UNIQUENESS OF THE UINVEST MODEL
Friday, 00:00
05 April 2013
Over the years, our customers and perspective clients have been entrusting their finances with UInvest without asking much about how is it that the companies listed on its platform can offer such high rates of return. Many uinvestors attribute it to the complexity of the UInvest model (which is, indeed, complex, but, nevertheless, does have an explanation of how it works). Some, even after having invested tens of thousands of dollars, still try to figure out whether UInvest is a trustworthy endeavor (sounds counterintuitive, doesn’t it?). And others just put UInvest into the category of HYIP and attribute to it all the qualities of HYIPs willing to take high risks and not wanting to dig deeper into the specifics.
With this article we are determined to answer some questions that might have been in the backs of uinvestors’ minds but have never been verbalized.
So, how can UInvest companies pay such high interest of 7-10 percent per month and still be profitable? How come, so far (thank God) there has been practically no defaults on the money borrowed by companies from uinvestors? Sounds too good to be true. But is it really so?
FOCUS ON EMERGING MARKETS
First of all, in order to examine this issue in detail, a uinvestor has to ask himself/herself a question: “What are the specifics of the companies and projects being listed on the UInvest platform? Are there features that they have in common? How do they differ?”
First, let us note that UInvest was originally founded as a platform that focused on listing businesses from Eastern Europe, and, specifically Ukraine. What was unique about UInvest’s success with Ukrainian businesses is that in 2008, with the global financial crisis, when Ukrainian banks stopped giving loans to businesses, opportunities emerged for those who had cash available to finance insolvent enterprises and buy their assets. That’s how the founders of UInvest got their start.
Ok, great! So, when we learn it, this information does not give us much except the fact that UInvest is a Ukrainian company and has expertise in Ukrainian businesses and their financing. Later on, however, UInvest has expanded its opportunities to businesses not only in the Eastern Europe. In the past few years, uinvestors had a chance to diversify their financial interests with businesses from Thailand, Malaysia, Uganda, and Nigeria, to name a few. One would say, “So, what’s your point? Yes, UInvest is going global.” Wait a minute, not so fast, our heady uinvestor. Global means any country where GUN agents can find projects or where business owners themselves have heard of UInvest and its services as a crowdfunding platform.
Right? Wrong!
If one takes the time to carefully analyze the projects in the Assets Management section of their UInvest account panel, they will notice that most of the projects come from the countries with emerging economies. According to Cory Mitchell, the founder of VantagePointTrading.com, a website dedicated to trader education and market analysis, “The growth potential in emerging markets is more significant than in the more developed and mature United States, United Kingdom and Canadian markets. While there are always blossoming stocks and money to be made in mature markets,emerging markets have more potential and have for the most part been outperforming the mature markets over the last several years”(1).
But how can a project owner from an emerging economy can afford high interest funding, you might ask? And why wouldn’t they just go to the local bank for a loan?
Well, this shall be the focus of our next two sections.
SCARCITY OF LOAN OPPORTUNITIES
Many of potential UInvest clients who come
from developed countries have gotten used to the idea that bank or business loans are easily available because the economic environment of the country they live in has conditioned them to think that it is a normal occurrence, a fact of life, one may say. However, those living in the countries of emerging and developing economies will note that in their countries the banking system is not so developed and, dominated with corruption and bureaucracy, it is nearly impossible to obtain a small business loan. “Risk capital — patient, non-asset-based capital that facilitates the growth of new and expanding companies— is scarce for small and medium enterprises (SMEs) in the developing world” (2).
Upon our interviews of owners business project posted on the UInvest platform, we have heard that it was nearly impossible to get a loan from their country and having UInvest as an alternative source of their funding was a game changer.
In the Western world, with its sophisticated financial tools and as sophisticated entrepreneurial initiative, it is almost impossible to fathom that someone with a great idea won’t be able to get funded. To understand how businesses in emerging markets work, a Westerner almost has to use an upside-down mentality: the ideas and opportunities are vast, but the real problem is to get funding. That is why business project owners agree to loans with high interest rates – this is merely the only opportunity for them. And they do treat it as their lifetime opportunity.
And here you may say, “Well, now I understand. But can you really call a deal an opportunity if they have to pay such high interests? In the US and many other Western countries loans at such high rates are considered usury.”
The answer to this question is discussed in our next section.
HIGH MARGINS
One other important factor to consider when analyzing business in emerging markets is an extremely low cost of labor. For those living in developed countries with highly regulated employment practices, minimum wage standards, and conditions favorable for employees, the idea of workers receiving a dollar (yes, USD $1.00 a day) for their hard work in not exactly the best working conditions sounds incomprehensible. In the US, we call these conditions “a sweat shop” and support businesses that promote “sweatshop-free” environment. However, the number of
businesses that do that still remains minimal, as business owners in emerging markets still would rather go for the high margins than focusing on the humane aspect of their business. Let’s consider an example, Etanya from Malaysia has a coconut processing plant. He needs a $10,000 in order to expand his operations. He has 20 employees working at the plant and needs to use the money to purchase additional equipment, hire more people in order to fulfill a large order that he bid on. If he has a substantial amount of the development capital, he can deliver the order and pay back the loan with even 10% per month because his margins are extremely high: his labor cost are a fraction of western economies, his facility rent in the rural area does not cost much; he owns the land – it belonged to his family for years. The only big expense is the equipment. However, the price is still relative compared to the potential return that he could get. The buyer of his coconut products comes from one of the Western countries and offers a significantly higher price than the locals for the total amount of $50,000.00. In this case scenario, it is feasible for Etanya to take a loan of $10,000 and pay 200% interest in it per year because he still makes his profit due to high margins. Makes sense?
If it does, you must still ask yourself, “If this business model is so perfect then why doesn’t UInvest have more projects from emerging markets? It’s almost risk-free.”
No so fast, our dear uinvestor. The risk issue here is a significant factor, which is is to be discussed in our next section.
THE RISK FACTOR
Having explained above the specifics of business in emerging markets and the opportunities that are hidden within them, we have to equally analyze the risks.
The truth is that just like the opportunities are very lucrative, the risks are very high as well. Our hard-working Etanya from Malaysia could, God forbid, turn out to be a crook and run away with the money; or let’s give him a benefit of a doubt and say that he is an honest fellow, but, again, God forbid, he fights with his brother who is his
partner, and the business goes downhill; or, even a better case scenario, we know that Etanya’s business ethics superb and he even tries to give a half an hour break to his employees every other Thursday to make their working conditions better, but someone from the municipal government decided that Etanya does not deserve to make so much money and wants his cut (we have discussed the issue of corruption in our previous sections). If Etanya does not come up with a win-win solution for the government official, say good-bye to the lucrative coconut products business. You see, there can be many case scenarios, where, even independent of the business owner’s decisions or choices, the deal can go sour. For uinvestors it is important to remember that the risk is always there.
With that mentioned, we must proudly say that, thank God, UInvest did not have that many defaults in the past five years of its existence. According to rough statistics, there have been 5-7% of business projects that defaulted on the borrowed funds. We hope that the percentage stays low and the businesses that universe as well as GUN agents bring to the table turn out to be legitimate, run by good people who know how to work with the regulations of their country.
IN SUMMARY
To summarize, the UInvest business model can be explained by its focus on the emerging markets where financing opportunities are scarce while profits from business opportunities can be quite lucrative relatively unexplored by Western entrepreneurs. The moneymaking aspect can be explained by extremely high margins yet with high risks.
With this article we are determined to answer some questions that might have been in the backs of uinvestors’ minds but have never been verbalized.
So, how can UInvest companies pay such high interest of 7-10 percent per month and still be profitable? How come, so far (thank God) there has been practically no defaults on the money borrowed by companies from uinvestors? Sounds too good to be true. But is it really so?
FOCUS ON EMERGING MARKETS
First of all, in order to examine this issue in detail, a uinvestor has to ask himself/herself a question: “What are the specifics of the companies and projects being listed on the UInvest platform? Are there features that they have in common? How do they differ?”
First, let us note that UInvest was originally founded as a platform that focused on listing businesses from Eastern Europe, and, specifically Ukraine. What was unique about UInvest’s success with Ukrainian businesses is that in 2008, with the global financial crisis, when Ukrainian banks stopped giving loans to businesses, opportunities emerged for those who had cash available to finance insolvent enterprises and buy their assets. That’s how the founders of UInvest got their start.
Ok, great! So, when we learn it, this information does not give us much except the fact that UInvest is a Ukrainian company and has expertise in Ukrainian businesses and their financing. Later on, however, UInvest has expanded its opportunities to businesses not only in the Eastern Europe. In the past few years, uinvestors had a chance to diversify their financial interests with businesses from Thailand, Malaysia, Uganda, and Nigeria, to name a few. One would say, “So, what’s your point? Yes, UInvest is going global.” Wait a minute, not so fast, our heady uinvestor. Global means any country where GUN agents can find projects or where business owners themselves have heard of UInvest and its services as a crowdfunding platform.
Right? Wrong!
If one takes the time to carefully analyze the projects in the Assets Management section of their UInvest account panel, they will notice that most of the projects come from the countries with emerging economies. According to Cory Mitchell, the founder of VantagePointTrading.com, a website dedicated to trader education and market analysis, “The growth potential in emerging markets is more significant than in the more developed and mature United States, United Kingdom and Canadian markets. While there are always blossoming stocks and money to be made in mature markets,emerging markets have more potential and have for the most part been outperforming the mature markets over the last several years”(1).
But how can a project owner from an emerging economy can afford high interest funding, you might ask? And why wouldn’t they just go to the local bank for a loan?
Well, this shall be the focus of our next two sections.
SCARCITY OF LOAN OPPORTUNITIES
Many of potential UInvest clients who come
from developed countries have gotten used to the idea that bank or business loans are easily available because the economic environment of the country they live in has conditioned them to think that it is a normal occurrence, a fact of life, one may say. However, those living in the countries of emerging and developing economies will note that in their countries the banking system is not so developed and, dominated with corruption and bureaucracy, it is nearly impossible to obtain a small business loan. “Risk capital — patient, non-asset-based capital that facilitates the growth of new and expanding companies— is scarce for small and medium enterprises (SMEs) in the developing world” (2).Upon our interviews of owners business project posted on the UInvest platform, we have heard that it was nearly impossible to get a loan from their country and having UInvest as an alternative source of their funding was a game changer.
In the Western world, with its sophisticated financial tools and as sophisticated entrepreneurial initiative, it is almost impossible to fathom that someone with a great idea won’t be able to get funded. To understand how businesses in emerging markets work, a Westerner almost has to use an upside-down mentality: the ideas and opportunities are vast, but the real problem is to get funding. That is why business project owners agree to loans with high interest rates – this is merely the only opportunity for them. And they do treat it as their lifetime opportunity.
And here you may say, “Well, now I understand. But can you really call a deal an opportunity if they have to pay such high interests? In the US and many other Western countries loans at such high rates are considered usury.”
The answer to this question is discussed in our next section.
HIGH MARGINS
One other important factor to consider when analyzing business in emerging markets is an extremely low cost of labor. For those living in developed countries with highly regulated employment practices, minimum wage standards, and conditions favorable for employees, the idea of workers receiving a dollar (yes, USD $1.00 a day) for their hard work in not exactly the best working conditions sounds incomprehensible. In the US, we call these conditions “a sweat shop” and support businesses that promote “sweatshop-free” environment. However, the number of
businesses that do that still remains minimal, as business owners in emerging markets still would rather go for the high margins than focusing on the humane aspect of their business. Let’s consider an example, Etanya from Malaysia has a coconut processing plant. He needs a $10,000 in order to expand his operations. He has 20 employees working at the plant and needs to use the money to purchase additional equipment, hire more people in order to fulfill a large order that he bid on. If he has a substantial amount of the development capital, he can deliver the order and pay back the loan with even 10% per month because his margins are extremely high: his labor cost are a fraction of western economies, his facility rent in the rural area does not cost much; he owns the land – it belonged to his family for years. The only big expense is the equipment. However, the price is still relative compared to the potential return that he could get. The buyer of his coconut products comes from one of the Western countries and offers a significantly higher price than the locals for the total amount of $50,000.00. In this case scenario, it is feasible for Etanya to take a loan of $10,000 and pay 200% interest in it per year because he still makes his profit due to high margins. Makes sense?If it does, you must still ask yourself, “If this business model is so perfect then why doesn’t UInvest have more projects from emerging markets? It’s almost risk-free.”
No so fast, our dear uinvestor. The risk issue here is a significant factor, which is is to be discussed in our next section.
THE RISK FACTOR
Having explained above the specifics of business in emerging markets and the opportunities that are hidden within them, we have to equally analyze the risks.
The truth is that just like the opportunities are very lucrative, the risks are very high as well. Our hard-working Etanya from Malaysia could, God forbid, turn out to be a crook and run away with the money; or let’s give him a benefit of a doubt and say that he is an honest fellow, but, again, God forbid, he fights with his brother who is his
partner, and the business goes downhill; or, even a better case scenario, we know that Etanya’s business ethics superb and he even tries to give a half an hour break to his employees every other Thursday to make their working conditions better, but someone from the municipal government decided that Etanya does not deserve to make so much money and wants his cut (we have discussed the issue of corruption in our previous sections). If Etanya does not come up with a win-win solution for the government official, say good-bye to the lucrative coconut products business. You see, there can be many case scenarios, where, even independent of the business owner’s decisions or choices, the deal can go sour. For uinvestors it is important to remember that the risk is always there.With that mentioned, we must proudly say that, thank God, UInvest did not have that many defaults in the past five years of its existence. According to rough statistics, there have been 5-7% of business projects that defaulted on the borrowed funds. We hope that the percentage stays low and the businesses that universe as well as GUN agents bring to the table turn out to be legitimate, run by good people who know how to work with the regulations of their country.
IN SUMMARY
To summarize, the UInvest business model can be explained by its focus on the emerging markets where financing opportunities are scarce while profits from business opportunities can be quite lucrative relatively unexplored by Western entrepreneurs. The moneymaking aspect can be explained by extremely high margins yet with high risks.
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