Revenue Share and Impact: How Untapped Supports Entrepreneurs
In 2012, I moved to Haiti to build water treatment systems in schools in the Central Plateau. Untapped’s CEO Jim Chu was also in Haiti leading dloHaiti, a water distribution company. We both were motivated to scale safe water access to Haitian communities, and while our organizations were very different in structure, we both faced similar capital constraints. I was operating an NGO, which meant all of our capital was dependent on donors — and recurrent fundraising was difficult. dloHaiti, as a social business, also struggled to find the capital to scale.
The sad truth for many start-ups in emerging markets is that the financing needed to scale is difficult to find, harder to obtain, or in most cases, simply does not exist. Currently, the vast majority of funding for start-up companies in emerging markets comes in two forms: venture capital and small business loans. Venture capital investors search for a liquidity event from their portfolio companies, such as an acquisition or IPO, to make their money back. The problem is that most start-up companies in emerging markets are not on a path to IPO or be acquired in the near term because those opportunities are much less common outside of ‘developed’ business markets. Globally, this leads to venture capital being concentrated in a small subset of start-up companies — asset-light, software start-ups.
The companies that do not fit the venture capital model, like dloHaiti, are often forced to resort to loans. The problem here is that most of these companies are deemed too ‘risky’ for loans by conventional lenders because they do not have the cash flow or collateral to pass the due diligence of the lending partner. Companies that manage to obtain bank loans usually only do so after an extensive due diligence period, at which point, the business capital needs have invariably changed.
Revenue-Share Financing: A New Model for Emerging Markets
Untapped’s model aims to address these issues through a revenue share (Rev-Share) partnership agreement with the start-ups we finance (our operating partners). The Rev-Share model aligns the incentives of the financier (Untapped), operating partner, and entrepreneur (the individuals using the equipment on the ground). As long as the entrepreneur is earning revenue on the financed asset, so are the operating partner and Untapped. By applying a rev-share model instead of a fixed-lease loan, Untapped adapts to the volatility of the markets we operate in.
For example, when Uganda shut down in July due to COVID-19, e-motorcycle taxi drivers were without riders and therefore stopped earning revenue on their asset (the motorbike). Our local operating partner, which leases the motorbikes to its moto-taxi drivers, then received very little in payments from the drivers, and Untapped, in turn, received minimal amounts from the rev-share. As a result, the entrepreneur, the operating partner, and Untapped all took hits to the bottom line; however, when operations bounced back significantly in August, we all saw the upside of the bounce back simultaneously. Essentially, the revenue-share model allows Untapped to celebrate the wins of our partners without punishing the losses.
Additionally, Untapped provides the rev-share financing on-demand for our operating partners to address another major pain point. We understand that the needs of our partners are rapidly changing based on market conditions. Our Smart Asset Financing adjusts to the flexibility of the market and provides our partners the type of capital they need when they need it. As they grow, our financing can grow alongside them.
Aligning to Impact
Rev-share financing also allows Untapped to align our mission with our impact. Untapped measures impact as the revenue earned by the entrepreneur operating the asset. We understand that the more revenue earned by the entrepreneur, the more sustainable income goes to the underserved communities in which they operate. Thus, each dollar earned is one brought home, and several more spent on goods and services in the community.
Built by and for entrepreneurs, Untapped is first and foremost empathetic to our partner’s number one need — scaling their business. By putting the needs of the entrepreneur first, we generate considerable demand for financing from our partners. Just as importantly, because our financing is on-demand and flexible, the operating partner continues to come back to us as they scale their business. For those entrepreneurs still searching for suitable financing, their search is now complete!
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