Fit-for-purpose financing to grow your access network business

By on 27 Feb 2020

Category: Development

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Left to Right: John Garrity (Moderator), Sylvia Cadena (APNIC Foundation), Jim Forster (Connectivity Capital), Michael Ginguld (Airjaldi) and Weng-Yew Wong (Extreme Broadband)

What would you do if you needed funding to start a new Internet Service Provider (ISP)?

For Weng-Yew Wong, recognizing a market opportunity to improve Internet services in Malaysia in 2005, the first bold step involved refinancing his 1998 Honda Civic. From that initial seed funding, he was able to start Extreme Broadband and expanded with additional companies, including Johor Bahru Internet Exchange (JBIX) and Open DC.

Read: New IX on the block launches in Malaysia

Similarly, AirJaldi, an ISP in rural India serving tens of thousands of subscribers and hundreds of thousands of Wi-Fi hotspot users, began with angel seed funding after the idea emerged at a gathering of connectivity advocates in 2007.

At the twenty-fifth annual APRICOT conference in Melbourne, a presentation and panel session, ‘Financing your last-mile connectivity infrastructure: Options and overcoming investment roadblocks‘, surfaced a number of these experiences and financing lessons that have been learned along the path of ISP growth and expansion.

ISPs and other access network businesses face a range of challenges in growth and expansion, and the panel discussion made clear that technical issues are not always the binding constraint. Survey data from over eighty wireless ISPs (WISPs) also demonstrates that one of the most prevalent barriers in network expansion is in accessing adequate financing.

For ISPs in the Asia Pacific, the opportunities to expand are immense. While over two billion people in the region are using the Internet, total usage is still below half the population (at 48%). Mobile cellular data service (3G or higher) may cover 96% of the region’s population, but at least 1.75 billion people are not using mobile Internet services in large part because of the prohibitively high prices for lower-income segments of the region’s population. Even in areas with dominant mobile network operators, ISPs are playing a complementary role by being able to provide high-speed and low-cost connectivity to enterprises, schools, organizations and residential customers.

In this context, significant opportunities exist for ISPs to expand connectivity services and bring more people online, provided they can find financing. However, ISPs still face a number of financing barriers to navigate and overcome.

One audience participant from Nepal shared that in his economy, a challenge remains in accessing debt capital as commercial lenders require significant collateral assets in exchange for loans. Other challenges surfaced by the discussion include:

  • The nature of ISPs as small to medium enterprise (SMEs) that can only access limited capital, but require significant capital investment to build Internet data networks;
  • The mismatch between linear revenue growth paths for connectivity service compared to the exponential growth expected by venture capital firms;
  • The large deal sizes development finance institutions (DFIs) look for, which tend to be beyond the absorptive capacity of small and emerging ISPs;
  • The trend for emerging ISPs to have to over-rely on self-financing for several years before being able to access debt capital;
  • The challenges that small operators have in speaking the language of finance and business management at a level that satisfies financiers; and
  • Incorrect investor perceptions around the commercial viability of WISPs that rely on unlicensed spectrum, the profitability of services to low-income consumers and market demand in under-served markets.

Jim Forster, a founding partner at Connectivity Capital, shared his experience angel investing in over fifteen companies and highlighted Connectivity Capital’s new debt capital fund specifically catering to ISPs by lending based on cash flow, moving beyond collateral-based financing.

Read: Helping ISPs grow

For early-stage investments, grant funding can provide the initial capital to test out new services. Sylvia Cadena from the APNIC Foundation shared how the Information Society Innovation Fund (ISIF) grant and awards program has supported ISPs and other entities in testing out new operations and new services. AirJaldi, for example, is one such grantee and while the commercial ISP has long since transitioned from being a community network, Michael Ginguld, AirJaldi’s Chief Strategy Officer, also noted that one of their financing strategies has been to remain open and flexible to a range of different funding options; stressing, however, the need to not stray too much away from core operations and services.

Other guidance from Weng gained from his experience included making sure to stay close to your various financial partners as different opportunities, and different challenges, emerge over time.

The extensive 90-minute session, with presentation and panel discussion, surfaced a number of key lessons for ISPs as they advance through growth stages and are considering different financing options. For the full set of insights, please access the presentation slides and review a video replay of the panel discussion.

John Garrity is an economist, policy advisor, and program manager focusing on digital inclusion through pro-poor information and communications technology (ICT) to foster universal Internet access and adoption.

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The views expressed by the authors of this blog are their own and do not necessarily reflect the views of APNIC. Please note a Code of Conduct applies to this blog.

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