This post originally occurred on the Village Capital blog at: http://www.vilcap.com/village-capital-case-study-eco-fuels-kenya
The following post was written by Myles Lutheran, a Director at Eco Fuels Kenya. With a background of developing early-stage, venture-backed companies in the United States, Myles first came to Eco Fuels Kenya through the Frontier Market Scouts Program, co-founded by Village Capital.
Village Capital: Developing Impact Investments Globally
Over the past six months I have been working with Eco Fuels Kenya, a startup which has become Kenya’s largest producer of organic fertilizer in only one year since its founding in March of 2012. I first engaged with Eco Fuels Kenya through Village Capital, an investor in the company, who sent me to help develop the business through a talent-placement program. Village Capital views Eco Fuels Kenya as an ‘impact investment,’ an enterprise with the potential for both financial returns and a positive environmental/social impact. Despite the fact that JP Morgan estimates that $17 billion will be dedicated to ‘impact investing’ in 2012 and 2013, my experience with Eco Fuels Kenya has exposed that a negligible amount of those resources get to early-stage enterprises creating impact.
This is a problem. As the impact investing industry has started to take shape over the past few years, most funds have shifted away from supporting early-stage enterprises due to the high cost and difficulty of performing due diligence on companies serving base-of-the-pyramid (BoP) populations. These changes in criteria have only worsened the biggest problem that most investors are facing: not enough investment-ready companies to put the growing amount of impact investing dollars into.
Recognizing this problem as an opportunity, Village Capital has developed a unique peer-selection model that makes sourcing, supporting and investing in early-stage enterprises effective. I have seen the impact of the Village Capital model first-hand at Eco-Fuels Kenya, who just six months after being selected as the top social enterprise in the Village Capital/GrowthAfrica: Nairobi program this past December has gone from a small-scale pilot project to an investment-ready company.
Eco Fuels Kenya’s Participation in a Village Capital Program
Just months before the Village Capital Nairobi program started last fall, Eco Fuels Kenya founder Alan Paul had begun market validation for the biofuel and organic fertilizers that he produced from local, indigenous materials sourced by BoP community members desperately in need for additional income. All signs were going well, but already having sunk all his personal funds into the venture, Alan was in need of more capital to increase production to a point where it could reach its revenue potential. Spending his entire life living and working in Eastern and Southern Africa and operating in a small, rural town in central Kenya, Alan had never heard of the term ‘social entrepreneurship’ and had no way to be connected to the ecosystem available to support for-profit ventures seeking social change.
A friend recommended Alan apply to the Village Capital program where he would get training over four months and the chance at a $50K investment. Alan applied and was selected from over 100 applicants as one of a cohort of fifteen. At the end of the four-month program Eco Fuels Kenya was picked by their peers for a $50K investment, accelerating the company’s progress in ways that otherwise may have taken Alan years to accomplish on his own:
- Business Model Validation
Like many social entrepreneurs Alan was building an enterprise that did things nobody had ever done before, specifically building a raw materials supply chain based on sourcing unused, indigenous materials through BoP community members and creating a commercial market for organic fertilizers sourced and produced in Kenya. Working with the other social entrepreneurs in the Village Capital program helped identify bottlenecks and focused Alan’s model to make it stronger than it was when he had developed it on his own. Since the participants in a Village Capital program were peers rather than competitors, it was a great opportunity to get honest, unbiased feedback from other impact-driven entrepreneurs who wanted to see Eco Fuels Kenya succeed.
- Committed Capital
Alan had put all the funds he had available into Eco Fuels Kenya and had proven that he could source his raw materials and sell his finished products, but he needed more capital to grow the business. Despite this need for funds, Eco Fuels Kenya didn’t meet the strict requirements of most funds investing in social enterprises and wasn’t in need of the amounts that many impact funds have adopted as their minimums in recent years. Since the money in the Village Capital program was pre-committed at the start of the accelerator and the investment was decided upon by the entrepreneurs in the program rather than analysts in a far-removed office buildings, Alan had the opportunity to get money vital to the development of his business without the lengthy, distracting and overwhelmingly unsuccessful process of courting impact investors.
- Exposure to the Ecosystem of Impact Investing
With a supply chain that never stretches more than 50km from the Eco Fuels Kenya factory in central Kenya, there was little hope that impact investors would ever find Alan’s company. This all changed when he participated in the Village Capital accelerator program, as Eco Fuels Kenya was suddenly exposed to a global network of impact investors who, mostly based in western countries or major cities, rely on Village Capital to generate strong leads in geographical areas they don’t have the capacity to reach on their own. The development of the model in the incubator, including being selected as a winner, was a strong ‘pre-due-diligence’ mechanism that showed the impact investing community that Eco Fuels Kenya was worth taking a closer look at.
Winning the Village Capital investment gave Alan Paul and the rest of the Eco Fuels Kenya team a huge confidence boost. The funds received were used to help purchase higher-capacity equipment and move from a pilot site into a full-size factory. With an improved model that was developed alongside supportive, entrepreneurial peers Eco Fuels Kenya is adopting new processes and technologies to expand its social and environmental impact while simultaneously increasing revenues and moving towards its first year of profitability.
Eco Fuels Kenya takes on a Frontier Market Scout
Shortly after their winning of the Village Capital investment I was placed with Eco Fuels Kenya through the Frontier Market Scouts program, a talent development program that Village Capital co-founded with the Monterey Institute for International Studies to provide career opportunities for professionals interested in the impact investment sector and hands-on assistance for enterprises like Eco Fuels Kenya. The combination of my experience developing processes, eliminating bottlenecks, and launching brands at venture-backed startups in the United States along with my passion for global social enterprise and environmental sustainability gave me unique credentials to help Eco Fuels Kenya further accelerate their development at a pivotal stage. After learning everything I could about the organization, environment and market I identified three primary areas where I would focus my initial efforts:
- Re-Branding to Reflect New Potential
Due to the discovery of market potential during the first year of operation, Eco Fuels Kenya had shifted its focus from biofuel to organic fertilizer. The problem was that we needed to raise additional funds for working capital and none of the internal or external documentation had been updated to reflect this new opportunity. I knew that in order to get the right attention from the right people, including both large agro-consumers of fertilizer and future impact investors, we would need a brand that reflected our new focus and potential. Within two months of my arrival the company had a new business plan, new website and updated product packaging to move from pilot phase to production stage.
- Scaling-up of the Seed Collectors Network
As fellow entrepreneurs in the Village Capital cohort identified with Alan, with new machinery and a bigger factory, the barrier to scale would be the rate at which we could collect our raw materials. Eco Fuels Kenya’s Seed Collectors Network, consisting of BoP community groups living in forested areas where our inputs grow, was lacking the structure and predictability of a healthy supply chain needed to grow the business. We knew we would need to formalize this network not only to reach our targets at our initial factory, but also to replicate the network at each additional factory in the future. I have written-up a proposal and raised grant capital for a mass SMS-based project which we believe will help us accomplish our supply chain goals, and early signs of its implementation look promising.
- Raising Additional Working Capital
Raising investment money is an incredibly time-consuming and distracting process to running an early-stage venture. Alan had successfully raised money through the Village Capital program to expand the factory and purchase new equipment, but more was needed to cover the gap between purchasing our raw materials from our Seed Collectors Network and collecting revenue from our large agricultural clients at a production scale. With an increased knowledge and exposure of the impact investing ecosystem attained from the Frontier Market Scouts training, I am able to confidently take the lead role in engaging and following-up with investors that have learned of us through Village Capital so Alan can spend his time on what will ultimately make the business succeed: running an efficient factory and selling fertilizer.
Recently appointed a Director of the company to help focus on areas of business development, I am excited to be a member of the growing Eco Fuels Kenya team and help address challenges as we scale our initial factory site and prospect second sites for replication. This unique opportunity to develop a high-impact, developing-country social enterprise would have otherwise been impossible without the Frontier Market Scouts program and Village Capital.
Eco Fuels Kenya’s Future
The new factory and equipment allows Eco Fuels Kenya to produce enough to meet the growing demand for its products and makes a strong business case for additional working capital needed from other impact investors. Winning the Village Capital program has helped to generate strong interest from investors, and has also connected Eco Fuels Kenya to the ecosystem of social enterprise, creating the opportunity for innovative, industry-changing partnerships to help establish a market presence and expand upon Alan’s original plan for scale.
With the addition of funds from a number of investors over the next few months, Eco Fuels Kenya will be on track to grow beyond its current factory by the end of this year and begin its vision of replication across East Africa. What was started as a biofuel company has turned into Kenya’s largest producer of organic fertilizer, with the potential to engage thousands of BoP community members on both ends of its supply chain, thanks to the teamwork of the social enterprise community facilitated through Village Capital and the investment received at a critical stage in the young company’s development.
As Village Capital increases the number of programs it runs and expands into new countries, stories like this begin to pop up all over the world and the impact investing community has a new way to find investment-ready social enterprises.
If you’re interested in following in Myles’ footsteps, learn more about the Frontier Market Scouts program by visiting the program’s website. An innovative program to place career-transitioning professionals with social enterprises and impact investment funds all over the world, Frontier Market Scouts is helping to address the need of talent in the social enterprise space while furthering the impact and increasing the chances of success for companies within the global network of Village Capital and its partners.