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
(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
Transcribed by Felipe Rivera-Uribe
Distributing Solar: Welcome to Distributing Solar. We speak with experts and entrepreneurs working in the off-grid solar industry around the world, bringing to life how distributed solar is changing lives in emerging markets. Today we have the pleasure of speaking with Leslie Labruto, who is head of global energy at Acumen. Acumen is a leading impact investment fund that looks to bridge the gap between the efficiency and scale of market-based approaches and the social impact of pure philanthropy. They invest in entrepreneurs who bring sustainable solutions to the big problems of poverty.
Distributing Solar: Can you tell us about your background, how you entered the energy access space, and about Acumen as an organization?
Leslie: My pathway into clean energy was 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 realized 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 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.
Distributing Solar: Can you tell us more about how Acumen differs from other Venture Capital funds and what makes it unique?
Leslie: Acumen uses philanthropically backed capital, 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 do not 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 low income in emerging markets, which are different compared to some of the customers that you might see companies serving in Silicon Valley.
Distributing Solar: Typically, the off-grid solar sector is divided into three main subcategories: mini-grid, standalone solar 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 could not 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 do not know what these solar home systems are, it is usually a solar panel, quite small, a battery, maybe 2/3 light bulbs, and a phone charging port. It is something quite basic, but it gives a customer autonomy, and it gives them freedom. If they can pay off this system, they then become financially included and part of a financial system that they maybe would not 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 are talking about infrastructure. 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 are talking quarter of a million dollars for, e.g., a 40-kW system. And, that matters, and particularly when we are trying to serve the poor. However, what we noticed is that although they are expensive, the breadth of services a customer can get access to is much greater than just light.
You can use mini-grids to power a milling machine, or a small store: you have anchor tenants. It is a more of a community-based approach. But it faces a different set of challenges than the SHS companies.
Distributing Solar: There's still a lot of discussion within the industry about how long-term and sustainable some of these business models might be. There is 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 is such a momentous time. In 2012, we saw $50 million of investment into the sector, and in the last two years, that number has increased sixfold to $300 million. So, we are seeing more and more capital come into the market. And for a sector that is 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 is 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 are 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 is 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 rounds, which is early-stage investment, and that is 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. 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 have 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.
Distributing Solar: 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 are 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 are looking for a 1x return. We want to make our money back ideally, realizing that there will be companies we have to write off, but there will also be great successes in our portfolio. We will invest anywhere from $250,000 to $1,000,000 into a company, and we want to reserve capital for follow on investments.
There are 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 are 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 they are doing this.
The second thing we want to see is that you have a product or service that is truly catalytic and which is struggling to find financing. I will 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 is 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 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 is 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.
Distributing Solar: 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 have made?
Leslie: In the energy space, Acumen has made 24 investments, and so we have invested about $24.1 million into the sector. In addition to mini-grids and solar home systems, we have 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 is lower cost and the demand from customers is quite a pull, clean cooking requires a massive behavior change. You are 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 is 3 billion people without access to clean cooking solutions which is damaging to their health, whereas there are about 840 million people now without energy access from an electrification perspective. So, it is not that one is better or worse: we just need more talented minds and brilliant people working on clean cooking.
Distributing Solar: 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 is helping a low-income customer generate income. We are 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 are finding is that productive use technologies, while quite innovative, are still out of reach for the poor. And maybe it is 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 are seeing that there are 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 are 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.
Distributing Solar: Do you think the commercial viability has been established for many of these SHS companies?
Leslie: As we look at the SHS market, we have 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, you are running an efficient business, and generating cash flow, which are the early indications that a market's viable. A lot of it comes down to execution. On the SHS, the demand is there, the growth is there. There has been a lot of capital to support these companies, but that is 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.
Distributing Solar: What are your thoughts about exits at the moment? What are the challenges around having more exits? Is it a matter of time or 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 is something that is typically talked about mostly within the investor community, but not talked about enough. 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 is actually something to celebrate. If an investor is able to exit a company, it shows the cash can be revolved. We are 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 are finding are that there is not a huge market or appetite for secondary sales (where an investor buys out the shares of an earlier investor). We are seeing that a lot of the growth stage investors tend to be Development Finance Institutions (DFIs), for example, and they have a mandate to support impact. And sometimes it is hard for a DFI to justify their capital going to buy out an early-stage investor when their capital is 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 are freeing up capital earlier in the market to support the next wave of entrepreneurs.
We are 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 are 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.
Distributing Solar: And on the strategic involvement of established energy companies that are entering this space, what do you think is motivating their interest in the energy access industry?
Leslie: From my perspective, having worked with many of them, I would say the intention really varies. For some, this an impact thesis of trying to do good in the world. In many of the markets where they operate, some want to show they are committed to energy access more from a philanthropic perspective, but others are really building this into their strategic visions.
And we are 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 are 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.
The long answer made short is that it does vary by strategic, and it's a case-by-case basis for which business models they are most excited about, what their risk appetite is, and what their overall strategic mission and aim is as a company.
Distributing Solar: 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 mini-grid sector, and is this an important sector in your opinion?
Leslie: The second pillar of what we are working on now through our Pioneer Energy Investment Initiative (PEII) is mini-grids. Historically, we have made 7 investments in mini-grid companies, and we just closed in two companies, one of which is PowerGen in Africa, which is the largest mini-grid company by sites in Africa. We see mini-grids are an essential component of energy access if we want to reach SDG7 (United Nations Sustainable Development Goal 7). They have a large breadth and ability to reach a large number of customers. What we're finding is that mini-grids have the business model that can serve the poor the best. They 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 is a bit of a mismatch in what we're seeing with capital flow into this market. The one thing I will underscore, and I am unabashed about saying is: mini-grids need subsidies, and that's okay.
These are really tough to reach markets, 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 mini-grid 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 are quite excited to double down our efforts in mini grids and we are hoping many investors who are willing to take that risk and be champions for subsidy programs that need to be coming online.
Distributing Solar: Results-based financing has typically been spearheaded by the World Bank and other governments. Do you have any thoughts about where the funding should be coming from? Should it be coming from local governments, multilateral development banks, or indeed from other sources?
Leslie: That money can come from anywhere! However, I will say there is some education that needs to happen so people know, “What is a mini-grid? Who can they serve? What is so exciting about them?”.
Now that companies have been pioneering and willing to understand customers better, getting that data and sharing it with local governments, national governments, the World Bank, DFIs, multilaterals, there is a recognition that a subsidy for these mini-grid companies could be game changing. As far as where the money comes from, everyone is working together in the sector. What I mean is investors like Acumen are coming together with our co investors in the sector and we are putting in money. If a subsidy came, we would be there 10-fold that to show that this market can really scale.
I think the likes of the World Bank are picking up on this and these are in development. For example, I know that Nigeria has done an incredible job being progressive thinking about results-based financing and unlocking the sector. Companies are really excited to set up mini-grids in Nigeria because there is promise that the economics can work. I give a lot of credit to the mini-grid companies out there. They are being opportunistic. Wherever they can go they are willing to go because they want to prove that it can work if there are subsidies available.
I think the outlook is bright. I think the impacts that a mini-grind could have are proven enough to the point where governments are taking note, they want to electrify their populations and they want customers to be satisfied with their services.
Distributing Solar: Related to the impact that these projects can have, Acumen developed Lean Data which was recently spun out to create 60 Decibels. What are your hopes for an organization like 60 Decibels?
Leslie: Acumen, like many impact investors in there 2010-12-14 time frame, were trying to look at their impact. A lot of it was just excel documents counting data and then we tried drawing conclusions of our impact on the sector based upon that and the behavioral psychology of customers. And we decided if we are really committed to serving the customer and serving the poor that is not good enough.
What started thinking, “What is impact?” and we realized that the people who could tell us the most about the impact were the customers of our products or services. So, Acumen created Lean Data. It is a low cost, low tech tool to reach out to customers and learn about their experience with a product or service. By using Lean Data, we are able to get a much more holistic view of a product or service’s impact on our customer base. This has transformed the way Acumen thinks.
We found the Lean Data tool to be exceptionally beneficial to our work, especially in energy access. We produced our first energy impact report that aggregated this data, and we were able to make meaningful conclusions.
The reason why Lean Data decided to spin out and become 60 Decibels (60 Decibels is the frequency of human voice and represents listening to customers) is because we wanted to give this tool to the world - and keeping it within Acumen, which is a nonprofit, stopped making sense. As more and more people started using Lean Data in the sector and started asking for Lean Data as a service, there was a clear opportunity to unleash 60 Decibels and the Lean Data tool to the world. We are really excited for the journey they just started on as their own entity.
Distributing Solar: Acumen works around the world. Are there any geographical locations you focus on? Or any countries you avoid due to political or socio-economic factors? How do you consider the risk/reward and impact profile of each country you invest in?
Leslie: Acumen is uniquely set up so that all of our investing is done locally. For example, despite the fact that I am here in London, we have teams all around the world that do the actual investing. Our offices and markets are East and West Africa, India, Pakistan, Latin America, and the United States. We set up these offices for a very strategic reason: We went to where we thought the need was in these core markets and we wanted to keep our geographic focus limited to where we know best. If Acumen decides to start investing in a market we do not know well or do not have staff from, we think there could be a disconnect in how well we could serve the company.
In West Africa we recently relocated our offices from Ghana to Nigeria, where the need is incredibly high, and the opportunity is tremendous. We also invest in agriculture, education, and health. Acumen is not just about energy access. In East Africa we invest in Kenya, Ethiopia, Tanzania, Rwanda, and Uganda out of our office in Nairobi. In India we focus on India and Pakistan.
I would say that there are so many markets that are underserved beyond where Acumen invests. There are so many solutions that are needed to deliver solutions to customers where they have choice. And that is really what Acumen is based on. In the future I would really love to see a region in every part of the world for Acumen to be operating but right now we want to go deep in the markets that we are currently operating in.
Distributing Solar: To close our conversation, what is your future outlook for the energy access sector?
Leslie: I get so encouraged by the numbers. When we started the PEII (Pioneer Energy Investment Initiative) there were about 1.1-1.2 billion people without energy access from an electrification perspective. Just recently, Sustainable Energy for All published that there were now 840 million people without energy access. That number was quite captivating to me. I think it is important to look at that number and see what efforts are happening. How did we (the whole sector) make that leap to electrify over 200 million people in such a small timeframe?
A lot of credit goes to Kenya, India, and to Bangladesh for their electrification effort on grid. However, in these markets I think a lot of the work that needs to be done is about reliability. We see that energy access has declared victory in these markets, but reliability is still quite low. In some of these markets you may only have power for four hours a day. There is a robustness that I get excited about that I can see for entrepreneurs who want to focus on reliability.
And then of the 840 million people who are still without energy access, over 610 million of them are in Sub Saharan Africa. We are seeing great progress in Southeast Asia but there is still a lot of work that needs to be done in Sub Saharan Africa, particularly in the markets that I mentioned before that are really high risk. There needs to be some thoughtfulness about how electrification can happen in some of these markets and how customers can have access to choice in some of the hardest to reach markets out there. I think this will require a different way of thinking fundamentally. The venture capital model will probably need to be challenged in these markets to see if we want to see market-based solutions become viable in the hard to reach markets.
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