Blockchain and Supply Chain Financing: A Conversation with Skuchain
On November 9th in Boston, we will be hosting our executive summit on Blockchain in Energy & Industry – a good excuse to catch up with some of the most interesting projects happening in the space.
Founded in 2014, Skuchain is applying blockchain technology to the digitization and financing of the supply chain. To learn more, we spoke to Rebecca Liao, who heads Skuchain’s Business Development and Strategy, and to Ranga Krishnan, the company’s VP of Technology, who will join us in Boston. In addition to insights on blockchain and IoT, we learned about their forays into inventory financing, and how it’s helping streamline supply chains.
Jules Besnainou: What is the story behind Skuchain?
Skuchain: In late 2014, the founders met at a blockchain Hackathon. It was at a time when people started to think about blockchain not just as the technology that powers Bitcoin and crypto currencies, but as a stand-alone technology that could be applied to other use cases in an enterprise context. We believed early on that supply chain was the perfect use case for blockchain because you have numerous parties who are already accustomed to interacting with one another with imperfect trust. There is an incentive to collaborate, but taking out the trust factor would be a significant opportunity.
JB: Supply chain is a broad concept. Can you tell us about what part you are tackling?
Skuchain: A first use case we decided to tackle is around digitization of trade finance. We did the first trade finance transaction on the blockchain and that involved Wells Fargo, Commonwealth Bank of Australia and Brighann Cotton. As part of that transaction we shipped a bale of cotton from Texas to China. While we continued to work with banks in the wake of this proof of concept, we discovered that when it comes to trade, banks are only service providers. The party that really drives the transaction is the anchor buyer. Buyers’ major pain point is the tracking and tracing of goods as they move through the supply chain. But while they seek that extra visibility, suppliers consider this digitization as additional cost without benefits, and adoption becomes a problem. We decided to tackle this problem of adoption by offering a solution for supply chain finance, and in particular, inventory financing. Instead of a supplier taking on financing through the receivable, which can be quite costly, we buy the inventory outright, and get it financed from the buyer’s cost of capital. The supplier gets immediate working capital relief and the buyer gets lower cost of goods, everybody wins. This definitely greases the wheel for adoption.
Can you take us through a typical trade process, outlining who is your client, how you are charging them, and what blockchain adds to the mix?
Skuchain: Sure. We own a subsidiary called IMT, which stands for Inventory Management and Trading Services. It’s a Special Purpose Vehicle (SPV) and the sole purpose of the fund is to enable these supply chain finance transactions. We directly purchase inventory from the supplier and hold that inventory for as long as the buyer needs us to. When he is ready to actually use that inventory, we sell it back to him. You can start to see some accounting benefits here. The supplier gets paid immediately, which almost never happens, and the buyer is able to hold the inventory off their books for as long as possible. Most importantly, the supplier avoids paying the high interest rates of receivable financing (8 to 15% depending on the cases, 30% in emerging economies), so the goods come out cheaper.
We can finance those transactions thanks to blockchain technology. While third-party financiers would be reticent to underwrite off-line transactions, they can now see the clear chain of title attested to on the blockchain, from supplier to Skuchain to the buyer, and they can see the payment guarantee from the buyer. Those two elements combined are sufficient for third-party financiers to consider this transaction virtually de-risked. What that means is that they are willing to provide financing off the buyer’s cost of capital. What the supplier was paying before in receivable financing, that is a financial gain. We at Skuchain take a platform fee, dynamically priced based on the specific terms of each individual transaction.
JB: Can you tell me a bit more about the structure of the SPV?
Skuchain: All the funding comes from third-party financiers, either commercial banks or wealthy individuals. The structure of the fund is a syndicate of loans. We take out a credit revolver with a few third-party financiers, and the rates vary depending on the rate for each individual transaction. With respect to the individual transactions themselves, we dynamically price them through an auction process.
JB: Is the key benefit a lowered financing rate for these transactions?
Skuchain: Lowered rates are one of the benefits, but the biggest difference is market opportunity. As a tech platform, we are not beholden to the same regulations that banks have to comply with, which allows us to do deals that banks could not underwrite. When it comes to inventory financing, banks have a narrow category of inventory that they can actually put title to. Commodities trading is especially common, but aside from that and a few other categories, it’s actually illegal for banks to hold titles to inventory. The second barrier is that even when they are allowed to do this type of financing, it has to be profitable for them. As it is rarely so, they end up only doing it for key customers, the largest anchor buyers, the ones that they have the longest relationship with. That is because the key to this transaction is the payment guarantee. If you have worked with this customer for a long time and know that they will pay on time, you are more willing to do that financing. Again, blockchain technology allows us to take that trust level away.
JB: Would you say that the third-party financiers that buy into the IMT fund take on some degree of technological risk based on the fact that the payment guarantee is held on the blockchain?
Skuchain: There is always some technological risk. We endeavor to make sure our product is robust enough to withstand any sort of breakdown, knowing we are transacting large sums of money. We are not concerned about security of the blockchain itself, as it is virtually un-hackable. The more important element is making sure the blockchain system that we have in place really conforms to the business logic that our parties are used to. Access control is a big one for us, as negotiations between buyer and seller are generally confidential. There is still a diligence process, and more traditional institutions stay involved in these transactions. We are keeping them involved because there are certain categories of risk that the blockchain just can’t take away. We want to make sure that we’re offering the capital opportunity without introducing new sensitivities based on the technology. To the extent that any system can break down, there is slight technological risk, but I would say that for the most part it is virtually risk-less to do this transaction.
JB: Could you give me an example of a good that has been transacted on the platform just for illustration?
Skuchain: We have financed large machines for aviation players. Food is a big one for us as well. We’re exploring that option with the World Food Programme, a UN initiative, to finance the procurement of food in East Africa.
JB: Given that you purchase the inventory, does that mean you deal with its storage as well?
Skuchain: No, we don’t have warehouses. The way we structure it legally is, we take on the obligation to pay the supplier and to deliver goods to the buyer, but the actual duty to perform remains with the supplier. They still manage inventory, have their own warehouses and their own workflows and we monitor that, but we’re not responsible for it.
JB: You are a key player in the blockchain x IoT space. Can you tell us more about how that ties into supply chain financing
Skuchain: With respect to IoT specifically, it’s a big initiative for us. We think of blockchain as a way to make IoT signals actionable. Where before you had sensors on humidity, temperature or location, and this data was actively used by companies for informational purposes, what you can do now is have these signals attached to the blockchain and trigger automated execution of contracts, enabling true automation of your supply chain. IoT is an area we’re actively doing research in. We are chairing the new supply chain working group at the Trusted IoT Alliance, and we continue to work with other standards-setting bodies not only to make sure that research is being done in that particular area, but also that open standards that are critical for adoption of scale can be accelerated.
JB: Can you give us an idea of Skuchain’s growth, and tell us more about what you’re hoping to achieve?
Skuchain: We have about 15 people right now, with a view towards staying lean until we’re really ready to scale. We are starting to see the first production deployments of our system as we speak. So far, our revenue has mainly come from proof of concepts. Initial commercial deployments are happening and we are working with Fortune 50 companies with large supply chains, so we expect strong growth after proving out our technology. We are still pre-Series A funded at this point, and once these production deployments are well under way, we expect to raise a Series A to scale up, hopefully late this year or very early next.
JB: Maybe a last question around geography. Are you mostly working in the US, or starting to look at Europe or Asia?
Skuchain: Our development team is centered in our office here in Mountain View. That is where almost all our staff is. But in terms of customers, we are already very global, with presence in Asia, Europe, Africa, and of course the US.
JB: Rebecca and Ranga, thank you! We look forward to hearing more from Skuchain in Boston!
Ranga Krishnan will be speaking at our next executive summit on Blockchain in Energy and Industry, taking place on November 9th in Boston. If you would like to learn more, don’t hesitate to reach out at email@example.com