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 is not able to access traditional forms of credit. The company has built a robust 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. Consumers also have the flexibility to merely turn in the item without any further obligation if that’s what’s best for their situation. Merchants can get onboarded quickly, purchases can be up to $5000, and payments are released within 24-48 hours.
AlleyWatch caught up with Kafene 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 $62M, and much, much more…
Who were your investors and how much did you raise?
We raised $18M in Series B funding. The round was led by Third Prime, with participation from Uncorrelated Ventures, Company Ventures, Xffirmers, Gaingels, and FJ Labs.
We’ll be using the funding to expand our merchant partnerships and hire top talent in a market where it’s more readily available than we’ve seen in recent years, given reports that roughly half of companies are cutting back on headcount.
Tell us about the product or service that Kafene offers.
Kafene works with retailers to provide flexible financing to consumers who are locked out of traditional credit. Imagine that your refrigerator breaks, with a replacement potentially costing $2,000. One hundred million Americans don’t have access to credit cards or sufficient credit capacity to cover an expense that large. Their only option historically would be to buy a used refrigerator or go to several payday lenders.
Kafene, however, partners with the appliance store selling the fridge to offer the consumer the financing needed to purchase the refrigerator through lease-to-own agreements. We’re different from other alternative financing mechanisms at the point-of-sale such as buy now, pay later in a few key ways: First, we serve a different consumer – one who can’t otherwise pay with a credit card. Second, we’re used for necessary, bigger ticket purchases rather than discretionary spending. Third, leasing is different from debt. It’s inherently flexible and can be canceled at any time without negative repercussions.
The lease-to-own model is quite resilient in the face of economic headwinds, and it’s uniquely suited to grow at a time when companies offering different forms of financing are in retreat.
I used to be a Wall Street trader before I caught the entrepreneurial bug. I wanted to make an impact. I left trading and became an early employee at a specialty lender that became a unicorn and I rose to CFO. I thought with recent strides in underwriting enabled by today’s technology, the lease-to-own industry was ripe for impactful disruption. I also sensed a bigger opportunity as I saw how many people up and down the credit spectrum were using flexible financing options. Colleagues of mine with the cash to buy their phones outright leased their iPhones until they were fully paid off, for example.
One of our future investors introduced me to James Schuler, who had been in Y Combinator during high school, became a Thiel Fellow, and had spent significant time in Africa doing microfinance. We cofounded Kafene and he’s our CTO today, and he’s responsible for building the technical infrastructure that really sets us apart.
How is Kafene different?
When you hear “lease-to-own”, it’s synonymous historically with Rent-A-Center and used furniture for a high cost. That’s a pretty dated perception. We’ve unbundled the retailer from the financing element and we focus on the latter so customers can use our product across thousands of retailers.
We’re not the first to do this, but what we’re different in a couple of key ways. First, we offer risk-based financing at different tiers rather than one-size fits all. That usually makes financing more efficient and affordable, and with a more competitive all-in price, retailers can better satisfy demand. That’s a key difference.
Second, while others in the space partner with companies who do buy now, pay later to see if they can underwrite those who BNPL cannot – we don’t partner. Instead, we want to compete. We think the prime and near-prime consumer who uses BNPL likes having flexibility and if we can offer merchants a one-stop-shop partner, we think they’ll see more value.
What market does Kafene target and how big is it?
We aim to help merchants finance the 100M Americans who don’t qualify for credit cards so they can purchase necessary big-ticket items.
As we grow, we plan to move upmarket so we can cover everyone. This is an incredibly broad addressable market.
What’s your business model?
When a customer reaches checkout and wants to purchase an item but requires alternative financing in order to do so, our integrations with merchants result in Kafene purchasing the item and leasing it to the customer until they fully own it.
Usually, this is over 12 months, and once all the payments are made, the customer owns the item. If they can pay earlier, the financing is discounted. If they decide to cancel or need to cancel, they’ve paid only for the time they’ve possessed the item with no further obligations or negative credit implications so long as they return the item. 80% to 90% of those who lease with Kafene reach full ownership.
How are you preparing for a potential economic slowdown?
While did just raise, we’re also thoughtful about how we deploy our runway and we recently named a CFO in Roland Jeon who is doing a wonderful job. I’ve also been a CFO before, so I think about finances and risk perhaps more than most founders do.
Demand for discretionary items has dropped dramatically but that’s not the area we serve. Instead, we’re focused on necessary items, and demand hasn’t changed. We’re also not dependent on low interest rates to support our unit economics.
We’re obviously watching conditions closely, but we believe we’re one of the few businesses built to thrive and grow market share in a downturn.
What was the funding process like?
We met with our existing investors and a number of new ones. It was definitely a different climate from when we raised our Series A in June 2021. But we have strong unit economics and a model that is extremely resilient, and we were able to come away as one of the few companies in the current environment to raise and to do so with an increase in valuation.
What are the biggest challenges that you faced while raising capital?
It’s undoubtedly a more difficult climate than it was a year ago. There are certainly headwinds in investor receptivity caused by the struggles of buy now, pay later companies that have been hurt by more delinquencies and lessened credit quality. At the same time, their margins are somewhat beholden to interest rates being low.
We’re unique, with fundamental differences in our customer, our business model, and our use case. The results have borne out. Our investors understood this from the outset but not everyone does.
What factors about your business led your investors to write the check?
I can’t speak for any of our investors but I believe what they were most drawn to was our resiliency during economic headwinds, our countercyclical model, and our strong unit economics.
Also, we’re lucky to have investors who think bigger than the present day. We’re transforming how a giant swathe of Americans buys necessary items, we’re doing it in a pioneering way, and there’s a path for us to move upmarket and meaningfully increase our addressable market in the future. Our investors share our excitement about this.
We’re lucky to have investors who think bigger than the present day. We’re transforming how a giant swathe of Americans buys necessary items, we’re doing it in a pioneering way, and there’s a path for us to move upmarket and meaningfully increase our addressable market in the future. Our investors share our excitement about this.
What are the milestones you plan to achieve in the next six months?
We plan to aggressively grow our merchant partnerships and we hope to have some good news to announce over the next few months. We’re also planning to hire across the board, especially in our C-Suite.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
Some businesses are better equipped for today’s economic headwinds than others. We’re happy to have a business model that is countercyclical. As a former CFO, I would advise companies to be prudent about using their existing runway. Even though we just raised, we’re certainly mindful of this, too.
I’d say it’s a good time for companies to really focus on culture make sure your teams produce 1+1=3, and really zero in on unit economics.
Where do you see the company going now over the near term?
We see companies in the buy now, pay later space as well as the traditional credit space in retreat. Valuations are dropping, credit boxes are tightening, and half of companies in the U.S. are laying off workers or planning to. We just raised and our valuation went up, and our business has been extremely resilient over these past few months. We are countercyclical.
Kafene is looking to expand aggressively into the gap others are leaving by growing merchant partnerships and hiring the best talent.
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