And so I am going straight into writing the business plan for my EneFin project. It means that from now on, for like the next two or three weeks, updates to my blog will be basically pieces of business plan, or nearly. In my last update in French, I already started connecting the dots. I focused mostly on the market of renewable energies in Europe, in comparison to other regions of the world. You can look up « Fini de tourner autour du pot » for more details.
The EneFin project is a FinTech concept designed for the market of renewable energies, for the moment just in Europe, but I believe it can be transposed into other regions of the world. In that respect, one important thing is to keep in mind. For the purposes of this project, Europe is being defined as EU + Norway + Switzerland.
FinTech means finance, and so I take on studying the financial context. I want to identify basic patterns in that respect. I focus on two basic components of the financial market, i.e. on the supply of money, and that of credit. I take the two corresponding metrics from the resources published by the World Bank, i.e. the supply of broad money as % of the GDP, and the supply of credit from the domestic financial sector, once again as % of GDP. As they are both denominated in units of the GDP, I need that bugger too, and so I look it up, as given in constant 2010 US$.
The logic I am following here is that anything economic that happens, i.e. creation or consumption of utility, has a financial counterpart. Every hour worked, every machine installed in a factory etc. has a shadow sibling in the form of some money written on some accounts, which, in turn, has a shadow cousin in the form of credit written in the balance sheets of banks. Each gigawatt hour of renewable energy is supposed to be mirrored by monetary balances, and both of them, i.e. the gigawatt hour and its monetary shadow, are being mirrored by some lending and borrowing in banks.
I define five geographic regions, namely: a) Europe (EU + Switzerland + Norway) b) North America c) China d) Middle East & North Africa and e) Latin America & Caribbean. I consider China as representative for the emerging Asian economies. In each of these regions, I have already calculated the overall consumption of renewable energies in gigawatt hours. Now, I calculate the absolute supply of broad money, and that of credit, and then I compute two coefficients: broad money, and domestic credit, supplied per 1 GWh of renewable energy. In other words, I am assessing how big financial a shadow each such gigawatt hour has, across space and over time. I am trying to define the shape of that shadow, as well, by computing the difference between money supplied, and domestic credit provided, once again per 1 GWh of renewable energy consumed.
Three graphs below are portraying the results of those calculations. Further below, I am developing an interpretation of that data.
I’m back after graphs, with, hopefully, pertinent an interpretation. Here is the thing: credit goes after expected profits, whilst money goes after transactions, as well as after uncertainty as for what kind of resources should we invest in so as to have those profits. You need credit to finance a new windfarm, and you need to monetize this credit, i.e. to transform it into monetary balances that you hold on your bank account, when there is a lot of alternative technologies for your windfarm, and you are really in two (at least two) minds as for which one is the right one for you.
Financial aggregates are like ravens – you can learn a lot by observing the way they go. Europe, such as defined in my business plan, is definitely burning the rubber as for the amount of renewable energy consumed. Still, credit from Europe seems to be going mostly to Middle East and North Africa, and a bit to China, as well. This is funny, because it has been so for centuries. Anyway, if a lot of credit emigrates, it is obviously looking for new horizons in foreign markets. It seems to see better horizons in them foreign markets than home. Money, i.e. our response to uncertainty and hesitation, tends to decline a bit in Europe, whilst it is swelling in other regions. The diagnosis that Herr Doktor Wasniewski can formulate is the following: Europe has developed a lot of actual, current capacity for generating renewable energies, and yet this capacity seems to be somehow short-legged. Both the innovative input from new inventions, and the financial greasing with credit and monetary balances seem to be fading in the market of this proud, small, and cold continent. I think this is the Dark Side of the Force, and said Force is called ‘Fiscal Stimulation’. When you look at the development of renewables in Europe, they burgeon mostly in those countries, where the fiscal shoulder of the government strongly supports the corresponding investments. Upstream subsidies, and feed-in-tariffs downstream, it is all nice as long as we don’t realize one thing: strong, resilient social structures emerge as the outcome of struggle and fighting, not as the result of gentle patting on the shoulder.
In other words, the European market of renewable energies lacks efficient, market-based solutions, which could channel capital towards new technologies and their applications, and give a hand to fiscal instruments in that respect.
It looks nice. I mean, I have just developed a coherent, economically well-grounded argument in favour of developing functionalities such as EneFin, and it didn’t hurt as much as I thought it would have.
Now, I change my optic, and I turn towards the financials of the EneFin project itself. I am starting from the point of breaking even, i.e. from the mutual balance between the gross margin generated on transactions with customers, and the fixed costs of the business. I need to figure out the probable amount of fixed costs. How to estimate fixed costs in a business structure that does not exist yet? The easiest way is business modelling. I take a business as similar as possible to what I want to develop, and I barefacedly copy what they do. The closest cousin to my project, which I can find and emulate is FinTech Group AG in Germany. In Table 1, below, you can see their selected financials.
Table 1 Selected financials of FinTech Group AG
|Year||Fixed costs in €000||Revenue €000||Share of fixed costs in revenue|
|2015||41 718||75 024||55,6%|
|2016||38 916||95 021||41,0%|
|estimate 2017*||45 020||99 124||45,4%|
|Average||41 885||89 723||46,7%|
*this is an estimate based on mid-year results, i.e. semi-annual figures have been multiplied by two
This is pretty obvious that revenues reaching over 99 millions of euro annually will be, in the start-up phase, out of reach in the EneFin project. What counts the most are proportions. It looks like a FinTech company located in Europe needs some €0,47 of fixed costs for each €1 of revenue, in order to keep its business structure afloat. Still, fixed costs are fixed. I know, it sounds a bit tautological, but it is the essential property of fixed costs. In a given business model, i.e. in a bundle of processes that create and capture value added, we need a certain fixed structure to maintain those processes. Thus, now, I wonder what is the minimum size of a business structure in the FinTech business.
What do I do when I don’t know how to go about a piece of information I don’t know? I go Google, and I type: ‘what is the minimum size of a FinTech business?’. Ridiculous? Maybe, but efficient. My first hit is a fellow Word Press site, labelled ‘Venture Scanner’, and there, I find this article entitled Average Company Size Per FinTech Category, and Bob’s my uncle. The EneFin concept matches three categories mentioned there, i.e. Crowdfunding, Institutional Investment, and Small Business Tools, with respective headcounts of 38, 40, and 80 employees.
It is so easy. It should be illegal. I type ‘what is the average salary of an engineer in Europe?’. My first hit is also a blog, www.daxx.com and there, I find this piece of information entitled ‘IT Salaries: Which Is the Highest-Paying Country for a Software Developer?’. Looks like €60 000 a year is a reasonable average.
Now, I assume that among those typical sizes of organizations in FinTech, I aim for the relatively smaller, i.e. 40 people. Those 40 people are supposed to earn €60 000 each, on average, and that makes a total payroll of 40 * €60 000 = €2 400 000 a year. Good. Next step: the rent. Once again, Professor Google directs me onto the path of wisdom, to the website called ‘The Balance Small Business’, and there I find the calculator of work space necessary. Looks like it is some 18,6 m2 per engineer (the original article gives amounts in square feet, but you just multiply them by 0,093). Hence, I need, for my EneFin structure, like 18,6 * 40 = 744 m2 in terms of office space. I check a big business hub, Frankfurt, Germany, for rental prices. Looks like €20 a month per 1 m2 is a reasonable rate to expect for a relatively good location, which makes me 744 * €20 *12 = €178 560 a year.
Thus, the basic payroll plus the rental of office space makes €2 400 000 + €178 560 = €2 578 560 a year, which I multiply by two in order to account for marketing and other administrative expenses. Now, some of you could ask, isn’t that multiplying by two a bit far-fetched? Well, what I can tell you for sure: at least some of those 40 people, maybe even most of them, will have to travel, and business trips, it costs insane amounts of money. Anyway, my rough guess of fixed costs for the core structure of EneFin is €5 157 120 a year, and this is sort of the first pit-stop on the path of development in that business. Based on what I found earlier, with that FinTech Group AG, I assume that €5 157 120 a year needs €5 157 120 / 0,467 = €11 043 083,51 a year in terms of revenue.
A pit-stop, you reach it after having driven on that racing track for some time, and here, the time is like 4 years. I assume that cycle on the grounds of the case study I did regarding the business model of Square Inc. You can find the details in « The expected amount of what can happen ». My vision of EneFin in terms of products marketed is a 50/50 balance between transaction based-revenues, on the one hand, and those based on subscription, on the other hand. Therefore, I split the target revenue of €11 043 083,51 a year, to be reached in the third year, into two halves, or partial targets of €5 521 542 each. In other words, I am sketching a business model, which leads to developing, over 4 years, two business units inside the same business concept. One of those business units would be focused on developing a product based on transaction fees, the other one would target a subscription-based utility.
I am using the model cycles of growth I nailed down, with the help of Euclidean distance, in the analogous, i.e. transaction-based and subscription-based, business fields at Square Inc. I apply it to the target revenue of EneFin, as calculated and structured above. The results are shown in Table 2 below.
Table 2 First approach to revenues and operational margin at EneFin
|Planned percentage of the target revenue||Planned revenue in €|
|Year||Subscription-based||Transaction-based||Subscription-based||Transaction-based||Operational profit after fixed costs of €5 157 120|
|1||10%||37%||€ 534 033||€ 2 033 301||€ (2 589 787)|
|2||47%||83%||€ 2 571 877||€ 4 575 370||€ 1 990 127|
|2||73%||91%||€ 4 046 709||€ 5 048 456||€ 3 938 045|
|4||100%||100%||€ 5 521 542||€ 5 521 542||€ 5 885 964|
Now, the market. I made a practical (I hope!) approach from that angle in « The stubbornly recurrent LCOE ». Provisionally, I estimate the basic transaction fee collected by EneFin at 5%, although the fork of possible rates is really wide, ranging from fractions of a percentage point, practiced in the actual financial business, e.g. the 0,4% collected by brokerage houses on your transaction in the stock market, up to the nearly 20% apparently collected by of Square Inc in their transaction-based products.
Subscription-based products seem to be sort of better in the FinTech business, but you need to tempt your customers into paying a fixed subscription fee instead of a casual, transaction-based one. You tempt them crudely and primitively, by making the subscription-based fee more attractive financially if they do a large amount of transactions. The mathematical construct that I adopt to simulate this one is the following: if %T is the transaction-based fee, expressed as a percentage of the actual transactions, the subscription-based fee %S should be like %S = 0,5*%T. If %T = 5%, then %S should modestly stay at %S = 2,5%.
I take the target revenues from the 4th year of the simulated development cycle, as shown above, and I compute the value of energy, at retail market prices, that corresponds to those revenues. It makes, respectively, €220 861 670 of energy in the subscription-based market, and €110 430 835 in the transaction-based one, €331 292 505 in total. Now, I take that lump sum and I apply it to the national markets of selected European countries, at their local retail prices. I calculate the quantity of kilowatt hours that correspond, in each country, to those €331 292 505, and I express it as the percentage of the overall national market of energy for households. Additionally, I calculate the amount of capital that suppliers of energy can raise through the complex contracts of EneFin, where the fork between the retail price for households and that for non-household users is being invested into the balance sheet of the supplier. The results of this particular calculation are shown in Table 3, below.
|Country||Price of electricity for households, per 1 kWh||Non-household price of electricity, per 1 kWh||Percentage of the national market of households, served by EneFin at target revenue||Capital raised by local suppliers via EneFin at target revenue|
|Austria||€ 0,20||€ 0,09||2,5%||€ 182 210 877,94|
|Switzerland||€ 0,19||€ 0,10||3,5%||€ 152 445 943,44|
|Czech Republic||€ 0,14||€ 0,07||2,9%||€ 165 646 252,68|
|Germany||€ 0,35||€ 0,15||0,2%||€ 189 310 003,06|
|Spain||€ 0,23||€ 0,11||0,6%||€ 172 848 263,66|
|Estonia||€ 0,12||€ 0,09||25,0%||€ 82 823 126,34|
|Finland||€ 0,16||€ 0,07||3,2%||€ 186 352 034,26|
|France||€ 0,17||€ 0,10||0,4%||€ 136 414 561,03|
|United Kingdom||€ 0,18||€ 0,13||0,5%||€ 92 025 695,93|
|Netherlands||€ 0,16||€ 0,08||1,4%||€ 165 646 252,68|
|Norway||€ 0,17||€ 0,07||3,2%||€ 194 877 944,33|
|Poland||€ 0,15||€ 0,09||1,2%||€ 132 517 002,14|
|Portugal||€ 0,23||€ 0,12||3,2%||€ 158 444 241,69|
Good. That business plan seems to be taking shape. EneFin seems to need just sort of a beachhead in most national markets of energy, in order to keep its head above the water. Of course, there is a lot of testing and retesting of numbers before I nail them down definitively, but the essential business concept seems to hold.
I am consistently delivering good, almost new science to my readers, and love doing it, and I am working on crowdfunding this activity of mine. As we talk business plans, I remind you that you can download, from the library of my blog, the business plan I prepared for my semi-scientific project Befund (and you can access the French version as well). You can also get a free e-copy of my book ‘Capitalism and Political Power’ You can support my research by donating directly, any amount you consider appropriate, to my PayPal account. You can also consider going to my Patreon page and become my patron. If you decide so, I will be grateful for suggesting me two things that Patreon suggests me to suggest you. Firstly, what kind of reward would you expect in exchange of supporting me? Secondly, what kind of phases would you like to see in the development of my research, and of the corresponding educational tools?
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