Proof of concept funds

Proof of concept funds: Lessons from Kenya’s startups

Proof of concept funds

Climate InnovationACCELERATING INNOVATION IN CLEAN TECHNOLOGIES IN KENYA

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Proof of concept funds

INTRODUCTION

Africa is witnessing a surge in start-ups as attention shifts from churning job-seeking graduates, to job creators. Studies have shown that millennials are an entrepreneurial generation with as many as 67% aiming to start a business as opposed to climbing the corporate ladder to become CEO. The result is a rapidly expanding start-up scene with innovations hubs being created in major African cities such as Capetown, Accra, Lagos, Gaborone and Nairobi among others. This has led to the growth of a start-up ecosystem in these cities that largely consists of private sector players with the exception of Gaborone.

The start-up ecosystem has also contributed to the growth of an entrepreneurial culture especially in the information and communication technologies sector. According to Disrupt Africa, in 2015 alone, tech start-ups in the continent raised USD 185,785,500. However, other sectors have largely been left behind with only a few players supporting start-ups in health, education, energy, water and agriculture.

The World Bank through the InfoDev Climate Technology Programme (CTP) is one of the pioneers in supporting start-ups and innovations that address climate change. Since 2012, CTP has established a network of seven Climate Innovation Centers (CIC) in Kenya, Ethiopia, South Africa, Ghana, Morocco, Vietnam and Caribbean. Kenya boasts of the first CIC which supports start-ups and innovations in renewable energy, water and agribusiness.

Proof-of-concept funds are monies given to entrepreneurs to test the technical, operational and commercial viability of their products, services or business model.

Many universities and incubators provide proof-of-concept funds to students and entrepreneurs that have business ideas or technologies that have market potential but have not been tested. The funds are then used to establish viability, isolate technical issues, suggest overall direction, and provide feedback for budgeting and other internal decision making processes.

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Proof of concept funds

BACKGROUND

The Kenya Climate Innovation Center (KCIC) is an incubation center that opened its doors to entrepreneurs in October 2012 and has been supporting the development and deployment of clean technologies in the country. By May 2016, approximately four years since the project began, the center had incubated 134 enterprises in renewable energy, agribusiness and water. Seventy percent of the enterprises are in renewable energy, 20% in agribusiness and 10% in water. A few businesses cut across two or more sectors.

KCIC offers several services to entrepreneurs including business advisory, access to

finance, access to information, access to facilities and lobbying for an enabling environment for clean businesses to thrive. Access to finance has three main components: proof of concept (PoC) funds, leveraged funds and the soon-to-be launched seed fund. This brief focusses on PoC funds. Between October 2012 and September 2016, KCIC disbursed USD * in PoC to 24 enterprises in Kenya. The funds were meant to test the technical, operational and commercial viability of technologies and business model innovations in improved cookstoves, solar home systems, organic fertilizers, bio pesticides, hydroponics farming and new rice for Africa, among others.

The companies that received funding and their area of innovation is provided below.

Company Innovation being tested1. Schutter Energy Pay-as –you-go biogas

2. Four for One Making briquettes from sugarcane bagasse

3. Global Supply Solutions Ltd Making briquettes from pineapple waste

4. Mushroom Blue Mushroom production using coffee waste as a substrate

5. Eco Fuel Kenya Market development and product testing for the bio-fertil-izer produced as a by-product of croton nuts

6. International Research and Development Africa

Efficient stoves that use bio ethanol as a cooking fuel

7. Keekonyokie Packaging biogas into a cylinder and thus make it portable

8. Develatech Test customer demand of a double burner energy efficient cook stove.

9. Kenya Stove Market and product testing of improved cookstoves and fuel made from prosopis juliflora (Mathenge).

10. Ngare Narok Semi-automation of the organic leather tanning process

11. Kickstart Increasing the efficiency of solar water pumps

12. Sustainable Energy Services To pilot adoption of vermiculture technology which in-volves adding earthworms to compost and other other organic agricultural or kitchen waste.

13. Sunny Money/Angaza The most suitable pay-as-you-go arrangement for popula-tions in semi-arid areas

14. Human Needs Project Feasibility and establishment of water kiosks to increase access to clean water in Kibera

15. Green Heat Kenya Ltd Conversion of human waste into ‘green heat’

16. PowerGen Renewable Ener-gy Ltd

Increasing the efficiency of a solar micro grid especially in remote locations

17. Sanergy Making organic fertilizer from human waste

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Proof of concept funds

18. Aviva Nest Promotion of Nerica rice variety in the Arid and Semi-Arid areas

19. Kuku Bora Commercial indigenous chicken processing

20. Wanda Organics Conducting field tests on the effectiveness of organic fer-tilizers

21. Mineral & Allied Demo farms to increase uptake of hydroponics

22. Lisha Bora Optimum conditions require to grow hydroponic fodder with the required amount of nutrients for dairy cows. Mar-ket testing.

23. Smart Cook A fuel distribution technology suitable for bio-ethanol as a cooking fuel

24. Eco Group EA Ltd Market testing of a liquid organic fertilizer

Lessons learned:

Reducing risk: The PoC funds should be disbursed in tranches/phases with the first disbursement being minimal and subsequent disbursements incremental depending on how well the funds are being utilized to achieve the set goal.

Time lag: There is usually a time difference between the time planned for implementing

funded activities and actual implementation, just like in many other projects. This means that the workplan created for PoC funds should try to be as realistic as possible by considering all the internal and external factors that are likely to affect the PoC activites. For instance, one company took 18 months to implement what had been projected to take 6 months. Some of the reasons for this time lag were external cookstove efficiency tests that had been outsourced, and the pace of integrating modifications proposed by customers in the first phase of implementation.

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Proof of concept funds5

Proof of concept funds6

Takamoto Biogas began operations in Nairobi, Kenya in 2012 by developing affordable biogas digesters from polythene. Kyle Schutter, the founder of Schutter Energy Limited, which owns the brand Takamoto Biogas, had noted that traditional masonry biogas systems required high upfront capital which severely limited the uptake of biogas in rural areas. His company then focused on designing an efficient and affordable biogas system for the rural poor. In 2013, Schutter Energy Limited joined the Kenya Climate Innovation Center and began testing a business model that would enable rural farmers to replace wood fuel with biogas without having to pay the high upfront cost which most farmers could not afford. Takamoto partnered with some micro-finance institutions that would advance negotiated loans to farmers for the dome or polythene biogas system and repay the loans at a lower interest rates. There was also another option where farmers would pay for preset units of biogas per month using a metering system. In February 2013, Takamoto received proof-of-concept funds from KCIC. Between March and November 2013 the company conducted field tests and installed 100 dome biogas systems in Githunguri village, Kiambu County. Before installation Takamoto staff would train farmers on how to feed a mixture of cow dung and water into the biogas system and even explain the benefits of using biogas as opposed to firewood. Takamoto staff also did regular maintenance of the biogas systems to ensure they operated at maximum potential. Each household paid a minimal installation fee and later made monthly payments for pre-set units of biogas.

According to Takamoto projections, each household would pay an average of Ksh 3000 (USD 32) per month. However, most households paid Ksh 200-500 (USD 2-5) per month. Takamoto sought to find out the cause of the low usage of the biogas and on speaking to customers, they found out that most households only used the biogas to cook tea and other light meals because they compared the biogas to liquefied petroleum gas (LPG) which is quite expensive in Kenya. For this reason, most of them still did a lot of their cooking with firewood. Households often did not regulate the gas as required and many times the pre-set units ran out before the month ended. Households were allowed to purchase additional biogas units through a pre-paid system but this was an extra expense which many households were not willing to incur. Using lessons learned from the pilot, theTakamoto team went back to the drawing board and redesigned their business model. They realized that their customers did not quite understand the biggest benefit of biogas, the long term low cost. Takamoto made the biogas digester twice as big and changed the purchasing model to lease-to-own, where customers were now granted unlimited use of the biogas for affordable and consistent monthly payments. This new model has now generated a lot of interest across Kenya and even beyond.

From KCIC’s perspective, the Takamoto PoC case was successful in the sense that they were able to discover the business model that was suitable for their target market, and they adopted it.

Takamoto Biogas

Proof of concept funds7

Getting a deeper understanding how the PoC activities fit in the bigger picture for the enterprise. For instance, a company might be so much focused on getting some equipment like a briquetting machine while they have not tested their ‘go-to market strategy.’ In such a case, the briquetting machine might arrive and when production starts, they are faced with a marketing challenge. It is important that an incubator funds something that is well thought out in the entrepreneur’s business plan.

PoC is a learning process: Many entrepreneurs develop business plans or models based on a number of assumptions. PoC therefore gives entrepreneurs an opportunity to test the assumptions and base their new business plans or models on the reality on the ground. Regardless of the outcome – whether positive or negative, entrepreneurs learn a lot along the way. For instance, when

Takamoto went out to pilot pay-as-you-go biogas, they realized the concept could not work due to preconceived ideas and the fact that customers preferred to own the biogas systems that were set up on their farms as opposed to the vendor owning and maintaining them. Having understood the dynamics on the ground, the company adopted the lease-to-own model that is more acceptable to the target market.

Human resource: Many start-ups are usually limited in terms of human resource. When funds are advanced to these enterprises, they come with the added responsibility of accounting for the funds. Not all entrepreneurs have an accounting background and as such they struggle to account for funds. This can be addressed by having either a consultant or staff from the incubator that shows such start-ups how to do basic accounting/book keeping.

Proof of concept funds8

Wanda Organic Limited was formed in 2012 and admitted to KCIC in October 2013. In December 2014, the company was awarded a proof-of-concept grant amounting to $38, 568 to test the market potential of organic inputs – Plantmate organic fertilizer and Prime EC foliar plant food – in Kiambu and Nyeri Counties. When the market tests began, farmers in Kiambu County were slow in adopting the products and Wanda Organic Limited decided to add Kirinyaga County to the test sites. The company recruited two field officers and put up demonstration sites in Waruhui and Wambugu in Kiambu and Nyeri County respectively. Between February and December 2015, 1650 farmers were trained on how to use the products.

The field tests showed an increase in production for crops such as maize, onions, capsicums and tomatoes, with an average increase of 44%. During the testing period the Wanda team realized that most farmers were skeptical about organic fertilizers and in response six demonstration sites were put up on the farms of the early adopters and six agents drawn from pre-existing agro-dealers were recruited as distributors. To create awareness on the benefits or organic fertilizers over chemical fertilizers, Wanda Organic Ltd participated in farmer field days and also sold their products on such occasions. The idea of partnering with agro-dealers did not work as expected as these entrepreneurs preferred buying in bulk and reselling to farmers at their own prices, as opposed to acting as distributors and selling the products at pre-agreed prices. The higher cost that agro-dealers wanted to charge meant that only few farmers would afford the products. During the pilots, the company learnt that awareness creation and use of demonstration sites were effective ways of introducing their new products to the market. In addition, they also learnt that farmers compare the prices of chemical fertilizers (which usually have a government subsidy) and organic ones and considered the organic ones to be expensive. Awareness creation sessions were useful in addressing these challenges but the company also adopted the use of seasonal promotions during the planning season to increase demand for their products. Wanda Organics was later able to leverage additional funding from USAID’s Feed the Future Project, and is considered one of the successful PoC cases. Plans are also underway to set up a plant to manufacture the organic fertilizer with the support of two Philippine-based companies. From the Wanda Organic Ltd case, KCIC learnt that PoC support is likely to be more successful when the entrepreneur has already committed some funds to the activities that are being funded.

Wanda Organic Limited

Access to markets is a real challenge: This challenge has been pointed out numerous times in different literature and experience has shown that even after the concept has been proven to work there are still a number of challenges that need to be addressed. For instance, one start-up used design thinking (human centered design) to develop an energy efficient cookstove

and received proof-of-concept support during the development process to ensure that the end product had been designed to customer requirements. However, after the development phase the entrepreneur had problems identifying honest sales people or securing partnerships that were moving sales. With limited funding and dismal sales, the entrepreneur closed shop.

Proof of concept funds9

Take time to do due diligence: Every start-up is looking for funding, yet not all start-ups qualify to get the funding. When doing due diligence, go beyond looking at the enterprise to also consider the entrepreneur. When doing the background check, also focus on how much, in terms of financial

resources, the founder has committed to the business. Expert involvement is also key especially where an innovation is involved so as to avoid funding something that in research circles has already been proven not to work.

Proof of concept funds10

Four for One Trading Services began dealing with biogas in 2007 when they partnered with a project that was working in Nyanza province, Kenya to provide rural households with cleaner energy. In 2012, the company began to explore the possibility of making biogas digesters that would produce gas for industrial use – specifically for steam generation in food processing industries.In November 2012, Four for One shared the idea of producing biogas for industrial use with KCIC, and they received proof-of-concept funding to test the technical and commercial viability of their idea.

Four for One initially set out to use water hyacinth as the feedstock. The initial test site was Kisumu but this later changed to Homabay because the water hyacinth on Lake Victoria had moved to the Homabay shore. Homabay is in Migori County and the county government provided the piece of land where the digester was built. On the same piece of land, the county government offered to put up a kitchen so that a women group would use the biogas generated to fry fish. The women group was using wood fuel and charcoal. The biogas digester was completed in July 2013 and tests revealed that biogas from water hyacinth had a relatively good yield of up to 60% methane. Four for One also tested another feedstock that was readily available in the Homabay region – sugar cake, a waste product from sugarcane processing. The methane yield with sugar cake was even much higher at 70%. Even though the methane yield was good, there was a setback. By August 2014, the county government of Migori had not yet constructed the kitchen and so the completed digester was not in use.

With good results from the testing phase, Four for One was now ready for the next stage, mapping potential clients and marketing the concept. A discussion with the Four for One operations manager showed that this did not go so well and that marked the end of the grant. The For for One case is considered a learning moment for KCIC because later analysis showed that biogas production was not the core business of the company. Four for One’s main business was construction and they were generating most of their income from that stream, and hence concentrated their efforts there. This means that when the biogas stream ran into problems, their commitment faltered and so did the whole biogas business. A key lesson for KCIC from this case was the importance of assessing an entrepreneur’s commitment to the technology they are trying to test. It is important to ensure that the enterprise in not pursuing other interests that are likely to divide their attention. Again, the passion and financial commitment of the entrepreneur is very essential.

Four for One Trading Services

Recommendations • Entrepreneurs require much more in terms of support than funding. Incubators should try to walk with the entrepreneur along their journey to establish their business. Creating an enabling environment and business advisory gives start-ups the support they need to penetrate the market and also scale their operations.

• Proof of concept funds are crucial but limited in availability. There are very few institutions providing this kind of support yet the demand is high. Many funders are more comfortable providing funds that help the company to expand than funds to test the viability of the business. Incubators should increase the allocation for this kind of funds.

Proof of concept funds

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Contacts

Strathmore Business School Bulding 3rd FloorOle Sangale Road MadarakaBox 49162 - 00100 Nairobi, KenyaTel: (+254) 703 034 701 Email: info@kenyacic.orgWebsite: www.kenyacic.org