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Creative Capital

Creative Capital
Photo by Towfiqu barbhuiya / Unsplash

One of the key advantages of the software business model is capital efficiency.

Efficient businesses earn the right to experiment in more capital-intensive customer segments that could produce higher returns at scale or deploy it more quickly to win big markets.

However, the influxes of capital that fuel these experiments and expansion shouldn't always be for ownership in the business.

Here are some business model examples where creative capital can prevent dilution while still giving startups the firepower to capture market share.

Marketplace liquidity

Reason for non-dilutive capital: too much cash, too early.

We've seen startups like OpenDoor and Carvana succeed by providing immediate liquidity and creating seamless transactions in markets where the original process was tedious, opaque, and time-consuming.

To provide a quick process and immediate offers requires a large balance sheet. These markets are often winner-take-most and "land grabs" for fast market share. That combination requires a large amount of capital and fast, which can mean premature dilution for the founding team.

Most of the markets around electricity are outdated, and carbon markets are brand new meaning; startups looking to innovate in these spaces will need to provide participants with a better process, which includes a faster time to value realization.

Buy-now-pay-later (BPNL)

Reason for non-dilutive capital: volume of cash need better suited by financial institutions with liquidity.

"Affirm for the energy transition."

Installing solar on homes, investing in efficiency upgrades like windows and HVACs, and buying electric vehicles will always require significant upfront spending by the consumer.

Great businesses will be built by helping consumers access cheaper forms of capital, and great businesses will be built due to consumers having more access to capital.

Buy-now-pay-later won't be the entry point, but it will be a feature that creates an insurmountable moat. Typically, buy-now-pay-later companies do best when partnered with firms that are amazing at customer acquisition - e.g., Peloton and Affirm.

We're likely to see a startup that excels at customer acquisition or partnering with those that do, build a low cost of capital solution that makes energy efficiency upgrades easier for the consumer.

Customer success

Reason for non-dilutive capital: valuation

The adopters of technology in energy and industrials are accustomed to white-glove service given the complexity of their operations and risk tolerance. Winning their business means spending significant capital on implementation.

The increased spending drags on gross margins, preventing software companies focused on these segments from mimicking their counterparts serving less risk-averse sectors.

This creates a downward force on multiples, and a higher cost of equity due to lower valuations, and alternative forms of capital begin to look more attractive.

Innovative firms will find creative ways to finance the service business without diluting valuable equity. Customer success investment often creates a more valuable customer, creating a better long-term business or the type that is more likely to absorb alternative, non-dilutive forms of financing.

Venture capital and project finance fit the energy transition narrative well because of the innovation and scale of technology required to solve the problem. But, as returns increase and the scale of winners becomes clear, we'll see more creative solutions like these and more available to those who want them.