Micro-investment Solution

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Micro-investment Solution

Portugal
Website:
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

The core of our solution is matching entrepreneurs that look for funding small value investments or new businesses with investors that look for new opportunities to invest their savings. In order to achieve that we create a trading platform for small value bonds which conditions and interest rate are defined in an open auction. For a detailed description check our web page.

About Project

Solution: What is the proposed solution? Please be specific!

In a nutshell, the uniqueness of our solution comes from providing a genuine market mechanism for responding to SME and micro firms financing needs and at the same time ensuring the social impact of the investment made (through what we call community empowerment). To explain better, let us see what the innovative features of our enterprise are: SME and micro-enterprises are not treated as “deficient” actors that are in need of some form of financial charity, on the contrary, they are valuable assets of the community. Therefore we look at their perceived lack of financing as a market failure and aim to tackle it. We do so by providing a direct channel between people that want to invest their savings and firms that need to invest in business expansion, or entrepreneurs that are just starting their business. Investors want to see change happen and want to earn a reasonable return for their money and the firms need leverage so that they may grow. By bypassing the traditional financial system we insure that company size is not an issue, while at the same time placing the decision of awarding the loan or not into the hands of the actual people that give the loan. We thus “add a face” to financial transactions and keep a market mechanism to decide who gets the loans.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

At its core, the micro-investment solution aims to enable a fairer and more efficient redistribution of savings towards the productive agent. To work, a number of incentives are designed including the potential gain to the potential small investors who seeks to make a difference in is community. Apart from the financial gains, important impacts are generated: - Allows SME’s to use their image in their communities in order to get a better loan; - Matches SME’s with different stakeholders and empowers society by helping to create more jobs, fostering initiative, enhancing community spirit, providing new models and opportunities for youth.
About You
Organization:
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About You
First Name

Pedro

Last Name

Magalhães

Your Organization

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Country

, PO

About Your Organization
Organization Name

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Organization Phone

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Organization Address

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Organization Country
Organization Type

Private Institution

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

East Asia and the Pacific, Europe and Central Asia, Latin America and the Caribbean, South Asia, North America.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

100.000$

Number of employees in your target firms

Fewer than 5, 5-24, 25-49.

Average number of employees of your target firm

15

Specify the size, average and range of expected loans or investments in each target firm

Taking into account data gathered for Portugal and considering the fact that SMEs are the most common form of business organizations worldwide, we have targeted our loans specifically for SME: a maximum of 64.000$ (50.000€), for an average period of 3 years covering investment in company assets (equipment, IP, expansion works etc.). Loans will not cover the costs of actually running the business.

What stage is your solution in?

Idea phase

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

SME are more and more the target of public programs to finance qualification, training, innovation, internationalization and so on. Normally these programs offer funding in the form of co-financing, which means that SME’s need to contribute with a part of the investment. This is sometimes a deterrent from applying even to such co-financing programs and other times it is a reason for the projects failing to obtain funding.
Our micro-investment tool will allow SME to gather additional financial resources (namely private funding), which may count as co-financing for the aforementioned programs.
Moreover, if SME’s manage to obtain more private funding than that required by the public programs or subsidies, this means less expense per project for public authorities and thus more projects than can be funded.
Therefore, we are not only contributing to more a more efficient public financing of SME investment but we are also enhancing the impact of public intervention in catalyzing SME finance, by providing opportunities to more SME to participate in public funding programs.

What barriers does your proposed solution address?

Asymmetry of information, Lack of collateral, Unavailability of financial products tailored to SME needs, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs.

If you checked any of these barriers, describe how your solution addresses them

Throughout the past years, several factors have been acting as to increase the power that clients have on the financial market: the surge of new communication channels, the proliferation of a myriad of information sources, the highly diverse offer of financial services on the market and recent changes in banking regulation. All these have contributed to decrease the asymmetry of information on the market, but even so consumers of financial services are still dependent on traditional financial institutions, which hold privileged information. We tackle this by bringing together the investor and the ultimate beneficiary of the loan (the SME or micro firm) on a platform that is actually a novel forma of market. The investor can thus “see” the destination of his loan, ask for more information, follow-up etc. The debtor knows where the money has come from and benefits from a transparent system of tariffs for getting the loan.
By their nature, dimension and structure, banks are forces to apply rigid criteria to evaluating credit requests, which include the provision of collateral. SME often find themselves in the impossibility of providing the collateral needed. We tackle this first by resorting to community guarantees (an investor may set his interest as guarantee for the project in which he invests, to defend the project’s trustworthiness and potential) and second by financing only investment in assets that may be offered as collateral, therefore erasing the need for the company to provide other collateral than the investment per se.

Our micro-investment platform in designed to finance specifically SME projects in need of funding. The loans they obtained must respect the conditions that the entrepreneur states, since he may communicate them directly to the investors, by defining the terms of the auction. This not only insures that the final bid is in agreement with both the conditions of the firm and of the investor but also addresses some other issues:
 As the financial transaction occurs through an online platform, between the investor and the entrepreneur, transaction costs are significantly lowered, compared to the tradition financial intermediary case.
 Financial institutions, due to their size and functioning, are more efficient when financing higher value loans to large firms, as they are both more lucrative and with a lower perceived risk. We create incentives for SME funding: distributing risk (investment in any 1 project is limited to a third of the total value, but not higher than 4.500 Euro), providing the option of alternative guarantees (like the community guarantee), contributing to the development of the local community (of which they are probably part), enhancing social change (and being able to track it step by step as they know exactly which project they are funding).

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

Our micro-investment platform has yet to come to existence. Therefore, there is no empirical evidence to the success of such solution. Nonetheless, it is possible to draw some conclusions from our business model and its objectives. First, we consider the human relations and synergies created by people working together as a key resource and we believe that when correctly employed these interactions may lead to a better valuation of society’s most precious asset: people. Therefore, our solution first impacts on people, by aiming to maximize the impact they have in the world around them: we help them turn their ideas into reality, have a chance at bettering their economic situation, their education, their position in their community. And we do this by matching their needs with resources from people that are also looking forward to leaving a mark, by using their saving in a productive, constructive way, while bettering their own financial condition. Win-win situation. By doing this, we also insure a broader impact on local communities, as a series of positive externalities is triggered: more jobs, additional well-being (stemming from new services or products being offered), development and opportunities for local youth, decreasing social differentiation or even just better services. This is bound to happen in any country where people have gone a step up the ladder of economic development and where their basic needs are reasonably taken care of (Europe, some parts of Asia and the Americas).

How many firms do you expect to reach?

We plan on providing 7.000 loans at the end of 6 years of operation

What is the volume of private SME finance you aim to catalyze?

The platform is mainly used by SME or new enterprises looking for microcredit. For the first we considered an average loan of 15.000€ and 6.000€ for the second (values created taking in consideration the Portuguese reality). Therefore we expect that a total of 91M€ to be traded.

What time frame will be required to reach these targets?

We based our projections on the Portuguese reality because we plan to use this country has a starting point for international expansion. Therefore, in order to reach the targets presented before we will need 6 years.

Does your solution seek to have an impact on public policy?

No

What would prevent your solution from being a success?

a) Political pressures
b) Lack of community support
c) Not be able to reach the necessary size in order to be cost efficient

Sustainability
List all the funding sources that are required for the sustainability of this solution

Our solution was designed to be self sustainable and profitable. Relying on the growing internet and mobile phone access both on developed and in developing countries, we are able to offer a scalable solution which, ultimately leaves diminishing costs. The amounts paid by both entrepreneurs (success fee) and investors (market management fee) are enough to cover operation cost and create value to our shareholders without scarifying the market gain and the lower interest rate that we which to achieve. Therefore, only a group of investors will be need in order to support the initial financial effort, which includes: design and implementation of the informatics and control structure and system advertising.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

Since the beginning, the trading platform proposed by us was designed to be totally private with no need for public money. By trading small amount of bonds, we expect to redirect private savings towards SME’s, allowing small investors access to a profitable and sustainable financial product.

Nonetheless government regulation is desirable. Such market should be accepted and ruled by law. The market manager (private enterprise which moderates bond auctions and regulates market entries and information) should be under regulation from an institutional body, which could be the same as the regular stock market. In most regions in which our platform could be implemented there is no need for a new public policy which could cost millions. Instead, governments only need to adapt their own Capital Market laws and regulation to this new market specificity.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The revenue generated by the fees paid by both investors and promoters, as well as other revenue sources planned are enough to keep the market working. Thus, external funding will be needed only in the start-up fase, for the initial capital and expenses relating to setting up the business, as well as for operating during the development fase (1 year). This amount will be secured before the enterprise starts working.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Partnership with country banks are necessary in order for the bond mechanism to work. Such a partnership enables us to operate in different countries without significant changes on the market structure. Therefore our solution may expand to virtually any country that has an operating banking system.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The non-financial threats identified and somewhat related to the financial market and its features, although are non-financial in nature. The below were identified as potential threats to the proposed solution success, and are somehwat inter-related:
-New and innovative financial products may not be well received by the market in an initial phase;
-Lack of “trust capital” and history: one of the most important imaterial assets of a financial institution is its reputation, including the willigness of its clients to entrust it with thei savings. In our case, it would be the trust of small investors that the investment opportunities presented are trully reliable and that the real quality of services is the same as advertised.
-Necessity of a big scale in order to be sustainable - !!!!isto acho que é financeiro

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

We plan to expand geographically the range of action of our platform. Internet and other forms of communication are expanding especially in regions such as South America (especially Brazil) and Asia. The use of internet and mobile phone as preferred transaction platforms enables us to expand our area of service both between countries and inside them and reach SME’s in need of investment in a country’s poorest areas.

On the other hand, we base our incentive framework on the proximity inside a specific community. As communities are complex structures, encompassing all sorts of activities, interactions, different social and economic development levels, we estimate that projects from different sector will ask for financing through our platform. We welcome the multi-sector perspective and believe it is essential to finance small industries, as well as commerce, as well as restaurants our cafés, or educational projects or services to the community and its members. The more innovative the idea, the more likely its enhancing of economic or social development or of people’s quality of life (including environmental) and the more convincing the arguments of its owner, we expect that the more interested investors will be to finance it.