Jay: This week’s show guest is Magellan Fetalino, cofounder and CEO of Acudeen Technologies. Acudeen Technologies is an online peer-to-peer marketplace for receivable discounting in the Philippines that provides accessible financing to under-banked SMEs by letting them sell their receivables from multinationals and blue-chip companies to Acudeen’s financing partner network. Magellan, welcome to the show.

Magellan: Hey, Jay. Thanks for inviting me.

Jay: Good to have you on. For the audience listening in, maybe you could give us a little bit of personal background — where you’re from, what you did beforehand, maybe some of your academic history and then your career history that led you to becoming an entrepreneur.

Magellan: Got it. I’m from the Philippines. I grew up in Manilla, and my background, essentially, is from college until my masters. I took up entrepreneurship, and being exposed to the business world as early as my teens, I was really struck by the idea of having my own business after graduation. So before I even graduated, I had already told my parents, “Hey, I want to be part of our family business afterwards.” So when I had the opportunity, initially, my first training was being part of our family business which supplies the large companies. After that, I realized how big of a problem receivable are for small businesses, since it was a big problem for our family business as well, and it became the precursor to what is Acudeen today.

Jay: I see. It was a direct pain point that your family business was experiencing that led you to starting this startup. I think it’s pretty cool, Magellan, that you sort of have always wanted to become an entrepreneur. You knew that. You studied it, and here we are. You have become an entrepreneur.

So for some of us that aren’t familiar with how receivables financing works, especially for SMEs and how important cash is and cash flow, maybe you could give us a little bit of background, basically on that world because I think that for many people, this is something they have never heard of or maybe have never experienced because they’ve never actually run a small business themselves.

Magellan: Sure. Receivable financing is, essentially, an alternative way to get financing using invoices or other forms of receivables like POs that are essentially assets but are not liquid. Normally these are due in 90 days, 120 days. So the thing about SMEs, it’s hard to get financing from traditional means. If you go to a bank, you’re a two-year-old business — especially in an emerging market like the Philippines — it’s almost important to get a decent loan or a clean loan. More so, a lot of banks would require you to give collateral — hard collateral like real estate. But if you’re starting a business, normally you wouldn’t have any valuable asset that you could collateralize.

But if you would look deeply into the balance sheets of small businesses, about 35% — and this is true for Southeast Asia — are un-utilized receivables. So if only these SMEs can use these receivables as some sort of collateral or even as a tool to get financing, it would really create a very inclusive environment for small businesses.

Jay: Right. Okay, so that’s a pretty straightforward explanation. Perhaps to exemplify that, maybe we can just run through a very simple example, perhaps even using your family business of how that would actually work in real life. So you mentioned that your family business was a supplier?

Magellan: That is correct. As an example, we used to supply the pills used for medicine. So we supplied to large pharmaceutical companies, and a lot of things are multinationals. But typically, these multinationals will impose a 90-day payment term or, worst case scenario, even a 150-day payment term. As a small supplier, you have essentially no power to negotiate these terms. You just have to abide to it, especially if you want to business.

Jay: Sorry to interrupt. Basically, what that means is you have to send them the pills, or the goods, and then you don’t get paid for that until 90 or up to 180 days afterwards.

Magellan: Exactly.

Jay: Okay. So this creates quite a bit of a lag as far as your cash situation. Right?

Magellan: That is true. It’s a massive cash flow gap. A lot of SME experience this.

Jay: Okay. So let’s continue with your example here. Let’s use your example. You’re supplying these goods to these large multinationals. You’re experiencing a lag. Basically, you’re getting your payments on the goods delivered, you’re experiencing a lag, which can really be detrimental, oftentimes, to smaller businesses, especially when they need the cash. Let’s talk about how your company now, Acudeen, will help solve this problem.

Magellan: How we’re able to solve this cash flow issue for small businesses is we allow them to utilize our platform to reach out or to connect to funders, like financing companies and even banks, who are looking for loans or loans to give. The thing is, we make it easy for them to be bought — their invoices, their receivables — because we essentially do the due diligence for the banks. Within the same platform, the transaction happens. So we also help in the facilitation of the transaction. So at least when they upload, let’s say, a receivable and then, after doing our due diligence, in the same platform, they will be able to get the funds or at least the action to buy the receivables happens within the platform. And they get the money within three days or less.

Jay: Okay. That’s pretty good. So Acudeen is the actual technology. It’s the platform that connects the SMEs to the funding side, the lenders.

Magellan: That is correct.

Jay: Let’s continue on with their example because I think this is the best way for the audience to understand how this mechanism works, or the technology rather.

Let’s say, Magellan, you’re working with your family business, and you’re experiencing some frustration because there’s a 90-day lag between the cash that you’re receiving for the goods that you shipped out. So you turn to this hot new startup called Acudeen. Walk us through the user experience. How do you actually onboard to the platform or apply to receive cash for your invoices?

Magellan: As you user, you have to create an account with us. Let’s say you are a small business. You go to the website, register, and we essentially do a KYC, a know-your-customer process wherein we ask for your business documents. We ask for the owner’s identification, and we create the profile for you. It would normally take us a day to authenticate some of the documents — your business registration and all. And after that, once we approve your account, you can already start uploading receivables and contracts that you wish to sell in the platform. Once you upload these invoices, immediately you’ll be given a cost, because we charge a discount for these receivables.

For example, if you upload a $100 invoice, you will be given an option to sell it at, let’s say, 95. Let’s say you agree to the rate. The funders will then start to bid on it. If one of the funders buy it at $95, you get the $95 straight to your bank account within three days or less. What happens, if it’s during 90 days, after 90 days, we collect it from the SMEs client directly. Once we collect it, obviously it’s going to be $100. We give it back to the funder. So the funder essentially makes $5 out of that transaction, but at the same time, the small business gets the money in advance, which mostly likely, he needs for his working capital.

Jay: Right. That’s a great example because it’s very clear. A couple of questions from that… First of all, how do you as a middle man… What is your revenue model? How do you collect fees on these transactions?

Magellan: Our revenue is based on usage. So we charge tag fees on both sides, so we’re true to our model. As a marketplace, we essentially have two customers — both the sellers and the funders. So we charge a rate for when you list the receivable. For example, we charge a fixed fee of $5. And, for example, if you’re a funder, we charge an origination fee. So essentially, by bridging these two customers we make money on both ends.

Jay: I see. And so you don’t actually touch any part of the actual spread based on the bidding. You literally just charge fees on each side, a true marketplace framework. Right?

Magellan: Exactly, to the point that the funds that flow through our platform do not even flow through our balance sheet. So it’s a pure marketplace play, and what we just did is we created an escrow facility for these funds to move from one participant to another.

Jay: Got it. And then the other question is, so on the funding side, who is eligible to apply to be a funder? Is it restricted to larger institutions and banks and lending type companies or can it even extend to investors? I can see that this could be quite a lucrative, a shorter-term investment for maybe a family office or this type.

Magellan: Absolutely true. We’re all about inclusivity. We made sure that the platform is open to funders, even to individuals, who are willing to buy these receivables.

Jay: It’s definitely a niche space that not a lot of people know about, but I think it’s very unique, and I think it’s very interesting once you understand the basics of receivables financing, and this sort of thing. One of your competitors that we’ve had on the show, up here in Hong Kong, they’re called Qupital. I don’t know if you’ve heard of them.

Magellan: Very familiar with Qupital.

Jay: Okay, yeah. I guess you would be. There probably aren’t that many in the space. But it’s pretty much the same thing. I love the business model.

Quickly back to the example… Your company, you have, say, a 90-days lag. So I jump on Acudeen, and I basically upload my invoice for $100 because I need the cash right away. It goes out, I guess, to the auction after I get through the onboarding and KYC and this sort of thing. Once I have my account set up, I upload. How long is the time between upload to actual hitting the auction? How long does that take?

Magellan: That takes less than 24 hours. But one key ingredient that we have is we have existing relationships with a lot of these large companies based in the Philippines. So a number of these businesses were actually integrated through their ERP system, and that makes it possible for us to verify and validate invoices, to some extent, almost real time for some cases. For those without the ERP integration, their relationship with the big companies makes it possible for us to verify within one day.

Jay: I see. So once the invoice is uploaded, is there a time limit on the auction? Let’s say it’s a very stable business that a lot of investors are interested in, and the bidding starts at 95, and it slowly starts ticking up. Is there an open window and then the auction closes? Or does it… How does that work?

Magellan: We normally run auctions for invoices… We have a time limit of nine hours. Aside from that, normally… We allocate a floor price to the discount. So when it reaches the floor price for the discount rate, it normally ends ahead of the nine hour timeline.

Jay: I see. I guess that makes sense. It would get to a point where the discount wouldn’t be large enough that it would be worth anyone’s time. So I guess there is a cap. Right?

Magellan: Exactly.

Jay: Got it. That’s pretty interesting. As far as… How do you deal with the verification where, perhaps, the multinational or whoever is actually paying the money, what if they’re delinquent on their terms? Let’s say it’s 90 days, and they still haven’t paid. What happens in that situation?

Magellan: Two things that we did to mitigate this risk… The first one is before an SME even sells an invoice, we already know that payment behavior who whoever the client is. Example — if the receivable is from a multinational, and we know that that multinational pays 45 days late, we already incorporate that 45 days in the pricing and in the expected time before it gets paid. So we allocate that allowance.

The second thing is, let’s say, okay, we allocated 45 days, and it still didn’t get paid. Maybe there is a process issue or whatever. We have an insurance component. If you’re a funder, you can trigger that insurance and, essentially, it secures up to 90% of what you invested in. But at the end of the day, as of now, we only accept invoices for goods or services that has already been delivered, which means the performance risk is eradicated in this whole ecosystem. In essence, the only risk that you have is delayed payment. So if you wait for it, then you make more money out of it, but if not, there is always the insurance.

Jay: I see. That’s a pretty good backstop then, having that insurance in play. That’s great. Magellan, I think we have a pretty good understanding of how your company works and how the actual receivables financing world works, because I think that could be new for many of our listeners. And it sounds like you guys are tackling a pretty big pain point and solving a pretty big problem, especially in a market, in the Philippines, that needs it, because I imagine there are a lot of SMEs there that are in need of this sort of thing.

Where else are you? Are you just in the Philippines right now? Or are you in any other countries? Do you have plans to expand within Southeast Asia?

Magellan: We’re now in two markets — Philippines and Myanmar. We’re about to roll out Q1 of 2019 in Indonesia and Vietnam, simultaneously.

Jay: Very nice. Myanmar, that’s quite interesting. I’m surprised that that was your second market that you went into. I imagine you have some sort of connection or network there.

Magellan: Exactly. It’s more opportunistic than strategic, to be honest. We had opportunity to work with a VC who was very interested to license our product. And for us, it’s a revenue-generating activity, and it was a good way to actually test out another market and the best way to roll out in another market. So at least, for us, it also means to experiment and learn about the best way to roll out our product for the other markets that we’re looking at.

Jay: Yeah, absolutely. It sounds definitely opportunistic, but it sounds like a win-win. I think it could be an asset as you expand because it’s not very many startups that have actually been about to penetrate that market. Even the multinationals are having difficulty right now trying to get into that market. So very cool, Magellan.

So as we look to wrap up our interview — and thanks again for the great overview — I want to switch gears a little bit here. Our mutual friends at 500 Startups were the ones that introduced me to your company and your portfolio company of 500 Startups, and you recently went through the Alibaba e-Fellows Program. And so I just wanted to spend the last couple of minutes just asking you about that program, what your experience was like. Were there any key takeaways that you would like to share with the audience from that program?

Magellan: It was an absolutely wonderful experience. One of the key things that was really great with know and to learn is how massive the adoption of the society when it comes to transacting cashless. Firsthand, I was able to see how individuals in China will just pay using their face for a particular transaction. That’s how advanced they are. But I guess the more spectacular thing is how it happened in five years. Five years ago… It’s not like this. You need cash in China. But in just a matter of five years, everybody was able to transition to a cashless environment.

Jay: Wow. That’s pretty incredible. Alibaba is obviously the market leader there within e-commerce. Were their strategies that were discussed during the program or any takeaways that they gave you, specifically in regards to growing your own customer base and integrating cashless payments or anything like that?

Magellan: Alibaba lives by this model called The Iron Triangle. The Iron Triangle is composed of e-commerce, logistics, and payments. So if you’ve noticed, when they try to look at another market, it’s either they approach it starting with e-commerce or with e-payments or with logistics. But the three things are intertwined.

For example, how did they start Alibaba? They started with e-commerce. But as the e-commerce adoption increased, they started to feel pains when it comes to payments. So what did they do? They came up with Alipay. Then as more transactions came into play, their next issue was that there were more orders, and, obviously, they had pains when it comes to logistics. So what did they do? They came up with Cainiao. This integrated system essentially made it possible for them to transact millions and millions of dollars in seconds, efficiently.

And how were they able to test their capacity? They tested every Singles’ Day, which happens on 11/11. So that’s how they measure whether their capacity for logistics, e-commerce, and payments is efficient enough to cater a big market.

Interestingly, if you’re a Southeast Asian startup or company, and you want to be acquired by Alibaba, you may want to align with either of these three verticals.

Jay: Very, very interesting and insightful. I hadn’t really heard it defined as the Iron Triangle. It does make sense. Now that you explain it, it makes total sense the way that they’ve positioned themselves and expanded their business, the verticals. That’s pretty insightful. Great advice to any startup founders looking for an exit.

Magellan: —then be acquired by Alibaba.

Jay: That’s right. Magellan, it’s been such a pleasure catching up and hearing about your great company, and thanks for sharing your insights and explaining how your company works. We’re excited to see the growth and the progress that you guys make coming up. Where is the best place that people can find you or follow you or learn a little bit more about Acudeen?

Magellan: Our website is www.Acudeen.com. If you guys are interested to learn more about the business, just go to our website or follow us in our Facebook or Twitter channels.

Jay: Great. Are you on social at all? I guess you’re on LinkedIn.

Magellan: I’m on LinkedIn. Look for Magellan Fetalino.

Jay: Okay, fantastic. Tell, thanks again, Magellan. Thanks for your time, and we wish you the best of luck.

Magellan: Thanks, Jay. Cheers, buddy.

Jay: Alright. Take care. Bye.