Path to Profitability, an investors’ perspective: 5 key takeaways

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Image: FINCA International | A. Wright

For the last four years, GOGLA together with Solarplaza has organized the Unlocking Solar Capital Conference (USCA) in different cities around the world to speak through the challenges, especially in finance, in the off-grid solar sector. This year, USCA comes to Dakar, and with it are well-curated conversations regarding various burning issues in the off-grid solar sector.

In the run-up to the event, we organized a webinar to unpack investors’ perspectives around the path to profitability in the sector. Together with Leslie Labruto (Acumen), Eda Henries (Persistent) and Geoffrey Manley (CDC), we discussed some of the sector’s most prominent topics, including sustainability, sector unit economics, scalability and growth.

About ten years in, the off-grid solar sector is nascent enough to remain malleable and adaptable to change, but it has also grown enough to understand profitability and the journey to attain it. Profitability remains an elusive goal for many companies that instead have been pressured to achieve growth at high speed. Concerns around unit economics and business models have been raised by multiple investors, who have different approaches to profitability. This is why, before discussing business models or even scaling, we began by unpacking the meaning of profitability. Here are our five main takeaways from the conversation:

1. “Path” is the keyword

It can be very difficult for a series A company to be profitable in the short term. However, impact investors are interested in the path that founders have mapped out for their companies. It starts with positive unit economics. It is important, from the onset, that companies focus on being ready to absorb investment, by figuring out their costs, both in their expenses and in the cost of products to consumers. The focus should be on being cash-flow positive –  not only EBITDA positive, from the beginning. Profitability can also be seen as the company being ready to reach its next phase of investment or reach scale the way its business model and cost structure are currently organized.

2. Scalability does not equal profitability – but a certain scale is necessary

Even with positive unit economics, a certain amount of scale is needed to cover fixed overhead costs. One of the main challenges is that as solar home system companies scale, costs may not be constant, and companies incur costs of expanding to new geographies or investing in infrastructure and distribution networks, even within existing markets. Broadening the customer base may also require additional investment to account for credit costs and bridge working capital.

In order to make sure the product offering is still relevant for the customer base’s needs, it is important to revise the pricing models every so often, which would require a certain level of information and data collection that a lot of companies struggle with at the moment.

3. Growth is no longer at the center of the discourse

Up until 2016, the conversation was very focused on growth, today the focus has shifted toward profitability. It is a wider belief that companies would achieve profitability at around 7 to 10 years’ time and we would start seeing exits at that point. These are companies serving difficult markets and the business model that you need to execute is going to take a lot longer to reach scale. Market leaders have grown at a rate that some investors feel comfortable with. The way some investors see it, larger numbers are less impressive than stable growth and a good grip on their cost structures, business models and customer base.

“As long as we continue to capitalize the right companies, the timeline has actually been very spot on. 20 years would have been tough, 4 years I’d say we’re being impatient.” – Leslie Labruto, Acumen

4. Business models are a large part of the mix

Beyond the difference in cash cycles of PAYGo business models versus cash sales, there are many factors coming into play. The last years have seen the segmentation of value chains and a focus on distribution that can potentially lead to better control of overhead costs and, eventually, to new or improved ways of serving customers, considering that the remaining 840 million without electricity are going to be even harder to reach.

There is a tension between impact and financial performance that many social enterprises might be familiar with, and both companies and financers will need to think about access to finance in the space differently.

“Companies (that can unbundle) have achieved a comfortable position in around 4 to 6 years, they are reaching a broad range of customers at a steady pace.”  – Eda Henries, Persistent

5. Lessons learned by investors

For Acumen, a lot is about the right capital at the right time. When debt wasn’t available yet, companies relied, perhaps overly, on equity. This seems to have balanced and there seems to be parity between equity and debt.

CDC’s Geoffrey Manley says there is still a long way to go, but they continue to believe the focus on local currency is critical.

For Persistent Capital, when it comes to making good bets, there really hasn’t been alarming situations, but they emphasize the need for the sector to focus on the product-customer fit.

Overall, there is a need for flexibility so that companies can be agile to address the challenges they face, as the sector moves to where it needs to be.

You can also read more on the topic in our blog 7  answers to your questions on profitability in the off-grid solar sector.

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