Spotlight: Arctaris and Growth Debt Financing

By Connor Schoen

A conventional challenge for any start-up is not only gaining access to capital but also accomplishing this mission on terms that are favorable to their growth. While impact investing is commonly known for its efficacy in expanding access to capital, firms in this sector of finance have also turned to tackle the second problem. Namely, Arctaris, a 100-million-dollar impact investment fund manager headquartered in Boston has taken an active stance on providing growth capital on terms that are favorable to the companies they invest in.

On a call with HCIIG, Managing Partner of Arctaris, Jonathan Tower, emphasized the success of their “Growth Debt” strategy. This style of growth financing is “a blend between traditional bank debt and venture… [that] offers a flexible structure with variable payments that let companies grow without having to dilute ownership.” Essentially, the Growth Debt strategy allows shareholders to retain equity by utilizing royalties instead of the traditional financing methods employed by conventional venture capitalists and private equity firms.

According to Tower, this form of financing also alleviates the company’s pressure to sell while still closely aligning the interests of Arctaris and their investees. Unlike pure debt models, this blended system of royalties and debt ensures that both Arctaris and their investees strive towards the growth of the company. Moreover, another advantage of the royalty-based loan system of financing beyond equity retention for shareholders is that it involves “payments that hew to the company’s actual sales growth” instead of a fixed amount of debt to pay back.

Founded in 2009, Arctaris has been using this model over the past decade to start a variety of funds in Massachusetts, Michigan, and elsewhere. They are partnered with the U.S. Treasury Department along with a variety of state government agencies “to form fund programs with primary emphasis on economic development and jobs creation.” Some of their current investments include Planet FitnessBerkshire Hathaway Home ServicesAFCO Manufacturing, and, and–according to Tower–they are currently working to expand their portfolio with some larger investments this year.