The Africa Enterprise Challenge Fund (AECF) is a non-profit development organization supporting innovative enterprises in the agribusiness and renewable energy sectors. Their goal is to reduce rural poverty, promote resilient communities, and create jobs.
AECF catalyzes the private sector to increase agricultural productivity, improve farmer incomes, expand clean energy access, reduce greenhouse gas emissions, and improve resilience to the effects of climate change. They finance high-risk businesses that struggle to access commercial funding and are committed to working in frontier markets, fragile contexts, and high-risk economies where few mainstream financing institutions are willing to invest.
We spoke with Victoria Sabula, CEO of AECF about how blended finance fits into their approach, measuring and tracking impact, the evolution of their business model, and more.
How does blended finance fit into AECF’s approach to mobilizing private capital across the agribusiness and renewable energy sectors?
Investing in the African agriculture and renewable energy sectors is less an issue of availability of capital and more an issue of availability of pipeline. AECF is the pipeline builder upon which many other investors rely. This is the difficult and expensive work of taking businesses with promise, testing their models, and scaling them to a point where they can be of interest to concessionally costed investors using blended finance. We see investors moving further away from the ticket sizes that scaling businesses need. These companies rarely appear without extensive work by organizations like AECF.
We typically use grants, repayable grants, and other mechanisms like results-based financing and guarantees to crowd private capital into innovative and early-stage businesses that offer commercially based solutions to systemic development challenges. By sharing the risk of investing in new areas, we can get companies to do things that they otherwise would not. Our intention is to surface and develop models that other companies can replicate, delivering changes to the market systems that engage with low-income households. Our long-term average is almost $4 of private finance mobilized for every $1 committed, but as we have increasingly sought out smaller and younger businesses this multiple is going down. We have recognized that while funding large and successful businesses to become inclusive does have large impact, we are leaving behind many good companies that do not have access to capital. Hence the reorientation of our portfolio to support more locally-owned businesses. These companies are especially important in frontier markets where they have strong social networks that reduce risk.
What are the various financing instruments that are deployed by AECF and how are they catalytic in nature?
The majority of the funds that we provide are matched grants, where companies receive staged payments as they implement an investment project in their business. In some instances, these include an interest-free repayable element, particularly where the funding is for a revenue-generating investment. We also deploy results-based financing where grants are given only after companies have achieved certain milestones with their own investments and partial guarantee facilities, mostly through financial institutions.
All of our funding options catalyze additional resources from the business – normally in the form of financing from existing owners, but sometimes in the form of loans and investments from third parties. Ensuring ‘skin in the game’ from other actors is essential both for value for money and to provide validation of the proposal. Finance is only provided to businesses that can demonstrate a clear social benefit from the investment as well as a financial return to ensure sustainability. We thoroughly scrutinize the request for funds, ensuring that impact is likely to be achieved and the funding is not crowding out other forms of less concessional capital that may be more appropriate. Many people think giving grants is ‘handing out free money,’ but in reality, it is more difficult than providing returnable capital that is underwritten by guarantees and goes a long way in de-risking private investments.
How do the advisory services and investment support that you provide complement your funding approach? Why is this important given the nature of the business/enterprises that you work with?
Businesses need a range of support with training, mentoring, and connecting to networks, which is often as important as capital. We started as a capital-only structure and added an investment advisory business in 2016 as we recognized the importance of linking our investees to follow-on finance. As our business has evolved in recent years and we have targeted smaller companies and those owned by people who are typically excluded from education and other capacity building systems, we have developed a comprehensive suite of technical assistance services and even set up an advisory studio that hosts experts that SMEs can access for support over a longer term.
This is how it works: once we onboard a new company, we will undertake a diagnostic that highlights their capacities and weaknesses, which is then used to craft a customized engagement approach. Through this, we provide access to a range of services, from online moderated training to long-term expert mentoring. We monitor not just the delivery of this assistance but the changes that it has on the company over time.
With respect to investment support, we offer both investor readiness and investor facilitation services. Often the SMEs we work with are not styled in a way to meet the demands of a sophisticated investor. We therefore not only work on establishing data rooms, but match-making with commercial investors, helping them to navigate the fundraising world and not fall into the ‘valley of death.’
We have found this to be a hugely important part of our offering to the business ecosystem, particularly in the soft skills – confidence building, pitching, networking – that women in particular are often excluded from in African cultures. While there are other service providers offering business development services and fundraising, we think this is an important area where we stand out. We also work with local consultants to both build and offer local language and culturally appropriate engagement for local markets.
In the future, we want to build on our own systems to partner with others. It’s a huge market, and we can only come close to addressing it by working together to deliver on common standards, share resources, and build local capacity in frontier markets.
AECF’s approach is a good example of blending across the lifecycle of a business/enterprise. Walk us through how your funding approach has led to more commercially oriented investors supporting the businesses/enterprises that you work with through follow on financing. Do you have any relevant examples that you would like to share?
We recognize that companies are on a continuum of financing, from incubation through to the grant stage, where we operate, and onwards towards more commercially costed forms of capital. A key part of our approach is to pick businesses that have the potential to scale and then work with them from the very beginning of our relationship to prepare them for their next financing stage. This involves a mixture of walking the companies towards the capital and the capital towards the company. As soon as we onboard a new company, we take them through an investment preparation screening that outlines where they are now and their growth aspirations and develops a plan for capacity development to get them ready for investors. We provide a wide range of technical assistance from in-house and contracted advisors. At the same time, we continue to work with a large portfolio of capital providers to understand what they are looking for so that we can build these needs into the companies that we are working with.
Investors know that as AECF grantees these companies are building systems to manage our grants that will in turn reduce the risk for subsequent funders. We are keenly aware that grants can give perverse incentives and can be looked upon by investors as insulating a company to get away with poor performance. Building management systems and providing a range of financing products enables our companies to scale to the point that they are interesting for investors without developing bad habits. To be sure, we have funded our share of ‘donor darlings’ over the years, but we know how to weed out companies who will not make the most of the funding we provide.
Example: One of the most compelling examples of AECF’s approach is our early investment in M-KOPA, a pioneer in pay-as-you-go (PayGo) solar energy solutions in East Africa. At a time when M-KOPA was still an unproven concept, AECF provided $750,000 which enabled the company to pilot its innovative model and refine its operations. With AECF’s support, M-KOPA demonstrated the viability of its business model, unlocking follow-on investments from commercial investors and impact funds. M-KOPA has successfully moved from dependence on grants to accessing equity and debt financing, scaling its operations to reach millions of households across Sub-Saharan Africa. Today, it stands as a leading provider of off-grid energy solutions, showcasing how AECF’s support can catalyze lasting impact.
You have historically focused on agribusiness, renewable energy, and most recently women and youth in fragile contexts. How has AECF’s catalytic funding model helped advance the investability of sectors/thematic areas with a high perception of risk?
AECF’s catalytic funding model has been instrumental in advancing the investability of high-risk sectors, such as agribusiness, renewable energy, and gender-focused initiatives in fragile contexts. Through patient capital in the form of grants, repayable grants, and concessional loans, AECF enables early-stage and growth-stage businesses to overcome market entry barriers, test innovative models, and build operational capacity. We take a market-building approach. This de-risks investments for other financiers by demonstrating the viability and scalability of businesses operating in challenging environments.
A critical aspect of AECF's approach is our focus on additionality—providing funding to businesses operating in sectors and geographies overlooked by traditional investors due to perceived high risks, unproven business models, or a lack of immediate profitability. These investments wouldn’t otherwise happen because market conditions discourage risk-taking, not because they are impossible. Our job is to participate in solving for Africa’s development challenges by showing the world the ways in which it can be done. Today’s innovative solutions are tomorrow’s new normal. 15 years ago no one had heard of household solar, now village houses across the continent have light as a result of them. Today we are investing in the first e-mobility business models/solutions. In a decade, hopefully, you won’t see a petrol powered motorcycle in an African city.
Another hallmark of AECF’s model is its commitment to testing various approaches rather than ‘picking winners.’ By ‘starting races’ through a competition approach, AECF has surfaced and invested in innovative solutions and business ideas such as PayGo, waste-to-energy solutions, climate-resilient seeds, and mini-grids. Some of these businesses fail (although our long-term survival rate in agriculture is almost 90%), but even when a business model does not succeed as anticipated, AECF considers such outcomes valuable learning opportunities, contributing to the body of knowledge that informs future investments and program designs.
The funding provided is arguably enough to allow the enterprises to scale their operations, reach profitability, or come close to it. This long-term perspective ensures that supported businesses have the runway to establish themselves and grow sustainably, and therefore become attractive for commercial investments. AECF’s interventions play a critical role in crowding in a range of additional finance, demonstrating to other investors that profitability and impact can coexist in high-risk sectors. This ‘showing others the way’ effect amplifies the impact of AECF’s catalytic funding by unlocking broader market confidence. For example, through our Nkwanzi program, an investment readiness initiative funded by the African Development Bank targeting women owners, we have helped women in sub-Saharan Africa raise $4.2 million for business growth and expansion.
How do you measure and track the impact of your activities and interventions? What are some lessons you have learned so far with respect to deploying patient capital across the various business and sectors that you serve?
As a not-for-profit, we don’t make money. What we do pursue is impact and we need a really robust yet cost effective measurement mechanism to be able to show people that what we are doing is making a difference. The trouble is that while there are some measurement standards evolving for impact investors, for grant givers it’s much more of a free for all. People can – and do – make all sorts of wild claims about the changes that their funding generates which undermines the credibility of the whole system. Just look at carbon markets at the moment and you can see the damage that unsubstantiated or exaggerated claims can have to a whole sector.
Our results measurement is based on the OECD DAC Results Measurement Standards1 and we use studies and other analysis to estimate our impact. We are conservative and use industry standard metrics and measurement approaches wherever possible when we are talking about how we change people’s lives. Our systems are reviewed by our donors and the results that we report to them are interrogated to ensure that we can be as accurate as possible. We have a model that incorporates independent mid-term reviews and end-term evaluation for each of our programs/initiatives.
The key lesson – perhaps blindingly obvious – is that in working with the private sector, companies are mostly interested in getting concessional capital to support their business. They are less concerned about the social change objectives that we are targeting. This means two things for us: firstly, we need to work with companies for a long time to get them to see that this is not a zero-sum game and you can make good business while doing good; and secondly, we have to have impact management systems, not impact measurement systems. If a company comes to us with their annual report and says, “I’ve given you the information you asked for on how many women I have reached this year,” we have failed. We need that business to tell us, “This is how women are doing better as a result of working with my business last year.” We put transformational outcomes at the heart of our investments, we make sure our businesses understand what that is and how it will be achieved, and we drive them towards it.
We have been pursuing a gender lens investing approach for the past decade – by which we mean that we seek to understand how cultural and social norms limit women entrepreneurs’ access to capital and develop mechanisms to level the playing field. This may involve providing additional advisory support such as through our Nkwanzi programme that offers training, mentoring and fundraising support to 400 women across the continent. Or it could deliberately target women entrepreneurs with financing programmes such as our $50 million Investing in Women programme funded by the Government of Canada. Here, we also engage much more intentionally with policy makers, advocates, and male gender champions to intervene beyond the investments themselves to change the way in which the world works for women in business. All our new investees get screened for ways in which we can maximize the outcome for women and girls through the business and are provided with finance and advice to achieve mutually agreed goals.
How has AECF’s business model evolved over time? What are some new projects and activities that you are working on to further support the challenges faced by SMEs in accessing finance?
AECF started in 2008 with the business model and the mandate to put sizeable amounts of money to large business for large impact. We gave grants to mega companies like Yara, SAB Miller, Guinness, and Barry Callebaut to change the way they did business or where they did business, to better include smallholder farmers and low-income consumers. And it was hugely successful, improving the incomes of millions of households in half the countries of Africa. This funding helped launch whole new industries and new products – sorghum for beer, avocados, household solar systems, solar water pumps, dual purpose poultry, improved seed, to name a few – and supported an emergent investment class of impact investing. Truly game changing stuff, but at that time we mostly funded corporate and foreign owned entrepreneurs.
Over the past six years especially, we have recognized that local entrepreneurs who lack privileged access to finance, are being out-competed by well-connected business people for concessional capital. They often lack the social networks, education, and language skills that are needed to write an attractive proposal. Good businesses, especially those run by women, self-exclude from this funding because they feel that this process is not for them. We have built a gender lens investing approach that finds women wherever they are and builds them to the point that they are able to stand against other applicants on a level playing field. We specifically favour locally-owned businesses in our selection process – but only by enough to recognize the limitations in their proposals from the exclusions they have faced.
Beyond making our business more inclusive, we are keenly aware that the impact investing space is constantly changing. New actors coming into the market, like those focused on guarantees – de-risking for financial institutions and new tools like blended finance, are accompanied by markets changing, people getting better off, and new companies emerging. We are extremely sensitive to the damage that clumsy financing into markets that have already moved on from grants can cause. We are constantly looking for where we can be most effective. That means focusing on really fragile contexts and nascent markets. We have expanded our operations in Burkina Faso, Sudan, South Sudan, Somalia, and northern Mozambique in addition to continuing to work in more stable places that still need our support.
We are also looking more at a world beyond grants. One of the biggest challenges we have is moving our investees from our funding to the next capital provider. Despite doing a lot of work in investment facilitation, we still see that third-party investors have to do expensive due diligence and this often makes them unable to fund what would otherwise be perfectly good businesses. We are developing debt-based instruments that allow us to offer a broader range of financing products. For the ecosystem, we are actively developing new financing products for other financial intermediaries, especially MFIs, so they can access money that they could not before and are able to loan to people that they would not before – more so women and youth. Since we are looking to blend capital, these two areas are really the sweet spot for further conversations with the Convergence network and we look forward to building on these in 2025.
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