Furlenco nets $30 million. Here’s the secret to its unusual mix of debt and equity
Photo credit: Furlenco.
India’s furniture rental startup Furlenco has announced that it raised a fresh funding round of US$30 million. Out of that, US$15 million is from equity and US$15 million is pure debt. That’s unusual, especially for a tech startup in India.
The debt that Furlenco raised will go into making new furniture. The equity will go into designing new furniture, technology, and expansion into new cities. So much will go into “being the best design company in the country,” says Sid Talwar, co-founder and partner of Lightbox, the VC fund backing Furlenco.
The reason Furlenco has gone for this mixed funding is its business model.
Furlenco has a vision of being the Ikea of India, explains its founder and CEO, Ajith Mohan Karimpana. What that means in plain terms is that it doesn’t want to be just another aggregator. It designs its own furniture to make people want to rent it.
Some of it are the usual tables, chairs, and beds designed for urban India. Some others are innovations to serve new needs.
For example, Bounce is a sofa-cum-bed-cum-cushions which can be configured in multiple ways. The insight that led to the design of Bounce, explains Ajith, came from talking to young people with well-paying jobs, working for companies like Flipkart and Amazon. They’re happy to buy high-end phones every year or two but not furniture which is a “settled thing” to do. Typically, they have shared accommodation and hate cluttering up the place with furniture that gets in the way of parties. Instead of beds, they prefer using mattresses they can roll up during the day.
Bounce is designed with such a user in mind. “It’s a shared accommodation kind of product,” says Ajith. “It’s a hit. Everyday 10-20 pieces get ordered.”
The need for debt
Furlenco founder and CEO Ajith Mohan Karimpana. Photo credit: Furlenco.
Such a business model, where Furlenco designs and makes its own furniture, comes with challenges. It makes Furlenco more asset-heavy than an aggregator. Funding that fixed asset in a scalable way with equity would become untenable. Hence the need for debt.
But debt doesn’t come easy for a startup. It has to first show it has traction as well as financial discipline and good unit economics.
Three-quarters of the initial funding round of US$6 million from Lightbox went into the fixed assets, says Ajith. But now with the business on sound footing it is able to raise debt and channel all the equity funding into technology, design, and expansion.
The equity funding part was standard, led by Lightbox with participation from Axis Capital of Hong Kong and some high networth individuals (HNIs).
The debt funding has been a long process that began last year. “We had to first prove that this model generates enough cash to pay back the debt holders with interest and capital,” explains Ajith. “Initially, banks like HDFC, Axis Bank, and Kotak Mahindra lent us very small amounts, then NBFCs like Intelligrow lent us small amounts, and now they are doubling and trebling up. That’s how we started off with debt.”
The next step was to issue non-convertible debentures to HNIs on which monthly interest is paid. These are based on the balance sheet and backed by the assets.
What convinced the banks and others to provide debt to Furlenco was the economics of its business. “When you are lending debt capital, you have to be convinced that the business has cash coming in. Even five to ten percent margin is still too less. In case of Furlenco, not only are they able to generate revenue, their revenues are consistent and visible. They have subscribers who pay everything month. They are not starting over every day,” explains Sid.
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Will renting trump buying?
Photo credit: Furlenco.
Initially, when Lightbox made its first investment into Furlenco last year, the startup had just 50 subscribers in Bangalore. The assumption then was that the average age of customers would be between 25 and 27. And that they would be transient in nature – mostly people visiting a city for work for a short duration. “We thought the average salary would be US$10,000 per year,” Sid recalls.
They were in for a pleasant surprise. Today, 18 months later, the average age of a Furlenco customer is 31. “Now, the company has 15,000 subscribers in Bangalore and Mumbai. The average person who rents furniture from Furlenco has an annual salary of US$15,000. Around 31 percent of these people are from the city, not migrants; 11 percent own their own homes,” Sid lists out.
“Surprisingly, 40 percent of my customers are married folks. You would think rentals are for singles. 80 percent of my customers earn over US$15,000. So it is not they can’t afford to buy,” Ajith says. That is why he believes what’s stopping these youngsters from buying furniture is the sense of commitment attached to it. “That’s why we’re solving the commitment issue with a rental model,” he says.
The fundamental question for Furlenco was whether its subscription model would prevail over online furniture sales from the likes of Urban Ladder and Pepperfry. So far, it has been encouraging.
Ajith points out that its revenue almost matches that of the online retailers, with a presence in just two cities, compared to 28 cities for Urban Ladder and 40 cities for Pepperfry. Its advertising and marketing spend has been a small fraction of that of the retailers.
“In Bangalore we are still growing at 20 percent month-on-month. We haven’t even moved to Delhi, Hyderabad, or Chennai. The potential of all these markets is huge. Now it is a matter of marketing, which we haven’t done much yet,” Sid says.
Is everybody going to choose access over ownership? No, Ajith admits. Majority of the 40 million potential customers who can afford good furniture will buy it, he says. “But the fact that 15,000 of them are thinking differently itself was enough for us to get a US$30 million in funding. We only need a minority to build a billion dollar industry,” he says.
*Converted from Indian rupees. US$1 = INR 66.71
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