financing terms and industry experience. They invested in Salvage Direct in September 2002 and since then the company has grown to employ 40 people. www.salvagedirect.com

Develop Market-Valued Products
While there is always the “immediate problem” that needs to be solved or deadline to meet, it’s vital that owners and managers focus on customers and markets to define the business, not raw material supply. Let customers know what problem your product or service will solve, with recycled or organic content thrown in as a “bonus.”

Another SJF portfolio company, SelecTech, provides an example of a shift from raw material-based thinking to market-based value products. Based in Taunton, Mass., the company makes new products from carpet and plastic scrap, including planters, timbers, parking and flooring materials. While it began as a recycling company that recovered waste plastics using a low-cost process, it is now positioned as a commercial flooring company.

FreeStyle, its flooring product, is quick to install, requires no adhesives, minimal subfloor preparation, and works well on floors with moisture problems. It uses 92% recycled content as a cost advantage. www.selectechinc.com

Don’t Rely on a Few Large Customers or Corporate Partners
Having large, well known customers or corporate partners can be helpful when seeking financing, but too much reliance on a few major players will increase your risk. Make sure you retain core competencies and critical infrastructure in-house instead of relying those of corporate partners.

EvCo, another portfolio company, uses reclaimed plastic beverage bottles and food containers (PET) as raw materials to make liquid coatings sprayed onto cardboard, cartons, and paper used in packaging perishable foods. These waterproof coatings replace traditional, nonrecyclable wax coated packaging and will eventually permit the recycling of over four billion pounds of currently wasted tree fibers. EvCo realized the need to go beyond one or two corporate partners. The company diversified, established multiple product development and distribution channels, and is expanding its infrastructure to accommodate new opportunities. www.evcoresearch.com

Whether you choose to approach traditional banks or community development firms, having a strong team implementing an innovative business model in a receptive, growing market will be more attractive to financiers.

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