Evergreen Funding

What Is Evergreen Funding?

Evergreen funding is a type of funding where a business receives investment regularly based on the agreement between the business and the investors.

In recent years, we have seen many promising start-ups receive huge investments in one sum, leading the company to spend to achieve growth without considering the business and profitability model.

Evergreen funding, also known as evergreen finance, ensures that start-ups can grow naturally without spending and growing too fast. Evergreen funding is a type of funding mainly provided by venture capital to fund a business or a start-up.

In this type of funding, the investment amount is dispersed in stages, meaning the business is gradually and continuously funded as it expands its operations.

It differs from traditional funding, where the agreed investment amount is given as a one-time lump sum capital infusion and has a set maturity date. In evergreen funding, there are multiple points at which the capital is required to be infused into the business.

Evergreen funding can be provided in many different ways, such as

• A credit line
• Target-based funding 
• Any type of arrangement where funds are continuously infused into the business. 

Evergreen Funding Types 

As you know, "Evergreen funding" refers to continuous financing, allowing an organization or project to receive ongoing financial support without a fixed end date. 

You may be wondering what evergreen funding can be used for; so, below are some types of evergreen funding:

1. Endowments: An endowment is an arrangement for managing a pool of investors' assets for a certain purpose. The generated return or income, such as interest, dividends, or capital gains, is used to support the organization's operations or initiatives on a gradual basis. This allows the endowment to provide a stable and perpetual source of funding by means of evergreen funding.
2. Recurring Donations: Some organizations receive donations from individuals or entities who commit to providing regular financial support on a monthly, quarterly, or annual basis. These donations can be essential for maintaining a company's ongoing projects and operations.
3. Membership Programs: Nonprofits and other organizations often have membership programs where individuals or businesses pay a regular fee to become members. Members may receive certain benefits or privileges while supporting the organization's mission and activities.
4. Grants from Foundations: Certain foundations offer evergreen grants to support specific causes or organizations on an ongoing basis. These grants can be renewed periodically, providing stable funding for the recipient organization.
5. Government Funding: Some government agencies provide ongoing funding to support certain initiatives, research, or public services. While government budgets may vary from year to year, some programs are designed to receive consistent support over time.
6. Corporate Sponsorships: Companies can enter sponsorship agreements with organizations or projects they wish to support. These are usually marketing agreements where the company pays to be marketed in that specific program. These agreements can provide both parties with steady funding, visibility, and other benefits.
7. Royalties and Licensing: In certain fields like publishing, music, or software, creators may receive ongoing royalties or licensing fees from their works' continued use or distribution. This can provide evergreen income for the creators or their designated beneficiaries.
8. Social Impact Bonds (SIBs): Social Impact Bonds are a type of financial instrument where private investors provide funding for social programs. If the program achieves predetermined outcomes, the government repays the investors with returns.

Evergreen Funding vs.Traditional Funding

Both types of funding have their benefits and drawbacks.

In traditional funding, a company gets all the sanctioned funds in a lump sum in exchange for equity. After getting their funds, the business is free to spend the whole loan amount on expanding the business.

This big influx of capital gives the management the ammunition to expand fast and outspend their competitors to capture more market share; this is known as blitzscaling.

Now, this in and of itself is not bad; in this type of operation, a business tries to capture as much market share as it can and make a profit after getting a dominant market position.

But this type of funding in recent times has been seen to be not ideal. As all the money is sanctioned at once, the venture funds cannot track the flow of money. And as businesses get access to all this money at one go, it can lead to other complications.

Sometimes, businesses grow too fast and cannot generate profits, and the whole business model can turn out to be incompatible with a high-growth model.

And sometimes, a startup turns out to be a fraud, and the founders just use the investment money for their gain.

This problem, the concept of evergreen funding became useful. Evergreen Funding Example

A startup named XZY got its first or series A funding where it managed to get an investment of $10 million for 10% equity and a lone of $5 million for 5 years at 5% annual interest.

Now if this was traditional funding, the business would get this $15 million in its bank account in one go and will have to pay back the $5 million with interest within 5 years. But the structure to access this $15 million is different in evergreen funding.

In evergreen funding of $15 million, the XZY has to give 10% equity now, but the money will be dispersed in stages.

They will get $5 million upfront to kick start the business and will get $5 million more if they achieve certain goals. And they will have access to a $5 million line of credit for 5 years.

This line of credit can be used if the business needs more funds to operate the business as it requires up to $5 million and if the remaining unused amount will be transferred back to the venture fund.

So XZY gets a $5 million capital infusion to kick start its business and has $10 million secured in case it needs more to operate.

There can be many ways this investment can be structured. They can have access to additional capital if they can achieve certain revenue numbers or market share. If the line of credit is used, an additional equity stake has to be sold to the venture fund.

Researched and authored by Kunal Raj | LinkedIn

Reviewed and edited by Alexander Bellucci | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Fidelity Bonds
• Finance Overview
• Machine Learning In Finance
• Market Value vs Investment Value
• Recovery Rate