In collaboration with Endeavor Global and Stanford University, the World Economic Forum recently released a new report, “Global Entrepreneurship and Successful Growth Strategies of Early-Stage Companies.” Click here to learn more.
The report, which demonstrates the importance of High-Impact Entrepreneurship in driving economies forward, includes interviews and insights from eight Endeavor Entrepreneur companies: DocSolutions, Globant, MercadoLibre, Petfor, Pharmacy 1, Refinancia, Technisys, and Yola.
In this special series on Endeavor’s blog, we are reprinting the published interviews with each Endeavor firm. Below is the section on Refinancia.
Launched in December 2005, Refinancia has its roots in a business plan concept developed by Kenneth Mendiwelson while he was a MBA student at Harvard Business School from 2000 to 2002. Refinancia purchases and services consumer and mortgage Non Performing Loans (NPLs). The company uses proprietary databases and modelling experience to assess loan quality, probability of recovery, costs and risks with portfolios of NPLs that it can purchase. Finance pools to invest in the NPLs are packaged by Refinancia and offered to sophisticated investors. Refinancia assumes and manages the relationship with each individual whose loan has been labelled NPL. A key differentiator is the humane way people with financial difficulties are engaged by Refinancia. The aim is to change the conversation from one about ‘defaulted loans’ to one which centres on ‘specialized credit products for special clients’. Refinancia’s initial focus was on NPLs in Colombia. In August 2010, it opened operations in Peru. In 2008, the founders were selected as Endeavor entrepreneurs by the Endeavor non-profit organization.
Kenneth Mendiwelson is a specialist in the financial arena. After obtaining his BA in Business Administration and Financial Law at Los Andes University in Bogotá, he worked in corporate financial positions in Scotland, Colombia, and the US. He enrolled at Harvard Business School (HBS) in the fall of 2000, and went on to develop an ambitious business plan for his thesis that would later become the founding concept of Refinancia Post HBS, he first worked as a consultant for McKinsey & Company, focusing on the financial services sector in the Andean region of Latin America. He moved back to Colombia in 2004 and saw that he could have higher impact on the nascent NPL market in Colombia if he struck out on his own. Mendiwelson took the plunge and launched Refinancia in December 2005.
What was the source of the initial idea, and how did that idea evolve into a viable high-growth business venture? How did it change over time?
Mendiwelson: “While doing my MBA at Harvard Business School, I researched the idea of buying and managing Non-Performing Loans (NPLs) in Latin America and eventually wrote a business plan with a friend from school. The interest came from my original background as an executive in new product development in the financial industry. With our business plan, we understood that this industry had evolved in developed markets and had some relevant players. However, it was still nascent at emerging markets. Colombia, in particular, had lived through an important financial crisis that generated a substantial inventory of NPLs. However, when I finished school I thought the banks were not ready to sell. Thus, I went to work at McKinsey & Co., especially focusing on financial services and risk engagements for regional banks in Latin America. A couple of years later it became evident that some banks were considering selling their NPL inventory in Colombia. That is when it became noticeable that this was a viable business venture and I decided to start Refinancia S.A. We became the local ‘pioneers’ as buyers of bad debt in Colombia, and banks in general started to follow a trend of selling NPL portfolios recurrently.
“As time passed we became very focused in developing very strong loan servicing company based on analytical capabilities that allowed for adequate predictions of credit behaviour and product development.”
What was the initial growth vision or aspiration of the founding team? Was there a sizeable change in this growth vision or aspiration over time? If a change, please describe.
Mendiwelson: “Originally, we were seeking to be the leader in the Andean region – especially Colombia and Peru – in the business of offering financial solutions to individuals with bad credit history. This is still the key focus, but we have understood that our business is also about offering alternative investment products to institutional and private wealth investors seeking attractive returns – it is through this funding that we are able to buy and originate assets (debt portfolios) for us to manage and service. Therefore, an important change in our focus has been in developing the right channels to access the required funding. Additionally, we have understood that our business is replicable outside of the Andean region, expanding our potential to other geographic markets.”
Describe the strategy or business model that enabled your company to achieve its high rate of growth.
Mendiwelson: “We have focused on building world-class capabilities in four elements:
1. Access to top executives at banks with high level relationships
2. Top-notch analytical capabilities (statistics and portfolio analysis) for
adequate pricing and product development
3. Reliable funding partners
4. Best-in-class sales force (collections group) that differentiate our
For each of these four elements, we have made important adjustments over time ensuring that all are at the adequate sophistication level. As growth has been achieved and cash flow allows it, we have made sure that we bring on-board the right management team members that add the right experience and reputation. We have been aggressive in pursuing sophistication in a market that is traditionally very basic. This has allowed us to redefine the playing field and achieve adequate differentiation from our competition.”
What were the major growth accelerators for your company in its high-growth years?
Mendiwelson: “Our aspiration has always been to be recognized as a world-class business case. This simple idea has permitted us to make decisions that are somewhat advanced for the entrepreneurial stage we are at. Making these decisions slightly before they were required has been an important accelerator in the sophistication level that allows for our differentiation. In emerging markets, sophistication is something difficult to achieve and replicate. I believe that this sophistication is especially driven by the talent that is recruited and retained within our team, as well as by the deeply thought out processes that we are able to construct and execute on.”
Briefly describe the financing of your company and how this financing impacted the growth of your company.
Mendiwelson: “Financing is core to our business and to our growth. We originally started our effort through friends and family finance, but quickly designed financing mechanisms that were scalable, such as building special purpose vehicles that allowed for sophisticated financiers to share upside of each of the projects and portfolios that we originated. As these initial projects were successful, additional finance from overseas and institutional investors started to come in, providing the basis for aggressive growth.
“Bank lending has also been critical to our growth as some of our portfolios were structured via project finance with local banking institutions.
“Currently, we are working on going directly to the capital markets to fund our growth, making sure that we are able to be held accountable to the way we are marketing our capabilities to investors.
“We have made sure that our payment behaviour goes unquestioned and is always reliable. Managing our reputation with our financial partners is critical and is what allows for them to be willing to accompany us in new portfolios and new avenues of growth.”
What were the major challenges your company had to handle in its high- growth years, and how were they managed?
1. “Talent: Recruiting and managing world-class talent and allowing it to flourish require an important effort by a founding CEO. There is a balance that needs to be in place to provide direction and execute through the team, while choosing the right initiatives to be involved in with a hands-on approach.
2. Cash commitments: Committing to important recurring cash out flows destined to build the right capabilities and creating new income models without having complete certainty of how future revenue stream will evolve is an important challenge. Management needs to be prepared to take important controlled risks and bets that assume that current expensive capabilities can build and sustain the expected income stream for the future.
3. Operational capabilities: As growth takes place, the operational structure is stretched to new levels. This creates stress in the organization and requires management to re-think and re-vamp many of the original operating procedures in order to take them to new standards. This involves new technology, new organizational structure, new procedures and new control mechanisms, among others. Implementing each one of these novelties is challenging, and in many cases, frustrating for the original team.
4. Reputation management: As the company becomes successful and grows, greater recognition in the business community is achieved. Managing our reputation needs to be thought out and a careful approach is a must, as our credibility is a critical element in the continuity of our business. Thus, living up to the required standard is more challenging as growth is achieved.”
Give examples of dark moments or negative periods that your company or you faced as part of your journey as an executive with this company.
Mendiwelson: “Fortunately, it is hard to identify specific dark moments throughout this journey. Of course, there are constant challenges, but all contribute to the exhilarating feeling resulting from building something that is relevant and that has potential for high-impact. The most frustrating elements that can bring ‘darkness’ to the picture involve competitors and regulatory initiatives that affect our business. For example, on competition, we have found that as our business has been recognized, other players have come into the market. We believe that in some cases, the behavior of competitors is irrational, in terms of the prices that they are willing to offer to the market. This can cause contagion that can, in turn affect the business model, as it has been conceived. This is frustrating because a business opportunity that has been difficult to build can be deteriorated by the short-term irrationality of competitors that will not survive at these price levels.
“In terms of regulatory initiatives, we have been exposed to changes in the laws that affect our business model. Access to credit has so much impact in the way people live, thus it is exposed to populist regulation. It is difficult to control the outcome of regulation, notwithstanding the efforts that we make as an industry. Having sudden changes is frustrating, as important adjustments need to be made to our business model, and sometimes this regulation does not benefit the market as a whole.
“Although we seek to be active in both of these fronts, having limited influence and control over how these elements evolve bring uncertainty and anxiety.”
What are the key lessons about entrepreneurship and successful growth strategies you’ve taken from you company experience?
1. “Sophistication is expensive but pays back.
2. Having the aspiration to be world class breaks many barriers and allows us to think big.
3. Top talent adds exponentially, but make sure that they have their space to shine and that they can come in at the right time.
4. Including reality checks in management routines is a must, especially related to cash availability. It is all about execution and control-the devil is in the details.”