Embracing the S-word: How smart subsidies can spark innovation in emerging markets
When designed well, subsidies can accelerate innovation, fix broken markets, and pull tomorrow's solutions forward.
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As a heatwave swept across central India in 2023, farmers struggled with crop losses and water shortages. But for Krishna, a farmer in Telangana who had recently purchased a new greenhouse, it was a different story. The temperature inside his greenhouse was a consistent 80 degrees Fahrenheit, the soil was damp and dark, and vegetables protruded from moist loam.
This greenhouse, purchased for only $667 from Acumen investee Kheyti, revolutionized the economics of Krishna’s farm. He added an entire new growing season, doubled his income, and repaid his greenhouse in 18 months. But there’s a catch: That greenhouse cost $1,200 to make. So who footed the $533 difference?
Enter venture philanthropy, which directly subsidized the cost and de-risked thousands of early adopters like Krishna.
Today, Kheyti has brought the production and product costs down to make their operations financially sustainable. This was a necessity; philanthropy alone cannot subsidize the cost of greenhouses indefinitely. But Kheyti could not have gotten to this stage without that initial subsidy.
The changing face of subsidies
Subsidies have always fueled transformative industries, from automobiles to aviation to the Green Revolution and the Digital Age. The corporate giants of today, firms like Google, Tesla, TSMC, and Huawei, owe their very existence to government grants and procurement contracts. Subsidies now underpin huge swaths of the global economy, both for good ($168 billion in renewable subsidies) and for ill ($7.1 trillion in fossil fuel subsidies).
The use of public money to support private business always creates political tension. From energy to agriculture to healthcare, governments are grappling with the costs — both political and fiscal — of propping up entire industries. In the U.S., disputes over healthcare subsidies lay at the heart of the recent government shutdown. In Europe, subsidy wars are reshaping trade alliances and testing budgets.
In emerging markets, subsidies face a different challenge: Most governments simply lack the fiscal capacity to subsidize innovation at scale. And yet, in these very contexts, subsidies have proven catalytic and unleashed markets for clean cookstoves, mobile payments, and off-grid solar — industries that now reach millions. Unlike wealthier economies where governments foot the bill, these subsidies often come from philanthropists, impact investors, iNGOs, and foundations.
At Acumen, we believe in this broader, more dynamic definition of subsidy. It’s not just government aid but any capital that absorbs risk and helps entrepreneurs build markets, ideally for social good. When done right, it can accelerate innovation, fix broken markets, and pull tomorrow’s solutions forward. Impact investors and those who share our mission have a critical role to play in making that happen.
Designing smarter subsidies
Years of operating on the leading edge of venture philanthropy has honed our perspective on subsidies. We view them as neither inherently good nor bad; they’re as effective as their design and the market allows.
At their best, subsidies can de-risk innovation, fund early R&D, and bring proven products within reach. At their worst, they can distort markets, muddy price signals, and misallocate resources without delivering meaningful change. For example in India, 70% of groundwater wells are in critical condition today because decades of subsidized electricity for farmers encouraged the over-pumping of groundwater.
Paradoxically, subsidies can actually discourage innovation by shielding organizations from the market discipline of developing scalable, self-sustaining business models that will stand on their own when public support moves away. But the answer is not to abandon subsidies or tip-toe around them. The answer is to recognize their value, their risks, and their finiteness.
For companies leveraging subsidies to deliver critical services, we have seen the following factors be essential to success:
- Address a clear market failure: Solving, not distorting. Subsidies must be grounded in need, in the case of clear market failures, and drive meaningful, additional progress against those failures. In cookstoves, for example, the positive externalities of reducing deforestation were not priced in — a market failure that carbon credits addressed.
- Send the right price signals. In the balance between affordability and sustainability, establishing the right pricing points is key.
- Have a sustainable source of revenue with a long-term plan. Poorly designed subsidies often lack an exit plan, and blanket price reductions are costly. Kheyti was eventually able to scale into a price point that the market could bear.
- Target well. The best subsidies continuously refine targeting, leveraging data, digital tools, and behavioral insights to maximize impact and minimize inefficiencies.
Case study: SunCulture and the art of stacking creative capital
Let’s look at these keys to success in practice with one of our investees, SunCulture.
SunCulture operates in Kenya and Uganda. In Kenya, where 98% of agriculture depends on rainfall, only 16% of land receives enough rain due to climate change. Smallholder farmers thus have to contend with lower crop yields, productivity, and income. The irrigation systems that do exist in the market today run on diesel, which is prohibitively expensive for poor farmers and pollutes local ecosystems.
SunCulture’s pumps are solar-powered. Once they’re installed and paid for, farmers can avoid the ongoing financial burden of diesel and vastly improve efficiency, reliability, and yields. But the upfront cost of a solar water pump ($500 to $1000) is often more than a smallholder farmer can afford. To bridge this gap, SunCulture combined carbon credits, results-based finance (RBF), and used their Pay-as-you-Grow platform to offer farmers a consistent, subsidized price.
Taking our keys to success one by one we see:
- Clear market failure: Yes, the negative externalities of diesel and positive externalities of solar were not reflected in the respective cost of pumps or fuel.
- Send the right price signals: Definitely. SunCulture is not giving away pumps or selling at a fraction of the price. They reduce the cost by ~30%, which still requires significant commitment from farmers.
- Sustainable in the long-term: To be seen, but if SunCulture can scale to hundreds of thousands of units, it will be able to reach these same customers with little or no subsidy – and can continue to increase pricing for its carbon credits.
- Targeted: Difficult to narrowly target in markets without robust social registries and identification (such as Rwanda’s Imibereho), so many subsidy programs operate based on technology (i.e. subsidizing all solar water pumps).
In Togo, SunCulture partnered with Bboxx-EDF, Shell Foundation, and the government, which covered half the deposit of solar water pumps. This drove rapid uptake across their markets. Already, 93% of SunCulture farmers report increased production and 87% increased income, showing the potential to scale across Kenya and beyond.
SunCulture’s long-term strategy is to slowly phase out the subsidy from results-based finance and solely rely on carbon credits. This doesn’t just make products cheaper. It builds a financial ecosystem where subsidies serve as a bridge to better livelihoods.
The way forward
Markets are failing people in poverty. While the risks of distorting those markets are real, the unequal impacts of climate change demand urgency and risk-taking. Rather than abandoning these mechanisms, funders, governments, and iNGOs should strengthen existing tools and finance what works. More specifically:
We need smarter subsidies with better safeguards and strategic partnerships. This requires stronger data, rapid feedback loops, and regulations that understand and protect lower-income households. In many emerging markets, public capacity is thin, which is where the private sector must step in.
There will always be a role for governments. We need subsidies across all stages of a company’s lifecycle. Just as early-stage Silicon Valley innovation was funded through DARPA and defense contracts, we need R&D funding for cleantech solutions to reach proof of concept. To scale, companies need support to find the right price point, establish value, and expand access, as challenge funds like the Energy Catalyst Challenge Fund have done.
Most of all, we need a mindset shift to make more long-term investments that take the risk. Markets like solar irrigation will take decades and billions of dollars to reach maturity. But market distortion can’t only be valid when done in the name of profit. Uber subsidized rides for years. We must extend the same grace to private companies that are delivering public benefits.
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