The Variable Payment Obligation (VPO)* is a financial innovation for impact investing. This innovation is designed to stimulate investments into socially-impactful, cash-healthy businesses lacking traditional collateral (and therefore unattractive targets for traditional bank loans).

Redleaf Venture Management, founded in 1993, engaged Starbird Consulting to create a What-If Analysis Tool for VPOs. This tool allows users to input basic financial statements about a company being evaluated; the tool then converts this information into a dynamic presentation for entrepreneurs, investors, and lending officers, including:

  • Key outputs and visual elements depicting health of the projected business vis-a-vis cash/working capital/VPOs

  • Financing and working capital dashboards presenting cash flow related to three different forms of financing: traditional loan, VPO based on Free Cash Flow, and VPO based on Sales Revenue

  • Dynamics of a VPO v. a traditional loan, showing how a bank can/cannot hit its target total debt obligation using a VPO of similar term as a traditional loan

  • Etc.

Like other What-If Analysis tools created by Starbird Consulting, this VPO What-If Analysis tool allows users to experiment with all salient variables. Using this tool, entrepreneurs and banks can now understanding what variables most affect the viability of VPOs and related financing structures vis-a-vis any particular business under consideration.

*Variable Payment Obligation (VPO), as described by John Kohler (Redleaf Ventures):

“[M]any enterprises founded to embed social or environmental solutions into their core value proposition are operating in frontier markets or local communities. Most often, the prospect of a public market offering to provide an ‘exit’ for private investors who have supported the company does not exist. Similarly, the chances for a merger or acquisition with a larger, cash rich company are few and far between.

The result is a new emphasis on innovative financing methods and tools that address both the growth capital needs of an enterprise and risk/reward returns for investors who choose to support them. One of these instruments is the Variable Payment Obligation (VPO), which falls into a new class of “structured exit investments”. The VPO is primarily designed as a capital infusion to propel social enterprises to positive cash flow. The thesis behind this and other structured exits is that the investor and entrepreneur agree on a gradual payback mechanism. […] Reliable ‘round-trips’ of investment capital has often eluded many impact investors, and the use of the VPO and structured exit instruments in general will increase the likelihood of investment return.”