Buy now, pay later options have emerged as a popular financing solution for millions of consumers who are unable to pay upfront for a wide number of purchases. Introducing even more flexibility are the lease-to-own financing solutions that are emerging. Kafene is a flexible point-of-sales digital offering that provides lease-to-own options making purchases accessible for the underserved consumer that has non-prime credit. The company has built a robust AI-powered underwriting engine that takes into account over 20,000 data points to establish risk-based pricing that provides approvals and seamless checkouts in seconds. The company works directly with merchants that offer furniture, appliances, electronics, tires, wheels, and other big-ticket items via their websites. 80-90% of consumers typically end up purchasing the item after 12 months without ever having to worry about debilitating credit card interest. With credit options tightening, Kafene is able to offer accessibility to a larger segment of the population and the company has orginated over $100M in rent-to-loan agreements since launching 2.5 years ago. Consumers also have the added flexibility to merely turn in the item without any further obligation if that’s what’s best for their situation, providing optionality at an uncertain time. Merchants can get onboarded quickly, purchases can be up to $5000, and payments are released within 24-48 hours.
AlleyWatch caught up with Kafene Cofounder and CEO Neal Desai to learn more about the business, the company’s strategic plans, latest round of funding, which brings the total equity funding raised to $64M, and much, much more…
Who were your investors and how much did you raise?
Third Prime led the initial Series B round of $18M that we announced last September, as well as the $12.6M extension, which is what we just made public.
Tell us about the product or service that Kafene offers.
We work with retailers at checkout to help offer customers flexible financing in the form of lease-to-own agreements that enable purchases of durable, big-ticket items such as refrigerators or sofas at fair prices.
We do this by leveraging an AI-driven underwriting platform that is tailored to help approve the nearly half of U.S. consumers whose credit scores are considered nonprime.
While lease-to-own itself is not a new concept, Kafene is disrupting the space by working as a partner to thousands of retailers rather than as a substitute option with its own storefront. This helps customers get the products they actually want from any retailer – instead of bundling financing with a single brick-and-mortar option. Kafene is also unique in offering risk-based pricing that generates each customer the best financing possible based on their risk profile – a first in the lease-to-own industry.
Finally, Kafene focuses strongly on transparency and consumer-friendly practices that set the standard in bringing forward what’s traditionally been an admittedly opaque and reputationally challenged space.
What inspired the start of Kafene?
Our founding team identified a need in the area of large-dollar financing in the nonprime space, where there simply weren’t enough options for consumers.
Together they saw a large opportunity in lease-to-own financing specifically, where they created a robust model that could also perform resiliently during adverse market cycles.
How is Kafene different?
Kafene is different in a few ways. First, it is different from other financing companies like BNPL, because it offers financing into the thousands of dollars range rather than hundreds. It also typically serves needs rather than catering to discretionary spending, and with its lease-to-own model, it tends to be able to underwrite consumers traditional lenders and financing companies leave behind. As a result, Kafene is not a substitution product the way credit cards and BNPL can be for consumers who use them interchangeably. We serve a real need in the market. It’s not just a convenience product.
As far as being different from other lease-to-own companies, Kafene pioneered tiered risk-based financing in the industry so underwriting can be as efficient as possible and affordable to the consumer. Kafene also has a unique underwriting model that sets the standard in the space for consumer-friendly best practices.
What market does Kafene target and how big is it?
We primarily serve as a financing tool at checkout for the 100M Americans who have nonprime credit scores, meaning they either have poor credit or no credit, and as a result are typically locked out of the traditional financial services system. In the durable goods space alone, this market is at least $50B. Multiple adjacent markets have similar-sized opportunities.
We primarily serve as a financing tool at checkout for the 100M Americans who have nonprime credit scores, meaning they either have poor credit or no credit, and as a result are typically locked out of the traditional financial services system. In the durable goods space alone, this market is at least $50B. Multiple adjacent markets have similar-sized opportunities.
What’s your business model?
We purchase the item from the retailer at point of a sale, and then instantaneously rent the item back to the consumer at a weekly or monthly price that slightly exceeds the total cost in the store. To the extent the consumer cancels the rental agreement, we simply take the return back with no negative impact to the consumer’s credit. Most consumers, however, are able to complete their agreements at which point ownership is transferred to them.
How are you preparing for a potential economic slowdown?
We’ve had to tighten our credit box a little bit– just like many other financing companies. We want to underwrite as many people as we can for our retail partners, but we also need to be careful that we’re taking the right risk and not putting ourselves in a position where we have to be defensive. At the same time, we’re also anticipating an uptick in demand for our product as traditional lenders tighten even further.
What was the funding process like?
It’s always difficult and particularly so in this market. Luckily, we have strong partners that have been with us since the start who helped generate excitement by being vocal advocates of what we are building.
What are the biggest challenges that you faced while raising capital?
Trying to boil the ocean one inch deep in terms of getting lots of meetings and hoping several will work out might’ve worked in 2021, but it’s not a great strategy today.
Right now, it’s important to go narrow and deep – to know who your investors are and what they look for. Know what reservations they might have and be ready to respond to their concerns. For example, we started with the premise that only certain investors invest in companies that take credit risk. Of those few that do, only an even smaller set are willing to understand the needs of a nonprime consumer. That was our target set.
Right now, it’s important to go narrow and deep – to know who your investors are and what they look for. Know what reservations they might have and be ready to respond to their concerns. For example, we started with the premise that only certain investors invest in companies that take credit risk. Of those few that do, only an even smaller set are willing to understand the needs of a nonprime consumer. That was our target set.
If you’re a startup in this environment looking to raise, you should only be meeting investors that have experience with your business model and asset type. Stay focused. Anyone who has a list of 200 investor targets is probably casting too wide of a net and it’s just the wrong environment for that.
What factors about your business led your investors to write the check?
We’d made a lot of progress in several ways. We reached $100M in originations since inception early this year – roughly 2.5 years after our product went live. Our unit economics turned positive at the end of last year, which means that on average, each lease we make now is profitable, which means we’re not far off profitability as a company.
In recent months, we also started to really benefit from the “trade down effect” where financing companies that typically serve those with higher credit scores than our customers start to tighten up their underwriting. Consumers with stronger credit quality began to turn to us. That’s not great news for the consumer – it means they have fewer options. But the companies that serve nonprime consumers tend to do well because the customers they get during a downturn actually represent fairly strong credit profiles.
We know how to underwrite someone whose conditions are stretched, and there happen to be more of these consumers during tougher times.
What are the milestones you plan to achieve in the next six months?
We hope to reach $100M in revenue run rate by the end of the year, which is ambitious but achievable for a company whose product has only been in the market for three years. We also are aiming to materially expand our retailer footprint and move into serving several new asset classes.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
You’re going to have to leave a bit of growth on the table and narrow your focus so you can extend runway as much as possible. Focus on your existing investors more than courting new ones. If an investor didn’t want to be part of your company in 2021, it’s hard to imagine they will want to be in 2023. That’s just the reality.
Run a tight ship, focus on being a healthy company today, and hopefully, those you’ve been with you all along will see your resilience as well as the impact your company is starting to make. When they are ready to write another check, others will be as well.
You’re going to have to leave a bit of growth on the table and narrow your focus so you can extend runway as much as possible. Focus on your existing investors more than courting new ones. If an investor didn’t want to be part of your company in 2021, it’s hard to imagine they will want to be in 2023. That’s just the reality.
Run a tight ship, focus on being a healthy company today, and hopefully, those you’ve been with you all along will see your resilience as well as the impact your company is starting to make. When they are ready to write another check, others will be as well.
Where do you see the company going now over the near term?
In the near term, we’re focused on sustainable growth and that’s really the extent of it. Not the type of hypergrowth that the markets were rewarding in recent years, but sustainable growth while keeping our fundamentals strong. The markets are done rewarding sexy – now they’re rewarding companies that are run with discipline, and frankly, that’s refreshing. We’re growing our sales team, building up our enterprise capabilities, and trying to make sure we’re in a great position to continue to under-promise and over-deliver.
What’s your favorite fall destination in and around the city?
I know it is cliché but I just love Central Park in the fall. It’s magic spending late afternoon in the sunlight and then watching the lights come up as evening falls.
