Equity Investments in Off Grid Solar
with Leslie Labruto (Acumen)

In this episode, we speak with Leslie Labruto, Head of Energy Access at Acumen, about the equity investment landscape in off-grid solar. We discuss Solar Home Systems (SHSs), minigrids, impact investment, successful business models, and what makes a great investment for Acumen.

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Show notes and related resources:

Lighting the Way: Acumen report on exits in off-grid energy

Acumen Energy Sector: Acumen's work and portfolio in clean energy

Show notes:

  • (0:55) Introduction to Leslie Labruto and how she got into the clean energy sector

  • (2:20) Introduction to Acumen, their higher risk approach to investments, and commitment to the poor

  • (3:30) Overview of the off-grid solar sector: pico appliances, solar home systems (SHSs), mini-grids -- the ongoing challenges around mini-grid business model

  • (6:20) Discussion of the investment landscape in the off-grid solar sector, contrasting Mobisol, d.lights and positive signs from new funds (e.g. KawiSafi and Sunfunder); the need for more early stage investments

  • (9:20) Acumen's approach to patient capital, investments, 1x returns -- what they look for in an investment

  • (12:35) Acumen's energy investments to date; the challenge and need for solutions around clean cooking

  • (14:30) Productive Energy Use: the opportunities and need for solutions that can support income growth; their focus on Pioneer Energy Investment Initiative (PEII)

  • (17:30) The commercial viability of the off-grid solar sector, the need for operational excellence, strong unit economics for successful companies

  • (19:11) Considerations around exits in the sector: the need for secondary sales to support the growth of the investment sector, the catalytic effect of secondary sales; the role of strategics (e.g. Shell, Total, Engie) in the sector

  • (22:20) The intentions and interests of strategic, corporate investors in the energy access sector

  • (23:50) The challenges for the mini-grid sector in particular; the ability for mini-grid sector to target poverty alleviation; the need for subsidies in the mini-grid sector and reframing of mini-grids as a public good

  • (27:00) Results-Based Financing: demand from investors for RBFs

  • (29:15) Lean Data, 60 Decibels, and focus on customers to determine the social and environmental impact of products and services; the use of Lean Data for due diligence purposes

  • (32:50) Geographical areas of focus for Acumen

  • (35:10) Predictions for the energy access sector

Podcast Transcript:

Yi Jean: Can you tell us about your background and how you entered the energy access space?

Leslie: My pathway into clean energy was pretty unique: I was raised mostly by my grandmother and my mom, and my grandmother was a tungsten coiler for a light bulb company many years ago. She was really inspiring for me and watching her work in the harder manufacturing industry made me always want to be an engineer. So I studied engineering and when I was quite young I realised I wanted to commit my career to clean energy.

And that takes so many twists and turns: I worked in everything from Venture Capital and finance all the way through to development work at the Clinton Foundation. And because I saw the power that capital markets can bring to solutions, I found Acumen where the role is quite perfect, and made me think about how we could use venture capital in a way that serves the poor, and in the words of Acumen, “make capital work for us and not control us.”

Acumen is a nonprofit, a venture capital fund. Primarily, we're focusing on investing in companies and in leaders who are trying to change the way society works and change the way the world tackles poverty.

Acumen uses philanthropic-backed capital, so often grant capital, to make its investments. That means we can take higher risks than any other venture capital firm out there, and we therefore also don't necessarily anticipate return. So we can take the risks without having to prove a return to, say, an investor.

That said, we do want to invest in financially-viable companies and see market-based solutions grow. So we target a 1x return, which is our hurdle rate. And what also makes us different is our commitment to the poor: the customers that our companies are trying to serve are really, really low income in emerging markets, which are different compared to some of the customers that you might see companies serving in Silicon Valley.

Yi Jean: Typically, the off-grid solar sector is divided into three main subcategories: mini-grid, standalone home systems (SHSs), and pico solar systems and appliances. Do you agree with this categorization, and if you do, can you provide an overview of how these systems differ and the commercial viability of each of these sectors?

Leslie: I think the way you broke it down is how we think about it as well. There's usually off-grid products and the ancillary services, and then mini grids is a different system and certainly a different business model.

The way I would differentiate them is: we've really seen PAYGo (Pay As You Go) for the solar home systems and solar products take off and they haven't really needed too much large scale market-based support. Certainly, grants have played a role in boosting that sector to where it is today, but these systems can cost anywhere from <$10 to $300+ and the beauty of that business model is that once PAYGo emerged, a low income customer who couldn't afford a $280 system, could afford it if they only had to pay 20, 30, or 50 cents a day, and over 18 months to two years, they can own that system. That's really the difference - that's a true market based solution.

For those that don't know what these solar home systems are, it's usually a solar panel, quite small, a battery and maybe 2/3 light bulbs, and a phone charging port. It's something quite basic, but it gives a customer autonomy, and it gives them freedom. If they're able to pay off this system, they then become financially included and part of a financial system that they maybe wouldn't have been part of otherwise. They have a credit history so they can access other goods and services beyond just energy.

On the mini grid side, we're talking about infrastructure. And that is a key difference that people sometimes overlook. Many people think: "Well, if solar home systems could work, why not mini grids?" But mini grids have a big capital cost. We're talking quarter of a million dollars for, e.g. a 40 kW system. And, that matters, and particularly when we're trying to serve the poor. However, what we noticed though is that although they are expensive, the breadth of services a customer can get access to is much, much greater than just light.

You can use mini-grids to power a milling machine, or a small store: you have anchor tenants. It's a more of a community based approach. But it faces a different sets of challenges than the SHS companies.

Yi Jean: There's still a lot of discussion within the industry about how long-term and sustainable some of these business models might be. There's a lot of investment capital that has come into the sector, and many companies are raising tens of millions of dollars in this space. What are your thoughts about the investment landscape at the moment? Is it time to be excited or are people right to be cautious?

Leslie: I think it's such a momentous time. In 2012, we saw $50 million of investment into the sector, and in the last two years, that number's increased six fold to $300 million. So we're seeing more and more capital come into the market. And for a sector that's trying to do a lot of good in the world, that's a good thing. Of course, the market will have ups and downs in a shakeout, and you'll have the likes of Mobisol on the one hand, but d.light on the other side of the spectrum.

But we need to remember that these companies both were first mover companies and they had so much to figure out: to figure out that your business model which started off as just distributing lanterns, was also a credit business, and a distribution business, and a financing company, and a maintenance company -- these are very complex business models. And that's the light bulb moment (no pun intended!) that I think people are now starting to have.

Something that seems as basic as providing light to the poor is complicated when you're working in really tough markets. So what excites me is that incredible entrepreneurs are coming up with solutions.

When we talk about disaggregating that value chain, that's what it really means: people are thinking about better software solutions, more efficient distribution channels, more efficient hardware -- trying to find their niche and then scale within India, East Africa, and West Africa.

So, when I think about the capital coming in, I think we have growth capital in the right places. Acumen invests in seed and series A, which is early stage investment, and that's where I see the pioneer gap is still persisting. We did some work around this because ultimately we all want to see the full viability of this market and we found that when we look at the early-stage energy access landscape: to get to universal energy access by 2030, we need about $210m of Seed and Series A capital to get these countries, companies, and markets to where they need to be. However, over the last five years, we've seen a dismal $16.5m on average. So that is a quantum gap and early stage capital is the difference between the next d.light vs. a company that will never make it out of the gate.

Yi Jean: Acumen is obviously focused on impact, but still looking to make a financial return of 1x, as you mentioned. How do you think about the tradeoff between returns and impact, and what are you looking for in your investments?

Leslie: We built our model around patient capital: Acumen is willing to keep our capital in companies for longer than most traditional VCs. Since we're using philanthropically backed capital, we can keep our capital in a company for 7, 10, 12 years to take the company to where it needs to be.

Across our portfolio, on average, we're looking for a 1x return. We want to make our money back ideally, realising that there will be companies we have to write off, but there will also be great successes in our portfolio. We'll invest anywhere from $250,000 to $1,000,000 into a company, and we want to reserve capital for follow on investments.

There's really three things that we're looking for when it comes to making sure it's the right investment for our company:

The first and foremost, and I always want to lead with this, is moral leadership: when it comes to the intention of an entrepreneur, is their heart and mind and mission in the right place for why they're doing this? Are they trying to pick up on the trends of the sector and seeing lots of money coming in? Or are they committed to serving the poor in a specific market? And that moral compass is something that you can only tell with judgment, and by really engaging with an entrepreneur to see why are they doing this?

The second thing we want to see is that you have a product or service that's truly catalytic and which is struggling to find financing. I'll give you an example. One of our portfolio companies, EasySolar, were operating a SHS distribution business in Sierra Leone. Sierra Leone is one of the toughest markets in Africa: 89% of the people live under the poverty line, 90% of the country is unelectrified and there's virtually no mobile money. So add that to the fact that there was just Ebola, and a civil war that ended in the last two decades, and mudslides -- it is a pure red flag for any investor. And for Acumen, it was a total green light because we want to go to the markets that are really tough to serve with entrepreneurs that are trying to figure something out in a market that is really difficult.

The last thing we look for is whether your product or service is really serving the poor. So many entrepreneurs will have products and services that are impactful, e.g. residential solar in India or C&I solar in Kenya. We think that is incredible work that's needed, but it might not be where Acumen focuses if we're trying to find solutions that are going to be within reach for the poor, or those living roughly under $3.10 a day.

Yi Jean: Acumen has made a number of investments within the energy access space and that ranges from clean cooking to mini-grids and SHSs. Can you tell us more about some of the investments you've made?

Leslie: In the energy space, Acumen has made 24 investments, and so we've invested about $24.1 million into the sector. In addition to mini grids and solar home systems, we've also invested in the clean cooking sector.

Acumen was a first mover in this sector. We have six clean cooking companies in our portfolio, ranging from a distribution company, reaching last mile customers in India called Frontier Markets, to Burn Manufacturing, which is manufacturing cleaner cookstoves in Kenya, and an ethanol-based business in Nigeria, called Green Energy Biofuels.

So we've made a lot of investments in the sector compared to other investors, and clean cooking has had a difficult track record. Unlike solar where it's lower cost and the demand from customers is quite a pull, clean cooking requires a massive behavior change. You're asking a customer to purchase a product that challenges or changes their traditional behavior when it comes to cooking and their preferences.

We think that all eyes are on clean cooking: there's 3 billion people without access to clean cooking solutions which is damaging to their health, whereas there's about 840 million people now without energy access from an electrification perspective. So it's not that one is better or worse: we just need more talented minds and brilliant people working on clean cooking.

Yi Jean: Another sector that has a lot of interest is Productive Energy Use. Do you share the excitement around productive energy use or are you more cautious about it?

Leslie: Acumen is deeply interested in productive use technologies. And when I say productive use, it typically means a product or service that's helping a low income customer generate income. We're talking about appliances like irrigation pumps, agro-processors for milling grains, even solar sewing machines.

In 2017, Acumen launched our latest initiative, our Pioneer Energy Investment Initiative (PEII), trying to commit about $20m to the sector. What we're finding is that productive use technologies, while quite innovative, are still out of reach for the poor. And maybe it's intuitive -- a solar irrigation pump is more expensive than a solar panel just for light. These solar irrigation pumps can retail from $700 - $2,000, and for a really low income customer living under the poverty line, it's going to be out of reach.

So we're noticing that PAYG is doing more integration with these technologies, but they have to work on the manufacturing and also the distribution, maintenance, after sales support -- with a customer that's probably in a really difficult to reach market.

So we're seeing that there's definitely some more kinks that need to be worked out. We've made some investments in the sector already, e.g. in a company called Simusolar in Tanzania that's focusing on the distribution components. There are companies providing creative payment plans with a longer tenor, being more thoughtful about what the deposit will be, and really offering that aftersales support. But we're excited to keep watching the space, making investments and, as costs continue to drop, we feel that there's great promise for productive use, especially its role in helping poverty alleviation.

Yi Jean: Do you think the commercial viability has been established for many of these SHS companies?

Leslie: As we look at the SHS market, we've seen varying success with some of the early movers in the sector. A lot of that comes down to operational excellence, because there are skilled SHS companies that are now profitable -- and profitable means your business model's working, you have the unit economics right, and along the way, you're running an efficient business, generating cash flow, which are the early indications that a market's viable. A lot of it comes down to execution. On the solar system side, the demand is there, the growth is there. There's been a lot of capital to support these companies, but that's okay: we have to remember these companies are working in really difficult markets, serving very rural customers, so the fact that grants have played a role in scaling these companies is okay.

Yi Jean: What are your thoughts about exits at the moment? What are the challenges around having more, large scale exits? Is it a matter of time? Is it that people are still naturally hesitant around making investments into the sector and particularly into these geographies?

Leslie: We're doing a lot of soul searching and work on exits in the sector. We think it's something that's typically talked about mostly within the investor community, but not talked about enough. And I think the importance of speaking about exits is it shows the full potential viability of a market.

An exit is not a bad thing -- it's actually something to celebrate. If an investor is able to exit a company, it shows the cash can be revolved. We're actually going to be putting out a report on this, so I'll encourage everyone to read it. But some of the early conclusions that we're finding is that there's not a huge market or appetite for secondary sales (where an investor buys out the shares of an earlier investor). We're seeing that a lot of the growth stage investors tend to be DFIs, for example, and they have a mandate to support impact. And sometimes it's hard for a DFI to justify their capital going to buy an early stage investor when their capital's meant to go towards creating new impact. Now that said, what I think needs to be reframed is that it could be hugely catalytic because you're freeing up capital earlier in the market to support the next wave of entrepreneurs.

We're finding that the sector is still quite young, so while we want to talk about exits and plan for them, we do need to give the sector a bit more time to mature.

And lastly, we are seeing strategics play a role. We all saw the acquisition of Fenix and Simpa Networks, both in Africa and India respectively by Engie. Strategics are investing more in the sector. We see Shell, Total, Engie and other energy majors coming in, and I think we're going to see more activity in this sector. These energy companies want to make distribution in Africa and India and Southeast Asia a part of their business model.

Yi Jean: And on the strategic involvement of established energy companies that are entering this space: what do you think is motivating their interest in the sector?

Leslie: From my perspective, having worked with many of them, I would say the intention really varies. For some, there's an impact thesis trying to do good in the world. In many of the markets where they operate, some want to show they're committed to energy access more from a philanthropic perspective, but others are really building this into their strategic visions.

And we're seeing more and more companies wanting to have customer acquisition in these really tough markets, and there are startups that are doing this exceptionally well. So we're noticing more and more strategics wanting to join the board, learn about these companies so that eventually they can either understand through their own operations, or by companies who are accessing these customers via solar, via business models that are working.

So the long answer made very short is it does vary by strategic, and it's a case by case basis for which business models they're most excited about, what their risk appetite is, and what their overall strategic mission and aim is as a company.

Yi Jean: Mini-grids seems to face the greatest challenge in terms of near term of commercial viability. Typically, if you look at the business cases for a mini grid, you would see paybacks of between 7 to 10 years. What do you think is necessary for expediting and accelerating growth in the minigrid sector, and is this an important sector in your opinion?

Leslie: The second pillar of what we're working on now through our Pioneer Energy Investment Initiative (PEII) is mini grids. Historically, we have made 7 investments in minigrid companies, and we just closed in two companies, one of which is PowerGen in Africa, which is the largest mini grid mini grid company by sites in Africa. We see minigrids are an essential component of energy access. If we want to reach SDG7, they have a large breadth and ability to reach a large number of customers.

What we're finding is that minigrids have the business model that can serve the poor the best. Minigrids have an ability to reach the poor that is unparalleled with any other business model.

That said, the market has had many challenges: these are infrastructure projects and people are expecting venture capital like returns and there's a bit of a mismatch in what we're seeing with capital flow into this market.

The one thing I will underscore and I'm unabashed about saying is: mini grids need subsidies, and that's okay.

Big infrastructure projects that are trying to reach customers that would not be connected to the grid otherwise, because it's uneconomical for the grid to extend to these specific places in rural Benin or rural Tanzania. A minigrid is a public good and I think we need to reframe the conversation debate in that way.

I see great promise with mini grids. We're quite excited to double down our efforts in mini grids and we're hoping many investors who are willing to take that risk and be champions for subsidy programs needed...

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