Renewable Matter # 19 / December-January

Bottom-up Funding

by Antonella Ilaria Totaro

Focus on Finance

in partnership with Valori

 

€500,000 raised in only three campaigns. A Dutch company’s choice focusing on crowdfunding to fund its circular business model and to show its financial soundness to future shareholders.

 

Funding the circular economy is not easy. Funding a start-up in the circular economy is complicated. Funding a start-up with a circular business model (product-as-a-service) becomes almost prohibitive. And yet, Dutch Bundles is successfully exploiting crowdfunding while waiting for top-down investors. Washing cycle after washing cycle, the “product-as-a-service era” comes into households establishing itself in the world of appliances.

“Wij houden van de toekomst,” “We love the future.” Bundles, the Dutch company offering subscriptions for high-quality appliances, chose this slogan, a series of T-shirts and white baby rompers hung out in the sun to dry to introduce itself to the public. It all started in 2003 with a partnership with Miele, a German company producing household appliances and with a high-end product that is home-delivered following a monthly subscription. Within a minimum of three to a maximum of five days, the chosen washing machine, dryer or dishwasher is delivered and installed in the user’s home, while still being owned by Bundles. The customer, benefitting from a service while not owning the appliance, pays according to the washing cycles and to the package selected on subscription.

Keeping ownership of the appliances means that Bundles is in charge of delivering, installing and maintaining the product while also offering additional services such as automatic restocking of detergents. Leaving ownership and liability of appliances coming into people’s homes to Bundles means that the products supplied must be of a high quality and innovative in order to offer the best possible experience to users while also using less energy, water and detergents.

So far, in Holland, Bundles has collected 1,100 subscriptions of which 800 for washing machines, 250 for dryers and 50 for dishwashers. There are 870 active customers. So there is a network effect for customers: after trying an appliance as a service, they choose a second and perhaps a third one.

In Holland alone, over one million washing machines, dryers and dishwashers are thrown away every year. Focusing on the Performance Economy and on efficiency means that only the best appliances are used and reused.

On paper, it is a worthwhile method. People do not pay for the cost of a home appliance that usually stops working after a few years of programmed obsolescence, but they only pay a monthly instalment for a product that, while it is not owned, offers a number of performances and very few headaches. Indeed, thanks to the installed software connected to the appliance, Bundles knows when the product is not working and sends home technical assistance.

Of course, together with such product-as-a-service model there are also some critical issues regarding ownership and home appliance liability (so far both belonging to Bundles) and the credit risk in a circular business model which is repaid on a monthly basis by its users and not by upfront payments as with traditional purchases.

Financing is certainly a crucial element for Bundles and for all companies dealing with circular business models. So, while waiting to reach new investors and scaling up, over the last few years, 2003-born Bundles opted for bottom-up funding. Besides capital invested by its founder Marcel Peters, former innovation manager for an energy service company and co-founder Wouter Buijze, Bundles organized three crowdfunding campaigns – all successful – raising a total of €500,000. The 2017 March, June and September campaigns have been hosted by the Dutch One Planet Crowd platform, where the general public can lend their capital starting from €250 to the company and/or campaign they wish to support.

The crowdfunding model has no doubt its limits in funding the “product-as-a-service business model” because instead of considering new investments, the whole revenue is used to buy new home appliances and repay loans. On the contrary, the €600,000 collected by Bundles from investors taking part in the first equity round, closed by the company in early December, will be used to expand Bundles’ services to new IoT applications, to develop new services and an improved software platform to manage subscriptions.

 

 

Bundles, www.bundles.nl/en

One Planet Crowd, www.oneplanetcrowd.com

 


  

Interview with Marcel Peters, Bundles’ founder and CEO

by A. I. T.

 

Subscribing to quality

 

Why did you choose crowdfunding to fund the product-as-a-service model?

“Because it is simple. The return on an investment in crowdfunding is clear. In the One Planet Crowd campaigns investors receive a guaranteed 6% return in the following 10 years. The equity capital in the case of Bundles is far more complicated because the return is unknown. It largely depends on Bundles’ profitability in the future. We opted for crowdfunding because we can also show we can be even more profitable. We would like to repay 6% of debt and show that we can improve the return on investments of these subscriptions. Crowdfunding is also instrumental in showing the financial soundness of our business model and in showing our future shareholders that Bundles has played and will play a significant role in the performance economy and that its stocks will be valuable in the future.”

 

 

What is the main obstacle for those who want to invest in circular companies such as Bundles?

“The uncertainty of how much value Bundles is able to gather in such product-as-a-service model is crucial. Today, those investing in a product-as-a-service model are not so much interested in how big the impact of their investment will be but rather in having a positive impact in the transition to the circular economy, by being active in the sector and by making their activity visible to customers. They see it almost as a non-commercial investment. Commercial investors have a vague idea of the speed with which a circular model scales up investments compared to the speed with which it uses money to operate the model. The transition towards the circular economy needs time. Until when a real transition takes place, the difficult step will be to estimate the potential value that companies such as Bundles can create for the future.”

 

What is the main risk for Bundles in the future?

“The risk is that large companies such as Electrolux or Miele may decide to go solo, after learning how it works, leaving Bundles out. Potentially, all companies with financial, marketing or information technology capacities can think of joining the subscription economy by doing away with Bundles. Over the next years, we have to show that the combination of our ability and the ‘network’ effect in offering various subscriptions and products through only one channel makes for a better and different experience for customers. The fact that customers do not need to take out ten different subscriptions with ten different suppliers is ultimately what makes Bundles so precious. Today, branding home appliances we deliver to people’s homes make us popular and sets us apart. This is a key element in order to gain an advantage in the future.”

 

What is the next step for Bundles?

“Once the problem of scalability is solved and once we have gained people’s trust in offering a good service, then real competition will start. Once a way of working the model is found, many people, perhaps already having a link or a partnership with Bundles, will try to conquer the market. However, if the market becomes large enough, that won’t be a problem because there will be room for everyone. In the future, I don’t want to sell washing cycles with Bundles, but I want to sell software, I want to sell a product-as-a-service brand. By selling software and scaling up we will be able to build something unique. By software licencing at international level, other people will be able to create a better company, suited to the needs of local areas and cultures and a win-win situation will be created.”

 

 

Are banks interested in the circular model?

“They certainly are, but banks are not private investors, they have very strict criteria in terms of risks they can take. If the repayment of a loan depends on the company’s stability, they can’t accept the risk of a company with a high cash flow. With crowdfunding and investors it’s different, they want and can give entrepreneurs the opportunity to show they can succeed.

“At the moment, ING and Intesa San Paolo are probably the most practical banks because they know everything with regard to payments and credit management. However, I believe they can’t take themselves alone on a journey towards the economy of subscription because if they can fund home appliances and build the software to collect money correctly, these two things alone are not enough to join the performance economy.

“Banks could take part of the risk in exchange for an agreed interest. In this way, Bundles would spread the risk with banks, or the same thing could happen with a transport or detergent company.

“But, ultimately, manufacturers or banks do not want users’ liability when subscription is cancelled or when customers have technical questions on appliances. Today, customers refer to Bundles for any doubts, they don’t contact their bank to know what button to push to wash a red dress.

“In the future, a joint venture between Bundles and some partners such as Electrolux could be created. Once contracts amongst partners and risks are well structured, I believe scaling up will be easy enough and the model will grow in other countries as well.”

 

So, how can banks help fund the circular business model and contribute to a transition towards the product-as-a-service model?

“Banks could not think as banks. They should be the guardians of cash flow and a company’s liquidity risks. Banks are good at estimating and structuring risks, while in the product-as-a-service model it is not very clear who takes the risks. Entrepreneurs and investors like to take risks, but they don’t like not knowing the scale of the risk. Here banks can be of help. They can structure risks in a way that it is clear for everyone how much the maximum loss and maximum gain would be, what criticalities would be. This is a role banks can play.

“The issue, though, is to understand how much money to pay banks for such service. So far, I have never seen a bank help, without supplying capital, companies structure risk in a way that capital costs for Bundles and for other companies with a subscription model diminish. A separate company from the bank could be created, a company with a different board, hiring experts from the banks as consultants. They do not have to analyse credit requests by customers, but they have to put themselves in the shoes of a company with a product-as-a-service company, helping to structure the risk and to understand what risks are and how they can be mitigated. Then the company could approach banks and offer them a financeable product with a structured risk. So, banks can decide if investing in savings of their own customers in companies with a subscription model where risks are defined and move their money towards the circular economy. All this, at the moment, is not possible because the risks in the circular economy are neither structured nor clear.”