Weekly Roundup: Extending Customer Credit – the Way to Scale?
VisionSpring, of course, is always on the short list of BoP success stories. Founded in 2001 by Dr. Jordan Kassalow, the company provides glasses and vision diagnosis in India and El Salvador. The enterprise is considered a model for forming strong partnerships with NGOs such as BRAC in Bangladesh to distribute and sell reading glasses.
“While it took us 10 years to sell our first million, we are on course to sell 10 million over the next 10 years,” Kassalow said in a press release.
It’s the sort of milestone that fills our sails a bit with the understanding that yes indeed, scale can be reached with a strong product, a strong model, and a strong set of partnerships. But for every VisionSpring, surely there are countless other social startups that have failed to reach scale, and not necessarily because they are marketing an inferior product. It might be because their customers cannot reasonably afford to make a purchase, even one as “small” as $10. With this working cash flow disadvantage built in and the inability of cash-strapped startups to extend credit to customers, many businesses are sure to stall before they can get close a scalable existence.
This is the need identified by Invested Development, which announced the creation of the Impact Factoring Fund, (IFF) that looks to provide short-term liquidity and working capital to early stage, high-growth companies in emerging markets.
“Factoring,” as Invested Development notes, “is a financial transaction where accounts receivable (the value of payments owed to the company) are purchased at a discount in exchange for the future stream of payments (the aggregated customer payments).” Put another way, the IFF will buy a particular startup’s accounts receivable to help the business avoid the working capital pitfall, allowing the customer to pay off their purchase over time via credit. The startup would then pay back the IFF after payment has been received from the customer(s). Because the startup company is no longer playing the waiting game for working capital, it can continue to grow, or so the thinking goes.
I sent Invested Development’s Marketing and Research Manager Christina Tamer a few questions over email this week to find out more about the IFF.
SA: Why was Invested Development motivated to test this model with some of the enterprises in the portfolio?
CT: Our BSP Fund portfolio companies are in their early stages of growth and have significant potential to scale. We invested in them because their products are innovative, cost effective, and can provide long-term benefits to users. Although their products are cost effective (amount of long term benefit gained from the customer’s purchase/investment in the product), they are not necessarily affordable. In developed markets, when a product is not affordable, a consumer can access a variety of financing solutions, but our portfolio companies are operating in markets where there is a lack of consumer finance. The enterprises must provide consumer financing solutions themselves, which stagnates sales cycles and ties up cash during crucial high-growth phases. The lack of available consumer financing is a burden to startups who need working capital to scale, and the IFF is a solution that provides just that.
SA: How will you measure success?
CT: The IFF enables enterprises to provide financing to their customers, thereby helping more customers afford beneficial products. Success will be measured in the growth and scale of the enterprises. This means that we want to see more customers with the ability to afford the enterprises’ products and gain benefit from them. While providing benefit to the customers and ability to scale to the enterprises, we also want to provide reliable returns to investors.
SA: In the value proposition, it’s mentioned that factoring has been used widely in merchant banking, but hasn’t been applied to emerging markets due to a lack of transparency. What’s different in terms of how IFF will execute on this?
CT: Factoring, along with many other financial solutions, has not been applied in emerging markets to due the lack of existing financial infrastructure. It’s difficult for an early stage startup to secure a loan for working capital or for a customer to access finance for a purchase. The IFF provides both, and will be managed by ID to ensure transparency between the enterprise and the IFF investors.
SA: Are you disclosing the value of the fund?
CT: The IFF is not a fixed fund. Investors can have their returns tied to the performance of a specific enterprise, or distributed across all participating enterprises. Disclosure with be at the discretion of the investors or enterprises for now.
I’m not suggesting that VisionSpring should move to a customer credit model. A VisionSpring spokeswoman says the company have determined the appropriate price point for its customers and so do not offer a credit system. The prices of the glasses are based on three to seven days worth or income and customers have demonstrated a willingness to pay for glasses, she said. There’s a big difference between a pair of glasses at $3 or $4 versus some of the products that IFF-funded companies sell. For example, investee Promethean Power Systems, designs and manufactures rural refrigeration systems for commercial cold-storage applications in off-grid regions. Meanwhile, Simpa Networks sells residential solar energy systems, wherein customers can pay via mobile phones. (Read past articles on Promethean Power Systems here and on Simpa Networks here). Still, we know this model works. Millions of people will roll out a new fridge or a big screen TV from a big box store in the developed world thanks to in-store financing.