They are Looking for Ventures
“They are looking for ventures, not businesses”
Referring to venture capitalists, this nugget of wisdom was given to me on a recent phone call to a contact within the energy access sector. This is alluding to the idea that venture capitalists are looking for companies with business models that allow for tremendous growth in a short period of time (ventures), rather than companies that offer potential profitability but at a more modest scale (businesses). This is crucial to the highly aggressive form of company financing that is the norm in Silicon Valley, for example, where normal businesses with ambitions of being worth 7 figures rather than 10 are sometimes referred to as ‘lifestyle businesses’.
In order to achieve the grand challenge of SDG7 by 2030, the energy access sector is rapidly shifting towards private-sector driven approaches. Broadly, I agree with this trend, and for the last two years I have been part of the analysis team for Practical Action’s Poor People’s Energy Outlook, which seeks to demonstrate how public and private must work together to meet our vast challenge.
However, we are at a critical crossroads.
When I started in the UK renewable energy sector in 2010, naïvely I believed that renewable energy, as a transformational alternative of the dirty energy economy, allowed for and possibly even required, social enterprise as a business model norm. The nature of the sector in all its ugliness revealed itself over the years: opportunistic oil and gas companies treating renewables as a hedge or a small side-line, cut-throat engineering contractors, landed gentry cashing in on wind instead of tree planting or grazing, etc. Yet at the very same time, an amazing grassroots movement around the world pioneered a different way of doing business, using a community-owned model for renewable energy development. I am proud to have been part of this alternative, social enterprise-based landscape for delivery, supporting dozens of projects.
Energy access, especially electricity access, now faces a similar predicament. I still believe in an alternative path. On one hand, energy access is most certainly a natural candidate for social enterprise models, and we hear good things about technology transfer, supporting youth and female entrepreneurship and using energy as a wider development tool. On the other hand, we suppress all of that good stuff by seeking to normalise a commercial model in which millions of dollars are expected to be raised by any company that wants to take part in the market. This has several counter-effects of a) driving a move towards proprietary IP, rather than technology transfer and open source, b) increasing investment return expectations, and decreasing investment patience – neither to the long-term benefit of customers, and c) disempowering youth and female entrepreneurs to the benefit of experienced and often western company directors that are trusted with significant investments.
Clearly the energy access sector cannot both reach its grand challenge and keep its integrity in check through the current ‘venture model’ alone. Indeed, some of the issues with this approach have recently been acknowledged by the funders themselves. A recent report from Shell Foundation and Persistent noted that solar home system solutions have only reached 1% of the off-grid market, and an estimated two-thirds of investment in the off-grid sector has gone to just 4 companies.
So what is the answer? Shell Foundation and Persistent make their own suggestions, which are tweaks to business as usual. Mine are a little more radical.
Venture backed businesses do have a role to play going forward – markets have been opened up for others to move into by early pioneers. But there are two critical shifts in mind-set which not only need to be recognised, but should be encouraged as methods for reaching sectoral scale.
The first is good old social enterprise (by which I mean social business through a for-profit vehicle, e.g. a B Corp). In India, where I am right now, the best known off-grid solar company is SELCO India. SELCO has operated as a social enterprise from its inception, and is now a company of a size to impress any venture capitalist. The benefit of social enterprise is that it allows for investment raising and returns, whilst putting requisite financial controls and mission alignment to protect the business’ customers from itself. In the case of electricity access, customers being low income families, a degree of protection is most certainly needed.
In 2015 Harish Hande, Managing Director of SELCO India, proclaimed to an audience of hundreds of people in Bangalore that “the poor are not a market”. Some people will pour scorn on this idea, whilst others will turn to social enterprise and patient capital for alternative means of scalable deployment.
The second aspect is genuine technology transfer approach that empowers thousands of smaller businesses to tackle the grand challenge in their local areas. Power for All and others have attempted to forecast the number of off-grid energy enterprises that will be needed to meet SDG7. The number is in the thousands, not just 4 or 5 unicorns. To achieve this, not only does the funding landscape need to be more favourable to local entrepreneurs, but the significant technology needs of a modern off-grid energy business must be readily accessible to start-ups too. In the latter regard, there are positive shifts with technology partners to off-grid businesses gaining significant traction - including Connected Energy.
That said, I believe we need to go further to support the development of thousands of off-grid energy enterprises. In practising what we preach, Connected Energy along with a handful of other technologists in this sector, will be open sourcing parts of our hardware and software through a new informal group of mission driven companies – the Open Energy Access Alliance. I encourage you to join us, if you think similarly.
As I wrote previously, there is no blueprint for how this sector should look. It needs to be built by the practitioners, policy makers, academics and financiers that work within and around it. Borrowing business lessons from Silicon Valley, building a hyper-aggressive market, will eventually lead to disappointment and disillusion among tens of thousands of future local stakeholders. The energy access sector of the West needs to pause, reflect and remould in a more balanced way - one that sees the countries with energy access needs as both the challenge and the key to the solution.