Did Impact Investing F%&k Up the PAYG Solar Sector? Yes, but it also holds the solution.

LIB Solar
LIB Solar
Nov 1 · 4 min read

A key finding of Acumen’s recently published report on the pay-as-you-go (PAYG) solar sector is this: “Lack of debt and a resulting over-reliance on equity in the early years of the market’s evolution led to a significant number of companies being overvalued.” The report focuses on how over-valuation in the sector now hinders exits. But the implications of the report extend beyond the finance-side of PAYG solar and reveal some unintended consequences of impact investing that continue to hurt the sector.

Equity investments — even from impact investors — require an expectation of out-sized returns. As Lauren Cochran of Blue Haven Initiative writes here, many of the early investors in PAYG solar were aiming for 6x returns or more. To have any hope of achieving these returns, early PAYG solar businesses had to scale fast. Technology seemed to provide the answer: lock-out technology meant that solar home systems could be remotely disabled when customers didn’t pay, and mobile money meant that payments could be collected at scale without the cost of face-to-face payment collection.

But this pressure to scale and reliance on mobile technology created an achilles’ heel in the PAYG business model. PAYG solar businesses assumed that lock-outs and mobile money would be enough to collect payments; old-fashioned, face-to-face customer service wasn’t necessary (and was bad for scale).

Technology cannot substitute for face-to-face customer relationships.

In fact, PAYG solar is all about payment collection — and effective payment collection depends on customer relationships. Going back to Lauren Cochran’s blog post, “Human touch is required on the customer side.” Customers are less likely to pay when they only interact with a company via automated SMS messages or occasional calls from a call center. And if a maintenance issue is not addressed, that customer is not going to pay in the future. The reliance on commission-based sales agents — another consequence of the pressure to scale — further hinders PAYG solar’s ability to collect payments, conduct maintenance, and up-sell customers on new products. (We’ve written more about the limitations of a commission-based sales model here).

Here’s the problem now: Impact investors are doubling-down on the first generation of PAYG solar companies, supporting the investors’ initial equity with larger-and-larger rounds of debt financing. But despite these investments, big PAYG players, with their scale-at-all-costs business models, struggle to reach profitability. Meanwhile, little investment remains for smaller PAYG companies testing new business models in what is still a young sector.

Acumen’s report offers a solution to this problem: “Off-grid companies and their investors [should] shift their focus from growth at all costs to demonstrating clear progress towards profitability.” Part of this solution involves investors being more willing to make bets by debt-financing young businesses with a less-than-proven track record but good unit economics.

Ideally, a diversity of business models would receive debt financing, and the best models would rise to the top. A variety of models could fit different market conditions, and companies could pick-and-choose (i.e. copy or acquire) the most appropriate models for their markets. The result would be a healthier, stronger PAYG sector as a whole.

Indeed, small-scale debt financing *should* be fairly attractive for impact investors. For one thing, the returns on equity have been pretty dismal. According to the Acumen report, one of the most successful exits occurred when Acumen sold its (relatively small) stake in d.light for a 2.4x return after 11 years. Acumen would have been better off with a 9% loan over this time period. Many companies (like ours) would jump at the chance of debt-financing with an interest rate at 9%, or even higher.

Debt-financing also allows investors to re-circulate their capital to new business models, contributing to the evolution of the sector and achieving greater impact on poverty and the environment. (Another consequence of the current investment dynamic is poor, rural customers are being left behind as large companies shift their focus to serving urban, wealthier customers to meet investor expectations.)

At LIB Solar, we’ve been focused on profitability from the start. We serve a small, idiosyncratic market, so we never believed equity investment was a good fit for us. We emphasize face-to-face customer service and community involvement because we find that this “human touch” dramatically increases the on-time payment rate. Technology, for us, is simply a way to augment our ability to serve customers and improve the efficiency of our operations.

We also prioritize the health of our portfolio over growth. We use data to identify communities and customers most likely to pay on-time, and we are fairly aggressive at repossessing material from customers who don’t. We simply can’t afford to have PAYG solar assets sitting idle, so we repossess and redeploy those assets to maintain good unit economics.

In the end, we use our resources efficiently and keep our overhead low. We’re fortunate that we’ve been able to raise debt from individual investors who believe in our vision, and fund some growth through grants. Our goal is to qualify for crowd-funded debt in the next year, and transition to commercial financing in a few years. So far things are going well, but we’ve been fortunate. A dozen companies like ours have probably failed — or never got off the ground at all — because of a lack of impact investment, even as total “impact” investment in the sector has exploded. Here’s hoping that a greater diversity of PAYG 2.0 companies will receive funding in the future. We can all learn from their experiences.