Friday, September 23, 2016

Kickfurther Defaults

As those who read this blog regularly know, I invest some money via Kickfurther, a platform that finances inventory for businesses.  In short, a business creates on offer on Kickfurther that states what inventory they are purchasing with investor's money, along with the rate of return and time frame.

How is a Kickfurther Offer Designed?

Wanda's Wonderful Widgets might want to finance 1000 blue widgets, which cost them $10 each to make, and which they sell for $20.  They believe that once they have the money in hand, it will take two months to make the widgets, and then four months to sell them.  They write an offer asking for $10,000 for six months, with an investor profit of 10% (a typical return, though some companies offer more and some less).  By some process Kickfurther does not publicize, it is determined how much of the revenue, per widget, goes to Kickfurther and how much goes to the vendor.  That split determines the PSR--the percent sold for return.  Let's assume that for these widgets, there is a 70/30 KF/Vendor split.  For every $20 widget sold, Kickfurther gets $14 and Wanda gets $6.  That means that 786 widgets have to be sold to give Kickfurther their $11,000.  The PSR is about 79%.

How is a Kickfurther Payback Supposed to Work?

If things go the way they are supposed to, investors look at the offer and believe that it is in their best interest to invest, and do so.  The vendor then gets the money, pays for production or buys the inventory, and starts to sell it.  Once the lead time for production passes, the vendor starts repaying the investors.  The way it is supposed to work is that as the product sells, Kickfurther gets paid.  In the case of our widgets, if Wanda has sold 300 widgets when the first payment comes due, she is suppposed to pay Kickfurther $4,200 (300X$20X70%).  If she only sold 100, she only owes $1400.  Wanda is supposed to pay monthly until she has sold enoough to repay Kickfurther completely.  Obviously, the lower the PSR, the more room Wanda has to discount the product, offer samples or otherwise sell for less than the originally figured price.

What if the Widgets Don't Sell?

What if six months has come and gone and Wanda has only sold 200 widgets?  At that point the investors can vote (on a dollar weighted basis) to either let Wanda continue to sell the widgets, or to end the contract.  If they decide to end the contract, Kickfurther gives Wanda the option of purchasing the remaining inventory for enought to make the investors whole, or of turning the inventory over to Kickfurther, which will then attempt to sell the widgets.  

How Has This Played Out in Real Life?

Kickfurther is a relatively new platform that is learning while it is growing.  Originally vendors were pretty much on the honor system as far repaying backers.  Most who have repaid their backers have done so in a linear fashion--dividing the total amount due by the number of projected payments and paying that amount monthly, or until they wanted to do another offer.  There have been a number of companies who have not paid anything or who have paid so little that it seems hard to believe the sales did not require a larger payment (and in some cases the vendors have admitted to having sales but using the revenue for other expenses).  Kickfurther has said they have tightend up their contracts and, for new offers, will require reporting on inventory sold.  Suffice to say there have been times when backers should have been repaid more quickly, and I suspect some where they were paid with the vendor's money, just to stay on track.

Is Kickfurther Really a Consignment Sales Platform?

Honestly, at this point, I don't think so.  If Kickfurther really wants to enforce the consignment sale contract they need to 
  • Assure that money raised goes to purchase inventory.  There was an offer up this week from a swimwear company that said in the offer that part of the money raised would go to advertising, not inventory.  
  • Integrate into the vendors' sale system and automatically transfer KF's share of the revenue away from the company as payment is received.  Otherwise you are asking investors to make a decison on the credit-worthiness of the company as opposed to the saleability of the merchandise.  
As things stand now, vendors are on the honor system as far as paybacks go.  They have no incentive to stick to the contract if sales are better than expected and every incentive to not use other money to pay off the offer if sales are worse than expected.

  Also, getting action from Kickfurthe requires at 50% vote of the investors.  I have one co-op that is over 140 days late with their first payment and KF has done nothing because 50% of the investors have not voted "no-confidence".  I don't have a problem with the "no confidence" vote if a vendor is selling, paying and way behind schedule.  At that point it becomes a decison for investors: Do you think KF will do a better job of selling this merchandise than what the vendor is?  If you think KF will, then vote "No confidence".  However, when a company is clearly in breach of contract (or even apparently in breach of contract if they have all that merchandise and have been unable to sell it) then KF needs to step in legally while the business and/or its owners can still be found. 

In another case, the company was sold and the new company has refused to pay.  The "no confidence" vote is under 50% .  In that case KF did step in despite the lack of vote, and sued the new company.

I still think the concept of Kickfurther is good; the question is whether the contracts can be designed to be enforceable and whether the offered rates are sufficient to offer a profit to investors.  If you think you'd like to invest via Kickfurther, use this link and you'll get $5.00 towards your first co-op.  

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