Greensill Capital was founded in 2011 to provide specialised supply chain finance to UK corporates, stepping in between suppliers and customers to provide funding to fill the gap between the sale being agreed and the payment being received.
Greensill used institutional investors and securitisation structures to grow beyond their own balance sheet, originate loans much faster, and take on more risk by financing future receivables. To give institutional investors more comfort, Greensill purchased trade-credit insurance on large portions of their portfolio. By February 2021, the four supply chain finance funds administered by Credit Suisse had assets of almost $10bn.
But cracks started to appear in 2020 when their main insurance provider, Tokio Marine, decided not to renew the relevant cover, and Greensill couldn't source an alternative. In March 2021 Credit Suisse suspended subscriptions and redemptions into their funds and put them into liquidation, freezing the main source of funding for Greensill, and by extension for their underlying customers.
The biggest victim was Liberty Steel, a major UK industrial employer with steel plants across the UK. They were part of GFG Group, a diversified industrial group which had borrowed as much as £5bn from Greensill and relied on them as their primary source of financing. Liberty and GFG survived, but they had to go through a significant restructuring process, and put thousands of jobs at risk.
This episode illustrates the risk of becoming over reliant on a single provider for financing, reliant on a single channel, and using the wrong source of funding.
This article maps that ecosystem. The sources of funding, the expectations that come with each, and what happens when things go wrong. The lifecycle articles later in this section cover which of them will actually talk to you at each stage.
Equity
Equity investors buy shares in the company. They get no interest and no promise of repayment. Their return comes from dividends and from selling the shares for more than they paid. Equity is usually the first to bear loss in a default, and has the most uncertain upside. It doesn't drain liquidity, or expect to be repaid. As a result, the expected return is significantly higher than all but the riskiest types of debt. Within the equity world, the providers differ mainly in stage and appetite.
Founder equity. This is where most start-ups begin. … read more show less
You have the money you put in yourself and nothing else. This is known as bootstrapping. In the age of AI, with the cost of tech build-outs coming right down, tech founders are expected to get much further under their own steam before seeking external funding. It's not a luxury everyone has, but if you can do it, you should.
Friends and family. Usually the first port of call for early founders once they exhaust their own resources. … read more show less
Often based on goodwill and enthusiasm rather than deep analysis, investment from friends, family and your close network often has a lower bar, and can keep early start-ups going a little longer before looking for more demanding capital.
Great if you can get it, but not to be taken lightly. If your venture fails, your venture capital funders might not talk to you again. If your friends and family overinvest, you will be reminded about it at family gatherings and social events for a long time.
Crowdfunding. A relatively new source of capital. … read more show less
Platforms allow a company to raise small amounts of capital from a large online pool of, usually retail, investors.
Angel investors. Wealthy investors, often successful founders or business owners themselves. … read more show less
They write small cheques to support early businesses, and can be very important to get you through to a first big funding round, or to round out a large raise alongside bigger investors.
High net worth investors and family offices. Wealthy individuals or family funds with professionally managed portfolios. … read more show less
Their mandate is often broad, but can include allocating a portion of their portfolio to venture type strategies.
Venture capital. Funds that invest in early-stage, high-growth, usually loss-making companies in exchange for minority stakes and a board seat. … read more show less
They expect most investments to fail and a few to return the fund many times over. At seed stage, they look for around a 100x return, and expect about one in ten to succeed.
This shapes how they behave. They push for rapid growth, prefer companies with enormous potential, and have no appetite for merely profitable, successful businesses. This puts pressure on founders, and once you take VC money you are on a track that is difficult to leave. The first round leads to the next, and the next, up to IPO or a successful buy-out.
VCs also protect their interests aggressively. Liquidation preference terms ensure they get paid before the founders get anything, meaning a down round, where a funding round is priced at a lower valuation than a previous round, hits the founders before anyone else.
Private equity. Funds that buy established, cash-generating businesses, usually taking control and usually with a substantial amount of debt layered on top. … read more show less
Their return comes from operational improvement, acquisitions and consolidation, growth and leverage. Their investment horizon is often 3-7 years.
PE owners are active shareholders and often parachute in specialist CFOs or COOs to manage the business, rationalisation, leveraging and expansion.
Equity capital markets. Where most ordinary investors finally get access to buy and sell shares in a company. … read more show less
An initial public offering, then rights issues, placings and follow-on offerings to a broad base of institutional and retail investors. The amounts are bigger and, once listed, relatively quick to raise.
Usually for larger corporates, but smaller indices and alternative markets make public listings a reality for mid-market corporates with the right dynamics. The demands are much higher, in the form of continuous disclosure, a share price that reflects your credibility daily, and a shareholder base that may not be aligned to your best interests.
Private secondary sales. A relatively recent concept, where successful start-ups allow employees and founders to sell shares while remaining private. … read more show less
They do this by arranging periodic tender offers where select institutional investors can bid to purchase shares before the company goes public. These structures have been used by the likes of Revolut and Stripe, allowing Stripe in particular to remain one of the largest private start-ups.
They are not used to raise capital, only to transfer ownership from existing shareholders to new investors, therefore avoiding dilution and allowing founders to retain more control.
Debt
Debt financing is lower risk than equity. Lenders get paid an interest rate determined by the term, level of risk and prevailing market rates. They don't participate in the growth of the company, and only get a claim on the company if it fails to repay the debt. Banks are the primary source of funding for most corporates, and even as companies outgrow their bank's capacity to lend, they return to them to arrange syndications to institutional investors.
Non-bank lending, a broad category encompassing any lending undertaken outside of regulated banks, has experienced explosive growth over the past decade.
Commercial banks. Still the first stop for most companies. … read more show less
- Overdrafts
- Term loans
- Revolving credit facilities
- Trade finance
Their money comes from deposits and their appetite is governed by regulatory capital, which is why bank lending has been flat for over a decade while everything else grew.
Generally speaking, large, process driven institutions can offer good value for a standardised offering, if you fit within their processes, but they aren't fast, and don't deal with exceptions very well.
Syndicated loans. A large loan, hundreds of millions or billions, made by a group of lenders to a single borrower. … read more show less
As your company and funding requirements grow, you might outgrow your relationship bank's risk appetite or concentration limits. When this happens, they might act as an arranger, bringing in a number of other banks, funds or institutional investors to share the funding while maintaining the relationship.
Private credit. Funds, also called direct lenders, that make loans directly to companies, bypassing the banks. … read more show less
They raise money from pension funds and insurers, lend it at a margin that reflects the absence of cheap deposits, and hold the loans to maturity or until they are refinanced. They will lend more, faster and with fewer covenants than a bank, and charge for it accordingly. They often fund PE deals, where acquisitions run on tight timeframes.
The market has grown from a small niche of $100-200bn after the global financial crisis to close to $2 trillion globally, according to Preqin.
Institutional investors. Insurers, pension funds and asset managers, providing long-dated debt directly through private placements and indirectly by buying bonds. … read more show less
Their liabilities are long, so they like ten- and twenty-year money, and they are the natural home for a company that wants to fund an asset over its life rather than refinance every five years.
They are not relationship lenders. They buy a credit story on a specific set of terms. Only a resource for large, high quality companies.
Debt capital markets. Where larger companies issue bonds and commercial paper to those institutions and the market at large. … read more show less
Bonds are the cheapest long-term debt available to a company with the scale and, usually, the rating to access them. Commercial paper is the cheapest short-term money there is, for the few rated well enough to issue it.
A public debt offering comes with similar scrutiny to an IPO, in the form of detailed analysis by ratings agencies for a credit rating, and a market price that reflects public opinion faster than any agency can keep up.
Alternative lenders. The catch-all for everything that grew up around the edges of bank lending while bank growth was stifled. … read more show less
- Invoice-finance houses
- Asset-based lenders
- Revenue-based financiers
- Specialist fintech lenders
- Venture-debt funds
They lend against specific assets or cash flows, move quickly, and price for it. They don't have the same regulatory burden as banks, but they also can't take deposits, so are forced to fund themselves in other manners. Some fund themselves with short-term wholesale money, while some turn to securitisation.
Both are standard models, but riskier than a traditional bank, funded by deposits and forced to hold the risk they underwrite on their balance sheet. Make sure you understand the funding model before relying on these channels, or have a back-up plan.
Hybrid instruments
These sit between debt and equity, combining some of the features of each. Usually designed with a specific purpose, or to give a funder or borrower additional protection or returns.
SAFE notes. Simple Agreements for Future Equity, an increasingly common format for the first cheques in early-stage start-ups. … read more show less
The investors provide the capital upfront, but it only converts to equity when a trigger event occurs, usually a subsequent funding round. The value of that round is then attached to the SAFE, usually at a discount to reward the early investors.
Most importantly, they avoid wrangling over highly hypothetical, made-up valuations for pre-seed stage companies.
Convertible loan notes. Another instrument for early-stage founders designed to avoid arguments over valuations. … read more show less
Convertible loan notes are issued at a discount, and accrue interest usually in the form of additional equity rather than cash payments. They convert to equity at the next round.
Not to be confused with credit linked notes.
Payment in kind (PIK) debt. High risk debt for cash strapped companies, where interest is paid by issuing additional debt rather than cash. … read more show less
It provides cash-flow flexibility, but with significant risk of overleveraging the business. Seen in turnaround situations or high risk PE strategies, but not something you would avail of unless you have to.
Convertible bonds. A debt instrument where the lender is given the option to convert the loan to equity at a pre-agreed share price at a future date. … read more show less
Usually used to entice lenders to lend at lower interest rates.
Preferred stock. A form of equity financing where investors give up their voting rights in return for a debt like annual payment. … read more show less
Ordinary shareholders retain control, and the preferred shareholders take a preferred dividend and seniority to regular equity in liquidation.
Public programmes
Development banks and government agencies. They lend where the market won't, or won't on terms that suit policy. … read more show less
The European Investment Bank, the British Business Bank, Ireland's Strategic Banking Corporation and their equivalents provide long-dated loans, discounted rates to higher risk borrowers, guarantees to commercial banks and co-investment alongside private funds, typically for infrastructure, innovation, SMEs and green investment.
Export credit agencies. … read more show less
They guarantee or lend against export contracts.
Grant bodies and tax incentives. They fund everything from early-stage start-ups to major multi-nationals. … read more show less
Early-stage tax incentives are part of what makes angel investing, high net worth investors and family offices an accessible source of funding for founders, and grants are some of the best ways to fund growth, research or foreign expansion without handing over an ownership stake.
What sits where, cost and accessibility
Indicative only. The regions overlap because the instruments do: almost nothing in corporate funding sits at one price for one size of company, and where any of them lands moves with market conditions, sector, security and the borrower's own credit.
What the map is for
Two things you should take from seeing the full ecosystem.
- Every provider has a balance sheet and business model of its own, and their appetite for you depends on their circumstances at least as much as yours.
- Each channel has its advantages and disadvantages, and its own idiosyncrasies when it comes to risk appetite, funding model, and target market.
In the Counterparty Risk article we focused on diversifying bank exposure with various alternative investments. The same argument applies to where the money comes in.
The same job at three sizes
Start-up. The ecosystem is founders, angels, grants and venture capital. … read more show less
Venture debt and revenue-based finance appear once there is revenue to lend against. Banks provide a current account and, if you are lucky, an overdraft.
Don't assume VC is the default option. Bootstrapping as long as possible is the ideal route to maintain and maximise control.
Established mid-market. Banks are the core, and the practical question is how many. … read more show less
Two or three relationship banks competing for the wallet is the sweet spot. One is a dependency.
Private credit becomes relevant for acquisitions or where leverage exceeds what a bank will underwrite, and institutional money through a private placement is the first step off the bank balance sheet for a company with stable cash flows and a good story.
Large corporate. Everything is on the table. … read more show less
A syndicate of relationship banks providing the revolver and ancillary services, bond markets providing the term funding, commercial paper for the short end, and a rating agency mediating the conversation with all of them.
The treasurer manages the ecosystem as a portfolio of channels and keeps every one of them warm. An investor relations team becomes a necessity as public scrutiny grows.