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 the traditional funding situation in which all the capital required for a business venture is supplied up-front by venture capitalists or other investors as part of a private funding round. When the money is provided upfront, the company then invests in short-term, low-risk securities until it is ready to use the money for business operations.
- Evergreen funding is a term used to describe the incremental addition of money into a business by investors; the company receives capital on an established schedule or as the need for funds arises.
- The idea is that, like the evergreen tree, such a firm always has the "green" it needs to survive; however, by spacing out the investments, the company will ideally avoid the tendency of some startups to grow too fast and fall apart.
- Evergreen funding plans allow a business to renew its debt at different times, pushing back the maturity date so that the amount of time until the debt is due holds steady while the arrangement is active.
How Evergreen Funding Works
Evergreen funding takes its name from coniferous evergreen trees, which keep their leaves and stay green throughout the entire year. Similarly, evergreen funding means capital is provided throughout the seasons of a company's development. In a normal debt-financing arrangement, company-issued bonds or debentures have a maturity date and require principal repayment at some future point in time.
An evergreen funding arrangement, however, allows a business to renew its debt periodically, pushing back the maturity date each time so that the time until maturity remains relatively constant while the arrangement is in place. In the case of venture capital dollars, the financing is done by selling ownership stakes in the venture, but the infusions of capital are spread out over set periods. This approach is used to avoid pushing a company to grow too fast. Evergreen funding of this nature assures entrepreneurs that the money is there but prevents them from growing too rapidly by limiting the pace of capital infusions.
With evergreen funding, capital is provided on a schedule or upon request by the investment team to the management of the company. Evergreen funding has also been used to describe a revolving credit arrangement in which the borrower periodically renews the debt financing rather than having the debt reach maturity.
In this sense, lines of credit and overdrafts are types of evergreen funding as the borrower applies for it once and then is not required to reapply again to access the credit within at a later date.
Evergreen funding is distinct from an evergreen fund. An evergreen fund is an investment fund that has an indefinite fund life, meaning that investors can come and go throughout the life of the fund.
Evergreen Funding for Cautious Growth
The main arguments for evergreen funding for new ventures are the cautionary tales of startups that grew too fast and quickly outpaced their business model to the point that a profitable business on one scale becomes a ruined venture on a larger scale.
Nevertheless, the majority of venture funding is still of the upfront variety as founders and investors are eager to scale up as fast as possible in order to fill any market voids in their sector before other startups can emerge to compete. Moreover, venture capitalists want as much of the growth as possible to occur when the company is in the private market so that the value of a potential IPO on the public market pays the maximum return.