Acumen | Accelerating Energy Access - Role of Patient Capital Report -

REPORT

ACCELERATING ENERGY ACCESS: THE ROLE OF PATIENT CAPITAL

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Executive Summary

We will not realize the United Nations Sustainable Development Goal of access to clean, affordable energy for all by 2030 at the current rate of progress, according to the latest data. The stakes are high: more than one billion people live without access to electricity, and three billion people cook in ways that harm their health and the environment, and drain their household savings.

There is, however, ample cause to hope: of the more than 800 million people who have gained access to energy over the last decade, 360 million—or 45 percent—have gained access because of path-breaking startups.1 These companies have harnessed the potential of off-grid energy to bring clean, affordable electricity to people who previously relied on dirty fuels like kerosene for their lighting needs. Clean cooking companies have developed products that burn biomass and charcoal more cleanly and efficiently, leading to reduced household emissions and deforestation, and improved household savings.

Patient investors who saw tremendous potential early on have backed these pioneering energy companies, and they are proving that they can help solve the challenges of energy access for those living off the grid. In 2017, over $300 million was invested into the off-grid sector compared to $50 million in 2012, and total sales in the sector are nearly $4 billion today.

Acumen has been investing in this market for the last 10 years. Given the increased capital flows, we believed the time was right to ask if entrepreneurs now have access to the right types, amount, and mix of capital to grow their businesses. To answer this question, we interviewed 15 energy access CEOs from Acumen’s portfolio, worked with external advisors, and reviewed peer research. We focused on the “pioneer gap,” where companies have experienced the greatest challenge attracting financing. These companies are too big for seed capital and too small for commercial capital, a conclusion that came out of From Blueprint to Scale: The Case for Philanthropy in Impact Investing by Monitor Group and Acumen in 2012.

We found that, despite a six-fold increase in capital invested over the last five years, the pioneer gap still exists in the energy access market. A majority of the capital invested has been debt or concentrated in a select few companies with proven business models. Meanwhile, 93 percent of our energy access CEOs operating in the pioneer gap stated that they continue to face significant challenges in accessing investment capital. With more than 200 other companies in the off-grid sector operating in the pioneer gap, the market is clearly falling short.

Next, we evaluated the important role patient capital can play in filling the pioneer gap.2 Patient capital is early-stage equity or debt focused on generating social and financial returns. Alongside grant capital, patient capital can support new business models to build markets and scale impact. For this report, we focused on equity because Acumen has primarily invested equity in early-stage energy startups. Our research indicates $210 million in early-stage equity is required annually to close the energy access gap, while less than $16.5 million has been deployed annually, on average, over the last five years.3

While grants can also help companies in the pioneer gap develop, validate, and establish new business models, patient capital plays an important role in attracting and unlocking the additional investment capital—equity and debt—needed to scale off-grid energy companies. For example, because of the $22.1 million of patient capital we invested in our 20 early-stage energy access companies, these companies have raised more than $219.5 million in investment capital in subsequent fundraising rounds, or 10x the capital we initially invested.

Lastly, we found that the subsectors we invest in—solar home systems, mini-grids, and clean cooking—need different types, amounts, and mixes of capital because they are at different stages of maturity and have different business model challenges. With the right infusion of capital and support, off-grid solutions could bring lighting and power to an additional 620 million people by 2030—that’s 60 percent of the total number of people living without access to energy today. Our hope is that this report will serve as a public resource for investors, entrepreneurs, policymakers, and other stakeholders to work together to increase the availability of capital across the sector, with a focus on the patient capital needed to close the pioneer gap.

 

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