Lack of access to affordable finance perpetuates global energy poverty. It limits both the supply and demand for energy products that improve people’s health, education, incomes and security. When energy companies that try to bring these products to consumers cannot get the capital to develop and commercialize new technologies, or in-house credit facilities, innovation is stifled.Read
When regional distributors, networks, retailers and agents cannot purchase inventory because they don’t have the working capital they need, the supply chain cannot function. And if banks or MFIs don’t offer appropriate finance, improved energy products remain out of reach of those who need them most.
What we see here is not one deficit, but a series of deficits. What they have in common is a shortfall of various capital coming into an industry in which demand is massive – and growing. To address these deficits, new ‘crowdfunding’ models provide alternative means by which energy suppliers and consumers can access the finance they need, beyond the traditional triumvirate of donor/grant support, debt, and equity investments. Raising money in small amounts from the public – the ‘crowd’ – isn’t new: charities and religious entities have been doing it for centuries. But crowdfunding via online platforms involving a pool of funders that is potentially global in scope for high social impact purposes in developing nations is definitely something new and different, and potentially game-changing.
What is the “Crowd,” and What Is It Funding?
In general terms, “crowdfunding” describes the practice of raising funds in small increments from large numbers of non-institutional sources. Typically, activity is mediated via an online platform and promoted through social media. While a handful of popular crowdfunding websites such as Kickstarter, Indiegogo and RocketHub continue to maintain market share and command considerable brand recognition, hundreds of other platforms occupy an increasingly segmented, specialized and competitive online marketplace through which over US$5 billion had been raised as of last year.
Crowdfunding’s appeal is its potential to unlock new sources of funds for purposes that conventional sources of investment and charitable giving are generally unwilling or ill-equipped to support, or even incapable of identifying in the first place. However, in addition to realizing greater funding availability, crowdfunding usually offers important cost and flexibility advantages as well. Funds sourced through platforms from informal networks of personal contacts (“friends and family”), shared interest communities and consumers are typically less expensive and impose fewer demands and expectations on fund-seekers compared to conventional private, public or charitable sources.
Crowdfunding in Practice
For this reason, crowdfunding has gained interest in providing low-cost, high-quality energy services to the world’s Energy Poor. Indigogo, based in San Francisco, is one of the world’s leading commercial crowdfunding platforms. Since launching in 2008, over US$100 million has been raised through Indiegogo’s website for over 275,000 campaigns in over 200 different countries. Indiegogo is a for-profit, private company that generates revenue by charging a fee to users of its platform. Fees are based on the amount of funds that users raise. While many campaigns support creative/artistic projects and new commercial technologies and products, the platform has also become a popular choice for social enterprises, non-profits and charitable campaigns that are explicitly focused on affecting positive social outcomes. Indiegogo places virtually no restrictions on who can raise funds and for what purpose, provided that the campaign initiator has a bank account and that the intended funding objective does not break any laws.
Campaigns that reach their goal pay a fee equal to four percent of the total amount raised, whereas campaigns that do not reach their goal are charged a nine percent fee. Indiegogo charges no entry or membership fees to use its platform, and campaigners only pay the company if and when they raise money. Campaigners are required to make some investments, such as a short campaign video. However, the scale of investment in both time and money are entirely up to the campaigner.
The company’s business model means the incentives of the company and the campaign are aligned: it has a direct stake in helping members reach their goals. It incentivizes success by increasing the visibility and audience of campaigns that register the highest level of funding activity. Indiegogo’s proprietary algorithm, “Gogofactor,” measures funding activity and elevates successful campaigns to featured spots on the homepage, increasing passive exposure by site visitors. In addition, various tools, tips and suggestions for success based on best practices can be found and accessed for free on Indiegogo.com.
Kiva is by far the best-known philanthropic P2P crowdfunder. Set up in 2005, it was created to enable individuals to lend mwww.kiva.orgividual micro-entrepreneurs via its website. Kiva partners with MFIs, community-based organizations and private companies to facilitate the provision of loans to individuals or small groups of borrowers. The borrowers repay the partner, which repays Kiva, which repays the lender. While the lender is lending at zero interest, the vast majority of loans are then recycled and kept in the system. In this sense, these small loans are de facto donations. As of last year, over one million online lenders had lent over US$691 million to 1.2 million borrowers. It works with 297 different field partner organizations and businesses in 86 countries worldwide.
One aspect of Kiva’s model which distinguishes it is the low risk aversion of its lenders, which allows it to experiment more than a commercial lender can, and this is allowing a steady diversification of its lending activities beyond conventional finance for micro-entrepreneurship to include consumer and SME finance, and its “Kiva Labs” initiative, which allows more rapid testing of new ideas, with lower due diligence requirements: the ‘testing’ is a form of due diligence itself, according to Kiva.
In response to demand from field partners, Kiva has also expanded into several new, high-social-impact verticals. In 2011, the term “Green Loans” was coined to describe diverse forms of Kiva lending that support both entrepreneurial and consumer investments that result in positive environmental impacts. Renewable energy and energy efficiency loans have emerged as an important segment within this new and growing category of Kiva lending. So far, Kiva’s green borrowers have received loans to finance energy efficiency upgrades and the installation of low emissions cook stoves at home (Mongolia); the purchase of domestic solar hot water heating systems (Palestine); and investments in biomass digesters that convert agricultural waste into both clean cooking fuel and organic fertilizer (Mexico).
Another lending platform is Milaap, an Arc Finance partner based in Bangalore. Founded in 2010 by three entre¬preneurs from the microfinance, off-grid lighting and mobile technology fields, Milaap raises loan capital for Indian microfinance institutions (MFIs) engaged in specifically energy, education, clean water access and other forms of essential service lending. By channeling low-cost, flexible loan capital from both online and offline lenders to a select group of MFI field partners, Milaap aims to overcome critical cost barriers that keep such services out of reach for millions of low-income Indian businesses and households. Milaap’s broader mission is to demonstrate the viability of essential services lending to the wider Indian microfinance sector and its commercial funders.
By early 2015, Milaap had raised and channeled over US$4 million into a diverse portfolio of over 26,000 loans, impacting the lives of over 100,000 people, while maintaining a 100 percent repayment rate from field partners – figures which have further grown in the year since. Funds are raised from an increasingly global crowd of lenders and disbursed to borrowers across ten Indian states through a network of 15 different field partners. The company’s energy portfolio continues to advance through its active partnerships with three microfinance institutions based, respectively, in the states of Orissa, West Bengal and Manipur. Due to the comparatively small size of loans for clean energy products such as solar portable lanterns and improved cook stoves, energy represents only ten percent of Milaap’s total portfolio. However, with over 2,000 borrowers financed to date, energy accounts for nearly one quarter of all loans disbursed.
Milaap’s “retail lending” model shares much in common with Kiva’s peer-to-peer approach. Milaap also works through a growing network of field partners that includes non-profit, community-based microfinance organizations as well as private companies. One hundred percent of funds provided by lenders goes towards borrowers, and, like Kiva, Milaap sees very high rates of relending, enabling the company to continuously revolve funds.
However, there are important differences. Milaap is a private social enterprise that operates on a for-profit basis. The company generates revenue by applying a small interest fee (typically five to eight percent) to field partners that receive and disburse the credit that it provides. Unlike Kiva, Milaap is exclusively focused on India, at least at present. And while Kiva’s energy-access lending can be seen as part of a broader portfolio diversification that occurred organically over time, energy lending has been a core part of Milaap’s vision since the company’s inception. Indeed, Milaap was launched for the explicit purpose of providing capital for unconventional “essential service” loans, such as energy lending, that mainstream commercial institutions and wholesale capital providers commonly view as high risk and therefore tend to eschew.
Milaap capital is flexible because the company does not dictate to field partners either the interest rates or terms that it must offer to its clients. This can translate into a variety of different benefits for partners and borrowers: loans can be structured in different ways to increase affordability, and thus bolster demand, as well as the ability to pay, among borrowers.
A final example of an online platform being used to fund renewable energy is SunFunder – a US-based private solar financing company that sources low-cost, short-term debt for solar companies operating in off-grid, emerging markets. To date, the company has maintained a focus on East Africa and has recently expanded to India. In contrast to Milaap and Kiva, which focus on providing loans to end-users and energy micro-entrepreneurs, SunFunder aims to meet the comparatively larger working capital and project finance requirements of established solar SMEs. Its website is designed to simplify the process of project review, selection and oversight, and to be as simple as possible for lenders as well, allowing credit card or Paypal-based payments. The minimum investment that lenders can make is US$10, and the maximum is whatever amount remains unfunded. Like both Kiva and Milaap, lenders are repaid on a monthly or quarterly basis.
SunFunder is still a start-up, but in the long run, it aspires to secure capital for off-grid solar companies through a variety of different means, and has deployed crowdfunding as a means of rapidly entering the space, and to demonstrate the bankability of off-grid solar companies to a wider field of lenders and investors. In this sense, SunFunder uses crowdfunding as a strategic bridge to larger sources of investment. One SunFunder loan recipient is the solar lantern distributor SunnyMoney, which, with more than one million units in sales, is the most prolific distributor of retail solar products in Sub-Saharan Africa.
Sunfunder’s mission is to ensure better debt funding through crowdfunding and also directly from private investors: SunFunder blends funds raised from its online platform with capital that it raises from accredited and institutional investors in the form of Solar Empowerment Notes (SENs) - a debt instrument that, unlike funds raised through the crowd, offer a financial return. SunFunder closed its first issuance SENs in September 2013, raising US$250,000 from four separate investors.
SunFunder generates revenue by charging a one-time capital sourcing fee to all borrowers and nine percent to 15 percent interest on all funds disbursed. Unlike Kiva and Milaap, the company does view the ultimate prospect of sharing profits with its network of lenders as a long-term goal, once regulatory reforms permit. SunFunder currently does, however, enable lenders to direct the reinvestment of interest gained to subsequent borrowers through its impact point program. In short, impact points represent small amounts of interest that are repaid with principal to the lender; while that interest cannot be withdrawn by lenders, it can be added to additional investments made by the lender.
Crowdfunding is unlikely to ever solve, alone, the demand for low-cost capital in the small-scale energy finance sector. It requires an investment in time and effort – far beyond putting a campaign or some beneficiaries on a website. Further, campaigns must be focused in order to succeed.
The focus of campaigns is critical to success, with a specific product orientation and if possible, rewards for lenders. If this is done, the benefits of crowdfunding can extend beyond capital to include valuable promotional and marketing benefits. By nature, crowdfunding is audience-driven and the ability of fundraisers to clearly and persuasively articulate and promote their ideas and products to large numbers of people drives success. So increased exposure to companies, projects, products and ideas can bring future customers, investors and media attention that can be leveraged further than small donations or loans alone. And if one thing is clear, it’s that bringing to a global audience the nature of energy poverty and the exciting affordable solutions to it which now exist, can be an important part of the expansion phase this sector is now in.