Interviews With BCTA’s ‘Breakthrough SMES’ SolarNow
The company: SolarNow
The inclusive business initiative: selling and servicing affordable solar home systems to rural households and entrepreneurs that live off the grid in Sub-Saharan Africa
Social impact: around quarter of a million users enjoying electricity
Commercial stage: closed first equity investment
Willem Nolens runs SolarNow, a company selling affordable solar-powered energy systems to rural Ugandan households that have no other access to electricity. Here, on the cusp of a new phase of business growth, Willem tells us the story of his inclusive business – the challenges of turning an NGO into a commercial enterprise, the importance of consumer financing and how partnerships aren’t always good for business.
Solar powered learning: girls in Uganda use a tablet powered by SolarNow
How did your inclusive business come into being?
SolarNow started as an NGO that trained people to sell and install solar home systems. In 2010, we decided to become a for-profit social enterprise in order to sell our own systems. Our consumers needed credit to pay for their energy system in instalments, but as credit simply wasn’t available in the market, we had to supply it ourselves. We got donors on board but this proved unsuccessful as we were driven by donor requirements to set up in different countries and pursue aggressive growth. In 2012, we changed our strategy, parting ways with our donors and narrowing our operations to one country, Uganda. This worked for us as we secured new investments on both the debt and the equity side, and could hence offer which allowed us to bring the asset finance model to scale.
How does your business work in practice?
We have designed a modular product range (50Wp – 500Wp) of solar home systems that is distributed through a franchise network in rural Uganda. The systems range from roughly $500 to 5,000 and 95% of the clients opts for the 18-months credit facility. Providing credit and guaranteeing quality go together. You can only sell a quality product (which often is a bit costly) to low-income people if you provide consumer finance. If you’re providing credit you can’t sell a low quality product because no one will continue to pay once the system stops working. Credit guarantees quality, quality requires credit.
We provide the credit directly after undertaking credit assessments based on ability and willingness to repay. Clients make a 20% down payment, then the system is dispatched and installed. Repayment starts after one month and is repaid over the next 18 months.
The credit facility has clearly been a key factor in your success. Have you encountered any problems in providing credit to low-income people?
Write-offs have been less than 0.5% historically although client discipline is an issue that needs monitoring. We need to invest in ensuring timely reminders and payments. If a client pays late they get a call or a visit from us. If they are ill, payment is rescheduled. If the client won’t pay, we take the system back but this rarely happens because people don’t want to be in the dark again. They also want to build a good repayment track record, so they can move on to the next product upgrade. So consumer financing has worked out very well for us.
How have you been able to build the market for your products?
Demand isn’t primarily for solar power but all the more for the appliances. Word of mouth and building trust has been the key to market expansion for us with customers referring their family and friends. After the first movers, it can take up to six months for others to follow. So again quality is essential. In a new location, it takes almost a year for sales to really pick up. Where operations have been going for two years, the product is now selling itself because trust and word-of-mouth work.
Product upgrades are an important revenue driver for us. Five thousand systems have been sold and around 1000 clients have already upgraded. We offer six lights, a radio and phone charger to begin with. People can then upgrade to a TV and panel, and a fridge. We are now looking at laptops and flat irons.
How do you distribute your product?
We operate a model that combines branches with franchisees. Independent franchisees facilitate the direct sales and installation of products while SolarNow runs the branch, oversees the process and provides training and support to the franchises to ensure quality. We moved from a dealer model to this branch model with franchisees in order to harness the entrepreneurial spirit of the installers, while maintaining high quality standards.
Currently, SolarNow has 45 branded branches and franchisees across Uganda. We aim to open up in other East African markets in the second quarter of 2015.
Have partnerships been useful for your business?
Not really. We have found it better to go alone. When we have partnered with others, the relationships have proved too complex with not enough alignment on core principles. For instance, when we were still an NGO in 2009, we tried to partner with MFIs but it just didn’t work. They didn’t want to do asset finance, and didn’t have a rural focus. We realised that MFIs were not going to solve the rural energy problem.
What challenges have you faced in raising finance?
We were naive to start our business in four countries. This was donor-driven. Early in 2012 we closed down our overseas offices, consolidated in Uganda, and sales accelerated because of the increased focus, and because there was no longer any donor dependency. We learnt that investment and commercial bank financing are much more helpful when growing a company than donor money, if only in enforcing commercial discipline and sound decision making. In 2013 USAID provided a guarantee that underpins our local bank loan.
Finding equity investment is hard work. Investors are all very impressed but we find it hard to tick the right boxes. Our balance sheet is like that of an MFI, but our product is energy. Some investors claim to be interested in early stage, but find it hard to accept the risk and work associated with investing. SolarNow has been lucky to have found strong partners. We have just announced our latest equity raise for EUR 2million in October 2014.
Working capital is a constant issue. The business has been chronically cash constrained. Cash constraints are good if it comes to enforcing high efficiency, but are killing your margins and stock-outs proved extremely frustrating to our franchises and sales staff. When operating at a small scale, supply is very expensive. With investment we will be able to grow faster and achieve much higher margins too.
Many branches are at break even. With investment we can go deeper into current areas and wider to new geographies outside Uganda.
What commercial success have you seen so far?
Profit is the most important yardstick to ensure success. The main drivers of revenue and profit are new clients, repayment rates, and clients upgrading. We currently sell a few thousand systems per year, and we aim to sell 100,000 systems before the end of 2018.
What social impact are you having?
Since providing credit requires a lot of client information, including household income and structure, we are able to gather our social impact information quite easily. About one third of our beneficiaries live on under $2 per person per day. Forty per cent of our beneficiaries live on between $2 and $4 per day. One third of our customers are institutions, including clinics and schools, which also reach the Base of the Pyramid. The vast majority of our beneficiaries come from these institutional sales which reach 500 people each. Counting all our beneficiaries who live below $4 per day, we estimate that we have reached 176,000 low-income people to date.
What key lessons have you learnt in your inclusive business journey so far?
Firstly, be wary of partnerships, they aren’t always right for the business. Secondly, avoid dependency on so-called free money, it may take away entrepreneurial focus. Finally, and probably most important, do manage your ambitions – ambition is high, we all want to rescue the world – however, setting up a business takes time and should not be done too fast. Many impact business that grew fast, got stuck and even disappeared, as the complexity grew faster than the management capacity in these businesses.
How do you see the potential for solar energy in Africa?
My goodness, solar in Africa, how obvious does that sound. Yet you go to villages and you don’t see it anywhere. There is massive market potential and we are anticipating good growth. Bigger companies and MNCs should look into solar in Africa. They are ignoring the market except in their CSR.
In this series, we speak to some of the ‘Breakthrough SMEs’ identified in the Business Call to Action’s (BCtA) Flagship report Breaking Through: Inclusive Business and the Business Call to Action Today. These are all small and medium enterprises that are emerging as influential actors in inclusive business. These interviews will uncover the stories of these SMEs – what sets them apart from other businesses, how are they overcoming the many challenges at the BoP and what factors are driving their success?