Solar Financing in India - Part 3
Fundraising - Equity and Debt
As a solar financing company, money is your raw material. Each residential / SME project or loan project could be Rs. 3 - 50 Lacs (300K to 5 million), hence the amount of capital required is much higher than most early-stage, tech-driven, asset-light startups. Apart from capital for projects, you would also need capital for running operations (building a team, marketing etc). Hence - This is a game of constantly raising capital and deploying it in projects or loans therefore fundraising is an important element of the overall game. I would like to share some of the avenues that you could explore.
There are numerous accelerators, awards, grants, and angel networks that can fund your first half a million. Over the years, as climate change has become a big talking point - the ability to raise seed has become easier.
Accelerators - India has several early-stage climate accelerators. Folks like Pratap Raju (Climate Collective), Starlene Sharma (Act Grants), Shravan Shankar (Climake) and others have dedicated many years to building the early stage climate ecosystem. Even institutions - both educational and corporate - have programs that help shape thinking. Sunvest Capital was a part of ISB DLabs’ first fintech cohort. Through ISB we were introduced to many NBFCs and Banks. The biggest advantage of an accelerator is that it can introduce you to the right set of partners while you are still refining your business plan
Awards - Awards can be a great platform to get some recognition and if it has a cash component, then its non-dilutive capital, which can be very helpful to build tech, pay a person’s salary etc.
Grants - I am immensely grateful for the grant we got from US India Clean Energy Finance Program … the grant allowed us to work with some of the best consulting and legal advisors to frame the building blocks of our technology stack, GTM strategies and legal agreements. There are many options for domestic and international grants for clean energy innovations however please be aware that grants take a long time - First you have to apply, then win, then RFPs for each workstream - by the time you use that advice / capital - you are already many months late - that’s like an eternity for an early-stage startup
Caution - Too much of anything is not good. I would like to caution that make startups end up going to too many accelerators and participating in too many awards. What is too much or too little is a matter of personal judgment but one must understand that after a point, this can all become a distraction and can give the founding team a false belief that they are growing. The above forms of capital/encouragement are good but do keep an eye on the north star - you want to make this a commercially viable and fundable venture
Angels - In India, the success of the startup ecosystem in the last ten years has allowed for a strong community of angel investors. There are many angel networks that one can go to - In my experience, angels are better suited for asset-light businesses like e-commerce than asset-heavy businesses like solar financing
The VCs in India, like any place else, focus on rapidly scaling sectors. That’s why there has been a focus on new economy sectors such as fintech, e-commerce, edtech. The ‘tech first’ component allows for quick scale and within one to two years there is ample feedback on where the business is headed. In that context, cleantech is still run by the old economy regulations and requires significantly more capital, even to test an idea and get that initial feedback on a minimum viable product. As discussed in part 2 of the essay, the solar financing business scales up slower than what may seem intuitive, which is why I have not seen much VC activity in the solar space. Much of this changes the moment you introduce tech-first products or services like data analytics, and marketplace models. VCs are keen on climate change, cleantech, and ESG themes - We just have to find an investable proposition.
Once you reach a significant scale or size, the traditional private equity business is a vibrant ecosystem that already has many historical precedents of success in India.
Entrepreneurs must understand that regardless of ticket size, funds have a life of their own - say 7 to 10 years. The fund managers make an investment and would perhaps like to exit 3-5 years later … If the sector does not scale fast enough, the investment is not prudent because the exit won’t be easy/possible.
Everything we discussed till now was new age thinking but debt in India (at least for solar) still works in the traditional way. If you are an NBFC, it will take you 3 years to get a credit rating, only after that, can a firm raise debt capital at decent rates. It's important to realize that as a lender you may know the asset class well but if you want to churn your portfolio - you will have to go to other NBFCs and Banks to take on fresh liabilities - this could be through refinancing etc. In which case, they too have to be equally convinced of your financial product as they will be carrying the risk, partially or wholly, going forward. If they perceive risk in your product, they will price in the risk, making your liability side unviable to do business.
Let me share explain with an example:
You believe you understand the solar financing market well - You have solved the customer acquisition, EPC, quality, regulations, repossession, and resale issues. Say after all this you think you price your product at 14%
After deploying Rs. x million, you will go to some other NBFC or Bank to refinance or securitize your book. If that lender does not buy into your thesis, they may price the monies to you at say 13%
Now 1% spread is too little to absorb opex and credit losses
The above Rs. x million could be any number but the bigger it is - the more takers you will find for debt
The above analysis does not mean raising early-stage debt is impossible - there are a few ways to do it:
Patience - Give yourself a lot of time to reach that scale.
This may include pledging promoter property to get some early-stage debt.
Also, note that any form of capital provider would like to see the repayment on your existing portfolio to see the proof of your thesis. If you have given a 5-year loan, they would like to see a year or two of the loan repayment before they refinance the loan i.e. More patience!
Track Record - Take a small loan, build a relationship with the lender through a repayment track record and slowly increase that facility
Start Big - Start out with enough equity to prove the thesis even if lenders don’t fund you
The solar financing ecosystem in US, Europe, Singapore is very strong. For an early-stage company, there are dedicated impact and environment-focused funds that look at solar financing for both debt and equity.
Foreign investors in India are unaware of the regulatory complexities in the solar and financing domains - If you provide comfort, there is a significant pool of capital waiting for your startup.
I continue to believe that there is no dearth of capital for the right business model - especially if you are solving for climate change. It’s the asset side of the business which is harder to solve and if you can crack that, the liabilities side will follow. Nevertheless, it’s an ongoing exercise of raising and deploying capital. If you are building an org chart, it will help to have a dedicated resource for fundraising.
In the next part, I shall write about lending operations - Managing customer acquisition costs and post-deployment oversight.