Coral Reef Conservation and Biodiversity Awareness | Early Career Ocean Professional (ECOP)
Startups, nonprofits, and NGOs working in the blue economy often face challenges securing capital due to perceived risks and uncertain financial returns. Blended finance, which combines public, philanthropic, and private capital, offers a powerful solution to bridge this gap.
By strategically deploying public or philanthropic funds to mitigate risks, these organizations can attract private investment, driving growth and innovation.
In this article, we explore how to effectively use blended finance to reduce risk, attract venture capital, and create sustainable, scalable ventures. Specific metrics and milestone examples will illustrate how blended finance mechanisms work.
Step 1: Leverage Public and Philanthropic Funding to De-risk Private Investment
Blended finance structures often involve using concessional capital—such as grants, low-interest loans, or guarantees—from public or philanthropic sources to absorb early-stage risks. This de-risking strategy makes investments more attractive to venture capitalists who might otherwise be hesitant to fund blue economy projects due to uncertainty around returns.
Key Metric: Private Capital Mobilized per Dollar of Concessional Funding – This metric measures how much private capital is attracted for every dollar of concessional funding. A higher ratio indicates successful de-risking, where public or philanthropic capital effectively leverages private investment.
Milestone Example: A nonprofit working on coral reef restoration could secure a $2 million grant from a development agency to leverage $6 million in venture capital from impact investors, achieving a 1:3 leverage ratio. In the next funding round, the organization could aim to double this leverage, demonstrating growing investor confidence and scalability.
Case Study: The Global Environment Facility (GEF) has used concessional funding to mobilize private investment in marine conservation, leveraging billions in private capital by absorbing risks related to conservation efforts. This blended finance model helps reduce perceived risks for venture capitalists, enabling more capital to flow into blue economy projects.
Step 2: Structuring Innovative Financial Instruments to Attract Venture Capital
Blended finance often involves the creation of innovative financial instruments such as blue bonds, equity investments, or sustainability-linked loans. These instruments are designed to reduce investor risk while providing an attractive return profile, enticing venture capital.
Key Metric: Risk-Adjusted Return on Blue Bonds Issued – This metric assesses the financial return that is provided by the investors relative to the risks undertaken. A higher risk-adjusted return indicates that blended finance mechanisms can effectively reduce risk while delivering competitive returns.
Milestone Example: A blue economy startup developing offshore wind technology could issue a $10 million blue bond, backed by a $3 million guarantee from a multilateral development bank. This structure ensures receiving a 5% return with reduced risk exposure. Over time, the company can issue larger blue bonds with less reliance on guarantees, signaling a reduction in risk and growth in investor confidence.
Case Study: The Seychelles Blue Bond, launched in 2018, combined $15 million in private capital with $5 million in guarantees from the World Bank and Global Environment Facility. This structure de-risked the bond for private investors while funding sustainable fisheries, demonstrating how blended finance can attract venture capital by mitigating risks through guarantees.
Step 3: Attracting Venture Capital through Impact and Environmental Outcomes
Blended finance is often used to align environmental and financial goals by structuring deals around impact milestones. These outcomes-based financing models can provide investors with returns contingent on achieving specific environmental or social targets. For venture capitalists focused on impact, this dual focus on returns and outcomes creates a compelling value proposition.
Key Metric: Impact-Linked Return on Investment (ROI) – This metric measures the return investors receive when specific environmental or social impact milestones are met. A higher ROI indicates that the project successfully achieves its impact goals while generating financial returns.
Milestone Example: A marine conservation NGO could secure a blended finance deal where venture capitalists receive a 4% return on investment if 100 hectares of mangroves are restored within two years. If the NGO exceeds its target by restoring 150 hectares, investors might receive a bonus return of 6%, incentivizing both financial and environmental performance.
Case Study: The Forest Resilience Bond, while focused on forestry, demonstrates a similar model that could be applied to blue economy ventures. In this case, private investors are repaid based on the success of ecosystem restoration efforts, with public agencies stepping in to cover costs if milestones are missed. By tying financial returns to environmental outcomes, this model reduces investor risk while promoting impact.
Step 4: Reducing Perceived Risk Through Public-Private Partnerships (PPP)
Public-private partnerships (PPP) play a critical role in blended finance by sharing the risk burden between government entities and private investors. These partnerships ensure that risks are distributed more evenly across stakeholders, thereby reducing the risk profile for venture capitalists.
Key Metric: Private Investment Mobilized per PPP Agreement – This metric tracks the amount of private investment secured for every public-private partnership agreement established. A higher level of private capital mobilization suggests that the PPP is successfully reducing risk and attracting investment.
Milestone Example: A blue economy startup focused on marine renewable energy could enter a PPP with a government agency to install offshore wind turbines. The government provides a $5 million investment to cover early-stage project costs, while the startup secures $15 million in venture capital. As the project scales and demonstrates viability, the startup can attract additional private investment without relying on public funds.
Case Study: The Sustainable Oceans Fund, managed by Althelia, uses a PPP approach to invest in scalable marine projects. By combining public and private funds, the fund reduces risk for private investors while delivering environmental and social benefits. This model has helped finance multiple ventures across fisheries, aquaculture, and coastal infrastructure, providing a blueprint for reducing risk in blue economy ventures.
Step 5: Implementing Pay-for-Performance Models to Reduce Investor Risk
Pay-for-performance (P4P) models, where investors are only compensated if certain performance milestones are met, align financial returns with project outcomes and reduce upfront risk for investors. These models can be especially effective in blue economy ventures, where environmental or economic milestones can be clearly defined.
Key Metric: Performance-Based Return – This metric tracks the return investors receive based on the achievement of the specific project milestones. A higher performance-based return indicates that the venture is achieving its environmental or financial goals, making it a lower-risk investment for venture capital.
Milestone Example: A startup focused on ocean plastic waste reduction could implement a P4P model where venture capitalists receive returns based on the amount of plastic collected and recycled. If the company achieves a target of recycling 1,000 tons of plastic within the first year, investors receive a 5% return. If the target is exceeded, they may receive a higher return, incentivizing strong performance while reducing initial risk.
Case Study: The Environmental Impact Bond (EIB) for stormwater management in Washington, D.C., is an example of a P4P model applied to environmental outcomes. The success of the bond was determined by the environmental performance of the project, providing a precedent for blue economy ventures to adopt similar models that reduce risk for private investors.
Step 6: Utilizing Concessional Equity for Early-Stage Financing
Concessional equity, where public or philanthropic capital is invested at terms below market rates, is an effective way to provide early-stage financing to blue economy ventures. This form of blended finance reduces risk for private investors by lowering the venture’s initial capital requirements, thereby making it more attractive for venture capital.
Key Metric: Private Capital Raised per Dollar of Concessional Equity – This metric assesses how much private capital is raised for every dollar of concessional equity invested. A higher ratio suggests that concessional equity can be effective in reducing risk and attracting private investors.
Milestone Example: A startup focused on sustainable aquaculture could secure $2 million in concessional equity from a philanthropic foundation. This initial funding allows the company to scale operations, and within two years, it attracts an additional $8 million in venture capital from private investors. The startup can then use this capital to expand production, demonstrating reduced risk and growing investor confidence.
Case Study: The Blue Economy Challenge, funded by USAID, used concessional equity to support early-stage aquaculture innovations. This approach enabled startups to attract follow-on investments from private investors, reducing the financial burden on early-stage ventures while promoting scalability.
Reducing Risk and Attracting Capital through Blended Finance
Blended finance is a powerful tool for reducing risk and attracting venture capital to the blue economy. By strategically combining public, philanthropic, and private capital, startups, nonprofits, and NGOs can create scalable, sustainable business models that appeal to investors.
Whether through concessional funding, public-private partnerships, or pay-for-performance models, blended finance mechanisms provide the necessary risk mitigation to unlock private capital and drive growth in the blue economy.
As Achim Steiner, Administrator of the United Nations Development Programme, has said: “Blended finance can turn billions into trillions for sustainable development.”
By leveraging blended finance effectively, blue economy ventures can attract the capital needed to scale their operations, protect marine environments, and generate financial returns for investors.
Sources:
Global Environment Facility. “Mobilizing Private Investment through Blended Finance.”
Seychelles Blue Bond. “Harnessing Private Capital for Marine Conservation.”
Environmental Impact Bonds. “Pay-for-Performance Financing for Environmental Outcomes.”
USAID Blue Economy Challenge. “Concessional Equity for Aquaculture Innovations.”