A brand-new Mexican tech startup is making its products affordable using a centuries-old financing trick that lets startups and their customers shift their risk toward third-party investors.
Even a $15 product is too expensive for many of the world’s poorest customers. Solar companies have made headlines in recent years with myriad solutions to making their products affordable through microloans, from $1 recharge cards to membership models where an entire village buys into a lighting system. But while media outlets drool over solar’s success, other industries in emerging markets, like the tech industry, have found that existing funding models leave them high and dry.
Take Frogtek, a Mexican social enterprise that creates apps for small shopkeepers in Latin America. In developing the company’s first app, a digital inventory system called Tiendatek, Frogtek found that the basic $100 Android devices used by many shopkeepers didn't run the app smoothly and shopkeepers couldn’t afford the equipment needed, which includes a tablet and barcode scanner. After four years, the company has essentially gone upmarket, relying on a smattering of customers in Mexico and Columbia’s rich capitals.
Frogtek’s potential impact is huge: small convenience stores are one of the biggest employers in Latin America, but often have no formal bookkeeping practices. Shopkeepers can’t get loans because they can’t prove that their business is profitable, and Frogtek’s market data could prove invaluable to major suppliers who currently have limited information on their clients. In an economy of unreliable informal jobs, giving small businesses a way to modernize their business practices could also create more stable employment for hired help.
The key to growth may come from a finance trick called factoring, which dates to before 1400 C.E. A third-party investor would pay for Frogtek’s equipment on behalf of the shopkeepers. Instead of paying Frogtek up front, the shopkeepers end up paying the investor over the next two years. In exchange for providing the capital, the investor pockets about 15 percent of the revenue from Frogtek's associated sales.
In the end, the shopkeepers get their equipment, Frogtek gets its money back quickly and the investor earns a market return.
Invested Development, one of Frogtek’s backers, is trying out this idea with a new investment fund in Africa, which it hopes to expand into Latin America eventually. Though complicated, the model lets tech startups focus on improving their software rather than raising capital. It also gives the startup flexibility so that as the company grows, it doesn’t have to keep selling to the factor and can keep a higher percentage of its sales.
For the time being, Frogtek is already piloting a similar payment model with microfinance non-profit Kiva. While this partnership hasn’t garnered any big headlines yet, other early-stage startups could certainly learn from its example.
Like solar, bottom of the pyramid tech startups need innovative business models to thrive. But innovation isn’t always about reinventing the wheel. Old ideas can work too.