Friday, January 27, 2017

Is Kickfurther A Scam or a Legitimate Investing Option?

I had a comment left on a post suggesting that I needed to re-evaluate Kickfurther and the posts I've written about it.  Since it has been a while since I looked at the platform as a whole, I'm going to take some time and do so.

What Is Kickfurther?

Kickfurther is a platform that allows ordinary investors to assist businesses who need money to buy inventory.  The Kickfurther concept is that rather than lending money to the businesses, investors pre-purchase the inventory, and then return it to the business to sell on consignment.  As the inventory sells, the business repays the investors, with a profit margin.

For example, Wanda sells widgets.  She buys them from the widget factory for $10 and sells them for $20.  Generally speaking she sells 500 widgets a month.  She comes to Kickfurther and asks investors to finance 1,000 widgets for six months, so she asks for $10,000 and promises to pay back $11,000 by the end of six months. 

Wanda knows it will take a month from the day she places the order until the widgets arrive at her store,so the offer is written so no payments are due for two months.  Then, every month, Wanda is supposed to pay for the widgets she sold that month.  How much she is required to pay per widget is determined ahead of time, and that is expressed at the Percent Sold for Return--so that if Wanda's contract said she had to give KF $15 for every widget the PSR would be 73%.  If Wanda only had to pay $11 per widget the PSR would be 100%.  Obviously a lower PSR is better for investors.

If production is delayed, or people decide they don't want widgets anymore, and at the end of six months, Wanda hasn't sold enough widgets to repay the investors, the investors are allowed to vote on whether to allow Wanda to continue, or whether to cancel the offer.  If the offer is cancelled Wanda can either pay off the offer or return the unsold widgets to Kickfurther which will then try to sell them.If investors vote to continue, then Wanda continues to sell the widgets but no additional compensation, in other words, no extra interest or late fees, is due to the investors. 

What Problems With Kickfurther Have Arisen?

The bottom line is that in more than a few instances, Kickfurther investors have not been paid.  This list tells you the current statistics.  Right now, if you do the math, the "average" Kickfurther investor who invested in a random sample of offers is in the hole.  Investors who lose money are not a happy lot.

The question is who is to blame for the failed offers.  The reality is that investing has risks and anyone who thought these deals were sure things isn't very bright.  However, I'm not convinced that the risk I signed up for is the risk that ended up getting me.

In reading the information on Kickfurther's website, I learned that KF owned the merchandise and that the businesses were selling it on consignment.  I assumed (and you know what they say about assuming) that KF had proper contracts and safeguards in place, so that the only real risk we had was the risk that those widgets wouldn't sell.  My personal appreciation of the risk was that we'd probably get at least some of our money back on all offers, that most would complete and that KF would end up with odd and ends of junk no one wanted to buy on some offers.

I was wrong.

First of all, it seems KF has no enforcement teeth.  They say their contracts have improved and that they are now filing UCC-1 statements on the inventory, but there have been many cases in which the companies have just disappeared so to speak.  They either never paid anything or quit paying and did not return the inventory.  In some cases lawsuits have been filed, but my guess is that they will be fruitless since one of the main things needed for a successful suit is a financially viable defendant.

There just does not seem to have been much due diligence on the companies. Kickfurther has recently begun pulling credit reports but that is a new innovation.  They have done offers for companies that it turns out don't really exist.  There are companies that admit to selling inventory and using the money for things other than repaying investors.  Right now I have 17 offers that have gone bad.  Of those only 2 have turned unsold inventory over to Kickfurther.

In short, as it as played out so far (almost two years), while KF bills itself as buying inventory that is sold on consignment, in reality, as I preceive it, though not billed as such, and specifically denied by Kickfurther, it is basically making unsecured loans to small business, which is a risky business.  Established companies that do it successfully charge higher rates and have tighter controls.

I added the text in red at the request of Kickfurther. I receivd an email that said
it's been brought to our attention that one of your articles is incorrectly labelling Kickfurther as an small business loan which is not part of our model.  I've been requested to ask that you update the article to accurately represent the Kickfurther model. ...please alter the text so that the copy accurately reflects the Kickfurther model.
At least one of the Kickfurther Merchants of the Week I interviewed referred to their arrangment as a "loan".  Kickfuther has had no way to guarantee that the invested money was spent on the backed inventory and no mechanism for tracking sales and making sure the sales matched the payments.  While the paperwork may have said "consignment sale agreement", you know what they say about ducks, don't you?

If it walks like a duck, and quacks like a duck, is it a consignment sales agreement?

Can Kickfurther Be Fixed?

Honestly, I don't know.  I don't know the realities of the business community.  However, some major problems I see:

No automatic payments on sales

I don't know the technological viability of the idea, though I tend to think it could be done.  Simply put, when one of our consigned items sells, Kickfurther needs to get notification and when the check for it hits the bank, KF needs to grab it.  Expecting a company that is having trouble paying the bills to pay us first obviously isn't working.

The overwhelming majority of companies, even companies which have paid as promised, have paid in a linear fashion.  In other words, if they had five payments due, they paid 1/5 in each payment.  I find it hard to believe that none of those companies sold more than what was necessary to remain in good standing with investors.

Clunky cancellation/collection procedures

Since payment is due only when a product has been sold, being late with the first payment, or having payment be less than the scheduled amount isn't necessarily a cause for alarm.  However, I have several offers that are quite late, without any explanation from the company.  In order to cancel the offer and make the balance due in 30 days, over half the dollar-weighted investors have to vote for cancellation.  My guess is that in most cases by the time that is done, the inventory is long gone and the money spent on the electric bill or some other pressing business need.  Any decent debt collector will tell you that the sooner you get onto a problem borrower, the greater your chance of success. 

I have one offer where the business owner admitted to selling some of the inventory and using the money to pay himself a salary.  Eventually, about six months ago, and after payments were eight months late,  the offer was cancelled.  KF just asked the backers to vote on a settlement agreement with this company, but they've given us no information on which to base a decision, despite requests on a private message board and email requests.  At this point I have no idea whether the offer we have is any good.

Some backers are pushing for a lawsuit, and if we have a viable defendant that may be the way to go.  However, the almount owed is under $20,000.  I doubt the contact calls for penalties, interest, attorneys fees etc.  Based on things the owner has said, my opinion as someone who knows something about lawsuits (but I'm not a lawyer and I don't give legal advice) is that we don't have a slam dunk case against him, which means to win the case we'll need to litigate, not just file suit and get a default judgment. Assuming we win, we'll then have a judgment, and collecting on those isn't necessarily easy, particularly when the defendant has few assets and could see bankruptcy as an alternative.

On the other hand, if businesses see that KF isn't willing to legally enforce its contracts, more will try not to follow them. 

Return is not commensurate with the risk

At this point, the average Kickfurther investor has lost money.  I'm in that number.  I'm not too far in the hole, but I'm there.  Clearly the reward isn't worth the risk.  Yes, if you managed to avoid the defaulting offers, you'd have a good return, but unless there are people out there who are more expert than I am, avoiding the bad offers is more a matter of luck than knowledge.  

Prosper used to let lenders bid on loans.  Unfortunately what happened is that the amatures doing the bidding bid the price down to the point that the defaults took the profits.  Early Kickfurther offers were often over 10% for 6 months.  When investors snapped them up in seconds, the returns dropped.  Now that investors aren't as quick to grab offers, returns are climbing.  However, I don't think they are up to the point they should be.

Kickfurther needs to develop some sort of rating and/or underwriting procedures and they need to price offers at a rate compatible with the risk. 

Too rich for my blood

Kickfurther recently switched to a "pack" system, where you buy the smallest possible portion of the consigned inventory, rather than contributing a certain dollar amount.  Going back to our widgets, If Wanda had only one type of widget then a "pack" would cost $10 and would consist of one widget.  If Wanda was buying 10 different types of widgets, then a pack would cost $100 and would have one of each type.  Recently there have been packs that cost several hundred dollars, and one that was over $1,000.  While there are certainly some KF investors playing with that much money, I don't think most of us are.  Given the luck I've had with KF so far, there is no way I'm putting subtantial money into any offer.

Update:

I started writing this post last night.  Tonight Kickfurther's CEO posted an update on reddit that stated that starting February 1, all offers would be backed by purchase orders and that Kickfurther would have tighter controls on the inventory and the money.  Further, he was hoping to raise enough money to pay out the failed offers.  You can see his message here.   I wish him the best, and I hope this new model works.  

Conclusion:

I've said before that Kickfurther is a place for money you can afford to lose.  I haven't seen anything that makes me change that opinion.  I think Kickfurther has potential but right now, on average, investors are not making money.  

I also think they are doing a horrible job with PR right now.  The CEO's post about improvments to the platform was a good thing, but then he asked for positive reviews at Trust Pilot (where I had previously written a cool review).  When folks went there, they found that Kickfurther's business development person had given Kickfurther a five star review.

I've given Kickfurther a lot of free and reasonably positive publicty.  Even before my red text addition above, I think it was clear to any reasonably intelligent reader that Kickfurther did not consider itself to be a lender.  Was it really necessary to tick me off by requesting that I change my post?

If you'd like to give Kickfurther a try, if you use this link, you'll get $5.00 toward your first offer.  If you have a business that is looking for a new way to finance inventory, use this link to see if KF will work for you. 
Disease Called Debt

2 comments:

  1. Thanks for your post and for sharing your learnings.

    I just got an email from Sean De Clercq (CEO Kickfurther), about fraud. email is pasted below:

    Dear buyers,

    We have just found out that Kickfurther has been the victim of identity theft. After a review of a few of our Co-Ops, we have identified three that are affected and will be administratively cancelled. You are receiving this e-mail because you are a Buyer on one of the affected Co-Ops. We will send follow-up information specific to your situation, but here is an overview of what happened.

    An individual came to our platform with the appropriate credentials and information required to create a business account on Kickfurther. The individual furnished stolen documents including a social security number and a copy of another person’s driver’s license. It appears the individual had a prior relationship with the person the individuals claimed to be. Because the information and documents provided appear to be valid, albeit stolen, when we ran those documents in our qualification process, nothing was flagged.

    When we focused on PO backed Co-Ops, we introduced new security processes. In the execution of these new processes, we identified some irregularities with one of our Co-Ops. After further investigation, we determined that an identity had been stolen and the individual had acted fraudulently.

    Our immediate priority is recovery of the funds that have been stolen. To that end, we are in the process of hiring a law firm to file suit against the individual. We do believe the individual that perpetrated this fraud has assets that may be recovered. We intend on making it clear to any outside counsel that recovery of the assets is our highest priority. Outside counsel may also choose to pursue criminal charges in this matter or utilize the services of a government agency to achieve justice.

    We have updated our process to prevent this from happening in the future. Specifically, we will now require that business owners show us their documents during a video interview and have introduced other measures which we prefer to keep confidential to preserve their efficacy. Thank you for your patience as we work to resolve this matter and recover your funds.

    Best Regards,

    Sean De Clercq

    ReplyDelete