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  • Writer's pictureAlex Brown

The Case for Structured Capital

With valuations falling, management teams raising capital in this market have been told their best option is to get comfortable with the dreaded down round (which HBO’s Silicon Valley Pied Piper co-founders were once warned was the “kiss of death”). The prevailing sentiment has been clear: while not ideal to raise more capital at a lower valuation, it is better than raising structured capital. In the news and on Twitter, structure is a dirty word – and the practice of using it is even considered by some to be predatory. Scary stuff!

But what even is structure?

Fundamentally, finance is about matching an asset or cash flow’s risk-return profile to the appropriate buyer. “Structure,” or the process of separating a company’s capital structure into layers that enable each layer to be fit for an investor who is seeking that risk return profile, can achieve that for businesses whose capital needs are not all created equally.

We love structure, and here’s why: when leveraged correctly, structure can unlock equity value and scale for certain kinds of businesses. And for many businesses in energy transition, having an efficient, scalable capital structure is critical to enable growth.

Investors seeking to take the most risk invest in venture capital, and venture fills an important gap in the capital markets. Investors balance venture’s illiquidity and high risk with high return expectations, which they try to meet by investing in businesses and sectors with high growth potential: SaaS, asset-light marketplaces, metered services, D2C. For businesses whose valley of death looks like the one illustrated below, it makes sense to raise venture equity – and it likely makes sense to avoid structure.

However, there are businesses whose valley of death, and the road in and out, looks very different. This is especially true in the energy transition, a high-growth space where BNEF estimates the investment opportunity to 2050 is $194 trillion.

The upfront work these businesses must do is typically more time- and capital-intensive than your standard venture backed-business.

  • Research and development take a long time. In the example of green hydrogen3, it took a combination of falling equipment costs, electricity costs, and government subsidy to make its production economic.

  • Businesses will have long sales cycles when selling to utilities and industrial customers, as these are typically large companies with complex internal bureaucracies that take time to navigate.

  • Their initial contracts often will have customer-favorable payment terms due to their lack of relative negotiating power.

  • Manufacturing, installation, operation & maintenance costs are often required to deliver their products or services. Combined with the sales and payment cycles described above, this can create working capital fluctuations for businesses that are difficult to resolve.

Although the upfront work can be difficult, the payoff is often more than worth it as businesses are rewarded with long-term contracts with creditworthy counterparties and sticky, mission-critical product offerings with substantial moats.

For these businesses, venture capital is the most expensive way to fund growth and can be prohibitively expensive if used in isolation. Structure can be a lower-cost, custom-fit solution to the company’s capital needs. Structured capital can take the form of:

  • Financing a specific asset using a financial instrument, or

  • Financing the entire business using a nonstandard instrument (structured equity, convertible bond, etc.)

Most importantly, raising non-dilutive capital can push out future equity capital raises, allowing the company more time to hit milestones and therefore build business value. Driving down total equity capital needs is the cherry on top.

Source: Keyframe

Here are some illustrative examples of structure and the growth it can unlock:

  • Project equity and debt: an off-balance sheet financing arrangement which depends on a project’s cash flows for repayment. These are typically complex, involving several parties such as the developer, EPC contractor, O&M provider, to the capital providers themselves. But structured correctly, they can provide an optimal cost of capital to the project, enabling the company/developer to scale rapidly and profitably. (Read more: Wunder Capital’s first institutional project capital)

  • Infrastructure-as-a-service – a structure which enables companies to provide infrastructure at no upfront cost to their customers, and whose repayment depends on the cashflows associated with that infrastructure. In the energy transition, this may look like energy-efficiency-as-a-service, a virtual power plant facility, EV charging-as-a-service, or more. Similar to project capital, the benefit here is financing infrastructure at an optimized cost of capital, providing 1) a sales tool to the underlying business and 2) capital fuel for growth. (Read more: Logical Buildings $110M VPP facility; TeraWatt’s $1B fundraise)

  • Working capital facility – a loan used to finance a business’s operations via attributing value to invoices and future contract value. Particularly valuable for businesses with long or cyclical sales cycles. Big companies commonly use facilities like these to manage working capital flows, but structured thoughtfully can be used for earlier stage companies in much the same way.

  • Structured corporate capital – convertible debt or preferred equity structured to solve internal stakeholder issues, bridge a company to its next milestone (operational developments or M&A) without taking a view on valuation, or enabling a capital raise in times of market instability.

In evaluating options like the ones above, flexibility and incentive alignment are key. A business’s needs evolve over time and having a capital solution can evolve over time to meet those needs can be tremendously valuable.

Unlocking growth in the energy transition requires investors and founders to consider all the above as they finance a business. At Keyframe, we are committed to leveraging our flexibility to be the most value-add capital providers we can be. If you’re building something in the energy transition and are thinking about how to finance your business, let’s chat.




The views expressed here are those of the individual Keyframe Capital personnel quoted and are not the views of Keyframe Capital or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Keyframe Capital. While taken from sources believed to be reliable, Keyframe has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by Keyframe Capital. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by Keyframe Capital, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.


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