Acumen, which is a non-profit global venture that uses entrepreneurial approaches to solve poverty and related problems, recently launched the Pioneer Energy Investment Initiative to increase their investment in off-grid energy, bridge solar power funding gaps and bring off-grid power to 8 million people by 2026. They will also use a lean data approach to help understand whether solar power has any real impacts on people's lives.
The initiative will boost research and collaboration to help investors in the sector to better understand emerging markets and exactly how solar products are changing people's lives, by using the less costly lean data approach in comparison to the more complicated and expensive traditional methods. The approach will help solve challenges imminent in the off-grid markets, and as a whole, bridge the funding gap in off-grid energy in order to catalyze the sector in the developing worlds.
So far, Acumen has invested $20 million in a portfolio of 18 social enterprises and companies that have, for the last decade, helped millions of people in East and West Africa, India and Pakistan gain access to energy by connecting to off-grid power and through other innovations. The investment has helped save $1.7 billion in energy-related expenses while offsetting more than four million tons of CO2 emissions.
Moving forward, the Pioneer Energy Investment Initiative will help scale up pioneer-stage companies in an attempt to improve access to off-grid power to poor communities around the world. Companies will get the support and technical assistance needed to scale up. The initiative will focus on new ways of generating and distributing off-grid power through mini-grids and standalone products, to homes, small businesses to communities that are not connected to national grids. It will also help fill gaps in the value chain and support the off-grid energy ecosystem.
“When Acumen began investing in energy, there were a few established players in the market but we saw an opportunity in intrepid entrepreneurs who recognized the potential of renewable energy to help bring access and range of other benefits to families,” said Acumen Founder and CEO Jacqueline Novogratz. “With the price of solar reaching unprecedented lows, we are at a tipping point. More and more companies are emerging today, but it’s critical they have access to catalytic capital that will not only help them scale but reach millions of communities in need.”
Using lean data
To help in scaling up companies, IKEA will give these companies access to market data through the Acumen’s Lean Data idea and approach, which is an innovative method of measuring impacts of investments by collecting data directly from low-income customers and use that data to understand exactly whether and how solar power actually changes the community and serves the poor better to make their life better.
Although hundreds of investors have invested in solar power over decades ago and huge numbers quoted in terms of the dollar figures invested, not much is said about the social performance in terms of how better user life is after these investments, which is a problem. Use of such flashy figures is one biggest problem with impact measurements that quote the number of people using the gadgets, number of solar kits distributed, amount of power generated and such like flashy figures. Use of these "near useless" tools for measuring social impact has lead to failure of impact investors and social entrepreneurs, writes Acumen's Chief Innovation Officer Sasha Dichter.
The traditional tools used in measuring impact are not only expensive, but also hard to use and take long to produce any real data. Lean data approach dwells on issues such as whether the invention actually solved the problem of the customer, why the customer thinks it solves the problem and how it helps their day to day life unlike the traditional method that capitalize on understanding the product-market fit. Data is gotten by both asking relevant questions through phones as well as other touch points such as visiting customer's home. It costs less and is easier to use.
"Our approach is optimized for entrepreneurs building social enterprises in the developing world, and it capitalizes on today’s information revolution to gather data directly from low-income customers. Our goal is to use this infrastructure to understand our social impact and better serve the poor. We call this approach Lean Data."
This data will help investors to better understand the emerging off-grid power markets and thus help identify the best ways of investing in providing energy access and improving value chain, system eco-system and efficiency. This will need a different kind of collaboration according to Yasmina Zaidman, Acumen’s Chief Partnerships Officer.
“The support of IKEA Foundation and our other partners, including the UK Department for International Development and the Osprey Foundation, is helping to establish an environment where experimentation is encouraged and investment is focused on impact," she said. "Our partners share our commitment to bringing access to the poor, sharing our lessons and data, and engaging with other key stakeholders in the sector.”
Acumen has already started the first among a range of research studies to be conducted in this series. The first study will look at how low-income households in Kenya are using solar products in the rural areas and how those products have impacted their lives. It is funded by Google in partnership with SolarAid and ETH Zurich.
Solving off-grid power challenges
Acumen has noted some challenges that hamper growth of energy firms and make it hard to provide desired access to off-grid power in developing world, which it says must be looked into if scaling up social enterprises is to bear any fruits in regard to improving off-grid energy access.
Overvaluation of companies is one problem: start ups, which mainly cite the low national electrification rates, high market potential of off-grid power in developing worlds and huge demand as the bases of valuation, are overvalued during the initial investment round and funding stage and thus fail to raise capital in subsequent rounds since they cannot justify funding in the future, and thus fail in the long run.
Overvaluation is common among copycat players or companies that manage to convince investors to fund them in the first round citing high demand for off-grid power. According to Acumen, in addition to creating a false sense of market success, overvaluation only leaves customers in the dark once the company fails to get funding in subsequent round. With solar products said to be becoming cheaper by day, overvaluation may also pressure these companies to increase prices in order to stay afloat, which hampers the larger goal of making the poor access these products.
Overvaluation creates a wrong impression to owners that the company is growing. It also creates a wrong impression to the governments that the market is growing at a very high rate, causing them to waive import duties and introduce subsidies, yet the incentive levers are still needed for early unit economics to make sense.
Although undervaluation would demotivate these companies to face a challenging market, investors should think in the long term and be patient with capital, especially in this sector, writes Acumen's Leslie Labruto.
"With no milestone exits to date, no IPOs, and a need for a constant flow of cash, we do our entrepreneurs a disservice if we overvalue their companies early on in the fundraising process," she said. "Valuations should account for the real risks these companies face."
To do appropriate valuation, much empirical and factual data would be needed, she said. Proper valuation will guide a smart investment in the off-grid sector in the future since it will help establish areas that need to be developed in the off-grid value chain. It will help in financial sustainability of the companies investing in this sector and boost their social impact along their path to scale
"We’ve come to know some talented, savvy entrepreneurs who understand the risks associated with their markets," she said. "By planning target valuations, having open, honest conversations with current and prospective investors, and seeking guidance from industry veterans, the payout of building a scalable business for the long term could be much greater than a short-term victory of attracting a high valuation."
When compared to traditional methods, lean data approach will be a good way forward to help firms understand whether solar power and related kits have any useful social impact and whether it does improve the life of customers. It not only puts the customer (instead of product) first when measuring impact but is also easy to use, quick to get results and far much less costly.