Providing early stage financing mechanism for clean technology enterprises
Obtaining financing for climate technologies is particularly challenging in developing countries due to additional uncertainty and risks that are hard to mitigate in private financial markets, lack of patient and low-cost capital, poor creditworthiness, lack of guarantees and low availability of capital for public investment. An analysis of Technology Needs Assessments (TNAs) confirms that the most commonly reported economic and financial barriers are the lack of or inadequate access to financial resources and inappropriate financial incentives (UNFCCC, 2013).
With the abundance of resources for climate finance, there is a shortage of bankable climate technology projects in developing countries. The lack of adequate financing is particularly acute for the first deployment in a new market, before a technology has established a track record. Overall, there remains a significant need for climate finance that is prepared to take on more risk and that is suited to smaller investment projects.
The KCIC Early Stage Finance Facility is proposed to finance development of clean technology startups in the renewable energy, agribusiness, water and sanitation sectors. It will comprise of an equity investment arm and a debt financing arm.
This is the earliest stage of venture funding which enables the enterprise to meet its financial responsibilities while getting started. The primary objective for KCIC is to enable the enterprise to raise money on a larger scale, at which stage KCIC will introduce and facilitate investment by later stage investors.
Some of the benefits that the enterprises will receive through the seed stage equity financing include certification or a validation benefit. The rigorous screening process that the enterprises will undergo validates the current health of the business and its prospects. A knowledge benefit through the knowledge transfer that they will receive from KCIC who will play the role of advisor and mentor to the enterprises.
They will receive financial benefit. A healthy debt to equity ratio will make it easier for these enterprises to obtain follow-on debt financing to finance further growth. KCIC’s equity investment facility will be a key element to the overall incubation and acceleration support provided to clean technology enterprises by the center. Enterprises will be able to work on other aspects of their ideas and prototypes to bring them to market.
KCIC will also help the entrepreneurs to deal with later stage investors. Assistance in pitching their startups and how to manage the deal process will be provided. Having KCIC on board as an investor will be a benefit, as potential later stage investors will be more attracted to the enterprise. Throughout the financing process, KCIC will continue to provide advisory services and support to the financed clients, the five service offerings that are provided to its incubation and acceleration clients. Overall, financing will continue to form a component of KCIC’s offering to clients.
As for the debt financing arm, it will be on offer to KCIC enterprises in all phases, development, startup, early stage and growth. It will be segregated into three categories: micro and small scale clean technology enterprises, medium-sized clean technology enterprises and small scale infrastructure projects (SSIPs).
Micro and small enterprises will receive direct finances from the seed fund for their short term working capital requirements. While a structured debt finance facility will target medium-sized businesses and small scale infrastructure projects. It will entail setting up of a loan guarantee facility for clean technology enterprises, acting as a first loss guarantor, and also bringing in other MSME guarantee providers and financing partners, such as banks, to unlock financing to medium-sized businesses and SSIPs, will be ideal.
For this facility therefore, KCIC will not be providing direct finance, but will structure facilities that unlock financing for such enterprises.
By Michelle Mung’ata