The Leading Edge #003 - Is your deal too risky?

Weekly Word

Welcome to the third edition of Edge Management’s new weekly newsletter, “The Leading Edge”! Each week, we'll cover topics about entrepreneurship and our industries of focus, and highlight the latest and greatest at the intersection of innovative insurance and finance.

We’d love your feedback on what you enjoy most about the newsletter and what you’d like us to cover in upcoming editions of The Leading Edge. We look forward to hearing from you!

Insights from the Edge

"Aim at what's possible"

As entrepreneurs, it's easy to set goals at the extremes: either they're too small and don't push us enough, or they're too big and might be unachievable on our timeline. This week, adjust your goal-setting framework to focus on what's "possible". If everything went right, what could your business achieve, realistically? Set the target there and work toward it.

Don't rush into equity dilution

All successful companies require capital to grow. Funding can come from all kinds of sources, so it's important to consider all options.

Greater "De-Risk" = greater reward

Investors, especially debt providers, focus on project risk. They want to feel comfortable they'll get their money back. So, by "de-risking" your deal, there'll be greater rewards for investors and for you. Lenders will feel more comfortable investing and you'll get more favorable terms on the money you borrow. Win-win.

Your investor deck is important

When it's time to raise capital, investors will want to review your slide deck. Putting together a good deck seems simple. But it can be tricky. Click here for five things to keep in mind when building your investor deck.

Make it impossible to fail

Speaking of decks, wouldn't it be great to stack the deck in your favor for your next project? Use this mental model from Tim Ferriss to guarantee success on whatever you're working on.

Is Your Project Too Risky for Investors?

For the sake of this article, let's use a green technology company as an example. The company has developed a new tech and needs financing to scale to commercial status.

You're the CEO of Company XYZ and you've developed a game-changing technology that will solve an important piece of the climate change puzzle.

But you're missing a key ingredient to scale the technology from prototype to commercial viability...funding. Time to go raise money.

The Company's slide deck looks good, the financial model is done, but there's still another step. In order to secure funding, you need to identify and mitigate areas of your project investors might view as risky. But what are these areas? And how do you mitigate them?

The three areas of risk of critical concern to investors:

• Supply Risk - your financial model looks good, but to hit your projected numbers, your technology will have to produce a certain amount of product. Do you have enough supply to feed through the tech? How reliable is the supplier? What happens if they don't uphold their end of the deal?

• Technology Risk - your technology works on a small scale. How do you know it will be as consistent at commercial scale? Investors want some assurance that you'll be able to pay back the debt they provide. What happens in the event the technology stalls or breaks down?

• Offtake Risk - say you are able to produce the amount of product you're projecting. Do you have someone lined up to buy what you make? How reliable is the offtaker? How strong is their agreement to buy?

Debt providers want some level of confidence that they'll - at bare minimum - get their money back. So how do you reassure them on each of these three points? This is where specialty insurance comes into play.

By using coverages that insure each of the three areas of concern to investors, you shift financial risk from investors to the insurance markets. The coverages are designed to guarantee your debt obligations and make investors more comfortable. These coverages aren't off-the-shelf, they take time to structure and place. But once they're in place, the amount of risk in your deal decreases significantly.

In this case, lower risk = higher reward: You're using insurance as a form of capital. Investors feel better about the deal. And You'll likely get better terms on debt. Wins all around.

Leading Headlines

🚀 Green Mining on the rise: it was announced this week that the Green Mining Market is expected to grow from $11 billion in 2022 to $17. 6 billion by 2027. Leading factors in the growth are "government regulation and awareness towards fighting climate change and global warming."

🔋 Group 14 closes one of largest climate tech rounds of 2022: the advanced silicon battery tech manufacturer closed a $614 million Series C, making it one of the top-ten largest rounds of the year in the climate tech space. Notable investors in the round were Microsoft's Climate Innovation Fund and Lightrock's Climate Impact Fund.

💰 $3.7 billion earmarked for CO2 removal: the Biden administration announced $3.7 billion from the Bipartisan Infrastructure Law will fund four programs that will "drive the commercialization of technologies helping remove CO2 directly from the atmosphere..."

Content of the Week

Disclaimer: None of this is financial advice. This newsletter is for educational/entertainment purposes only.