How local companies accelerate universal energy access
Mar 03, 2022
Laura Fortes, Sarah Bieber, Federico Hinrichs
As part of the Global Off-grid Solar Finance Summit in December 2021, GOGLA, supported by GET.invest, organized a virtual boardroom to understand investment barriers in the Off-Grid Solar sector towards locally-owned and managed companies. The boardroom, in partnership with Acumen and Global Distributors Collective, convened off-grid energy investors, development partners, and locally owned companies to share perspectives and experiences. This blog shares the highlights of the discussion and summarizes next steps for the sector.
The off-grid solar sector has attracted more than $2 billion in investment commitments and reached more than 420 million users. Yet, a study from Acumen finds that most of the investment is concentrated in a few companies led by expat founders. Of the 10 SHS companies that raised 84% of total global energy access investments between 2010 and 2018, 8 of them operate in Africa. All of those companies have non-local founding teams.
While underrepresented in investment, companies owned and led by locals (local companies) have a significant role to play in achieving universal access in a way that is sustainable. Local founders know their homes, and have contextual knowledge that is invaluable in designing, distributing, and marketing products or services. Because of this, local companies may be better placed to address last-mile and harder-to-reach populations.
The following recommendations are a summary of a dialogue amongst locally owned companies, investors and development partners in the context of the summit, to identify ways to work together and step closer to each other:
Believe in the local founder’s vision
Local companies hold valuable market intelligence, they are close to the customers and hold deep market knowledge. They typically know what it takes to scale and reach more customers and can be leaner and more agile than their international counterparts.
Nevertheless, investors shouldn’t expect these companies to have everything in place when they’re still young. They need to evaluate the founder and the management team by assessing their potential to build their business. Only backing from investors enables companies to bring in the talent that they need to move the company forward.
Measuring impact, due diligence processes and local currency financing remain the main hurdles
According to one of the participating companies, many CEOs in the energy access sector are focused on tech, engineering and building up their businesses - and, as such, companies struggle to build the fundraising skills in their leadership team. One of the biggest barriers is that local businesses are not familiar with the due diligence and investment processes that investors require.
Furthermore, local companies are frequently measured according to Western-made impact standards when they are the best positioned to understand their local context and impact. One of the companies in the boardroom mentioned that they make an impact just by existing: ‘’Simplifying and streamlining the impact reporting and due diligence process would be a game-changer’’.
Accessing local currency financing remains a critical challenge for all types of off-grid solar companies, but local companies are at a further disadvantage. Given their typically smaller size, they do not have access to the larger debt facilities that benefit from foreign exchange risk mitigation, and have difficulties attracting interest from local banks.
Communication among financiers across the capital continuum is timely and critical. Continuous, local TA support is essential
The investment supply chain that is appropriate for local businesses can be difficult to navigate. More coordination among investors willing to support local companies is needed: grant providers, early-stage investors, crowdfunders, local banks, DFIs, and many others should be speaking to each other to capitalize on each other’s strengths.
There is still a long way to go to identify appropriate instruments for financing local companies. Efforts to create innovative financing packages that combine grants, equity and debt are underway. Speed is also critical, as companies find themselves in long due diligence processes to fund their businesses before they can expand.
Tailored, ongoing TA support, when possible from local providers, will be key going forward, especially to prepare companies in their pre-investment phase. Short term TA support is more harmful than helpful and should be avoided.
The lack of equity available in the market causes companies to rely heavily on grants
Grants play a critical role in supporting promising young companies, but they are not designed to build and grow commercial enterprises. Because grant financing is more easily available for local ventures than investment capital, there is a risk that it can skew the growth of the companies and the long-term development of the local venture capital ecosystem.
A recent study from EEP identifies that the focus from grants should be in de-risking the period when companies need to test the viability of their model, and attract follow-on investors.
‘’Companies rarely reach break even with a grant’’ an investor said – and there is a need to have capital providers lined up to pick up promising companies. ‘’Every company should have a strategy in place to graduate from grants and prepare to attract commercial capital’’.
With more coordination and more fitting capital, we can achieve Sustainable Development Goals
There is an unprecedented level of interest in investing in local companies across investors and TA providers; programs such as GET.invest Finance Readiness support and GOGLA’s Elevate are steps in the right direction for local companies to unleash their full potential in the energy access space.
Providing spaces such as this boardroom to have candid conversations among investors, TA providers and companies can help foster the growth of new companies and business models to meet the demand for electricity services and appliances.
With more coordination, innovative finance can unlock the potential of the next wave of local energy access companies tol bring us closer to SDG-7 and SDG-14.