Project Management . Capital Raising . Renewable Energy

If there’s anything you do not want to be in a post Covid-19 World is a growth oriented, early stage Kenyan entrepreneur raising capital; an undertaking that already proved challenging before the pandemic, and now even more so uncertain. The fundraising dilemma grows, the further away your business model is from the conventional sectors such as real estate, education, agriculture and the likes.

An example of a non-traditional sector is off grid energy. A sector that local banks are yet to wrap their heads around and one that has a disproportionate representation of foreign backed investors. For such local enterprises, being able to close an investment round would be considered a miracle to say the least. A recent WRI Report  candidly observed that “The top 10 Solar Home System (SHS) market leaders worldwide raised about $1.1 billion since 2010. The top 10 mini-grid developers worldwide raised $190 million. Altogether, 20 companies raised 76 percent of total disclosed investment....Impact investors were criticized for investing only in foreign-owned companies and not local entrepreneurs, particularly in Africa.” 

A Hybrid minigrid installation in an un-electrified community. Photo Credit: Green Leaf Technologies
A Hybrid minigrid installation in an un-electrified community. Photo Credit: Green Leaf Technologies

This article explores the fundraising challenges faced by local entrepreneurs and provides recommendations  on how investors can better support them:

A trip down memory lane
There is a common argument that most energy access and impact investors have against banking on the local entrepreneur:  Your usual local founded business is prohibitively risky for the above market returns expected. While this statement has some validity, it is important to put the argument into perspective. There’s been a fair share of business failure from the local entrepreneurial pool as well as insolvencies from foreign owned off-grid energy companies. Some of which had been heavily capitalised with multiple rounds of equity investments years preceding their quiet exits. Some of the notable names that fell off in hard times include MobisolBarefoot Power, Solarkiosk, Newlight Africa. This humbling statistic underpins a challenging last-mile distribution energy business model that is not only unique to local entities but to the sector at large. So investors’ perception of risk should be overlaid by business economics such as product-market fit, team capacity, business processes, pricing and the macro landscape as opposed to where the parent entity is incorporated and blitzscaling. This could improve transparency in fundraising as local companies would feel that they have a fair shot while at the negotiating table.

Sometimes, it is easy overlook the challenges within an enterprise and blame it on race. Our work with some local business owners has underscored challenges with timely communication and formalization. We have seen local entrepreneurs who failed to provide feedback to their investors early enough resulting to mistakes that could have been avoided.  Lack of clear cut or timely communication is often grounds to breed mistrust. A Scholar once said that all ambiguity is interpreted negatively. Maybe it is because of aspects of our African culture - to speak only when necessary. Additionally local companies should enhance their attractiveness to investors through improved processes, governance structures, record keeping and branding.

So is there a need to pivot?
The long and the short answer is - yes. Companies need to pivot but so do investors. Here are some of our thoughts on the “how”; 

For investors #1 - There's a need to redefine the term “impact”; For instance, is impact what you look for or what you create? Isn’t investing in a local company impact in and of itself or is it just a means to an end? The danger is the term impact may end up being another cliche in the long list of business jargon. Recently, there’s been an increasing concern of green washing by fund managers as noted by a well cited PWC study that observed that the number of ESG funds could outnumber the conventional funds by 2025. 

For investors #2 - There’s also a need to reimagine the African funding experience. Truth be told, the current VC model has a lot of semblance with the structure in San Francisco, London and other global financial or tech hubs. The typical archetype of such transactions is a focus on 10X+ growth multiples and the insatiable appetite for market share as a path to achieving viable exits. This could be a possible reason to some of the solvency issues in the energy companies above. Such investors often push entrepreneurs to continuously scale as opposed to focusing on profitability and unit economics. Markedly, for the most part, East Africa’s local early stage entrepreneurial journey has been devoid of institutionalised venture backed growth stories. Majority of local start-ups may not be cognizant of the modus operandi of such investors when shopping for funding.

It is easy to dismiss the Equity bank story - a Kenyan bank that has captured the imagination of the  mass market through scaling deposits and loan products -  as that of an outlier. Its early growth was fuelled by a combination of its shareholders, local investors and bootstrapping of its proceeds before eventually going public. These ultimately gave it the liquidity it needed to attain a sizable market share and eventually went public. It is no scaling cautiously across the Eastern and Central Africa, For most local entrepreneurs, outside their own savings and seed funding from friends and family, the only way they know how to scale is bootstrapping their business.

What this essentially means is that some of these businesses end up failing not because of anything to do with their business model, competition or even profit margins but rather liquidity issues. For instance, a six month payment delay by a key customer may be all that takes to bring a local business under with Covid-19 clearly proving this.

The energy access sector and its nexus with agriculture and water is well positioned to improve African economies particularly given its role in promoting rural development. Sustainable and innovative business models around deployment such as mini grids, solar home systems, and productive use appliances like solar water pumping, solar irrigation pumps and cold storage carry a ripple effect potential. Energy can be used to expand access to education, increased farmer incomes, financial inclusion for women and youth through internet access, and partnerships between the rural farmer and the global market among other potential benefits. As these underlying technologies improve thus making the cost of electrification cheaper, innovation and reality on the supply side of capital also needs to happen to make this growth potential a reality. 

In summary, all the above arguments show that for a successful early stage financing ecosystem to emerge that caters for the needs of local entrepreneurs, a significant mind shift is needed. A simple cut-and-paste approach from Silicon Valley’s anatomy won’t work. Safaricom’s Spark Innovation Fund, KCB Lion's Den, a Kenyan equivalent of America’s Shark tank, Pezesha, a digital platform that connects SMEs to capital and even the proposed startup bill 2020 are just some of the positives emerging but more is still to be done. We’ve barely scratched the surface! 

Opinion By:
Wanjohi Theuri