The path to developing a bankable clean energy SME (small and medium enterprise) in Asia is a long and arduous road that often times requires multiple capital infusions along the way. Unfortunately, external sources of capital for early stage endeavors have become increasingly scarce and difficult to access, leaving entrepreneurs limited resources to complete feasibility, proof-of-concept(s), and other early-stage activities necessary to attract external investors. Public Private Partnerships such as the Private Financing Advisory Network (PFAN) attempt to address this issue by providing these early-stage businesses and projects varying forms of technical assistance (i.e. professional services such as financial advisory, strategic consulting, etc.) that augment SME resources and capabilities during this early stage of development and, in turn, improve their ability to navigate early-stage development and successfully raise external sources of capital. Since late 2013, Resonance has been working on the USAID-funded PFAN-Asia project, which has the ambitious goal of mobilizing $1 billion in capital for clean energy SMEs across the region.
Across the Asia region, PFAN’s portfolio spans a wide array of businesses: from end-user focused retail startups focused on waste-to-energy and solar home installations to more ordinary energy producing assets such as biomass power plants and wind farms, the companies we work with represent an eclectic mix of entrepreneurs and innovative ideas from across the region. Within the portfolio, we can broadly divide companies into two major categories of financial approaches: those who are seeking to raise project finance, and everyone else. This simple categorization helps us orient entrepreneurs to the general characteristics of the capital they are seeking, captured in the table below:
Along each of these financial approaches, PFAN plays an important role in assisting SMEs with navigating and engaging with the various players in the financial ecosystem – primarily through mentoring and match-making. PFAN does this by understanding the sources of capital and when it is appropriate to access them.
While there are many potential sources of capital (e.g. banks, PE funds, and DFIs), in general, there are very limited options during early stages of development where the risk is the highest, and capital is constrained to equity from informal sources such as friends and family. As the business or project matures, risk typically decreases inversely, and additional options begin to emerge that were previously inaccessible, including debt. In the context of New Venture Finance, this means that it is highly unlikely that a clean energy SME will be able to secure a loan from a commercial bank for early stage, proof-of-concept product development. What follows is an example of how access to capital evolves with increasing maturity for a typical New Venture Finance company; an analogous chart for Project Finance would look very differently across the board.
It is important to note that even though many investors might evaluate opportunities along similar fundamentals (i.e. management capacity, maturity, competitive positioning, exit opportunities, and ROI), the degree to which each plays in shaping a particular opportunity’s attractiveness will vary widely based on their individual allocation strategies.
The growth potential for clean energy in Asia is simply enormous, but unless they can access capital SMEs in the region will struggle to access this opportunity. By helping promising clean energy SMEs better understand how investors evaluate opportunities and by connecting them to the right sources of capital, PFAN strengthens the ability of small companies to seize the clean energy opportunity by sourcing the right capital at the right time.