This article is Part B of the fifth alert in our series of alerts focussed on the alternative protein industry. While Part A provided an overview of financing options in the industry, this Part B considers a variety of key financing options in more detail, including important considerations for nascent companies.

Newcomers may wish to read Part A of this alert, or our previous articles, which include an introduction to this series, a comparison of the regulation of insect protein as food and feed, a quick guide to JVs in the alternative protein industry and key considerations for early-stage companies in the alternative protein industry. Further life sciences updates are available at our blog post.

1. Funding Options

Early-stage companies usually begin by obtaining seed funding, which aims to get the company going so that it can demonstrate its earning potential, or other potential value (see section (a) below). Once it can evidence a working business model or a solid route to profitability, value creation or some form of liquidity, the company can seek further funding options. We explain what each type of funding is and discuss when each might be optimal for emerging companies below; this will depend on the nature of each business and its needs.

(a) Seed Funding – Typically raised by very early-stage start-ups using sources such as friends, family, the founders’ personal savings, angel investors, crowd funding, and incubators. It is often secured by way of advance subscription agreements, often known as simple agreements for future equity (SAFE notes) developed by Y combinator to speed up the funding process, or, in some cases, convertible loan notes (CLNs).

• SAFE notes allow investors to buy shares in future rounds, usually at a discount and with a valuation cap. They can typically only be converted when a qualifying equity financing round (QFR) occurs, or the company is sold or listed. The agreed discount (normally 10%–20%) is applied to the price per share that future equity investors pay on the QFR and the valuation cap determines the minimum percentage of investment that the SAFE noteholder could receive.
• CLNs are a type of short-term debt that represent a loan made to the company. They can be converted into shares at the company’s discretion or upon the occurrence of certain events (e.g., when the company raises a QFR), and typically involve valuation caps, discount rates, and interest rates that apply to the debt.

(b) Series A/B/C/D Funding – In early rounds, this type of equity-based financing often involves venture capitalists and growth investors focussed on early-stage company investments.

• In a Series A funding round, a company can create different share categories to generate funds for the business’ continued growth and development. With adequate runway, that growth will continue and companies are usually ready for Series B funding when they have consistent revenues as well as some profits.

• Series C and D (and later-stage) funding rounds are pursued by successful companies with solid revenue growth that are often profitable. In today’s market, profitability is taking a more central role, with companies seeking to curtail elements of growth that come at the expense of breaking even or achieving profitability. As a less risky investment, Series C or D companies typically attract existing investors, larger financial institutions, PE funds, corporate investors and sovereign funds. For example, sovereign fund Qatar Investment Authority led a Series D round for Innovafeed, which raised €250mn to advance its insect protein business, and existing investor Creadev also participated.

(c) Interim Financing – This type of financing provides the company with funds in between series rounds. Examples include bridge financing and venture debt, which are explored in further detail below.

• Bridge Financing – Bridge rounds usually come in the form of convertible debt. They are useful where funds raised in earlier rounds will not last until the next funding round, and companies require liquidity quickly (e.g., to manage ongoing operational costs). For instance, plant-based seafood company, Gathered Foods, secured US $26mn in a bridge round (after its earlier US $37mn Series B round) to increase its product range and expand its retail business into Europe. In the current climate, companies are choosing to raise small bridge rounds until they are again comfortable with revised valuations for their businesses.
• Venture Debt – This short- to medium-term financing is suitable for more established companies, and is typically advanced to companies by specialised funds, commercial banks with venture-lending arms or non-bank investors. It usually constitutes a term loan which can be secured (e.g., against accounts receivable) or unsecured, and can also be convertible into equity within a certain timeframe or upon certain trigger events. Venture debt counters some of bridge financing’s disadvantages (examined below) and is commonly provided for general working capital purposes (e.g., for leasing or purchasing machinery) between equity funding rounds.

(d) Traditional Financing – This is an umbrella term for a wide variety of corporate debt funding that is suitable for more established early-stage companies. It generally takes the form of an overdraft, term loan or revolving facility (or a combination thereof). The terms of a traditional financing agreement will vary widely with regards to, to name a few, drawdown mechanisms (including whether the facility is committed or uncommitted), the repayment/amortisation regime, whether the loan is syndicated, and the security and covenant package.

(e) Project Financing – This type of loan structure mainly uses a project’s cash flow to pay back the debt and equity used to finance the project. It is appropriate for long-term, high-capital projects under well-established companies, which will likely form a special purpose vehicle specifically for such financing.

(f) Accounts Receivable Financing – This generally short-term financing uses a company’s issued invoices to raise capital by selling the invoice before it is due. In exchange, lenders usually provide a fraction of the receivables’ face value to the company (e.g., 80% of the invoice’s value) and such arrangements can be carried out as an asset sale or a loan.

(g) Joint Ventures – More established companies may wish to consider joint ventures to obtain funding and acquire further expertise – this is particularly relevant in the alternative protein industry. In forming joint ventures, companies can agree that the main joint venture partner will fund ongoing R&D and commercialisation in exchange for a percentage in the company (usually 50%). Find out more about alternative protein joint ventures in our previous alert.

(h) Other Financing Options – Very established companies may ultimately seek large senior and/or mezzanine loans, and sometimes even an initial public offering (IPO) whereby their shares are made available to the general public on a public stock exchange (e.g., alternative dairy product maker, Oatly, raised $1.43bn during its NASDAQ IPO in 2021).

2. Key Funding Considerations

When choosing suitable types of funding at each stage, companies should consider the potential benefits and drawbacks associated with each option. These are summarised in the table below.

4. Conclusion

Early-stage companies in the alternative protein industry have numerous financing options involving debt, equity or a mixture of both. When choosing appropriate financing, timing is essential, and the key considerations set out above should be carefully assessed, taking into account a company’s business plans, growth, assets and position in the alternative protein market. 

Julia Kotamäki and Michelle Luo, London trainee solicitors, contributed to the drafting of this alert.

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