By Cindy Nawilis, community & operations lead
Here’s a recap of some interesting news and releases in the off-grid renewable energy sector. If some of it is old news to you, then give yourself a pat on the back for being ahead of the game:
Stay tuned for another one of recaps next month!
Here they are on a map. Did you think it was coincidence that SunFunder currently focuses on the East African market?
From the latest International Energy Agency (IEA) report:
By Cindy Nawilis, community & operations lead
Much of what’s discussed about solar energy in developing countries revolves around the needs of those living without electricity. While that is undoubtedly the most important factor driving the clean energy access sector, it’s also crucial to address the needs of the solar energy entrepreneurs that are working to solve the global energy poverty problem. These clean energy entrepreneurs do everything from designing and manufacturing solar kits to providing solar energy as a pay-as-you-go service that makes using solar technology as cheap (if not cheaper) than using a kerosene lamp. In all cases, unelectrified communities around the world can reap the benefits of solar technology at a significantly higher rate if those entrepreneurs run successful businesses.
The biggest challenge cited by clean energy access entrepreneurs is lack of access to finance. This not only was repeated in Lighting Africa’s annual market trends reports, but also concluded by a number of organizations and think tanks that have done research into the off-grid and grid deficit market.
From Global Partnerships’ blog:
With strong consumer demand for solar lighting products, one of the main challenges for social enterprises that are trying to reach the most remote populations with solar lamps is the lack of working capital available to purchase products. […] Long lead times require solar distribution companies to order product long before they have sold their current inventory, causing a persistent capital crunch. As a result, distributors often do not order enough product to consistently meet demand, and have scarce resources to invest in a salesforce to drive future demand. This situation impedes growth, and represents the greatest bottleneck in the supply of solar lights today.
From World Resource Institute’s blog:
Late last year, WRI gathered East Africa-focused social entrepreneurs and investors in Uganda to identify potential solutions to the finance challenges facing the distributed clean energy sector. The biggest challenge cited by most of the social enterprises was a lack of working capital. While most had been able to put together enough initial funding to develop pilot projects that demonstrate the viability of their business models, securing the financing to scale up operations has proven a challenge. Participants noted that commercial loans in East Africa often come with interest rates above 20 percent, with collateral requirements up to 150 percent of the value of the loan. These requirements are not feasible for enterprises looking to rapidly scale up the delivery of energy services.
Our team has known about this issue facing clean energy entrepreneurs through previous experience before joining SunFunder. For example, Ryan founded SunFunder while working with off-grid solar companies in SE Asia and India in early 2012, where he was struck by the need for new financing solutions to make an off-grid solar revolution possible. Cofounder Audrey performed market research for energy access impact investor E+Co and also recognized that access to finance is a great need for the market. Our newest team member, Andrea Griffin, worked with Orb Energy, a main solar installer in India, also knew to what extent capital constraints from long lead times of purchase orders can hinder the company from meeting customer demand.
Now we work together to provide short-term, working capital and project finance loans for solar lighting, phone charging, micro-grids and commercial solar projects. Because we understand where clean energy access entrepreneurs are coming from, we are able to tailor our financing services to meet their needs at every stage of enterprise. One way we do this is using the Master Loan Agreement approach with all solar partners. Through a Master Loan Agreement, we’re able to execute multiple project loans at different amounts and at different terms, ensuring our debt financing meets our partners’ changing capital requirements at the right time.
The SunFunder and SolarNow team in Uganda.
For more information becoming a SunFunder solar partner, check our Partners page and contact us at firstname.lastname@example.org.
Congratulations to our solar partner Mera Gao Power for being selected as one of World Economic Forum’s 2015 Tech Pioneers!
In March, SunFunder launched our first solar project in India with Mera Gao Power. It was also our first foray into micro-grids, whose impact is village-level rather than household-level. The project raised $30,000 in 22 days.
Seeing that more and more energy practitioners are now eyeing micro-grids and mini-grids as the next evolution in clean energy access markets, we’re sure the Mera Gao Power team has much to look forward to (and prepare for!).
By Cindy Nawilis, community & operations lead
The pay-as-you-go (PAYG) model has been applied by a growing number of off-grid solar companies and has evolved quite significantly since we launched a PAYG solar project with Angaza Design in late 2012. Thanks to a recently published paper by CGAP, we can now understand how this model has performed in different countries through various implementations and how it could be further improved to deliver affordable energy access to even more people worldwide.
Here are some key statistics from the paper that we think highlight the potential PAYG model holds for the growth of solar in emerging markets:
Angaza Design and Fenix International, both of which are SunFunder’s solar partners, are used as case studies of companies that have innovated the PAYG model with mobile money payment integration—a key factor in the rise of digital finance in developing countries. Other companies highlighted in the paper are Off:Grid-Electric, Mobisol, divi Power, and Simpa Networks.
We highly recommend reading the study as it provides valuable and in-depth insight into the advancements in PAYG model and product offerings as well as the energy access sector. You can download the paper from CGAP’s website.
This week a couple new videos about off-grid solar technology for energy access in Africa were released. We throw in a bonus video for you to see solar through the end-user’s perspective:
The US Agency for International Development has released the video series to show what living in energy poverty for the Power Africa initiative, which we are a part of. It’s a 5-part series of individual testimonies of what living off-the-grid is like in Sub-Saharan Africa. The video titles highlight the difficulties of living without electricity:
Hear from healthcare practitioners, mothers, students, and teachers themselves on how access to electricity could greatly improve their lives and help them reach their dreams:
The Consultative Group to Assist the Poor (CGAP) produced a video that follows the work of two of SunFunder’s partners in Kenya: Angaza Design and SunnyMoney. It shows how pay-as-you-go solar is a great option for people living with no access to electricity but use mobile money for everyday transactions.
BBOXX, another partner of SunFunder, has released a TV commercial geared toward solar home system customers who have unreliable access to electricity and frequently experience black-outs. For those living off-the-grid, being able to power a TV inside their homes is an aspiration. With companies like BBOXX reaching remote areas, having a solar powered TV is a reality not so distant in the future.
SunFunder only lends to solar partners that pass our rigorous diligence process. Despite the high quality bar, we have a huge pipeline of partner companies and this list is constantly growing. To date, people like you have invested in 18 projects that total to $324,000 and we have had 100% repayment rates so far.
However, the unpredictability of a crowd project’s timing can sometimes be problematic for our customers. The way crowd projects has worked in the past is that we first decide the loan size, then we put the project up for the crowd to invest in. Then it can take anywhere from 15 days to 2 months for the project to get fully funded. As solar distributors and retailers, our partners need to plan ahead for inventory purchases, taking into account estimated time for shipping and customs, to ensure business runs smoothly at all times. The timing of funds becomes key, and the uncertainty around timing is a barrier for many solar partners. This is why we have been putting up crowd projects at a slower rate than what our community wants.
We can solve the crowd investment timing problem with pre-investments. You can pre-invest today in the next solar project. When the project gets fully funded, our team will match it right away to the best candidate for the next loan. With consistent pre-investments, our team can continuously and more efficiently perform diligence work on our pipeline of solar partners. This helps maintain our standard of high quality projects for the crowd to invest in while ensuring we can deploy more project loans using crowd investments.
You will be pre-investing in projects similar to the ones we’ve funded before, which will have loan terms of 18 or fewer months. You will also be able to monitor which projects your pre-investment has been used for in your account activity when you log in and on your email updates. In other words, all other activities surrounding your investment are the same as they have always been.
Consider making a pre-investment for solar in emerging markets today!
By Audrey Desiderato, cofounder and COO
In May, SunFunder received a thoughtful question via Twitter from Antony Bugg-Levine of the Nonprofit Finance Fund:
#learnfromdoers. I like that. E+Co’s Founders took many first steps for the impact investing world, and we should learn from the organization’s successes and failures, rather than sweep these under the rug.
Disclosure: Phil LaRocco (Founder of E+Co) has been an important mentor to me, largely responsible for my leap into the entrepreneurial realm to find a solution to energy access. He was my professor at Columbia University’s School of International and Public Affairs, and I served as the LaRocco Fellow at E+Co after completing my Master’s degree from Columbia University from July – November 2010.
(Phil and I at the E+Co Global Meeting, November 2010)
Some background information on E+Co:
Launched in 1994 with support from the Rockefeller Foundation, E+Co made equity and debt investments in small and growing businesses focused on clean-energy technologies in developing countries. Working with over 220 entrepreneurs, E+Co made 287 investments totaling over $45 million in 36 countries within Africa, Asia and Latin America. E+Co brought clean energy access to more than 6.2 million created 5,300 jobs and offset 4.6 million tons of carbon. E+Co paired seed and growth capital investments raised from primarily DFIs, and also impact investors through the issuance of notes, with Enterprise Development Services provided by regional team members.
In 2012 E+Co ceased operations as a nonprofit financial institution and transferred ~$30 million loan portfolio to private-equity fund managers. $5 million of E+Co’s African investments, would be managed by the for-profit spinoff “Persistent Energy Partners”. David Bank’s article in Impact IQ details how bad loans drove E+Co out of business.
E+Co’s Co-Founder Christine Eibs Singer believed that the restructuring plan was not the only option, nor did it solve the issue at the core of E+Co’s mission: how to create “bankable” deals. Over time as E+Co’s volume grew, it became increasingly challenging to fund the technical assistance necessary to de-risk investments. Sadly, the narrative that emerged during the end of E+Co damaged its reputation. However, more focus should be placed on what can be learned for others seeking to provide financing to scale businesses in emerging markets.
It’s important to start off by highlighting the ways that SunFunder differs from E+Co. SunFunder is a solar finance company that provides short-term, working capital and project finance loans to off-grid solar companies. We do not dabble in equity, and remain focused technologically and geographically. Neither do we offer seed capital to companies; we require a certain amount of track record and focus on financing scale.
1. Start with a for-profit model
E+Co’s early entry into the market, and its mandate to provide capacity building services to entrepreneurs meant that at its founding it was structured as a non-profit. We can’t overlook the pivotal role E+Co’s “enterprise development services” had on launching entrepreneurs like Toyola in Ghana. As E+Co grew and morphed from a more grant-driven to investment vehicle, its organizational structure and systems struggled to transition in time. Learning from this, and because the landscape has since evolved, we decided to launch SunFunder as a for-profit entity to design and implement a model that is sustainable over time. Perception-wise, it also sets clear expectations to borrowers from the onset that we too are a business, and our success depends on getting repaid. With the help of an OPIC ACEF grant, we’ve engaged local counsel and consultants to improve our loan documentation and diligence requirements. We also believe that an efficient communication platform and systems are key to our success. Early on, we brought on a 3rd Co-Founder who specializes in product development, systems design and software engineering to optimize and automate processes through technology.
2. Overcome data gaps
Still, the sector remains young and most of the companies in this space do not have the resources or capacity to furnish us with an ideal level of financial and customer data. This is major problem that E+Co faced, and it is one that we and other SME emerging market investors continue to face. Technology is changing things in our favor. A number of well-capitalized, foreign-run companies have implemented sophisticated ERP and CRM systems for data collection. Pay-as-you-go technology is also gaining traction in the sector. And we predict that others will follow suit as software and hardware becomes more accessible and affordable. In the meantime, we may have to do some of that data gathering work ourselves (which takes more time), and are also exploring developing our own tools that can be used by our borrowers. Furthermore, allowing for flexibility through a tranche-approach helps us move the needle in the face of missing data. Our approach is to start with a small loan and to only re-loan to success while building our borrowers’ “track record”, and a working relationship.
3. Be close to your investments
As Phil’s student, I’d repeatedly heard him say that an important part of risk mitigation is “to have tea with the entrepreneur and their family, in their home”. I joined SunFunder full-time in December 2012 as Ryan’s Co-Founder, and moved to Tanzania in January 2013. I can casually pop by into one of borrower’s points of sale to verify the reporting information I’m receiving from management. Being close to our investments helps us be the first to know what’s going on in case of impending defaults and come up with a Plan B. Legal costs and the realities of collections can be prohibitive, and you want to make sure that you are in a position to get paid back first in difficult times. Relationships matter, and are a crucial supplement to spreadsheets when gauging the trustworthiness and commitment of an entrepreneur.
(My colleague Dustin, in a SolarNow franchise we spotted while driving back to Kampala from Western Uganda, April 2014)
By the way, SunFunder is hiring in East Africa. Check our website for job opportunities.
4. Creating a financial eco-system
As a business based on scale, we have heard repeatedly that the biggest risk to us is finding enough ‘bankable deals’. The off-grid solar sector lies between development and commercial finance, and the area in between is hard to navigate for both enterprises and investors. SunFunder strives to be that bridge. Our loan agreements range from $50K to $500K, with individual disbursements ranging $10K to $250K. With a couple of our borrowers we decided to launch our partnership with a small loan on the crowdfunding platform. This acts as a catalyst for graduating borrowers to a Solar Empowerment Fund loan once their capital needs go beyond a $30K loan. The first loan allows us to build a relationship and track their performance to better assess them for subsequent loans. We also need to foster increased coordination with other investors, rather than compete for the same deals. Matching capital sources and services with business life cycle, coordinating on diligence, milestones, timing, and use of funds can accelerate the speed at which a company moves through that in-between area. Additionally, we are in the process of collecting information on other challenges our borrowers face in scaling to eventually provide important value-add services supporting our loans.
This last “lesson learned” is in my view the most important, and two-fold.
A. Match investor expectations: Another piece of advice Phil gave me is that the obstacle is no longer “access to finance” but finding the right “financial match” for our borrowers. Bruce Usher, former E+Co Board Member, advised that the investor expectation mismatch was a serious issue that we should address early on. (1) How do we structure a product on the investor side that fits with our borrowers’ profile risk? (2) How do we bridge the 2 capital types (catalytic and commercial) we are raising? We know that robust communication between our fundraising team in the U.S. and the deals team in Africa is a first step (I talk to my US team at least 3x a week). But to be completely honest, this is one that we are going to be figuring out as we grow.
B. Match your board, staff and advisors to the realities of your business model. With the induction of new board members and advisors, E+Co was pushed into a direction of fund management and investment funds as the path to sustainability. However, some may argue that this approach played to weaknesses in experience rather than core competency. This was perceived as mission drift by some and caused rifts within the organization and undermined team cohesion. This might be the most important lesson learned from E+Co for any start-up, particularly as we start to grow our team and form a formal board of advisors. This means bringing on strong board & team members, engaged (and relevant) advisors and investors that add real value while understanding market realities. Our management team needs to ensure that ALL team members understand our mission from a customer’s perspective and how it fits with our vision. We will also need to perfect the art of setting clear processes, decision-making structures, expectations and accountability to ensure that execution, growth and mission remain aligned and that our core competencies are strengthened over time.
By Cindy Nawilis, community & operations lead
Last week the Global Off-Grid Lighting Association (GOGLA), in collaboration with A.T. Kearney, released an finance and investment study of the global off-grid market. The report makes clear that the off-grid lighting industry’s rapid growth can be further enhanced and accelerated by adequate financing. Adequate financing in the off-grid space makes sense not just for financial returns, but also for more tangible societal benefits that helps fight energy poverty. The report can be accessed here.
Since SunFunder launched in 2012, we have been vocal about the tremendous potential that the off-grid solar market holds based on the data we’ve found. This latest GOGLA report validates what we’ve been saying since two years ago.
The report estimates an annual market of up to $2.7 billion for solar pico lighting products (including lanterns and plug-and-play systems) and $6 billion for larger solar home systems. Compare both markets to what the 250 million off-grid households currently spend on fuel-based lighting (such as kerosene and candles): $30 billion. If all 250 million households would switch from kerosene and candles to solar pico lighting products today, about $27 billion would be freed up, which give the poor additional purchasing power for education, health, and other investments to increase living standards. And this is strictly for the off-grid/kerosene market—the report does not get into the grid-deficit/diesel market, which SunFunder has an eye for.
The report also projects that the off-grid lighting market will continue to grow to up to $50 billion because of three megatrends that drive the demand for off-grid lighting products:
Number 3 in particular is one that SunFunder CEO Ryan Levinson has talked about in a GigaOm article back in 2012. People will need a better way to charge phones than the options available to them today, which sometimes is walking miles to a charging station to charge phones with a car battery, and every year the number of people in this category will increase. This graph illustrates the drastic gap between mobile phone users and lack of electricity:
If solar energy is so poised to take off in emerging markets, why hasn’t it done so in a big way?
From day one, SunFunder’s work is solving a barrier that we know is needed to unlock a solar revolution in emerging markets: increase access to finance for solar companies. The GOGLA study also reported that the one market barrier that is agreed upon by both investors and industry players is lack of access to finance for solar firms. As the report says: “Although there is interest from capital providers to invest, as the environmental and social impact is in most cases clear, the greatest difficulty appears to be ‘matching’ requirements from financing providers to the company profiles.”
SunFunder’s work in the last two years has positioned us to be the leading solar asset finance company to match commercial and impact investors with energy access projects by solar companies in emerging markets. We started in 2012 as a crowdfunding platform and raised $169,000 by the end of 2013 from hundreds of crowd investors. In 2012, we quickly learned that the demand for working capital from solar companies can’t be dismissed. We also learned that there is untapped, private capital interest to complement crowd money as working capital loans for solar companies in emerging markets.
Moreover, the potential market for such investments is huge. The graph below from the recent GOGLA study shows that the industry’s capital requirement along the value chain. So why isn’t the money flowing into the space?
There are several reasons, which the study explores, but our team has found that the main reason holding most investors back from investing is the lack of market knowledge and local expertise to make informed investment choices in solar companies in emerging markets. Since many of the solar companies are startups, they also have short track records to show. This in turn drives investors to perceive investments in emerging market solar businesses as riskier than the economics prove. Another barrier is the varying investment deal sizes that are available from impact investors and foundations versus what is sought after from solar companies. The GOGLA report states that “the average ticket size sought by [off-grid lighting] industry is $900,000. This is considered subscale, as a minimum ticket size for [impact investor funds] is normally $2 million or more.” An innovation financing solution is needed to cater to both sides, and SunFunder has already begun to refine our solution before GOGLA released its set of suggestions.
To complement our crowdfunding activity, SunFunder launched Solar Empowerment Fund (SEF) in Sept 2013, offering a rare opportunity for accredited and institutional investors to invest in a diversified, vetted, and high-impact portfolio of off-grid and grid deficit solar projects with an attractive risk/return profile.
We are now in the process of fundraising for SEF II, a $5 million facility with an initial $1 million Solar Note issuance that closed in April 2014. SEF II investors benefit from:
To date, our SEF investors have had 0% default rate on their loan portfolios, and repayments from solar customers across the board (including crowdfunded projects) have all been paid in full and on time.
SunFunder alone won’t address the entire near-term capital need of the off-grid lighting industry. But as the size of our Solar Empowerment Fund grows, so will its impact on how the market gets financed over time. We are driven by our goal to prove that solar energy in emerging markets is bankable.
Due to regulations, you need to be an accredited investor and send an inquiry to participate in SEF. You can inquire at email@example.com.
We made it to African television! Check out this CCTV Africa clip on SunFunder, featuring on-the-ground interviews with staff members of partner SolarNow in Uganda as well as with people who have benefited from solar energy: