Funding platform concept
- Ashu Sikri (Unlicensed)
Funding Platform for Small Scale Producer Climate Resilience
Summary
Small scale producers face significant challenges on the front-lines of climate change.
They are also landscape stewards whose actions can deliver climate benefits including carbon sequestration, efficient water usage, biodiversity preservation while meeting our food security needs.
While farmer groups can empower small scale producers to overcome their diseconomies of scale, they universally struggle with quick access to low-cost capital which inhibits their growth.
Farmer groups know what investments they need to make in order to enhance their climate resilience and deliver value to their farmer members. Digital Green is launching a platform for farmer groups to share their needs and connect with funders who want to support them.
Timely grants can be catalytic and provide groups a much needed boost that accelerates their maturity and sets them on a path to unlock additional opportunities like government subsidy programs and commercial banks / capital markets.
Key Learning Questions (as of March 6)
What donor persona are we targeting?
Hypothesis is to focus on small foundations / family offices. Other options: Individual social investors/donors; Large Foundations; DFIs; Impact investors; CS; Crypto
Closely related to this is what “theme” do we want to showcase as that influences which funders to target; current take is to prioritize climate adaptation / resilience. Other options are livelihoods / farmer income, gender inclusivity, GHG mitigation, etc.
Schedule brainstorm w Strategy / BD team. Aiming for Apr 8 or Apr 12
What sort of investments do we want to initially showcase (eg, what are the “use of proceeds”)? While this will be driven by farmer group needs and donor personas, want to start with a focus area.
Hypothesis is to focus on assets which support climate resilience which could include sustainable ag mechanization (zero tillage machines, laser land leveling), resource efficiency (eg, drip irrigation), reducing food wastage (cold storage), drought resilience crop varieties and inputs, etc
Other areas to consider:
Funding for adopting sustainable production practices; up-front payment which would enable farmers to achieve certification or tap into ecosystem services markets (maybe drought resilient seeds and inputs fit here?)
Direct cash transfers which FPO members can use to procure service which don't make sense for the FPO to own (eg, warehousing for farmer groups working with cereals, transportation, tractor rental, premiums for insurance or other risk mitigation products, etc.)
Develop a list of “Top 5” technologies under the “climate resilient assets” theme which are backed by solid evidence for their impact. Speaking with JK on Apr 8 to explore further, reached out to Maria at ADMI who has worked in this space. There are some good reports available here as well.
What sort of impact metrics and stories do farmer groups need to generate for funders?
This will be informed by (1)
Can KDE be adapted as a tool to gather FPO level metrics?
How should we navigate govt subsidies?
Sample potential investment: 15 lakh for a 2MW solar powered cold storage unit
Expect 60% to the covered by govt subsidy (Agri Infra fund), 25% from funding platform donors and remainder from farmer groups (to ensure skin in the game)
Given collecting the govt subsidy funds will take a long time, does it make sense for funding platform to cover the 60% tranche and then recover payment once the govt subsidy finally comes? This might not be practical so maybe the 60% is just a further investment we make early days
Funding mechanics
Would funding happen from DGT or DGF?
Any GST / other tax implications to the FPO that receives funds?
Context
If we pursue an "access to capital" path, I think we should give grants to farmer groups (where they put up say 33% of the required proceeds to have skin the game) rather than debt. The pool of grant financing that could be mobilized is pretty large and it feels closer to our DNA.
Mobilizing capital at scale does require some return to flow back to capital providers; given all the challenges w ag lending (which results in low risk adjusted returns) I think we could provide tooling to enable blended finance consortiums to come together and make it easy for capital providers to slot into whatever part of the capital stack makes sense given their mandate, all the way from donors/govts/extended govt (eg, NABARD) that provide first loss guarantees to DFIs to commercial investors.
This summary of a fund that OAF is working on in Rwanda with avocado value chain is a useful reference (disregard the venture studio stuff, not relevant for our discussion)
I found this model on mangrove restoration interesting bc there is a nonprofit arm developing the Forest Smart Ledger which is open software and then the funding platform (GROVE) sits alongside.
User Journey
Farmer groups develop funding proposals to make investments for climate adaptation / resilience and mitigation (could broaden this to cover achievement of other SDGs like livelihoods and gender as well)
Each project and its associated data is aggregated in an NFT
Projects are listed in a website where donors can fund a portion (similar to GoFundMe)
Donors/funders are buying “shares” in an NFT which aggregates a bunch of info about a project (which is captured via KDE) incl headline stats on the farmer group and impact metrics (performance on SDGs, maybe even climate outcomes like emission reduction, reduction in water usage, biodiversity improvement, etc) associated w the project
Sponsoring a project gives funder a “claim” on the impact metrics generated by the project which he/she can display to their stakeholders
5% of proceeds to platform provider, 10% to data verifiers (could be fixed $ amount based on size of project) and remainder to project / farmer group. Farmer group puts up [33]% of cost of project
Sample projects
$[50]k for a cashew processing facility to increase earnings
$[20]k for soil moisture sensors that cover 500 acres + 5 year subscription to irrigation advisories to save water and increase yield (Cultyvate)
Committed capital that is a backstop for existing farmer loan, pays out in adverse outcome; quasi-insurance
FPO pre-pays farmers for [50]% of their expected marketable surplus to cover their input costs at most recent season price to build trust / credibility among farmers
Cold storage for horticulture FPOs (reducing food waste)
$[2]k for sustainable honey procurement equipment for bee-keeping collectives in Ethiopia
$5k for post harvest stuff like PICS bags, dry-card, drying equipment (to manage moisture levels, reduce wastage, improve price realization)
What’s needed to test this ?
Develop [4] investment proposals w FPOs w estimated impact / climate angle
DG funds [40]% of each project and speaks with donors / retail funders for the remainder to get feedback on the concept (esp the blended finance opportunity, see below)
We don’t need to mint NFTs right away but explore how this might add-value in the future
Further Considerations
Demand driven; farmer groups list funding needs. Contrast this with a lot of financing which goes through SMEs which have a second order benefit to farmer groups. Also, letting farmer groups state what they need to adapt builds agency
Start with grants and evolve to blended finance
Angellist model where capital providers can collaborate to form syndicates; each participant gets exposure to the terms that fit their mandate (donors provide first loss, DFIs are mezz, commercial are most senior)
NFT “shares” could be tradeable; smart contract where [50]% of gains (and no losses) to go back to farmer group (motivation to trade and what drive increase of value TBD)
Fee based model gives this a relatively clear path to sustainability