What do innovators want?
For Jacob Nathan, founder and CEO of UK biotech start-up Epoch Biodesign, part of the Fashion for Good programme, its important to move beyond a reliance on venture capital and towards debt financing to scale up new technologies.
“Beyond technology development demonstration, I think the most impactful thing startups in our space can do is to get to some semblance of bankability where we can wean ourselves off venture capital – really, really, expensive money – and begin to move more into debt financing (to build) projects in order for that to happen.”
Epoch, which synthesises tailor-made enzymes to break down plastics to make new recyclable materials has already raised $11 million in seed funding and wants a change in the procurement mind-set of brands with more engagement at senior levels so that innovators can break out of early-stage development.
“There needs to be strong C-suite level support,” notes Nathan. “We need brands and their supply chains to put in place multi-offtake agreements, because the reality is that entrepreneurs are not going to sell 90% of their business in order to fund the first commercial facility.”
This type of equity dilution remains a problem for some entrepreneurs in the textile space. It’s been a reason for past failures to get promising sustainability solutions off the ground as the original creatives that often front these businesses become less motivated to succeed.
“Likewise, venture capital is not going to put in money at the type of valuations that can control for dilution,” Nathan points out, saying that debt financiers are what’s needed to build out to scale. “Strategic capital becomes important in ultimately moving away from (reliance on) equity investors and into debt. Brands need to step in at this point and help us do exactly that.”
I see companies go bankrupt because they can’t raise capital, not because they can’t agree on a valuation
Some might say that Nathan cannot make the equity case attractive enough for investors to come in at reasonable valuations, and therefore the brands need to sponsor his personal profit and loss. But is he really putting a moral obligation on the brands to help entrepreneurs out?
“I see companies go bankrupt because they can’t raise capital, not because they can’t agree on a valuation that is high enough for the founder to keep a big chunk of equity,” one private investor told us after the Future Fabrics Expo. “He clearly has his priorities misaligned with the impact case.”
One question would be how does the textile sector get the top management from innovators, brands, supply chain actors, venture capital, project financiers, philanthropists, government funding, corporate debt providers and growth equity to all work together to help support start-ups like Epoch?
Although an opposing view would be that innovators themselves need to avoid shifting the funding problem on to others. “Innovators need to find ways to make it attractive to work with them. If you have such a golden solution, people will come to you, you don’t need to talk about ‘brands ought to help us’ if you have something they want,” noted the investor, who asked not to be named.
Lowering the risk–return profile is one way to do this – but how can impact investors be convinced to release funds in an environment that over the past 12 months has seen global sustainable equity funds make an 11 per cent return, compared with 21 per cent for conventional stock funds, according to the Financial Times which cited a May report from JPMorgan.
Again, these are mutual funds investing in ESG stocks, and while sustainability private equity and growth equity funds are still performing not too dissimilar from normal funds – the overall data on impact investing is still not clear.
In our industry, giving more confidence to investors in this space means getting all the types of organisations named above to join up the collaborative dots to help secure debt financing for big projects. That’s why in the coming 12 months, Fashion for Good says it will launch a new ‘scaling venture fund’.
“This will be geared to unlocking scaling capital backed by some of our pioneering brand partners as well as supply chain actors and project financiers so that we don’t just have venture capital, but we actually start loaning that conveyor belt of capital,” said Jooste. “All of this will be done to enable the scaling of our most promising soft and hard technologies.”
Whether this happens, remains to be seen, because other existing funds related to textiles and sustainability in this space are yet to gain the required amount of traction – but that’s another story.
