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Venture Funding for Cleantech SMEs in Developing Nations

Capital Markets | Saturday April 2nd, 2011 | 0 Comments

The following open letter is a part of the Presidio Graduate School’s Capital Markets course. For one of the course assignments, students write a letter to an oversight body, government entity or other appropriate institution. The topic: changing the sector of capital markets that relates to their chosen topic so it reinforces principles of sustainability. Follow along here.

An open letter to John Doerr, Kleiner Perkins Caufield & Byers

Dear Mr Doerr,

We are very encouraged by KPCB’s forward thinking leadership in cleantech.  In light of KPCB’s record of investing in world-changing businesses and because the firm has recently embraced cleantech opportunities with the Greentech initiative, we urge you to go a step further and consider broadening your company’s view to investing in Small & Medium-sized Enterprses (SMEs) focused on cleanteach in emerging markets.

SMEs in emerging economies have long been on the periphery of venture capital investing.  However, demonstrated by successful social ventures and growth in developing countries, we assert that a for-profit venture capital approach promises enticing financial returns.  In additoin to the business opportunity, investment in cleantech SMEs in the developing world fits with KPCB’s passion for fighting global warming and poverty eradication championed on KPCB.com.

The Opportunity

In McKinsey’s “Cost Curve for Greenhouse Gas Reduction,” the study suggests that under a business as usual scenario China will emit 18% of global GHG emissions by 2030, overshadowed by other developing countries making up 39% of future emissions.  However, China’s abatement potential is only 8% while the rest of the developing world holds 71% of the emissions abatement potential.

With offices in Shanghai and Bejing, KPCB is investing in the next wave of Chinese innovation.  Yet, potentially larger opportunities exist across South Asia, Africa, and Latin America.

The Significance of SMEs

SMEs are widely recognized as powerful engines of innovation and productivity.  In Europe and the U.S., SMEs account for over 90% of the workforce and more than two-thirds of business enterprises.  Despite their importance to economic growth, however, SMEs are underserved by the investment community in emerging markets.  While microfinance has helped thousands of individual entrepreneurs and because large enterprises have little trouble attracting financing, SMEs, often labeled the “missing middle, have struggled to obtain the capital needed to scale.

Overcoming the Challenges

SMEs in emerging markets have trouble attracting capital for a number of reasons.  First, transaction costs of monitoring SME-sized investments are higher which increases the perceived risk.  Many entrepreneurs in developing countries also lack the the collateral for debt financing, which makes equity investment an even more attractive tool.

Showing Promise

As barriers to monitoring investments diminish, opportunities for financial returns are starting to out weigh transaction costs.  In recent years social venture and philanthropic investors like Acumen Fund have made great strides in proving the profit potential of SMEs in emerging markets.   Recently, more traditional profit oriented venture capital firms are just entering this field.

Recently venture capital has entered this space with the emergence of organizations like Song Advisors. Song specializes in investing in Indian SMEs that create value across the entire stakeholder landscape. Backed by the Omidyar Network and Google, Song is harbinger of an exciting new investment space.

d.light design, a company that has sold over 220,000 solar powered lamps that displace kerosene for base of the pyramid consumers, recently raised $5.5 million. Philanthropic investors Omidyar and Acumen Fund continue to finance the venture, but they are now joined by traditional venture capital firms such as Nexus Venture Partners and Draper Fisher Jurvetson.

Sequoia Capital is investing heavily in cleantech in India, and Vinod Khosla recently announced that he will use the $117 million he earned through investing in the Indian microfinance firm SKS to create venture capital firm specifically for Asia and Africa.

Seizing the Opportunity

Building on KPCB’s pioneering investment leadership, we recommend that the firm seriously considers investing in cleantech focused SMEs in the developing world. We are available to explore opportunities in this segment and answer questions about how to identify and monitor potential investments.

 

Sincerely,

Heath Cox, Peter Glenn, & Amanda Ravenhill

MBA Candidates at the Presidio Graduate School


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