Evergreen Funding: What You Need to Know

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, 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 up front, the company then invests in short-term, low-risk securities until it is ready to use the money for business operations.

How Evergreen Funding Works

Evergreen funding takes its name from coniferous evergreen trees, which keep their leaves and stay green throughout the year. Similarly, evergreen funding provides capital 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, repeatedly pushing back the maturity date 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 by limiting the pace of capital infusions, it prevents them from growing too rapidly.

With evergreen funding, capital is provided to the management of the company either on a schedule or upon request by the investment team. 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 to access the credit at a later date.

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 a small scale became a ruined venture on a larger one.

Ways of business funding are multiplying, but the traditional up-front variety of venture capital remains popular. Reasons include founders and investors being eager to scale up as fast as possible to fill any market voids in their sector before other startups can emerge to compete. Also, 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 initial public offering (IPO) pays the maximum return.