Over the last six months, our Kiva U.S. team has undergone a significant shift in how we are approaching the growth of our program. I think it’s probably an unfashionable shift — especially here in Silicon Valley. And who knows — maybe it will turn out to be a misguided shift. But on the Kiva U.S. team we’re excited by it, and aligned behind it. Whereas a year ago, our growth strategy was more focused on “mass marketing”, in 2017 we are focused on a community based approach to growth.
In our 2016 budget, our Kiva U.S. team got some significant marketing budget for the first time. The hope was that we could find an advertising / marketing channel where we could make the economics work. We don’t charge any interest or fees on the U.S. loans that we make here at Kiva, but we do consider that each loan has revenue associated with it — in a couple of ways. Firstly, the average lender “tips” us a few dollars for every Kiva loan they make. So if our average loan size for U.S. loans is $6,000, then we earn around $300 of revenue in “tips” on that loan. Secondly, the average funded U.S. borrower invites 25 new lenders to fund their loan, and join the Kiva movement. If the average lender “tips” Kiva $12 over the course of their lifetime, then again the revenue per funded loan works out at $300. So as we experimented with different marketing channels in early 2016, our question was whether we could find one where our cost per acquisition of a fully funded loan was (ideally significantly) less than the $300 “lifetime value” that we could budget from the revenue associated with that loan.
And unfortunately, the answer was an emphatic “no”.
Led by our Marketing Manager Adam Kirk, we tried Facebook ads to targeted small business owner audiences in geographies where we had significant on-the-ground presence. We tried bidding on Google AdWords like “small business loan”. We ran direct mail campaigns — both our own, and in conjunction with partners like The Greenhorns or Farmer Veteran Coalition. And we established referral partnerships with more conventional lenders, who would send us the loan applications that they were rejecting. We bought contact information of small business owners throughout the country from Radius, and optimized our landing pages using Unbounce and Optimost.
Adam and our team executed extremely well on these strategies, in series. But while we saw significant growth at the top of our funnel — i.e. loan applications started — , the conversion through our funnel (to loan applications submitted, loans posted to the Kiva website, and then loans fully funded) through these “mass marketing” (usually digital) channels was very, very low.
Reflecting on why we saw this low funnel conversion, I see three principal likely explanations:
1) Low quality leads. Compared to loan applications that come to us from our community partners (Kiva “Trustees”), loan applications that came in through these mass marketing channels were just lower quality. These small business owners were less interested in, and committed to, taking out a Kiva loan in the short-term, when they were small business owners at all!
2) Lack of trust. Chatting with one of our borrowers in Oakland one day, she told me something very enlightening: “You know, people in this community have been burned a ton of times by lenders in the past. There’s a real lack of trust.” When our Trustees recommend Kiva loans to their community members, their credibility in the eyes of their community is conveyed to Kiva. But when someone sees an ad for a 0% interest loan cold, they might well think it sounds too good to be true, and be asking themselves “where’s the catch?”
3) Perceived barriers to entry. Lastly, while we have tried to streamline the Kiva loan process as much as possible (no bank statements, tax returns, business plans, arduous financial forms, etc. etc.), it can still be daunting to a small business owner who has never undertaken a crowdfunding campaign before, and is working 100-hour-weeks desperately trying to keep their business going and growing, with extremely limited resources. Again, our Trustees can hold the hands of the small business owners they are referring to Kiva, help answer any questions they might have about how the process works, and reassure them that the benefits of applying for a Kiva loan will significantly outweigh the costs.
As a result of our very low funnel conversion through these mass marketing channels, in the fall of 2016 we decided to move away from this approach. It was a little bit scary to “turn off” these digital ad channels — see the chart below. We went from 1,685 loan applications started in October with digital ads running, to 1,210 in November without digital ads — a drop of 28%. But we had a vision — for a more community based approach to growth — and we were excited to move in that direction.
At a high level, we see community focused growth as growth that comes more from our existing community, than cold outreach to new people that we are not connected to yet. In a sense, it’s similar to viral growth (which is, in fact, very fashionable in Silicon Valley!), but our definition of community focused growth includes other elements too, which I attempt to outline below. This (non-exhaustive) list of components of our community focused growth strategy is obviously most relevant to our Kiva U.S. program, but I expect there are many parallels with other industries and companies too:
Human hand-holding over faceless automation. At Kiva, we are caught in a quandary. We are a technology company, based in Silicon Valley. But we are also a non-profit that dreams of re-imagining a finance system based on people. And we have been around the block long enough to know that the entrepreneurs that we get most excited about lifting up, sometimes need a helping hand to navigate setting up a PayPal account, or making it through our Private Fundraising Period. And so we’re trying to strike a delicate balance. On one hand, we’re constantly striving to improve our website, and improve our automated notifications to the small business owners we serve. But on the other hand, we provide dedicated, genuine human customer service to any small business owner that we post to the Kiva U.S. website. Reading through some of the comments in our borrowers’ NPS survey responses, it is not difficult to see that our customers truly value this service and support — as well as the community-oriented nature of our Kiva U.S. program more broadly.
As these comments imply, one of the most exciting aspects of the Kiva model is that our crowdlending approach connects our small business owners with hundreds of individual lenders, who are now microinvestors in their businesses, and would love to see these businesses succeed. In the long term, our hope is that the personal touch, relationship-orientation and “humanity” of the Kiva experience for a small business owner, comes not just from our Kiva team, but also from the millions of Kiva lenders from around the world, cheerleading for the entrepreneurs they are investing in.
When we talk about community focused growth on the Kiva U.S. team, these eight examples — (1) engagement of our Trustee partners, (2) a focus on building relationships with existing customers, (3) borrower-to-borrower viral growth, (4) repeat loans, (5) content marketing to niche audiences, (6) social media marketing, (7) our “boots-on-the-ground” Kiva Leads program, and (8) human hand-holding and support — are some specific initiatives that we are focusing on, in order to try and deliver on it.
As mentioned above, the “lifetime value” of a customer (small business owner borrower) for our Kiva U.S. team is about $300. But for an online lender (like OnDeck, FundingCircle or Able) that makes very large loans (e.g. $200,000) and charges an (often quite high) interest rate (e.g. 15%), the lifetime value of a customer is much higher — perhaps $20,000. This means that, while the marketing playing field is one of advertising spend, our Kiva U.S. team is always going to lose. Small business loan keywords on Google are about the most expensive keywords out there, and we are going to be outbid and outspent every time.
But if we change the marketing playing field to be one of community, then Kiva can win there. We have 1.7 million generous lenders, from all around the world, looking to support Kiva entrepreneurs with 0% interest loans, $25 at a time. Those lenders are becoming customers, brand ambassadors and business advisors of the borrowers they are funding, and writing them encouraging messages of support on their loan pages. Whereas delinquencies on conventional loans are met with stern threats and debt-spiral-inducing fees and penalties, hardships in Kiva borrowers’ lives and businesses are almost invariably met with grace and understanding, as long as the borrower meets their own commitments to the Kiva community by demonstrating strong communication and good faith. As a 501(c)(3) non-profit, our mission and brand are beautifully aligned with a marketing strategy that’s focused not on cold, mass outreach, but on established relationships and community trust.
Community focused marketing is our turf.
So for our Kiva U.S. team, a community focused marketing strategy is a more cost-effective way for us to reach more small business owners, and increase the quantity of loan applications coming into the top of our funnel. But perhaps even more powerfully, we see community focused growth as the best way of ensuring the quality of these leads.
On our team, we define loan “quality” along four dimensions — (1) depth of social impact (e.g. we would rather lend to highly financially excluded entrepreneurs operating businesses with deep social missions), (2) risk (i.e. we need our borrowers to pay their loans back!), (3) popularity with Kiva’s lender base (i.e. as a crowdlending platform, we want to be posting loans that our community are excited to support), and (4) cost-to-serve (i.e. the less time it takes us to review, post and service a loan, the more scalable our model becomes, and the more entrepreneurs we can empower). Of course, these dimensions of quality are often in conflict with each other — a loan to a more moderate income borrower might be lower risk and lower cost-to-serve, but the depth of impact is also lower. A loan to a pre-revenue startup being launched by someone who is currently homeless is incredibly impactful, and will probably be very popular with Kiva’s lender base, but might be much higher risk.
But the beautiful thing about community focused growth is that it can improve quality along each of these four dimensions! On the depth-of-impact front, many of Kiva’s Trustees are non-profits with incredible, deeply impactful missions. La Cocina catalyze immigrant women food entrepreneurs in San Francisco. Defy Ventures provide technical assistance to formerly incarcerated entrepreneurs. Urban Innovation 21 support the development of small businesses in some of the lowest-income neighborhoods in Pittsburgh. From a risk perspective, loans sourced from our existing community (whether a repeat loan to a former borrower who has now fully repaid their previous loan, an endorsement from a Trustee, or a referral from another Kiva borrower) tend to have a much stronger repayment rate. And because Trustees can help us handhold their borrowers through the Kiva process, they tend to have higher quality loan profiles (business descriptions, personal stories, photos, etc.), and require less time investment from our Kiva team.
Whatever industry you operate in, the quality of your customer is critically important. But in lending, where your entire model is dependent on your customer repaying their loan over the next two to three years, quality is of paramount importance. A growth strategy focused on community delivers it.
The Kiva U.S. team’s focus on community led growth only began in earnest as we entered 2017, and so it’s still too early to say whether our belief in the promise and potential of this approach is well-founded or misplaced. But having led this team since its inception in late 2011, I’m pretty convinced by the logic of the strategy here. Community focused growth is a cost-effective alternative for a non-profit that can’t compete on advertising spend; it’s perfectly aligned with Kiva’s mission, brand and generous lender base; and it can cultivate high quality leads at the top of our funnel. As a team, we’re aligned behind this strategy, and working hard to execute on specific initiatives that embody it.
The only remaining question is whether it will work or not — from a quantity and quality perspective — over the coming months and years.
Watch this space.