The Need for a Smarter Funding Ecosystem ( Innovations Case Commentary : Husk Power Systems)

Abstract

Most people don't realize how difficult a challenge Husk Power is tackling today. The geographies in which the company operates are physically harsh and suffer from severe skilled labor shortages. Their technology platform and business model are new and require large teams to implement. Execution of the scale-up plan requires high levels of capital expenditures and R&D spending. Nevertheless, Husk Power is succeeding, step by step, in delivering on its business plan. It's important for us as funders to remind ourselves of this context, as it is an example of how we are expecting entrepreneurs to tackle the world's toughest challenges with new technologies in the toughest markets in the world, all while delivering a commercial return for investors in less than 10 years. It's an enormous task, and one that can only be achieved with a mix of funding instruments-from soft funding to angel investment to venture capital to commercial debt-deployed in ways that are market-building, not market-distorting. A glance at the current funding ecosystem in India reveals a mostly siloed approach to funding: grant providers primarily fund NGOs, debt providers overwhelmingly fund fully collateralized enterprises, and venture capitalists tend to fund revenue-generating enterprises with at least a year-long track record, although there are a few exceptions. The results are threefold: (1) a severe lack of unsecured debt, forcing many enterprises to use expensive equity to fund their working capital requirements, which in turn increases equity investment requirements and decreases the return on investment for investors; (2) limited deal flow for venture capitalists and other social investors, as few enterprises are able to attract sufficient seed-stage funding for proof of concept; and (3) provision of grant funding is largely disbursed in unleveraged ways to organizations that are not structured for scale, thus decreasing its long-term impact. We need to innovate around how the providers of these different funding instruments can work together more effectively.