When it received a $5 million award from the U.S. Agency for International Development last month, Off Grid Electric became the first company to receive all three rounds of funding from the Development Innovation Ventures program.
Following the DIV application trajectory of this social enterprise working to bring affordable solar power to 1 million Tanzanian homes by 2017 reveals both the benefits and limits of this new model to turn bright ideas into breakthrough solutions for global development.
While $5 million may not seem like a lot for a company that raised an additional $65 million in 2015, Xavier Helgesen, the founder and CEO of Off Grid Electric, said the DIV grants were catalytic in attracting investment.
“Investors seek a combination of risk and returns, and the best way for USAID to drive private investment in frontier emerging markets is by reducing the risk side,” Helgesen told Devex. “USAID is in a unique position to take lots of risk because it isn’t seeking a return.”
It probably also helps that the company is in an industry that’s particularly hot at the moment and represents a significant opportunity for growth.
Donors can do a lot to up the numbers of investors taking chances in frontier emerging markets, where the capital is expensive and the time horizon is short, Helgesen said. Of course development agencies face budgetary pressures and bureaucratic constraints that many impact investors do not. But given USAID’s track record, DIV grants are a signal to other investors that they can save some of their due diligence work, said David Ferguson, director of the Center for Development Innovation at the U.S. Global Development Lab, which is home to DIV.
Donors and social entrepreneurs: An evolving partnership
Donors are increasingly exploring how to put their money to work in supporting entrepreneurs — sometimes that means funds to test an idea or explore scale and access to networks. But the financing often comes with strings attached, prompting the question: When should social enterprises seek donor funding?
“When we make a grant to somebody, especially on the innovation front, it’s incredibly validating for everybody else who’s weeding through the same thousands of opportunities that we do,” he said. And in the same way DIV grants reduce the risk for public and private investors, outside support for grantees like Off Grid Electric from investors like SolarCity also reduces the risk USAID faces.
Helgesen said too many people fixate on the dollar signs without understanding how Off Grid Electric actually benefits from the $45 million it raised in debt financing last month, with $5 million from USAID and $40 million from family foundations including the Packard Foundation.
“I think what people don’t always realize is that not all this capital that you raise just goes in your bank account and you can spend it,” he said. “You don’t get the cash on day one but the financing is available if you meet certain criteria.”
In addition to providing a $5 million grant, USAID was also part of the discussions that led other investors to lend $40 million in an effort to reduce risk for investors and make things easier on the company as it scales its model from Tanzania to Rwanda, Helgesen said.
DIV is using a venture capital approach, which first asks entrepreneurs to prove their business models then requires that they hit certain milestones before further investment.
The tiered model allows DIV team to work with grantees to try new approaches in order to meet their metrics of rigorous testing, cost effectiveness, and ability to scale, said Ferguson.
More than half of 145 DIV grants have focused on the first stage. Off Grid Electric received $100,000 for proof of concept and $1 million for testing at scale before reaching the third stage of DIV funding, focused on scale.
The staged funding allows DIV to make lots of smaller investments in ideas with potential, but protects it from those that don’t pan out, he said, adding that the early grant to Off Grid was for a different business model than where it has evolved to today.
USAID offered incentives for the Off Grid Electric team to focus on serving base of the pyramid customers, keeping in line with the priorities of the U.S. government’s Power Africa Initiative.
“They have a foot in Silicon Valley, which has led partners such as DBL and Solar City to invest in them, Jonathan Kirschner, a DIV portfolio manager, wrote Devex from Tanzania. “But Off Grid is also connected to the local community. It's this deep local knowledge and experience that makes Off Grid a viable solution.”
While USAID has been clear in its commitment to find and support innovators in developing countries, Ferguson said he sees no problem in funding solutions that come from beyond those borders as long as they meet the needs of local consumers.
“We are not going to forsake those opportunities simply because they are from a developed country or Silicon Valley specifically, and in fact we want to embrace them,” he said.
DIV is one way USAID is becoming more relevant for social entrepreneurs like Helgesen, but he said the sector needs to do more to take the kinds of risks that are needed.
“The key is, when grant-makers talk about acting like venture capitalists for impact, to really do it you have to take risks,” he said. “The whole sector being able to embrace failure and embrace speed is so important for us to solve more of these problems more quickly.”
DIV gets more bang for its buck in part by collaborating with other funders and thought leaders in the public and private sector, many of them from Silicon Valley. By bringing diverse perspectives into the decision making process, Ferguson explained, DIV can up its chance of success for investments now and in the future.
“We cannot fund our way to success alone,” Ferguson said. “A $5 million dollar investment that begets $70 million worth of value? Now we’re talking.”
These partnerships also help USAID learn best practices to move DIV applicants like Off Grid Electric, which got its first grant in 2013, more quickly through the selection process. Some entrepreneurs have been critical of the slow pace of the DIV process as well as the benchmarking systems that can limit the flexibility they need to adapt.
DIV is planning to refine its reporting requirements so that the program is not creating an additional burden on grantees but is instead helping them develop as they seek to demonstrate success, Ferguson said.
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