Module 3: Innovation at the Base of the Pyramid with Access to Capital

In the last module, we examined the presence of entrepreneurial talent at the BoP, manifested most prominently in the “cheetah generation” that has taken a considerable step towards forming a strong entrepreneurial base of the future Africa. Nevertheless, entrepreneurial talent is destined for the local small-scale if entrepreneurs are not equipped with the resources to ramp up their enterprises.

Access to capital, be it from micro venture capital firms or by other means, can bring local innovations into the homes of individuals across nations, improving the quality of life by simplifying daily chores or providing a new means to generate income. Access to finance is a major hurdle towards the growth of African businesses, especially because many members of the BoP lack track records, and hence, trust. (1) Providing these sorts of financial resources therefore presents a way in which multinational companies can expedite development. To incentivize their help, one possibility would be to exchange start-up capital for a stake in the burgeoning enterprise.(2),(3)

Jacana, a multinational venture partnership firm, has partnered with a Kenyan venture capital firm to help finance small and medium sized enterprises (SMEs) in Sub-Saharan Africa. SME investment makes sense on many levels. Besides being a primary driver of economic innovation and development, investing in SMEs makes economic sense. Every $1 invested in an SME generates $10 in the local community; every $1 of SME finance creates 3 times more jobs than a $1 investment in microfinance.(4) Jacana helps by providing both capital and expertise. Their capital provided has helped the Kenyan venture capital firm expand into the neighboring countries of Tanzania and Uganda, whereas the expertise is used to help with high quality transactions and to raise additional capital from investors, based on a wide range of contacts. Jacana hopes to develop attractive financial returns, which would grow the African private equity industry. That in turn would make SME development sustainable and lead to local job creation.(5) Historically, the creation of an entrepreneurial society has led to economic as well as political liberalization, meaning that entrepreneurs may prove to be forces of global stability.(6)

Case Study: Toyola Energy and Carbon Credits

In Accra, Ghana, a small stove company called Toyola Energy is making a big impact due in large part to an injection of capital from a multinational company. Toyola stoves replace older stoves that burn wood and charcoal less efficiently, polluting the air and using more raw materials to generate heat. Over the course of a three-year lifespan of a stove, carbon dioxide emissions are reduced by approximately 0.8 tons. (7) The stoves are also produced cheaply. The metal used for stove construction comes from excess metal on new roofs, reducing the manufacturing cost to roughly ten dollars. The stoves are sold to Ghanaians at approximately the same price.(8)

At the outset, Toyola was unable to get funding from local banks, but E+Co, an American nonprofit, saw the potential to generate carbon offsets, which are purchased by corporations to offset their carbon emissions. In Toyola’s case, its carbon offsets are purchased by Goldman Sachs. After Goldman Sachs purchases offsets, every Toyola stove owner receives a rebate, which means that the customers pay less for the stove than the manufacturing cost. The American carbon-offset market is currently valued at US$100-$130 million annually, but could balloon with the increasingly greater momentum behind eco-friendly products. Some estimate that impending regulation could expand the carbon offset market in the USA anywhere from US$300 billion to US$1 trillion.(9)

Before investment, Toyola made 5 household energy-efficient cooking stoves a week. A few years after investment, in 2010, Toyola produces 75,000 stoves every week and has 150 employees. Aside from job creation and contributing to the local community, Toyola also has an added development benefit: the World Health Organization estimates that more people in the developing world die each year from poor indoor air conditions than from tuberculosis or malaria. Most of the indoor air pollution results from inefficient, solid-wood-burning stoves, and in Ghana, approximately 85 % of people are exposed to poor air conditions. By reducing the amount of fumes released during cooking, Toyola's stove directly addresses this concern.(10)

Toyola’s story produces benefits for both the local community and multinational companies. Nevertheless, it stands as a rare example in carbon finance. Small-scale projects such as Toyola in carbon finance are rare, since cap-and-trade money usually goes to larger firms.(11) Carbon finance therefore illustrates an unexplored avenue for multinational companies to finance innovative environmentally friendly projects in the developing world, promoting development by a novel means.

Case Study: Sorghum and Beer

Sorghum, a species of grass, is considered a “poor man’s crop” in Zambia, where it is a drought-resistant cereal that grows abundantly. In 2000, a Zambian brewery called Eagle Lager started fermenting sorghum to make beer, instead of the traditional imported and expensive malt cereal grain. The developmental pay-off for using sorghum is that it uses local resources and supports local farmers. Furthermore, because sorghum is considerably cheaper than malt, Eagle Lager provides an affordable lager for general consumption.(12)

Eagle Lager receives funding from a number of American organizations, including the United States Agency of International Development (USAID) and the Cooperative League of the United States of America (CLUSA). The financial support helps to provide loans for the expenses for farmers to start sorghum farming, as well as agricultural training to ensure that the sorghum produced meets the standards of the brewery. The partnership between Eagle Lager and the farming population is mutually beneficial because the brewery gains access to a consistent supply of high-quality sorghum, while the farmers gain a secure and stable market, and thus a consistent income. Over 4,500 small-scale farmers in 14 Zambian districts have joined this partnership.(13)

Furthermore, CLUSA helps farmers implement conservation agriculture by teaching them farming techniques such as crop rotation and inter-planting. These practices reduce the need for artificial and environmentally dangerous products such as fertilizer and pesticides, improving soil fertility and hence increasing crop yields. In Zambia, conservation agriculture practices have increased by 75 %, while cotton conservation practices have increased 60 %.(14)

The Zambian government has recognized the benefits of the Eagle Lager initiative and is helping to encourage it by lowering taxes on Eagle Lager. Furthermore, SABMiller is trying to replicate the model with sorghum farmers in Uganda, Zimbabwe, Mozambique, and Tanzania.(15)   

Entrepreneurs and Scale: The Need for Financial Resources

Being able to gain access to capital is essential for entrepreneurial talent to fulfill its potential. While multinational companies can help supply developing countries with venture capital and other financing options, governments can also adjust their taxation and regulatory policies to support entrepreneurial talent. All in all, being able to recognize the existence of an entrepreneurial talent base is critical to being able to support it. The examples in this module demonstrate the potential of entrepreneurs to find solutions to local problems—including poverty—when they are given the resources to replicate their innovations.

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Footnotes

(1) Njeri, M. “Jacana Capitalizes East African SME Investment Fund.” 5 July 2010. Accessed July 23, 2010.

(2) Schramm, C.J., 2008.

(3) Gupta, A. and Kadri, M., 2010.

(4) Nieri, M., 2010.

(5) Ibid.

(6) Schramm, C.J., 2008.

(7) Connolly, K. “Turning Carbon into Cash.” 19 December 2009. Newsweek. Accessed July 23, 2010.

(8) Ibid.

(9) Ibid.

(10) Ibid.

(11) Ibid.

(12) Theobald, M. “Innovation of the Week: Locally Produced Crops for Locally Consumed Products.” 24 June 2010. Nourishing the Planet. Accessed July 23, 2010.

(13) Ibid.

(14) Ibid.

(15) Ibid.