Who ever said that social startups are not profitable? Recently I had the chance to analyse a small company connecting European investors with Central American women, to micro-finance their local entrepreneurial projects. Yep, another platform, charging investors 2% of their investments (typically between 500 and 2000 Euro) in return of promised 8% 1 year later.
So far so good; in fact, in just 4 years, these proven entrepreneurs managed to finance hundreds of projects. You might now start wondering who collects and selects those projects, meets, trains and ensures the women for success. I mean, unlike other well known platforms, this kind of business implies local content and contact, in other words, being there!
The main office of the startup is based in Europe and its financial statement does not record any travel expense. The founder revealed that all local activities are managed by a NGO in Central America, based on trust, to whom an annual fee goes to sustain their operations. I can accept a “based on trust” concept in this case, relying on good faith of the NGO and the personal relation they have. However, it is more difficult to accept a whole business model relying on the black box of the NGO, a relation of dependency which would simply vanish in case of default of NGO or change of conditions or change of personal relations. To such a hostage position, I’d say NO-BID.
At the time of the analysis, the founders of this project declared that the rate of insolvent entrepreneurs was 0%. That’s a good sign, but it should be crosschecked with the statistical sample taken into account as well as the duration of operations until then. That rate might suddenly grow rapidly and what if it gets to 5%?
Double hostage. The company promises a fixed 8% of return to investors. Not bad at all. Think now at the relation between return to investors and insolvency rate. The latter is not controllable, especially as the money of the investors does not go straight to the Caribbean projects, but it goes through the aforementioned NGO, which is not controlled by our founders. Checkmate.