LendUp $150m round shows Underbanked market needs patient capital


The Underbanked is one of those inevitable but not imminent markets. It is inevitable that the next billion people entering the global middle class wired to the world through their mobile phone will be a massive market. However it is not imminent. You cannot realistically forecast when this will be big. You need patient capital to fund ventures in the Underbanked market. The recent LendUp $150m raise shows this patient capital in both the debt ($100m) and equity ($50m) portions.

Think like a VC, invest like a Debt Fund

The $100 million in debt came from a fund called Victory Park and will be used to finance LendUp loans.

When you look at Victory Park on Crunchbase you see a fund that is equally comfortable investing in equity or debt. This goes against prevailing wisdom on Wall Street that your fund should be defined by the asset class; you should be either a debt or an equity fund. Victory Park looks more like a thematic fund focused on Altfi (although Victory Park’s own site currently emphasizes the credit/debt part of the story a bit more than the equity part).

No explanation risk or liquidity risk
The $50 million equity portion came from investors like Google Ventures, QED, Kapor Capital, Yuri Milner, SV Angel, Eagle Cliff, Bronze Investments.

What many of these investors have in common is that they are investing their own money (corporate money in the case of Google Ventures).

That means they have neither explanation risk nor liquidity risk compared to traditional funds with LPs putting in most of the capital:

  • Explanation risk. If you invest your own money and it does not work out, you learn from the experience and move on.If you invest other people’s money and it does not work out, it is ok if you invested in what everybody else invested in. However if you invest in something contrarian and it blows up, you have a tough time explaining this to LPs.
  • Liquidity risk. Traditional VC funds need to return money to LPs within some defined time in order to show a track record to raise the next fund. This is OK if you invest in a market that gets quickly to scale. A market such as the Underbanked, which may take a long time to get to scale, needs patient capital. Individuals and family offices often take a multi-generational view. They are “long term greedy”.

Patience is needed to get to Underbanked Version 3

  • Underbanked 1.0: The Gameen Foundationproves that default rates can be low when lending to the very poor. Microfinance is born. This was possibly the most important financial innovation in the last 50 years.
  • Underbanked 2.0: Fast money rushes in to Microfinance and interest rates go to a level that is still better than loan sharks, but not the low rates that billions need in order to escape from poverty. This almost killed Microfinance by giving it a bad reputation.
  • Underbanked 3.0. This is emerging at the moment and is characterized by innovators such as LendUp and others that we have profiled here on Daily Fintech.

The Underbanked is not a suitable market for the VC to IPO high velocity startup model where GPs need to show liquidity to LPs within a defined time. Nor is it a good market to replace subprime mortgages and pay day lending in the debt markets. The Underbanked is a market where scale matters and it takes time to get to scale. Low prices (aka low spreads in financing terms) has been proven to work at scale. There is money at the base of the pyramid, but not if you treat it like a get rich scheme.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.


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