Gluwa x Untapped — Emerging Markets Investing, Asset Financing, OpenFi and Everything in Between
A conversation between Jim Chu and Toby Bromer
“Everything is digitizing like crazy in Africa and other emerging markets, creating this unique once-in-a-generation opportunity to do this type of financing, which is essentially asset financing with a revenue based return and technology base.” — Jim Chu
Untapped Global, a capital-investment platform delivering Smart Asset Financing to tech-enabled companies in Africa and Latin America, recently announced its partnership with Gluwa, an open finance platform connecting capital from developed markets to emerging market lending opportunities using blockchain technology.
Jim Chu, CEO and Founder at Untapped joined Toby Bromer, Editor at Gluwa to chat about investing in emerging markets (and why you should get in on it!), what open finance can do for real world assets, and how the Gluwa & Untapped partnership is set to change who invests and how they invest!
Toby: Tell me about how you came to start Untapped Global?
Jim: So, I launched a decentralized water infrastructure company to serve underserved regions of Hati with clean water, co-funded with The IFC and FMO. The model works. We serve close to 100,000 people today with clean water, but finding the right kind of capital to scale was very challenging. It was either bank loans or equity financing, and neither made sense. There weren’t that many options, not only because we were in Haiti but also because we had a very capital-intensive business.
At the time, I was also investing in other parts of the world, including Africa. I noticed an untapped opportunity to finance capital-intensive businesses in emerging markets. I like to joke that you can borrow $500 to buy a cow or $20 million to set up a power plant, but anything in between, you’re out of luck! That’s where my company in Haiti sat.
Millions of entrepreneurs and successful businesses are excluded from the financial system because they are informal or just not the right size — they are either too big for micro-finance or too small for regular finance. Finding the right kind of capital to scale is challenging. We also realized that many of these companies were implementing technology in their business models. Everything is digitizing like crazy in Africa and other emerging markets, creating this unique once-in-a-generation opportunity to do this type of financing, which is essentially asset financing with a revenue-based return and technology base.
We finance smart assets, i.e., assets that have a digital footprint — they generate data on usage and revenue accrued because often, this asset is being paid for and operated using digital payments like M-Pesa in Kenya. ‘Smart Asset Financing!’
Asset financing has been around for a long time, and so have smart assets. You combine smart assets with digital payments, and what you’ve created is a way to finance an untapped market that’s growing like crazy! A smart digital economy run by small businesses; ordinary people generating cash flow and solving basic needs like clean water, transport, irrigation, and payments.
There is a clear divide between people who have jobs and therefore have the assets and collateral to secure bank loans and people who don’t have the assets, the W2 or the pay slips, to get loans. Those people did not have financing options, now they do.
Toby: This is a unique opportunity as you mentioned, traditional banks haven’t been catering to those people. There’s this massive slice of the pie now.
Jim: Interestingly, whereas this may be tougher in developed markets, we’re taking a data-native approach to risk management underwriting. Banks often say, “let’s improve our credit scores by using data.” Well, that’s nice, but you’re still underwriting the same way: looking at people’s balance sheets, getting their collateral, and using a legal contract. Our markets have an opportunity to go full digital, full data natively. We assess risk by using data at its core, not just looking at your payslips. Our strategy is geared for emerging markets in a data-driven world natively designed to ensure we get repaid at high rates.
Toby: Can you give examples of the kinds of businesses Untapped has invested in?
Jim: I’ll give you three, and they’re quite different. We finance a lot of mobility. We started with Flexclub, a car subscription marketplace for Uber drivers. If you’re in a market like South Africa, where they operate, you have to have all the trappings to get a car lease. You have to have a job, credit scores, and history. Instead, Flexclub uses Uber driving scores to assess the drivers’ quality and offer them a car subscription, which we finance. So we’re using the car’s Uber ratings on an ongoing basis and the fares collected to ensure we get paid.
Toby: So you’re almost piggybacking on Ubers metrics
Jim: Precisely! We’re using the data they provide. That way, Flexclub can finance the scale of their business so they can serve not just thousands of drivers but hundreds of thousands of drivers. We’re now working with them in both South Africa and Mexico, and we have almost a dozen different electric mobility providers similar to Flexclub! We’re providing vehicles so drivers can earn revenue.
What’s interesting about electric mobility is that it is highly complementary to Smart Asset Financing. The total cost of ownership of electric vehicles is much lower than your typical petrol vehicle, thanks to lower maintenance and energy costs. However, a motorcycle taxi driver may not realize it because it costs more to buy it upfront. We use Smart Asset Financing to lower the per kilometer costs of an e-vehicle below that of a petrol vehicle and allow the taxi driver to pay just that. Instead of paying $1 a day, the driver can pay 80 cents a day. Everyone wins, including the environment!
We are shoring up a whole ecosystem of electric vehicles that allow us to provide drivers with electric vehicles at a lower cost than petrol vehicles, hopefully accelerating the transition to e-mobility. We’re doing that across Ghana, Uganda, Kenya, South Africa, and hopefully many other countries.
A third example we’re very proud of is financing solar-powered Pay-As-You-Go refrigerators in Nigeria, developed by Koolboks. Small-scale entrepreneurs, most women, use these solar-powered refrigerators to cool the drinks and food they resell. Instead of buying the refrigerator upfront and paying the electrical company, which in Nigeria electricity use is intermittent anyway, you pay per hour to use it. Small-scale entrepreneurs without refrigerators can now get one and pay by the day or hour. We get repaid directly from these assets because it’s all PAYGO. We also get all the data on how much the refrigerators are being used… or not being used.
Toby: You touched on the repayment there. How does that process work?
Jim: We provide assets to a lot of operating partners — for example, water treatment systems for grocery stores. The operating partner will not disappear with the assets because we integrate their data to track the assets. The operating partner collects from the grocery store and pays us what is owed. Similarly, if the grocery store doesn’t meet its payments, the operating partner recovers that asset.
Toby: It seems that another huge advantage of supplying the asset itself, obviously, if the business does poorly, you can always recycle the asset and use it elsewhere.
Jim: Exactly. The only way they’d default is if the asset is destroyed.
Toby: Talk me through what that process looks like. If something’s not going so well, how do you approach that?
Jim: I think it’s useful to talk about our underwriting process. When we first come across a potential operating partner we’ll provide a small check to assess their unit economics by data integrating with that partner, we see the data coming in real time, along with the payments. We then provide a larger check to assess how they deploy capital at scale. With those first two runs, we’ve assessed three key pieces: one — how good is their data, and how good are they technically? Two — is there enough margin to give good wages to the operators and deliver our returns? And three — can they deploy capital quickly and at scale? If the answer to all three is yes, then we’ll write a larger check.
Toby: How do you find your operating partners? Do you have boots on the ground? Are people reaching out to you?
“I’ve been investing in Africa for quite a while. So myself and my team are quite immersed in the ecosystem there. What we do wouldn’t be possible without that immersion, which is an important aspect of risk management. It’s the reason we aren’t doing deals in Indonesia — because we are not there.”
Jim: We have teams all across Africa. In the North, East and South. It’s really important to be on the ground. Additionally, I’ve been investing in Africa for quite a while. What we do wouldn’t be possible without that immersion, which is an important aspect of risk management. It’s the reason we aren’t doing deals in Indonesia — because we are not there.
According to the World Bank, the financing gap for SMEs in emerging markets is $5.2 trillion. Everyone recognises it, but few are changing the model. Muhammad Yunus came up with this incredible model of banking the very poor and created a revolution in micro-finance. That covered one part of that spectrum, but that model didn’t change how underwriting was done for larger loans. Most micro-finance institutions are lending just like banks do. The financing gap is systemic. Until you change how you manage risk, who gets money won’t change. You can change who gives the money and who invests the money, but if you don’t change how you invest the money, it won’t change.
Toby: You’re talking about the dynamics of risk there as well. From the operating partners perspective, they finance that business, buy the capital and take the loan. If the business doesn’t work out, then they’re taking a huge risk. Whereas if they’re scaling with third party capital, that also limits their exposure as well as yours by the fact that you own the assets.
Jim: That’s a really good point. We’re putting ourselves in the same boat as the companies we finance. We don’t have this guarantee projection of taking away somebody’s house. But, we temper it with this rolling database, due diligence model, and using data to really assess the risk. What we’re not doing is saying, ”Toby, I like your business, I’ve never seen it before, but we’ll finance it.” We’re not taking that kind of risk. We’re saying, “ There’s 1000 motorcycle taxis in Nairobi already, we know there’s demand for another 500. So, we’re going to take that business model, and use IoT to monitor it, but we can relatively safely predict what each motorcycle is going to do, and again, we use that data in the IoT to track usage and revenue on a regular basis.
We’re mitigating the risk with data by putting ourselves in the same boat, but at the same time that allows us to get much higher returns than what we can do with just debt — without putting that burden on the entrepreneur. Because the entrepreneur pays only when they make money, versus interest which is; business didn’t do so well this month but you have the bank banging on your door, and that’s ultimately a conflict of interest that doesn’t get resolved.
Toby: Why do you think that this revenue financing model is working so well in emerging markets? We haven’t seen it much in other economies.
Jim: I think the reason we don’t see as much in the US is because the capital markets in the US are quite flush with cash and efficient. Depending on the state that you’re in, you can get money, no matter who you are. There is a relatively good working system.
One of the inspirations for what we do today is what I saw about seven years ago with Square, where they would use the data from the POS systems they provided to cafe owners to give instant loans. To cafe’s turning over $100,000 a month, a $10,000 loan, is nothing. The likelihood of them suddenly running away with the $10,000 and shutting down the cafe is nil. So it’s already in practice in other markets.
Toby: So a bit of a segue, It’s all been good news. What’s the biggest challenge Untapped has faced so far?
Jim: It’s a common question that people ask, and people will often ask, is it fundraising? Or deploying capital? My answer is neither!
The challenge really is growing both sides at the same time. Having just enough money to deploy to meet our demand, and vice versa. So this is where I’m looking at crypto as a possible solution to that in the sense that there’s faster liquidity in the crypto world than in the conventional world. I however don’t want all my cash coming from the crypto world, but I can use it to smooth out my demand curve to ensure that I always have the capital to deploy when I need it.
Toby: It’s always a huge challenge for retail investors to invest in the same kinds of opportunities. We’re talking about expanding financial access here. But there’s also the other side of that coin — that a lot of people can’t invest in products like this. Is crypto also a way to access that market in a way that wasn’t previously possible?
“I could argue that what we’re doing is the original vision of decentralized finance. Changing who gets to invest, and where the money goes. We’re channeling capital towards asset types that otherwise would never get financed, because we’re using data to create these transparent contracts to link investors and investees”
Jim: Yes, we do have to be careful. Our goal here is not to issue a coin and say, “hey, everyone invest in this.” We want to follow US SEC compliance. You have to register securities. If you want to work under reg D, you have to ensure that you do your KYC and that the investor is accredited. You can be compliant and still use crypto.
Where I think there might be some interesting opportunities is that in the jurisdictions where retail investors are allowed to invest through crypto compliantly, that we do that in those jurisdictions because it is a more nimble and appropriate investment instrument for us. Ultimately, I could argue that what we’re doing is the original vision of decentralized finance — changing who gets to invest, and where the money goes. We’re channeling capital towards asset types that otherwise would never get financed, because we’re using data to create transparent contracts to link investors and investees.
Toby: I think there’s even an opportunity in there. Currently you own the assets, but still a heavily intermediated process. If we’re talking about Internet of Things and such, essentially, these assets could be directly programmed with contracts, which pay out investors directly, therefore, they’re not even relying on Untapped as the facilitator.
Jim: That is our goal eventually! One way we could have done this was to build a crypto- fiat platform and try to do that right away. We decided against it because we can do this through conventional routes, through fiat, and still be very effective. Technology platforms are important, but what is equally important is this vetted base of operating partners and a vetted stack of assets that are producing value. We decided to put that together first and build that to scale, then layer in the technology to make it efficient.
Toby: I completely agree with that. As much as it’s a bit of a corny phrase in the space, we’re still very early. I don’t think the infrastructure is really there to efficiently interface with the real world. All the potential is there, but realistically until governments start really getting to grips with the issue and things get standardized, that’s when opportunities like this will truly unlock.
Jim: It is really early. It reminds me of web one in 1995. We’re still taking this new medium and applying it to the old world. Newspapers in 1995 were still putting their newspapers on the internet. They didn’t realize what was possible with interactive features until a Craigslist or Medium comes along and disrupts how they do publishing.
There’s also a lot of noise that’s coming along with it. When you think of crypto, you think billionaires or crypto Bitcoin millionaires with yachts in Puerto Rico. Yes, there’s that and people are speculating on crypto and making money, or losing money on it in some cases. I think the real value of DeFi and Web3 will come into focus when we start connecting decentralized finance with real world assets that are creating real value. Unless we want to live, breathe and do everything in the metaverse, we have to connect the two — which is what we would like to do for emerging markets.
Toby: What are your imminent plans for the next one to two years?
Jim: We plan to continue growing our asset base, and our network of vetted operating partners in the countries that we know well in Africa, and carefully examine other markets as well. There’s still a lot of growth left in Africa, so we don’t have to go anywhere for a little while. We also want to establish a solid capital deployment runway that can generate strong returns for investors, and at the same time start exploring these new ways of raising capital — that’s retail investors.
We just launched a retail investment platform on the fiat side. You can go to www.untapped-global.com, create an account, and start investing in these assets right now!
Toby: Do you have to be an accredited investor?
Jim: Yes, indeed, you have to be an accredited investor. By the end of 2022, we should be able to allow non-accredited investors to invest as well, but we also want to include institutional investors who I know will be interested in our portfolio of electric mobility assets — and sell them a securitized version of our portfolio.
We want to work with great partners like Gluwa and offer crypto investors an opportunity to invest in these assets. We are looking to expand and consolidate the different sources of capital so that our operating partners can leverage all the work that we’re doing centrally, to gather up this capital in a way that’s on-demand and efficient for them.
Ultimately we want to work side by side with companies like Gluwa and get a clear understanding of what DeFi and OpenFi can do for real-world assets. Sure you can stake your money on something very speculative, but why don’t you earn just as much, or more, and stake it on something that will feed 1,000 families, and create value. I hope that will resonate with many people in the Defi and Web3 space.
Toby: Definitely. I think that’s the future.
Untapped Global is reshaping private investing in emerging markets — making it easy, safe and profitable for you to invest in Africa’s fastest growing startups! Invest now— > untapped-global.com
