NPI Evaluation of KickStart


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NPI Evaluation of KickStart

  1. 1. NONPROFIT INVESTORINDEPENDENT RESEARCH FOR PHILANTHROPYKICKSTART INTERNATIONAL SUMMARY KickStart International Inc. (KSI) provides technology to enableINC. entrepreneurial individuals to lift themselves out of poverty. Its key product is a human powered mechanical pump that allows crops toNonprofit Investor Rating: be irrigated consistently and grown throughout the year. The endNEUTRAL result is higher farm productivity for subsistence farmers in Africa.Mission Statement STRENGTHSKickStart’s mission is to help millions of people ▲ Potentially self-sustainable model. KSI sells each pump above itsout of poverty. KSI promotes sustainable cost, generating positive gross margin. The business model has theeconomic growth and employment creation by potential to become self-sustaining if enough units are sold.developing and promoting technologies thatcan be used by dynamic entrepreneurs to ▲ High return on investment for farmers buying KSI pumps. KSI’sestablish and run profitable small scale studies show an average increase of $738 in farmer income within 24enterprises. months of purchasing a pump and accessories that cost $39-144.Financial Overview CAUTIONS$ in MM, Fiscal Year Ended June 30th ● Barriers to technology adoption limit scalability. KSI’s target$MM 2009 2010 2011 customers, subsistence farmers, often lack the education, businessRevenue and Support 6.8 7.2 9.5 skill, and capital needed to make such a large investment. DifficultyOperating Expenses 9.3 8.6 10.5 of reaching farmers is a key roadblock to increasing pump sales.% of Total: ● Overhead cost per pump remains high. To reach farmers, KSI Program Expenses 92% 89% 90% supports a large sales and demonstration staff that travel to villages. G&A 4% 6% 7% This results in high operating costs (~$300/pump). Fundraising 3% 5% 3% ● Precariously low cash balance. KSI has operated at a deficit in the last three fiscal years. It ended FY2011 with $213k of cash and $19kYear Founded: 1991 of unrestricted net assets against annual expenditure of $10.5m. Cost overruns and thin cash cushion pose a risk to KSI’s operations.Contact DetailsKickStart International - USA2435 Polk Street, Suite 21 RECOMMENDATION: NEUTRALSan Francisco, CA 94109-1600USA KSI’s programs have exhibited the ability to significantly increase farmer income. However, difficulty in reaching farmers is a challenge to widespread adoption of the pump. Operating expenses per pumpEIN: 06-1613235 remains high due to operating subscale. KSI has run an operating deficit since 2009 and ended FY2011 with $213k of cash, leaving the organization in a precarious financial position. NPI advises donors toAnalyst: Arthur Xu seek clarity on management’s budget and plan to achievePeer Review: Kent Chao, RJ Price sustainability.Publication DateJuly 19, 2012 Nonprofit Investor Research |
  2. 2. OVERVIEW OF KICKSTART’S ACTIVITIESKickStart International Inc. (KSI) sells human powered water pumps to subsistence farmers in Africa. The charityfacilitates the production, marketing, and distribution of three types of pumps, the MoneyMakerMax (MMM), SuperMoneyMaker (SMM), and the Hip Pump (HP). KSI establishes the supply chain, buys from factories, supplies to localdistributors, and markets to farmers. The non-profit currently operates in Kenya, Tanzania, and Mali.Price Points of Different Pump Models: Model Price to Farmer Price to dealer MoneyMakerMax (MMM) $144 $129 Super MoneyMaker (SMM) $100 $87 Hip Pump (HP) $39 $33Price to Dealer: What KSI receives when supplying pump to local retailersPrice to Farmer: Sales price that local retailers charge when selling to end usersSource: KSIProductKSI pumps draw water a lower elevation source to irrigate farmland. They are designed to endure heavy use with alifespan of three to four years. KSI has shown that 70% of pumps lasted more than 3 years in Mali and Tanzania, and 72%lasted more than 5 years in Kenya. As for ongoing maintenance costs, the piston cups are the components that requirethe most frequent replacements (every nine to twelve months). Each cup costs $1.50 and four are required.Target CustomersKSI’s target customers are families in Africa whose main source of income is subsistence farming. According to KSI, thetypical target farmer earns $300-400 a year, or less than $2 a day. Around $100 of this is directly from farming activity.KSI estimates that around 4% of farmland in Africa is irrigated. Farmers grow mainly drought resistant crops, such aspotatoes and onions, and receive one to two harvests a year. Because farmers tend to plant the same crops, productionis highly cyclical. In periods of good weather, oversupply results in approximately 30% of the produce becoming spoiled.Irrigation dramatically boosts farmland productivity for several reasons. It gives farmers the ability to grow during dryseason, increasing harvest to three to four crops a year. Irrigation also allows farmers to grow a greater variety of cropsand supply them at different times based on market need, thereby selling them for a higher price. In addition, it frees uptime for families to pursue other productive activities. KickStart International | Nonprofit Investor Research 2
  3. 3. Reaching the CustomerFor KSI’s target customers, purchasing a pump is a huge investment. There are three versions of the pump. In addition topurchasing a pump for $40-$110, farmers also need to purchase hoses, which typically cost ~$30.For a subsistence farmer making $300-400 a year, the total upfront cost of a pump and hoses is more than a quarter of atypical household’s annual income. With most of a farmer’s income used to pay for necessities, farmers need about 8-12months to save up enough to afford a pump and hoses.In addition to financial barriers, KSI has pointed out that the key constraint to demand for pumps is a lack of awarenessand trust among farmers for the technology. Despite the strong economic case for installing a pump, many farmers needto be educated about the value of the technology. Much of donor funding is used to educate farmers about the pump,often going farm by farm. Overcoming this is critical to scaling up.The Path to ScaleThere is a possibility that the awareness and trust problem will be solved as KSI sells more pumps. KSI points to theadoption curves of bicycles and sewing machines in Africa as examples of how technology gain widespread acceptance.These technologies had a slow start, but when their penetration reached a certain level, word of mouth started togenerate more demand. The hope is that once enough farmers in an area are using irrigation pumps, the benefits wouldbe so obvious that demand would take off. KSI estimates that this may happen after 15-20% penetration is achieved. IfKSI pumps reach that point, operating cost per pump would drop and the operation could become self sustained. Incertain areas of Kenya, KSI’s first market, penetration rates are 11-12%. KSI believes a “tipping point” may be reached in2014.Over the last two and a half years, KSI has experimented in a small region of Western Kenya to test the “tipping point”hypothesis. The experiment drove local pump ownership to 13% compared to 1% for the rest of Kenya. KSI reported thatcost per sale in the experiment zone was 42% lower than the rest of Kenya. KSI is applying marketing and sales lessonsfrom this experiment to the rest of its markets. Key marketing initiatives include: • Mobile Layaway: A micro-savings program that enables farmers to make mobile payments toward the purchase of a pump. Results of a pilot indicate that it is increasing sales and reaching poorer farmers and more women. • Farmer 2 Farmer Referral Program: A program that increases word-of-mouth, marketing, recognition and rewards. • Partnerships with microloan institutions: Provide access credit to purchase MM pumps. • After-sales service: A 12-month guarantee availability of spares and a hotline phone number to build confidence in the products. • Live demos pumping water at the retail shops • On Farm Demonstrations, Field Days and Farm to Farm salesWhy Nonprofit?Existing market forces have failed to address the need for pumps among subsistence farmers. This market failure existsbecause of the difficulty of reaching customers who are risk-averse, cash constrained, and uninformed. It takesenormous resources to cultivate trust and awareness before farmers are ready to commit to an investment in anirrigation pump. KSI has been in Kenya since the late 90’s. For-profit companies have not been able to justify the costand time necessary to cultivate this market.While KSI is a nonprofit, the organization makes a gross margin on each pump sold. In addition to creating a moresustainable model than handing out pumps for free, a KSI buyer exhibits readiness by saving for many months to makethe purchase. As a result, the individual is more educated on the benefit of the pump and more motivated to make fulluse of the technology.Even if KSI’s operations become self-sustained in a certain market, KSI will likely continue to rely on donor funding toexpand to new markets where for-profit approaches are not viable. KickStart International | Nonprofit Investor Research 3
  4. 4. PROGRAM RESULTS AND EFFECTIVENESSAfter an 18% decrease in number of pumps sold in FY2010, KSI’s unit sales recovered in FY 2011. Pump accessoriesaccount for 30-65% of product revenue each year. Units of Pump Sold Breakdown of Product SalesPumps sold per year Units of pumps sold $ in 000 30000 27,277 27,326 2500 25000 22,412 22,625 2000 528 724 20000 829 547 15,069 1500 15000 405 1000 10000 1,777 1,566 1,336 1,276 500 990 5000 0 0 FY2007 FY2008 FY2009 FY2010 FY2011 FY2007 FY2008 FY2009 FY2010 FY2011 Pumps Other Products (Hoses, Parts, Etc)Source: KSI Annual Report and Form 990Measuring ImpactKSI has conducted internal studies showing an average increase in income of $738 within 24 months for buyers afterpurchase. This data is collected from surveys conducted by visiting the buyers. At the point of sale, KSI offers farmers theoption to register for a one-year warranty program for free. KSI estimates 90% of buyers are registered. KSI staff thenvisits a random sample of buyers two times: within three months after the purchase (to establish a baseline) and againaround 18 months later. The surveyors attempt to triangulate the change in household income by looking at assets, cropsales, and purchases.Average Change in Household Income Between Surveys: Country Zero Age Follow Up Duration (Mo) Delta (USD) Kenya Jan-00 Jul-01 18 1,100 Kenya Nov-04 Jun-06 19 810 Kenya Feb-06 Sep-07 19 540 Kenya May-06 Mar-07 10 340 Kenya Nov-04 Dec-09 62 530 Tanzania Jul-01 Jun-03 23 770 Tanzania Sep-05 Mar-06 6 830 Tanzania Sep-05 Jun-08 33 950 Mali 770 Average of all studies 24 738 Average of all studies excluding pumps that are not in use 870 Farmer Annual Income: 300-400 USD Source: KSIThe table above shows aggregate results from several studies that measured changes in household income. Each studyselects 50-70 farmers from a random pool. The baseline is established at “zero age” and the delta is measured at “followup”. The delta is the change in income between the first and second visit. KSI notes that the average increase in incomeper pump in use is greater (when excluding pumps not in use which generate zero income). KickStart International | Nonprofit Investor Research 4
  5. 5. Third Party Study PendingThe analysis in this report relies upon KSI’s annual reports, Form 990s, and discussions with management. For thepurpose of receiving third party verification of its results, KSI has contracted International Food Policy Research Institute(IFPRI) to conduct a three year longitudinal randomized study of 3,900 pump users in Kenya and Tanzania. In addition topoverty, the study will cover impact on health, education, and gender equality. IFPRI has the rights to publish theirfindings independent of KSI. The study began two years ago and is expected to be completed in 2013. KickStart International | Nonprofit Investor Research 5
  6. 6. FINANCIAL OVERVIEWFrom FY2008 to FY2011, overall expenses have consistently exceeded overall revenue, leading to a drain on net assets.Net assets have fallen from $8.4m to $3.7m over the last 4 years. KSI ended FY2011 with $213k of cash and $19k ofunrestricted net assets. In light of annual operating expenses of $10.5m, KSI is precariously close to running out of cash.Expenses have exceeded revenue since FY2009. Given the current state of the balance sheet, it will be critical to see howmanagement addresses this issue going forward. Revenue Breakdown Expense Breakdown$ in 000 $12,000 $12,000 95% Program Expense % of Total $9,531 $10,000 $8,715 $10,000 $2,216 90% $6,756 $7,202 $2,142 $8,000 $8,000 $1,645 $1,454 85% Expenses $6,000 $6,000 80% $4,000 $4,000 $6,566 $7,279 $5,799 $6,055 75% $2,000 $2,000 $0 70% $0 FY2008 FY2009 FY2010 FY2011 FY2008 FY2009 FY2010 FY2011 Other Program Services Fund-Raising Contributions and Grants Product Sales Other Management and General Cost of Products Sold Program Expense % of TotalKSI makes a small gross margin on product sales, which includes pump and accessories. Fluctuations in gross margin(which ranged between 2% and 15% over the last five years) are primarily driven by product mix shifts between differentmodels of pumps and accessories. In each of the past five years, KSI has demonstrated its ability to generate a positivegross margin, despite shifts in product mix. Cost per Pump and Revenue per Pump Sold $ per pump sold 100 90 80 70 60 50 40 30 20 10 0 FY2007 FY2008 FY2009 FY2010 FY2011 Total product costs per pump Total product revenue per pump Source: KSI Annual Report and Form 990 KickStart International | Nonprofit Investor Research 6
  7. 7. In addition to product costs, it costs KSI $303 of operating costs per pump. The number spiked up dramatically in FY2010due to a decrease number of pumps sold that year. However, while pump units sold recovered in FY2011, cost per unitremained elevated, suggesting that overhead costs growth far outpaced pump sales between FY2009 and FY2011.Conversations with KSI suggest that the organization is investing heavily to build scale. If KSI’s strategy is successful, thisnumber should decline over time. Total Operating Expenditures per Pump (Program & Support Services) $ per pump sold 320 309 310 303 300 296 290 279 263 280 270 260 250 240 230 FY2007 FY2008 FY2009 FY2010 FY2011 Source: KSI Annual Report and Form 99045% of KSI’s total expenses are related to employee compensation. While Awareness and Outreach account for only 7%of expenses, that figure only includes the direct costs of print, radio, and other media advertising. Through discussionswith KSI, NPI learned that KSI has a sales staff of 160 employees, who travel to the farms to educate and demonstratethe pump. To do their jobs, demonstration staff must travel deep into rural Africa. The traveling and staffing expensesare incurred to develop the market for pumps. Breakdown of Total Expenses (FY2011: $10.5 million) Salaries, Benefits, Other Compensation 45% Other 8% Motor Vehicle Expenses 4% Awareness and Outreach 7% Occupancy 3% Professional Services 1% Office Expenses Travel Tools for 1% 10% Beneficiaries 21% Source: Form 990 KickStart International | Nonprofit Investor Research 7
  8. 8. KSI sold 27.3 thousand pumps in FY2011 with a sales staff of 160, or approximately 170 pumps per salesperson per year.Total salaries, benefits, and other compensation were $4.7 million in FY2011. Dividing this by a sales force 160 people(ignoring all other staff such as management, design, administrative) means expenses of $29k per employee per year.Considering the challenges of reaching farmers, these expenses seem reasonable. Detailed Financial Information $000’s Fiscal Year Ended June 30 FY2008 FY2009 FY2010 FY2011 Revenue and Expenses (Tax Accounting Basis) Support: Contributions and Grants 6,615 4,301 5,054 7,158 Revenue Product Sales 2,018 2,290 2,105 2,305 Investment Income 60 10 8 3 Other Revenues 22 156 35 64 Total Support and Revenues $8,715 $6,756 $7,202 $9,531 % Growth -22.5% 6.6% 32.3% Expenses: Tools for Beneficiaries 1,454 2,142 1,645 2,216 Other Program Services 5,538 6,450 5,959 7,279 Support Services 780 715 964 1,011 Program & Support Services Expenses 7,772 9,307 8,568 10,506 Net Foreign Exchange 261 116 96 0 Total Operating Expenses 8,033 9,423 8,664 10,506 Revenue Less Expenses $682 ($2,666) ($1,462) ($975) Program Costs as a % of Total Expenses 87.0% 91.2% 87.8% 90.4% Support Services as a % of Total Expenses 9.7% 7.6% 11.1% 9.6% Per Pump Sold Number of Pumps Sold 22,625 27,277 22,412 27,326 Pump COGS $43 $48 $43 $62 Other Products COGS (Hoses, Repairs, Etc) $21 $31 $31 $20 Total COGS per Pump $64 $79 $73 $81 Other Program and Support Services $279 $263 $309 $303 Total Cost per Pump $344 $341 $382 $384 Total Product Sales per Pump $89 $84 $94 $84 Net Cost per Pump $254 $257 $288 $300 Assets and Liabilities (Year End) Cash 938 874 1,074 213 Pledges and Grants Receivable 5,822 3,635 2,572 2,412 Accounts Receivable 1,185 969 663 523 Inventories 473 681 679 773 Loans Receivable 0 231 292 264 Other Assets 602 474 302 347 Total Assets 9,020 6,863 5,581 4,532 Accounts Payable and Accrued Expenses 440 445 305 763 Other Liabilities 137 125 135 57 Total Liabilities 577 570 439 820 Net Assets 8,443 6,293 5,142 3,711 Unrestricted Net Assets 2,351 1,650 1,777 19Source: IRS Form 990 for FY2008-FY2011 KickStart International | Nonprofit Investor Research 8
  9. 9. In summary, KSI’s operating costs have grown significantly and remain high on a per unit level. This reflects the difficultyof reaching farmers and operating subscale. A bigger concern is the drain on cash and net assets seen over the last threeyears. While operating at a deficit is not inherently a problem for a non-profit, doing so for many years may reflect poorcost control. Finally, a low cash balance exposes KSI’s operations to a greater risk of disruption. Cash constraints maylimit KSI’s ability to provide after purchase support to its customers or pay its employees and suppliers. Thus, NPIrecommends donors to seek clarity on management’s budget and plan to achieve sustainability.THIRD PARTY RATINGSKSI holds a four-star rating from Charity Navigator. KSI has received a single user review on GreatNonprofits (four stars).KSI applied for a grant from GiveWell in 2007 but did not meet their criteria for further evaluation. KSI is not currentlyrated on Philanthropedia.DISCLOSURESArthur Xu certifies that he does not have any affiliation with KSI and has never made a donation to the organization.Additionally, Arthur has not supported directly competing organizations in a greater capacity than a nominal donation.NPI analysts and NPI as an organization do not receive any form of compensation from reviewed charities.This report is for informational purposes only and does not constitute a solicitation for donations. While the reliability ofinformation contained in this report has been assessed by NPI, NPI makes no representation as to its accuracy orcompleteness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect ourjudgment as of the date of the materials and are subject to change without notice. NPI has no obligation to update,modify or amend any report or to otherwise notify a reader thereof in the event that any matter stated herein, or anyopinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research onthe subject organization is withdrawn.Opinions and recommendations in our reports do not take into account specific reader circumstances, objectives, orneeds. The recipients of our reports must make their own independent decisions regarding any organization mentionedby NPI. KickStart International | Nonprofit Investor Research 9