A frequent question we get at FTL is how to finance large, innovative projects.
Real innovation is exciting. But it can also be scary to investors; they may not have a perfect view of what success looks like—but can always imagine a lot of failure modes. And scary risks will stop a project from getting funded.
At FTL, we overcome this with Risk-Mitigated Finance. Here is the process:
- Go through and identify all the risks in a project, making a list of them and a mapping to show how they relate to each other.
- Create a financial model to quantify how each of the risks, individually and together, impacts the overall value of the project to investors.
- Systematically go through each risk and identify ways to mitigate it.
The first step requires some creative thinking, and should include feedback from investors who have looked at the opportunity. The idea is to include any and all risks that can be identified, even if they seem trivial or unimportant to the management team. An investor’s perception of risk is a deal-killer, so we need to deal with any risks they might identify, whether or not we believe it is legitimate.
Once we have our complete list of risks, we need to include them all in a financial model that shows the value of the deal to an investor. We can then use sensitivity analysis on each of the uncertain risks to see what sort of quantitative impact they have on the overall value of the deal to an investor.
Finally, each risk requires a carefully thought-out mitigation strategy. This is the story we tell about how we are going to eliminate the risk, and the plan we make to do it. For example, if investors have a concern about a project’s supply chain, then a large, respected supplier might guarantee their work, or delivery deadline. If there is a concern about regulation, a regulatory agency might issue a letter of compliance. In some cases, we might ask a large insurance company to issue a bespoke policy to cover a risk where we cannot identify another solution.
Once we have identified a strategy for each risk, we can calculate exactly how much uncertainty remains in the project, so the investor understands what they are taking on.
This simple process can transform a big, exciting, but difficult-to-invest-in project into a simple-to-understand investment opportunity, unlocking the capital the company needs to move forward with the business.
