Why did the startup hire a fractional CFO? — Because they needed someone who could divide and conquer their finances! (rate our cringe in the comments)
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Too busy to listen? Check out the transcript below 👇 (if you’re reading in email, check out the full transcript by reading on Substack)
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Today, we are talking to Dimitry Gershenson of Enduring Planet
After three back-to-back episodes about sustainable timber/building materials, we dip our toes into the ClimateTech-Specific Services space.
Building in climate has several unique challenges. One of those is the complex business model options. Some companies pursue an IP licensing route, some build their own manufacturing, and others work through partners.
Is it about being capital heavy so you can borrow against it? Do you need to optimize for project finance?
There are many paths to commercialization, so not having a CFO early on can be detrimental. But as we all know, cash is tight; fractional is the way to go.
This is the first problem they solve.
The second is providing working capital.
When you land a grant, it can take a long time to get the money. They’ll forward you the money at favorable rates.
If you sell to governments, it can take a long time to get paid because they often pay upon completion of the work. If you’ve got capital-intensive hardware, you’re going to need some cash to get things rolling. They also solve this problem.
Every ClimateTech Entrepreneur needs a reliable legal partner. Why settle for less than the best? 💪🏽
Reach out to Goodwin Law today; the law firm of choice for hundreds of ClimateTech Entrepreneurs worldwide. They have you covered from funding docs to offtake contracts to IPO and M&A support. GoodwinLaw.com (and tell them CleanTechies sent you!)
In our conversation with Dimitry, we cover the problem and how they are solving it in detail.
We also dive into:
When to hire a Fractional vs Full-time CFO. You might be surprised by the answer. 👀
The need to make VC more inclusive. For reference, black founders received less than 1% of VC dollars last year (climate is slightly better than tech in general). 👨🏾🦱
The importance of Catalytic Capital. How philanthropic capital and other grant funding are the key to unlocking more capital. Some companies are willing to take the short straw to help build confidence for others.
ClimateTech’s political resilience. He’s confident that climate has a strong enough pull that a lot of the government funding won’t be too much at risk regardless of the administration next year. Check out the episode to hear why.
We also get some time to go through Dimitry’s background from Facebook to Enduring Ventures (yes, they are partnered closely) to founding Enduring Planet. He’s got a fascinating journey.
Another fun fact is that he’s been heavily involved in various community-building projects, such as Climate Vine (shout out to Candice Ammori) and Climate Curious, a network for Portland, Oregon’s climate people.
They are doing great work helping enable climate tech companies to reverse climate change. Know of any other ClimateTech-specific service providers? Drop us a note.
Enjoy the episode! 🎧
PS: stay tuned for a new format of takeaways in a separate post where we highlight notable things and draw out themes to help you learn how to be a better Climate
Got future guest suggestions or topics? Leave a comment!
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📝 Show Notes:
Topics
2:30 Introduction and Overview of Enduring Planet's Services
4:10 The Importance of Supporting Climate Entrepreneurs
8:47 The Gap in the Ecosystem for Finance Expertise in Climate Tech
12:31 The Importance of Getting Finance in Order Early
14:51 Timelines for if iFractional CFO and Hiring Full-Time Finance Talent
17:22 Navigating Finance Challenges in Hardware Climate Tech
19:18 Transparency in Lending
46:17 Building Local Climate Communities
50:47 Addressing Capital Gaps in the Climate Ecosystem
Links
Text Transcript 👇🏽
Silas (00:00)
Alright, welcome to the pod, Dimitri. How are you doing today?
Dimitry (00:02)
So good, man. Thanks for having me.
Silas (00:04)
Yeah, absolutely. Really a pleasure to have you on. I've heard a lot about what you guys are doing. Some people are very big fans, so we're excited to uncover it a bit more. Tell us, what's the high-level summary of you and what you're doing?
Dimitry (00:18)
Yeah, so I'm the co-founder and CEO of Enduring Planet and we provide a mix of working capital and financial advisory services to climate entrepreneurs. Most of our working capital work is really focused on climate entrepreneurs that currently work with government. So folks that have large government grants or sell to government and they're looking for cash flow or liquidity support for those projects because generally the government tends to pay on pretty long timelines and that can be really painful. It also can impact the speed with which companies can execute on those projects. It impacts their ability to do their core work as well outside of those engagements. And so we provide pretty critical liquidity support, cash flow support for those companies with our sort of government advanced product. And then as of January, we started providing fractional CFO services to climate entrepreneurs as well, because we saw a really deep need in the market and had built a lot of expertise internally around doing that work through our lending business. It's been going really well so far.
Silas (01:35)
Nice, man. Well, why is this important currently? Why is this type of business and this service super important now?
Dimitry (01:42)
Well, I think that the needs are slightly different across the two businesses. You know, within the sort of working capital universe, there's just not enough money in this space. And there's particularly not enough money supporting climate entrepreneurs to do this kind of work. You know, most founders, their options are either raise really expensive dilutive equity capital to support their working capital needs, which is not good, lots of reasons. We're not a replacement for VC money, but we are a means for companies to dramatically reduce dilution and sort of their cost of capital. And then for the CFO work, I think our experience in the market has been that one, there's not enough of this kind of help in the ecosystem, but also the help that is available from some of the larger, more established players is often not tailored enough to the sort of the needs of climate businesses, right? It's a lot of kind of template cookie cutter bullshit that just isn't good. And it doesn't help people make good decisions.
Silas (02:42)
So specifically on the topic of like why fractional CFO just for climate tech, you're saying it has to do with some of the specific things that they tend to deal with on a regular basis or is it also that plus the combination of the big guys just don't want to work with them because they're not familiar?
Dimitry (03:12)
So, I mean, I think you can hire the likes of Pilot and Bench as any company, right? But what you get is this kind of like... I don't know what to call it, whether it's a template or a premade model. And I think in a lot of cases, that works fine. If you have a really standard SaaS business, you sell B2B, you have one type of customer segment, you have three plans, whatever, that will probably work for you. Although I still have questions about the quality of the models and the assumptions. But as soon as you start to introduce complexity, which is really common in climate businesses, right? Maybe they sell to government and they have different pricing regimes for different government clients and different onboarding processes with a pilot and then, you know, phases and all this stuff. Maybe they get grant income. Maybe it's a hardware business and they want to do hardware as a service and want to introduce complex financing to model out what a working capital facility looks like for financing heat pumps, or maybe they are a carbon rule company and they need to add project finance to their model. Or maybe it's like a really young technical founder, or not even a young technical founder, just a less experienced technical founder who doesn't know a lot about finance. A lot of the elements of building a model, thinking through the pricing structure, thinking through the assumptions, thinking through the different levers that a company... that they can pull to drive revenue or reduce costs. Like that tailored help is not available in the market except from very limited number of very, very high quality specialized fractional CFOs that we personally know, but they only have capacity for three to four clients at a time. Right. And even they don't want to do accounting. They don't like, it's not also a great use of their time to build models necessarily. Like those people are expensive and their expertise and value really comes from that like hands-on working with the CEO, et cetera. And so what we found is that there's a pretty big gap in the ecosystem for this type of expertise around accounting, around FP&A. There's also all these accounting needs around grants and sort of reporting for government funds, which most bookkeepers are not really well positioned to do. And I think we do pretty well. And so I think in general, it's a question of like one availability of high quality services at our price point that's accessible to startups, which I think ours is very accessible. And then two is this like tailored, customized, bespoke help where what you're getting is like something that truly represents your business. as opposed to this like cookie cutter thing you get from everyone else.
Silas (06:10)
Yeah. And I guess just on the high level, what are the – you mentioned a number of things there, but what are the high level categories that climate tech businesses, especially in hardware, have to deal with? What are the topics that they need to be familiar with when it comes to this kind of financing?
Dimitry (06:27)
Maybe you can help me understand the question a little better. When you're talking about like, what is unique about raising money for these types of businesses, or are you asking what's unique about having to think about internal finances for these businesses?
Silas (06:41)
Yeah, what are the specific finance topics that somebody has to be familiar with to really navigate climate tech, especially as a hardware founder, well, like project financing, you mentioned some specific accounting things around dealing with obtaining grants. What are those key categories that you guys see?
Dimitry (06:57)
Man, it's, it's the list is long, right? Like having, yeah, I think that oftentimes people put off thinking about their finances at any level of detail until like the series A. We see a lot of founders who sort of get by with the bare minimum. And then, you know, decide like, we'll, we'll think about this when we have more resources. This isn't. You know, we need to really think about product. We need to really think about the customer. And I actually would argue that understanding your capitalization journey and in detail is important from day one and decisions you make really early on as a founder can shape how you get to build your company in perpetuity. So whether or not you buy equipment or lease it, whether or not you start to create structures for off balance sheet finance early. what you track and how you track it, how you price things and how you structure relationships with customers to get sort of the margins that you want. What are reasonable margins to target? How to think about product development so that you have a business that is financeable, right? I think a common example that I use is I used to work at a very large tech company and people want to look at my LinkedIn and figure out who it is they can. But I used to work at a very large tech company and they were very big bet on providing internet to areas that are unserved with some really complicated drone, wifi technology. And they spent $2 billion on that project before they built a financial model to understand the cost basis and how it would work over time and how to actually have a competitive offering to other services available in the market and they only figured out after two years and a couple billion dollars that the project would have to have a cost decrease of over 100X in order for it to be competitive with even the worst product. And at that point, they scrapped the project. Okay, they could have done that analysis a billion and a half dollars prior. Maybe not all the way at the beginning, but much earlier. And I think like that's a good anecdote for climate entrepreneurs is like, get your finance house in order early, spend the money. You don't have to spend a lot of money. But I would say like, if you've raised a pre-seed round and you don't have fractional CFO help, where they're building you a vision of your future that's relatively detailed and allows you to think about what assumptions drive outcomes in your business, then you should get one. It doesn't have to be us, but like you should get help. And then probably like around... the series A, that's when people start getting full-time talent. But I would honestly hire that full-time talent less for their ability to model or do accounting and more for their like strategic capacity. And then you still can use outsource help for sort of building models, doing accounting work, stuff that's like relatively, like it's hard work. But if you're going to hire CFO level expertise, you don't want them spending their time doing that work. They can guide the development of the bottle. They can tell, hey, analyst, build me this thing. But if you have a really expensive person who costs, I don't know, whatever, 250 grand a year plus, it's not always a good time. And it's not always a good use of their time to.
Silas Mähner (10:16)
Yeah. So broadly speaking, what you're saying then is there are so many different challenges in this space, especially depending on the business model itself, that it's as a founder, unless you are a wizard with finance and you've already done this stuff before, you probably should have some external support as an advisor because you're likely... There's a lot of, I don't know what I don't know going on.
Dimitry (11:01)
Yeah, and it's, you know, people are so willing to spend money on like a fractional product person or a fractional marketing person or, you know, just like so many places where people spend the funds. And this is a place that I find is often overlooked. Like people will do the bare minimum. And I think that's a mistake.
Silas Mähner (11:22)
Yeah. And just to clarify, what do you think is the typical timeline for somebody to bring in a fractional CFO and when does that typically taper off? You mentioned a couple of things around that when to hire a full-time person, but how do you typically view it with the average hardware climate tech startup?
Dimitry (11:38)
So yeah, so we have clients that range as early as like pre-seed, you know, maybe they've raised some angel money. Maybe they have actually raised a formal, you know, pre-seed round with institutional investors. I would say that's a good time to have. at the very least really good accounting help, but ideally like what I would call FP&A, financial planning and analysis, where you have an operating model that you update every month, where you track cash flow really carefully. You should be able to answer in any given moment to any outside party, whether it's a new investor or your board or whoever, questions around how much runway do you have? What are the factors driving that runway? What are your top expenses? How's your revenue growth working? Like, how are your margins looking? Like a lot of CEOs that we talk to don't have good answers to those questions. And that's like, that's a thing that you should be comfortably able to do. Starting at that point, right? As soon as you have any outside money, you better be very, very cognizant of how these numbers work for your business. And then, you know, some of our clients are as late as like kind of like late series A, early series B. In most of those cases they have internal finance talent already. So they'll have a VP of finance or a CFO and we play a supporting role because our time is less expensive than their time. So, you know, obviously generally folks people have outside accounting teams unless they build an in-house accounting team for quite some time typically until series BEC. But in terms of that FP&A function, I think oftentimes people will hire FP&A talent. to support their CFO. And that's like not always a great investment. I think that unless you have a lot, like let's say you are a project development business, right? And you have to build models every time you spin up a project and you have more than, you know, a handful of projects every month and you have to do a lot of diligence. Then like, yeah, you probably want to have an internal FP and team. But I think oftentimes it's overkill and people then expend a lot of resources on talent that their cost basis doesn't justify the value.
Silas Mähner (13:26)
Yeah. Well, I mean, also, we've seen really, really commonly that until like even series up to series B, a lot of hardware companies, like especially if they're doing deep tech innovation,
They may not know what business model they want to pursue in the long term. So you would hire a different CFO type depending on the business model you're pursuing. So why hire a full-time CFO when you don't even know which direction you're heading and you need somebody to help you kind of figure that out and plan for the options basically, whether you're just going to license the technology or you actually plan to build a facility and produce it. So I think it sounds like I do not want to be the person having to deal with this. I'd much rather outsource it to somebody like you. So I think that it lines up with what we've heard in the pods, I'm trying to say. I guess one thing I want to understand is just broadly speaking for people who aren't familiar, how do you make money on this? Is it just a consulting service and then on the lending side, it's just like an interest rate? Is it pretty straightforward how you guys make money?
…Tune into the episode for the rest 🎧💡(or check the full version out in the Substack app)
#192 Catalytic Capital, Hiring a CFO, Inclusive Financing, Grant Funding Gaps, & More w/ Dimitry Gershenson (Enduring Planet)