Grover is a role model for debt-based asset funding. With nearly € 2bn of debt from various lenders in multiple rounds Grover has shown a way of separating startup and asset risk.
In this episode, Mitja Sadar, former Senior Vice President Finance and Head of Debt Capital Markets at Grover, gives insights into Grover’s approach. Mitja explains the various stages, pitfalls and the interrelation between the product portfolio and debt structures.
This episode is the eighth in the series PaaS Decoded, 16 conversations about the fine details of product-as-a-service.
Video Impression
People
Mitja Sadar, Co-Founder & CFO SKROL, formerly Senior Vice President Finance, & Head of Debt Capital Markets at Grover
Patrick Hypscher, Co-Founder of Green PO, Expert in Sustainable Business Models
Chapters
00:00 Intro
01:52 Grover developing from small to big debt facility
03:04 Separating startup and asset risk
06:03 The stages of asset financing
08:47 Internal structures needed to secure debt financing
10:52 Finding the right lender
14:42 Good relations with lenders are key
17:04 Contractual terms will last
19:04 Return on money & return of money
23:58 Influence of the product portfolio on the debt structure
31:18 Find your circular contribution and the value add
34:17 Trends towards use, sustainability & flexibility
35:41 Startups, SMEs & Investors welcome
About Grover (from website):
Grover is the global leader in technology rentals, enabling people and empowering businesses to subscribe to tech products monthly instead of buying them.
About SKROL Capital (from website):
SKROL is on a mission to modernize the backbone of the global economy by acquiring and transforming small and medium sized businesses globally.
Further Links:
https://press.grover.com/136970-grover-rings-in-the-new-year-with-250m-funding-deal
https://tech.eu/2022/09/28/grover-takes-on-more-debt-funding-this-time-to-the-tune-of-eur270-million
Transcript:
[00:00:00] Intro
Mitja Sadar: Most important, you need to have a good relationship with the lender and you need to understand what they can and cannot do.
Patrick Hypscher: Welcome to the eighth episode of PaaS Decoded. 16 conversations about the fine details of product as a service. In the last episode, Ankita Das introduced us to rebound effects and mitigation strategies. In today’s episode, we learn more about how to leverage debt to finance product as a service assets.
Patrick Hypscher: He studied economics, worked for the Royal Bank of Scotland, and was corporate finance lead at Kreditech. He worked for over five years for Grover. His last position was Senior Vice President Finance and Head of Debt Capital Markets. Currently, he is CFO and co founder of SKROL. He has a track record of successfully raising over 1. 6 billion in debt financing and over 190 million in equity financing for various companies.
Welcome, Mitja.
Mitja Sadar: Hello, glad to be here. Thank you for having me.
Patrick Hypscher: you don’t speak on behalf of Grover anymore. But may I still ask, what is your favorite product at Grover?
Mitja Sadar: Ah that’s actually a good question. In a sense that on one end if I want something long term, I mean, of course, I, I like to get a new iPhone. And I also like actually the home appliances section in the sense that if I want a nice Roomba or hoover for a couple of months that’s something I got as well.
[00:01:52] Grover developing from small to big debt facility
Patrick Hypscher: So during your time, how was Grover’s asset finance structured?
Mitja Sadar: So when when I started, there was a small facility with with Varengold Bank. I think that’s, that’s public info, so I think we can, we can disclose that. And it was in a way measuring the value of the assets, market to market. So you went to to a certain agreed secondary players requested the price for those. And this that’s how it was it was structured, was valued.
And we have built on that as Grover expandeded, brought together a couple of very strong players. And yeah, every year was a new height in, in terms of what we, what we had bought in terms of the assets, as well as in terms of the structure. We were moving it towards more grown up structure preparing for for the capital markets.
Obviously then, then came the 2022 and a little bit change in the in the whole outlook for, I think for the whole startup ecosystem as a whole where then we, we slowed down a little bit, the expectations or with regards to the, to the public markets. And so we haven’t pursued that option since then.
And then, yeah, afterwards when I left I don’t have information in the sense of what’s, what’s been developing.
[00:03:04] Separating startup and asset risk
Patrick Hypscher: When you talk about the structure, what do you mean by that? So different legal entities and contracts or what do you refer to there? Okay
Mitja Sadar: what you generally have in let’s say in a securitization structure or, or in an asset backed structure is that you have a financier or a lender who is comfortable with the, with the risk of the underlying, so of the risk of the asset and the customer receivables, but not necessarily with the, with the risk of a startup itself and the operational operational things that you have in a, in a classical startup.
So what typically happens is that you create a special entity or a special purpose vehicle to use the, the correct name, the SPV. Where you put in all the assets that you plan to finance this way. And the assets refer to both physical assets or any customer receivables or whatever is the object that’s being financed by the, by the lender.
And in that way and you grant security to the lender with that regard. So what you have effectively done is you have separated the risk of the startup as a new operating growing entity, which the lender did not feel comfortable with. And the assets themselves and the, and the portfolio that the lender is financing with which they feel comfortable.
And in that way, you can obtain funding for this portfolio at a rate that’s much cheaper than if you wouldn’t separate it. And that’s that’s the reason why, um, securitization has been proliferating quite a lot.
And I mean, it’s also the product that it’s not only used by startups. I think one of the biggest originators in Germany it’s Volkswagen is securitizing consumer leases so the car leasing. So it’s a very well established product well received by the investors and funnily enough, that was pretty much the only product issued by Volkswagen during the diesel gate scandal that did not have a massive repricing as a result, because the, the investors understood that the risk is on the customers and on the vehicles, not on the Volkswagen as a, as a group and any fines that they will, they will get as a result of that.
Patrick Hypscher: so actually you separate like the customer facing company legal entity and then the special purpose vehicle that owns the asset and gets the funding from one or several lenders.
Mitja Sadar: Correct. And the only thing what what’s connecting them is of course the customers that need to pay to that entity and not to the customer facing one.
Patrick Hypscher: okay, okay, clear. And not sure if you can disclose that, but the ownership of the special purpose vehicle is completely by the customer, usually completely by the customer facing company or startup.
Mitja Sadar: That depends, but generally yes. I mean you know, there’s no obligation why you, you cannot put this on the stock market. I mean, if you want to, and you have, for example, certainly real estate investment trusts are there and shipping companies, they actually usually sold the ownership to to the pension funds in Germany.
So the whole topics. So you can always you’re not obliged to own it a hundred percent. But with the startups, it’s generally the case that they do they do own significant majority, if not a hundred percent of those.
[00:06:03] The stages of asset financing
Patrick Hypscher: Okay. Okay. Clear. You mentioned that initially the, the, the main partner was Varengold Bank and later on the more lenders appeared. If I start a renting model, which funding stages can I expect later on?
Mitja Sadar: Yeah. So what, what you have is in the first level, you are proving the concept. So this is the financing, which you generally do with with equity to make sure that you can originate and that the customers pay and that the customers accept. So this is normally small volumes, Up to about 100, 000. Just to build some initial traction, initial track record and show it.
After we have done that you normally go towards the early stage investors, such as Varengold Bank, for example which will give you a facility of up to a couple of million. I think Grover started with a four million facility with the ability to draw in a hundred thousand tranches.
And and, and that basically means that as you buy more more assets, you can actually, you know, scale and, and grow, but at the same time, This is small and flexible enough that you know, it doesn’t overwhelm you.
Because the problem is once you go to the next level where you get larger facilities up to 20 million, you normally have half a million to one million minimum drawdown.
That means that if you are originating 30, 40, 50 thousand per month and you need to draw 1 million, the costs of that is going to, is going to kill you financially speaking just because you’re going to have a lot of money sitting on your bank account for which you’re actually paying interest. And that’s why you need to go first with the early stage somebody like like a bank that I mentioned that can do smaller tranches.
And then as you grow, as you expand, you will see that there’s a relatively big gap on the market between 25 and 100 million or 25 and 75 million facility. So what what we have done in Grover at that point in time was to, to bring a second party on board with about the same side that the Varengold Bank did.
Patrick Hypscher: hmm.
Mitja Sadar: And that’s how we reached 35, 40 million total, let’s say total capacity. And from then we were able to make a jump to to a larger area. And when we got Fasanara on board, I think that was also publicly disclosed, we were able to significantly increase the facilities and expand.
And at some point when you see that you have a lot of dependency and a lot of utilization, you want to bring a second party on board just in a sense of not having all the eggs in one basket. And that’s what we have also done with uh, with the M&G, which is which is also which is a big British based or UK based fund that was a stepping stone towards the transaction that I mentioned, which was in the works that would have been a public transaction. Which obviously, because of the changes in 22, didn’t happen.
Patrick Hypscher: Okay. Clear.
[00:08:47] Internal structures needed to secure debt financing
Patrick Hypscher: What makes it so difficult to find partners between 20 and 75 or 100 million?
Mitja Sadar: Because this is exactly the size where partners already expect that you have certain structures in place, certain certain maturity as a company, and you’re still too small to actually have it.
So what, what can result in that, and that’s the experience we also had is that if you try to grow too quickly before you’re ready for it, I mean, to get the facility from a too big partner you end up doing nine months due diligence. The result of which is you are you need to still do this and this and this before you’re ready. And that’s on one hand, not only that it’s demotivating, it’s super distracting and you’re better off doing it step by step and in a proper sequence to make sure that you have the maturity.
It’s, it should always be a stretch, the facility that you’re that you’re raising, because it should always bring you to the next level as a as a corporate maturity. But you cannot skip three, four steps because that just doesn’t work operation.
Patrick Hypscher: And by structures, you mean things like credit check, risk management, the financial operations to actually be able to handle this amount of money.
Mitja Sadar: Risk management exactly. So risk management, internal controls the maturity to handle complexity. So for example if you go from a, from a deal where you’re dealing with with, with a bank, you make one transfer per month to a party which uses 17 funds or 20 funds on their end to to finance you, you suddenly have to make 20 different interest payments every month.
When you get different different payment instructions, that’s an operational complexity that your treasury needs to learn how to deal with it, how to, how to do it. And to top it off normally at the size when you raise your first facility, you don’t have a treasury team. So it’s it’s difficult to to handle that.
You have certain audits requirements, you have certain reporting requirements, you have certain data analysis complexity that you need to do. It’s all doable uh, don’t get me wrong um, it just it adds a certain layer of cost which you should not necessarily carry at the too low level or too small size of the company.
[00:10:52] Finding the right lender
Patrick Hypscher: So for most founders starting off especially the initial phase is interesting or also the second phase when you mentioned you had like the partner like Varengold. Where to find these kind of partners?
Mitja Sadar: So for the first phase it, it should, it should normally be friends and family or or the early stage investors but all, but already try to to structure it properly because everybody wants to see track record. Okay. And if you don’t structure it properly, you will not have this track record to show.
So that’s why it’s good to get to work with a with a strong legal legal company, legal firm from the beginning, from the, with the good lawyers who can help you, guide you to set it up in a way that from the day one, you’re building the track record.
And then how do you find the, the second stage?
So the investors who will then bring it to the, to the first couple million it’s on one hand lawyers are a good source of referrals. They see who’s doing deals in the market. Also listening to or, or looking at what other people in, in, in the space have gotten or who they have gotten facilities from.
So there’s an announcement, Hey, a Varengold bank did this deal. i4 capital, for example, did that deal whatever. And then you can read and you can reach out to those. And investors can sometimes also be helpful in saying, Hey you could try this one as well.
But at the end of the day what, who you need to find is somebody who is willing to invest the work to understand what you’re doing. Because unless you’re doing a classical copycat in most of the cases, your product doesn’t exist on the market. Which means that somebody needs to be willing to put in the work to understand what are the risks, what are the benefits, and how to secure themselves. And then you can structure the proper deal.
I mean at this level getting an advisor it’s something I would not recommend because advisors are very good at the at the classical plain vanilla deal print, repeat print, rinse, repeat. But when you have a bespoke deal where you need to figure out together with the lender, How to make them secure, but how to still make them be able to do the deal, that works both for you operationally as well as financially, you need to have a relationship directly with the lender. You need to build it. You cannot rely on a third party to do
Patrick Hypscher: Mm hmm. Okay. Makes sense. You mentioned
Mitja Sadar: There’s another, there’s another reason for that, sorry to interrupt. And that is, at this stage, you’re likely going to pivot or tweak or whatever you want to call the product at least three, four times.
And, and that’s why you need somebody flexible who understands it, who will be able to accommodate that pivot. That’s also the reason why you don’t go with the big ones immediately because the big ones because of the nature and because of the amount of money that they go through, they cannot be too flexible.
They try to be, they try to accommodate. And they are super super reasonable. So I have very good experience with the, with the big ones as well. But if you need to do a major pivot that’s something that they cannot go along.
Patrick Hypscher: You mentioned you have to show track record early on. What are key metrics that you need to prove in order to show that track record? Mm hmm.
Mitja Sadar: Yeah. I mean at the end of the day, regardless of what you’re doing, lender is giving you the money. They need to see the return on the money and return of the money. Basically in short, so they need to see that there are sufficient cash flows generated to pay the interest, et cetera. And that they have a relative strong visibility of recovering their money in case things go well, which obviously everybody like that’s super easy to show.
And in things, in case things don’t go well, which is of course more difficult to show. But in both sides, lenders need to be satisfied reasonably satisfied that they will be able to recover them. Because like what the lenders like to say is there’s only one thing more important than return on money and that’s return off money.
And they don’t want default because default for them is much more expensive. Equity is a bit more open to risk because equity has an unlimited upside if you do well. The debt has in the best case scenario, their interest. In the worst case scenario, they need to take a hair cut.
[00:14:42] Good relations with lenders are key
Patrick Hypscher: You also referred to getting professional lawyers on board rather early. Can can they also help in avoiding any mistakes later on? Or what’s important to watch out for in structuring these contracts?
Mitja Sadar: Yeah. So that’s, that’s a very good question, I think in terms of the, the lawyers, the lawyers can make sure that they structure a deal that makes sense and that’s, that’s flexible enough. But, and that enables you to do to do the things that you need to do. But I mean, what’s, what’s super important is actually your relationship with a lender because contract with a big organization is set in stone with a small, with a small lender, with a small, smaller player you adapt it on the relationship and then if you pivot, I mean, they’re no, they’re like, you cannot foresee all future events in in a contract. So that’s very important is that you work with a lender that where you have a strong enough relationship to be able to amend the things as the, as the need arises, as it changes.
That doesn’t mean that you go around and you say, okay, now we take the interest out of the contracts and I’m not paying any interest. Obviously, I mean, it doesn’t work that way.
But I mean, if you agree that 80 percent of your assets will be in Germany and then you suddenly have an amazing opportunity to launch France and you need to adapt the contract to say, okay we can have up to 40 percent of assets in France and we can use the same facility. That’s something that a smaller lender will be able to adjust relatively quickly, provided that, of course, you can show that the risk return rewards in France are similar to the Germany. But it’s something that a bigger player might struggle with because they invested from a fund that’s focused on Germany. And that fund might have prohibition from investing in France because there’s another fund for France and things like that.
So most important, You need to have a good relationship with the lender and you need to understand what they can and cannot do.
And if you have a good discussion, you will know that relatively quickly.
I mean, they will tell you, look, I mean, this is something we can do. This is something we can’t do. And and then, you know, and I say, okay, fine, we want to do this, but we cannot do it with this lender. So we need to find another lender who can, who can cover that. Or this change it’s not allowed in the contracts, but I know that that the lenders are happy to do that.
If of course they’re properly risk is properly protected and they are, they are properly compensated for that. Then you go and you talk with the lenders and you adjust the contract to make sure that you can do that. And, and that’s what’s, that’s why relationship is super important.
[00:17:04] Contractual terms will last
Patrick Hypscher: And next to relationship, are there mistakes you can make in your early agreements that you, you will regret later on when you grow to further stages and have more partners?
Mitja Sadar: of course. Of course, of course they are. And and this is something that you do, you can do both on the debt or the equity side.
And that means that any terms that you agree on tend to be carried from one contract to the other. So whatever concession you made on day zero is likely going to happen in the next one, two, three facility.
Until you come to the level where It’s a paradigm, a paradigm change where where you have a power to to take those clauses out.
So on the equity side, this, this terms normally carry all the way until IPO and at IPO, you have a chance to do a clean reset of the, of the terms. And on the debt side as well, until you reach 200, 300 million facility that’s where you have a chance to to wipe the slate clean and remove any of the other terms.
But even then you will, like on the debt side, have a bit more pushback in a sense that if you have done things in one particular way and now you want to change it in a way that’s less favorable to lenders, unless you have a very strong interest and a lot of competition on the product, it will be very tough to get to get those clauses even, even at that side out.
Patrick Hypscher: So everyone should get experts in rather early on.
Mitja Sadar: you, you need to understand that any concessions you do, you’re likely to have them on forever. So, you should not do a concession, let’s get this deal on the road and we’re going to get it done, get it out in the next one or two deals. You’re going to likely life with them for the next for the foreseeable future.
Rating, rated deal or a bond are of course the differences. So if you work towards a bond or a rated deal, then you’re fine to accept on the private side a bit more painful stuff. Because once you do a, a, a rated deal, there’s a market standard and you will need to comply with that market standard anyway.
And there’s not going to be a push to a deviation in one way or the other. So on that side, you’re fine if you’re working towards that takeout, but if you want to stay on the private side you will be carrying those terms for some time.
[00:19:04] Return on money & return of money
Patrick Hypscher: Okay. You mentioned initially that there’s a return on money and return of money. So of course, the first one is a bit like the interest rates. Can you give a short overview when do lenders get the return on money and the return of money?
Mitja Sadar: So return on money is the interest payment and return off money is when you pay them back the principal. So that’s, that’s effectively it.
Normally for, for lenders the return of money, It’s very important and that’s normally non negotiable because they cannot earn in interest that much that they can lose in the, in the principal if the, if the, if they cannot recover the principal.
So lenders are, let’s say they put the negative glasses on when they evaluate the deal and they need to be comfortable that even in a negative scenario things are fine and everything everything works. Or at least it works to a degree that they, they have a reasonable path to recover their, their principal.
That’s the key message and then return on money. It’s of course the yield that they’re targeting for their portfolio for the funds and and is there, but the reason why they are in this, in this sense is that you need to have at the, let’s say, imagine you have a yield of 10%. In a year if you have 10 deals that are all equal in size and one deal collapses and everybody else pays you the 10 percent interest, you will still be 10 percent down. So that means but if you have a, if everybody pays you 5% and you make sure that every deal returns you the money, you will be 5 percent up.
For them, the return of money and the security is much more important than yield. And you, it’s generally a bit more difficult to let them relax on the structure for an extra yield or two extra percentage portfolio. Sometimes they do it. Some lenders are more more open to take a bit more risk in exchange for higher return.
But, but generally most of the lenders, especially the ones who don’t get any equity upside, any warrants will want to make sure that their, their downside is protected before they even start thinking about the upside.
Patrick Hypscher: And are these deals usually do they come with a fixed date when the lenders do get the full money back or is it a bit like ongoing and open or do both versions exist?
Mitja Sadar: right? It’s actually both at the same time. So they have a final maturity date, but the expectations that they will either be rolled over or refinanced.
Patrick Hypscher: Can you elaborate more on these two options then?
Mitja Sadar: Yeah. So you negotiate a deal where you say, okay, I have two or three years to take the money and then I have another two years to pay it back pretty much. And that’s pretty much standard structure. So that you have either 2 plus 1, 2 plus 2, 2 plus 3, or 3 plus 2. Something like that, you normally see.
And and then what you normally have an expectation is that as the, end of the so called revolving period, so the first period in which you can take the money, is coming to an end that you will either agree a new transaction with the same lender or you will bring a new lender and repay the, or refinance the existing under existing facility, which means that lender will get the money back under that original loan and then either issue a new loan or somebody else will issue a loan.
But you as a company have almost an evergreen facility. You just need to make sure you. That you don’t have any significant deterioration in the performance metrics, because obviously if your underlying is not performing as it should, you won’t be able to get it refinanced. But as long as everything runs well, this is for a company, an evergreen facility that stays in place and is just either increased, refinanced, or extended.
Patrick Hypscher: Mm hmm. And referring to the underlying does the structure of the funding affect the let’s say the operations in, in, or the growth? I mean, I can imagine, especially in the early phase, it can limit your growth if you don’t have funds anymore to grow, yeah? But can it also be the other way around?
Mm
Mitja Sadar: It should not in a sense that if you do things properly, a customer wouldn’t even notice that you’re refinancing that idea on somewhere else. A customer will be doing business with you as a, as a customer facing entity. And and then you will be operating things just normally and refinancing in the end.
Sometimes the customers will of course see that, that you’re using a refinancing partner, but I mean, that’s, that’s not an issue. So no, it should not impact your growth.
And generally if you see that you are changing your, your strategy, to comply with the financing requirements, you messed up on structuring the deal because it should not, you need to do what’s best for the company and financing structure is there to support your growth, your plan to deliver .
The moment this is no longer the case, you need to refinance or renegotiate the transaction with the lender to make sure that it does not limit the business. It is there to support the business.
[00:23:58] Influence of the product portfolio on the debt structure
Patrick Hypscher: Let’s stick to the underlying or let’s say the product portfolio. Are some products more attractive assets for lenders than others?
Mitja Sadar: That’s like objectively, no. So objectively the lenders are like, are saying, look, you’re an asset manager. You’ll do an asset allocation and you get me a certain cash yield with a proper structure in place. So that means backup servicers. I don’t actually care if you have bicycles, phones, computers, or, or cars at the end of the day, I give you money, I get money back and I get my return in in money. So whatever you do in terms of the assets, I don’t really care. That’s on a purely objective objective and rational side.
However, people are not always fully rational and certain people prefer cars. Certain people prefer iPhones to or like, you know, there are certain things which subjectively you might the credit team might feel they’re more like more better. And with certain products, you have a easier way of getting them approved.
For example, just a typical case, if you come up with a solar panel or or a windmill that electrical mills for electricity it’s easier to get them placed and and structured than if you come up with the idea of I dunno, refinancing computers or providing robots for factories.
Part of it’s obviously objectively because you have a lot of support on the ESG side and on on a renewables. Part of it’s because, um, let’s say if you have a specialized robot in the factory, it’s a bit more difficult to dismantle and in a negative scenario, a bit more costly to to turn it into cash, but ultimately if they all produce the same cash flows, you should be broadly agnostic to to that.
Unless, unless you have something else written in your investment principles.
Patrick Hypscher: Mhm, mhm.
Mitja Sadar: Which could be like only invest in a renewable energy or don’t invest in specific sectors or, or stuff like that.
Patrick Hypscher: And have you seen limitations in a way that the asset doesn’t have a second, second market yet. So it’s pretty difficult to determine the the value of the assets after one or two years being, being used.
Mitja Sadar: So that’s not only the financial problem. That’s also the commercial problem of the company. And how you’ll answer this on the commercial operating level will also drive the financing. I mean, if you say, look, I mean I’m, I’m renting it out. I have no clue how I’m get rid of the asset, then you have to figure out your unit economics yet. And then, I mean, this is not a financeable.
However, if you have a clear plan and you say, look, I mean I’m renting this auto customers, or I’m leasing this out to customers, whatever, for three years or two years, and afterwards I recycle it and we still make good money out of it then this is what the lender will underwrite. So you just need to, I mean, you need to have on a commercial level a plan.
Finance, like I said, the financial structure should not be driving the driving the business. It should follow the business and implement the business in a way that, that makes sense. And and just make sure that there’s money there to execute the things that business, or that, that you decided on the commercial side.
Patrick Hypscher: And is there also some interaction on the maturity? So if there are some people who prefer a Hoover at home, and then you also have the asset like a robot in a factory. So something, the first one might be six months. The other one might be six years. How does it influence the debt financing structure?
Mitja Sadar: It changes the, the ratio between the normally between the value of the receivable and the value of the asset. And it changes a little bit how you, how you structure it. But ultimately it gives you a depreciation rate that you need to, that you need to pay one way or the other. And it gives you certain cash flows that you need to distribute one way or the other.
So, at the core, it does not change it. It does change the proportions a little bit and how quickly you need to originate new deals to keep the same the same lending volume or the same volume of the borrowings. So for example, if you have a Hoover that you throw away after six months just because it breaks that of course the cost of depreciation and the need to replace it as much higher than with a robot that you install and you keep it for 10 years running in a factory. Et cetera.
You of course have also very different different topics in terms of maintenance. So the, the robot needs much more maintenance and regular maintenance and checks. And the maintenance book becomes much more relevant for the lending and for the lender than it does on a, Hoover which in any case, it’s plans to be discarded after whatever time has been has been rented.
It’s a, it’s basically changes a couple of the, of the details, but ultimately you need to prove to the lender that you’re getting in more cash than than the product is losing in terms of the value and that that more cash is sufficient to to cover the downside and to cover the the interest costs and your operating expense.
Patrick Hypscher: And the last question on let’s say product diversity and portfolio is also related to risk. So if we take Grover, Grover serves multiple categories, be it consumer electronics, but also office equipment, home appliances. uh, um, And many, Subscriptions focus ,on one niche, be it bicycles, be it just certain type of furniture.
Is this problematic on the lender side in terms of risk and diversification or is it rather common that you didn’t just have a partner who is willing to take that, let’s say, industry risk or segment risk.
Mitja Sadar: I think that’s a decision for each lender in terms of how much diversification versus concentrations they want to have.
I don’t see this as a problem per se. As long as you can show sufficient resilience to any external shocks. So, I mean, if you would be saying I only do iPhone iPhone 15 and or, or let’s put it a bit more more case if, if you do Huawei and you only focus on Huawei. And then Huawei gets banned in European Union for whatever reason. Obviously that’s a concentration that you as a company should not be taking unless, I mean, unless you decided this is how it works. But generally if you have a healthy mix of products and brands, or depending on, you know, it depends on what industry you’re in you need to demonstrate that that from the commercial side, it makes sense and the financial side will follow.
Lenders might have an objection, but quite frankly, if you’re surprised and for the first time hear that objection from the lender and not from your commercial team, you’re going to need to have a chat with your commercial team first. And, and by then, after you have had a chat, you either have an answer or you fire all of them and and talk to them to manage the thing properly.
But in any case jokes aside what’s super important again, here, the lenders will ask questions that they believe, but those questions should not surprise you. And you should have been asking those questions yourself.
Am I comfortable with this concentration? Am I comfortable of by buying 100 percent of my products from China knowing what’s happening geopolitically?
If the answer to this is yes, and I have a good reason why that’s the reason I’m gonna sell to the lender as well, and the lender will most likely accept it if, if the reason is real and not like a fake, just, yeah, yeah, we’re just doing that, but we want to do that. But if it’s a real well, well reasoned reason, it’s fine.
But in this case I mean, the lender wants to make sure that the risk position is secured. And as long as you can give them reasonable comfort, it’s fine. If you can’t, then you should have a problem on the commercial side anyway. Which you need to address as well, and that should be addressed.
Patrick Hypscher: I like your simple and clear answers
[00:31:18] Find your circular contribution and the value add
Patrick Hypscher: Mitja, I have three last more generic questions . So the first one is, what’s the main thing you need to make sure as a brand or manufacturer before you start a circular product as a service?
Mitja Sadar: Yeah, that’s a, that’s a good one. I mean I think you need to understand how the circularity works for your product. How do your customers use it and why would a circularity or a circular system work for your customers? So, for example, if, if you do cars how, how does the car ownership cycle works?
So first, you sell a new car to somebody who uses it for 2 3 years, or 4 years, sells it on, somebody buys a the newly used car, or, like, you know, relatively new used and uses it for another 4 5 6 years, and then somebody buys a 10 year old clunker, uses it for another 5 10 years, and then then the car gets bust, whatever the cycle is, I mean.
Then, what you need to see is, okay, how can I actually add value to the whole thing? I mean, am I doing circularity just for the purpose of showing it on an ESG report and not thinking about it? That’s, from my perspective, the wrong way to do it, but sometimes it’s valid.
But if you really think, okay, as a car owner or as a car manufacturer, how can I disrupt really that sector? What can I offer?
That’s that’s going to make the life of people easier. And in the car, for example, you already have leasing for three, four years. That takes care of, or at least in the eyes of many people, takes care of the first problem. You don’t have any proper solution for leasing other than financing on down the line.
You, and you don’t have a good solution or you didn’t have a good solution for, um, let’s say a flexible leasing. I mean, with the leasing, you sign a three year contract, you move out of the country after 18 months, you, you better pay off the whole leasing. There’s no way you can you can get out of it. I mean, it’s not a flexible. So if you want to do as a car, as a car OEM you might want to think about, you know, offering a flexible option to get out of it. But for the car, specifically what’s the problem after the car is used? Nobody knows the provenance. Nobody knows the servicing. Nobody can, can do this thing.
So if you can solve as part of your product, circular product, the problems down the line, which are currently not being addressed, or they’re, it’s currently a little bit shady market where you don’t know if your car has been properly serviced, if you still have the original parts in et cetera, if the manufacturer can, after, you know, after the end of the list period, take back this product and again, offer a flexible solution for the people who are down market for this product, but at the same time, validate everything well, that works.
So basically before you offer a circular product, understand how your market and understand where do you actually add value and where, where are you uniquely positioned to add a lot of value?
But at the same time, obviously you don’t want to be peddling 10 year old cars. So you also have to make sure that it doesn’t dilute your brand.
[00:34:17] Trends towards use, sustainability & flexibility
Patrick Hypscher: Okay. Second question. What are significant trends you see in circular renting or renting in general for the next five years?
Mitja Sadar: I think just continue, mostly continuation of the, of the previous trends.
I mean, what, what you have there is in general especially in Europe, people getting more and more comfortable with the utilization or use versus ownership. And, so this is going to be continuing trend. That’s going to be happening.
People getting more and more concerned about end of life. And how to make sure that what I’m doing is sustainable. That’s specifically German topic, but also slowly spreading in Europe. What’s my CO2 footprint. And that’s something that you need to address as part of your circle offering, because I wouldn’t say it is important for everybody, but probably for 10 to 20 percent of your users.
Once you’re at scale, this is a, this is important. I mean, when you’re small. I mean, this, this is the initial target first, or you can target first, first. But after your scale, probably 10 to 20 percent of your population will be the one for whom that really matters.
And you will also have the trend towards, I don’t need leverage. I don’t want to have financing. I want to have a flexible solution because my life is changes changing. And we’re seeing in general that we’re starting to live faster and faster. And that we. tend to be less stuck in a geographical situation than we were in
Patrick Hypscher: Yeah.
Mitja Sadar: People are moving around.
[00:35:41] Startups, SMEs & Investors welcome
Patrick Hypscher: And my last question is about yeah, sharing knowledge, connecting people. Maybe you have some milestones you want to reach opportunities to unlock. If someone is listening to this conversation right now, who should get in contact with you?
Mitja Sadar: Well, that’s a, that’s, that’s a good question, actually.
I mean, there’s on a, on a professional level, I am right now breaching out into the, into the board advisory, you know positions where I can help younger companies, startups with with an interesting concept in, let’s say in an asset heavy areas where my expertise can be, can be deployed. And, where I can help them, at least guide them.
Because in most of those cases the companies don’t need somebody like me full time. They can’t afford somebody like me full time. But having somebody like that on the board where you can ask a question or two on a structure, every now and then can help you avoid some mistakes can help you get get there. So that’s that’s one of the options what we could do.
On the other side. Right now, as you mentioned at the beginning I’m a co founder of SKROL. And at SKROL, we are we’re right now looking to actually unlock the potential of the small and medium sized companies by acquiring them and then preparing them for growth and for scaling.
So anybody who’s interested in that area super happy to connect and exchange ideas. And yeah, I mean, if they’re investors who want to invest in that area or people who want to work there let’s, let’s have a chat. Let’s see if there’s enough of common ground that we do something together.
Patrick Hypscher: Nice. Thank you so much.
So dear listeners I’ll, I’ll add the link to Mitja in our show notes reach out to him.
And Mitja, thanks again for sharing your experience, answering this question and giving us insight into structuring the debt financing.
Mitja Sadar: My pleasure. Thanks for having me.
Patrick Hypscher: This was another episode of PaaS Decoded. 16 conversations about the fine details of product as a service. If you liked it, share this episode with colleagues or on social media. If you missed a question or topic, please send me an email so I can improve the conversations for you. If you learned something from this episode, please provide a review via Spotify or Apple Podcasts.
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