What Is Evergreen Funding?
Evergreen funding (or evergreen finance) is the gradual infusion of capital into a new or recapitalized enterprise. This type of funding differs from traditional funding, where all the capital required for a business venture is supplied upfront by venture capitalists or other investors. When the money is provided upfront, the company typically invests in short-term, low-risk securities until it is ready to use the funds for business operations.
Key Takeaways
- Evergreen funding involves periodic additions of capital into a business by investors. The company receives funds on a set schedule or as the need for capital arises.
- Named after the evergreen tree, this method ensures that a business always has the required capital to survive. By spacing out investments, it helps prevent startups from growing too fast and potentially failing.
- Evergreen funding plans allow businesses to renew their debt at different intervals, thus leveling the maturity date so it remains constant while the arrangement is active.
How Evergreen Funding Works
Just like evergreen trees remain green year-round, evergreen funding supplies capital consistently throughout a company’s development. In a traditional debt-financing arrangement, company-issued bonds or debentures have a maturity date and require principal repayment in the future.
Evergreen funding, however, allows a business to renew its debt periodically, pushing back the maturity date, keeping the time until maturity relatively constant. In the case of venture capital, the financing happens by selling ownership stakes in the venture, but capital injections are spread over set periods.
This approach helps avoid pressuring a company to grow too fast. Entrepreneurs are assured that the money is available but handled cautiously to prevent rapid and unsustainable growth.
Capital in evergreen funding is given to the management on either a scheduled basis or upon request by the investment team. This funding method has been used to describe revolving credit arrangements, where the borrower is allowed to renew debt financing instead of letting it reach maturity. In this broader sense, lines of credit and overdrafts are also forms of evergreen funding.
Evergreen Funding for Cautious Growth
The key argument for evergreen funding is avoiding the pitfalls faced by startups that expand too quickly, surpassing their business model’s capacity. While there are many ways to raise business funds, traditional upfront venture capital is popular. Founders and investors often aim to scale rapidly to fill market voids before competitors emerge. Venture capitalists prefer significant growth in the private market stage to maximize the potential value at the initial public offering (IPO).
What is Evergreen Funding?
Evergreen funding provides periodic infusions of capital to a new or existing business instead of a lump sum at the start. It continually extends the maturity date of the debt.
What is Traditional Debt-Financing?
In traditional debt financing, venture capital is raised at the beginning of a startup’s life and has a set maturity date, at which point principal and interest must be repaid.
What are the Benefits of Evergreen Funding?
Evergreen funding helps a business avoid over-expansion and collapse from growing too fast. It ensures the company has access to capital but prevents premature and rash expenditure.
Related Terms: capital, recapitalization, investors, securities, debt financing, principal, credit.
References
- Nasdaq. “Evergreen Funding”.
- MJ Hudson. “The Forever Fund: Evergreen Capital in Private Equity”.
- CB Insights. “Research Report: How the Traditional Venture Capital Pipeline Is Changing”.
