Acumen Fund Breakfast Discussion on Energy

[Editor’s note: this entry was originally posted on the Acumen Fund blog.]

Yesterday morning, Acumen Fund hosted a monthly breakfast for members of our Partner community featuring Acumen Fund Director of Capital Markets and Energy Portfolio, Raj Kundra. With 30 guests in attendance, this promised to be an engaging discussion.

Brian Trelstad, Acumen Fund Chief Investment Officer, opened up the discussion with reference to Acumen Fund Advisory Council member Peter Goldmark, who observed in 2006 that marginal changes in the climate will affect those on the margins first and most profoundly. Later that year – in no small part due to Peter’s influence – Acumen Fund made a Clinton Global Initiative commitment to launch an energy portfolio, and we began our work in energy 12 months ago.

Raj began the talk with a description of the Acumen Fund model, and how we raise philanthropic capital to invest in breakthrough enterprises that provide critical goods and services to the poor – with a focus on health, water, housing, and most recently energy. So while Acumen Fund acts like a venture capital firm, we differentiate ourselves with our focus on large-scale social impact, coupled with economic sustainability, as our primary objectives. We invest in management assistance to support our investees – both before and after we make an investment. And we believe in the power of sharing what we are learning, based on the recognition that in a world with trillions of dollars of capital, we will always, by definition, be a relatively small player.

Raj continued with a discussion of the poverty trap that poor people face with respect to energy. As of 2005, poor people spent more than 14% of their incomes on energy, and Raj estimates that these numbers have increased to over 20% with the recent surge in energy prices. In addition, the poor often use fuel sources that are expensive, inefficient, and dangerous (for example, kerosene lamps or burning wood for cooking in open spaces). Finally, with limited access to energy, productivity (whether on the farm or the result of the shortened day for studying or work) is simply lower, all of which contribute to a ‘poverty trap.’

Even though this problem exists, there’s a significant market opportunity in energy, with the poor spending roughly $433 billion a year on energy – or about $100 per person per year – most of which is in Asia. So a lot of spending is already happening today, and the question for Acumen Fund is how to find entrepreneurs who are looking to provide products that are better, safer, more energy efficient, and therefore lower cost for poor consumers.

Raj scoped out Acumen Fund’s focus areas as broadly divided between “Renewable Energy Generation & Supply” (micro hydro, wind, biomass, solar, biogas, and biofuels) and “Energy Consumption & Appliances” (high efficiency lights, cookstoves, and other household level applications). Broadly speaking, Acumen Fund sees opportunity in these two areas, though some areas (like large scale generation and supply, where the state plays a heavy role; or direct-to-consumer retailers) look to be out of scope for now. Raj went on to describe Acumen Fund’s portfolio of closed and approved investments, totaling $2.5 million, which focus on LED lighting and a micro-hydro provider in India; as well as our late-stage pipeline of about US$4 million of investments on which we are doing serious due diligence. We are seeing significant progress in the portfolio and expect it to grow considerably over the coming 12 months.

Raj closed the presentation with a diagram of what it takes to navigate the carbon markets, pointing out that there are across the board opportunities for Acumen Fund to provide expertise and support to entrepreneurs; and also noting that there’s a particular role for patient capital to play in these markets, where a two year certified emission reduction process can significantly alter the economics of a given investment.

This discussion quickly shifted gears, touching on LED light prices (currently US$10 to $30, with the expectation that costs will continue to drop as companies scale); the role of mini-grids (by definition less efficient, but potentially effective in areas where the grid will not be built out for the foreseeable future); how to ensure that customers get access to energy; whether and how Acumen Fund should invest in biofuels companies (where we have been extremely cautious); how we think about environmental impact in this portfolio in particular; and how to compare various options at the level of the low-income household, to decide which interventions might have the greatest impact.

In the end, I was left with a sense that Raj and Acumen Fund have both a broad and deep understanding of the energy market, but that there are a number of truly complex issues where we and others still have a lot to learn. We hope to continue to learn by doing, supporting entrepreneurs with the passion, vision, and commitment to execution to help millions of people to escape the poverty trap.