One of the things that undoubtedly holds back the growth of social enterprises, especially in emerging markets, is lack of access to funding. What are needed, argues Chris West of Shell Foundation, are local intermediaries to provide initial money and business skills support to help social enterprises demonstrate viable growth and then shift to accessing local commercial finance.
“I’ve always taken the view that Shell Foundation is a means to an end. We act as a bridge.”
Why does Shell Foundation make grants to for-profit organizations? Doesn’t that distort the market?
Grant funding helps social enterprises both test new ways of working and establish the capacity and systems from the outset to operate at scale. For example, our grants to Husk Power Systems provided the means for them to pilot innovative technology but also take on key staff and develop efficient operating systems. While the lack of grants might not have frustrated their growth, it would have significantly slowed down their scale-up. If you’re a start-up, and you start taking on commercial capital even on relatively soft terms, it affects your own risk perception about your business. It probably means you will be more cautious.
In India and in other emerging economies, you’ve got this massive demand for power, and I think the only way you’re really going to solve that in a scalable and sustainable way is through the small enterprise sector. But it’s incredibly difficult for a small enterprise in any emerging economy to access the skills and capital needed. So the issue is not so much about the technology; it’s about how we resource these start-up enterprises to help them get there quicker than they would otherwise do. I think that inevitably means you have to have start with smart subsidy support from investors who are willing to take high risks.
What do you mean by smart subsidy?
A smart subsidy to me is one that enables social enterprises to test new business models, to offset the cost of social marketing and to build the organizational capacity and operating systems essential to achieve scale of impact. By contrast, such subsidies are not used to reduce the cost of the service or product to the consumer, as this will frustrate efforts to create sustainable markets.
Governments around the world clearly have a role to play here, as is the case with the valuable subsidy support from MNRE to Husk Power Systems. But one needs to help social enterprises plan an exit from the unpredictability of subsidy provision and become financially viable through earned income models.
Does India need a specific fund to provide subsidy to SMEs in the energy sector?
Back in 2004 in South Africa, we launched a pilot SME energy fund. This fund targeted black-owned enterprises involved in the provision of modern energy services in the country. Rather than do lots of direct investments ourselves, we found a local partner to manage the fund and provide the vital skills and finance to support start-up and growing small enterprises in the energy sector. The fund did reasonably well, but we found that limiting the fund to the energy sector was a bit too restrictive, as the deployment of business skills and finance was relevant to the entire SME sector. So we helped co-found GroFin, as a specialist provider of skills and finance to viable SMEs in Africa. GroFin now has $250 million under management, and is the largest financier of start-up and growing small enterprises across Africa, of which a portion are energy related.
The $250 million comes from development finance institutions, like CDC, FMO and IFC, as well as from African banks. Shifting from our initial grant support to GroFin, Shell Foundation made an equity contribution of $15 million to the $170 million GroFin Africa Fund.
So that’s what you’d like to do in India?
We believe more such local intermediaries are needed to provide both the skills and finance to unlock the potential of small and growing businesses in all emerging economies, including India. So we are currently working to establish an ‘accelerator facility’ in India that will provide skills and finance to viable enterprises and in ways that, just as with Husk Power Systems, can fast-track their ability to go to scale.
India needs hundreds if not thousands of Husk Powers. So why aren’t we seeing them? I think the answer is that doing this as a social enterprise is incredibly difficult, and this is compounded by the lack of access to skills and finance (including grants as well as other instruments). Banks typically will not finance people without track record or collateral, and at the moment, there aren’t enough impact investors with the capital or risk appetite to meet the needs of the market.
How near is Husk Power to getting investment from a local bank?
Whether it’s Husk Power or another enterprise, you want to get them to a point where they’re accessing capital from Indian sources, not from financiers in the US or Europe. There’s lots of liquidity in India, so in my view we need to help the Husk Power Systems of this world demonstrate to Indian financiers that they are capable of handling debt or equity finance. This means building links to Indian finance institutions, which is what we are doing through our partnership with IntelleCash, which encourages them to extend debt finance to local social enterprises and enables such ventures to develop the track record required to secure further finance from Indian banks.
I’ve always taken the view that Shell Foundation is a means to an end. We act as a bridge. Our role and value is – like an angel investor – in making high-risk, early-stage ‘investments’ in innovative business models deployed by new partners. Through our skills and finance, we then help our partners bridge to those organizations that are able to take lower-risk, second-stage financing – be these impact investors or local finance institutions.
In the meantime, it’s back to an intermediary. GroFin has financed over 250 businesses across Africa, but it’s still taking far more risk than a bank would. None of the businesses that GroFin finances in Africa could access bank finance. But what you hope is that financing them allows them to build up that track record in servicing debt so they can be financed by banks. That’s why we deliberately made an effort to get banks to be co-investors in GroFin.
But your experience demonstrates that it’s not only a question of money, doesn’t it?
Exactly. Everyone thinks the problem with this market is lack of access to capital. Money is necessary, but not sufficient. What start-up and growing enterprises need most are two other critical things: disciplined business development assistance and better access to market networks. If you have the right combination of money, networks and skills then – while your venture may still be high-risk – there’s a better chance you can get to scale quicker and sustainably.
Chris West is director of Shell Foundation. Email email@example.com