We live in a world where we often have to wonder what the balance between promise and performance is. It is especially critical to see the distinction in a space where Billions of dollars is being pumped into.
“The promise to provide lending solutions brings in more capital at higher valuations than lending itself”
– Ganesh Rangeswamy, Quona Capital
During my vacation in India in the past three weeks, I had a chat about the Indian Venture capital landscape to a bunch of VCs. I had an opportunity to talk to Ganesh Rangeswamy from Quona capital – one of the top Fintech VCs in Bangalore. He succinctly indicated that promise seems to bring more capital to firms than performance.
We have seen several late stage VC investments over the past 12 months. Some of them backed by late stage investors like Softbank, have had an extended run into an IPO adventure. However, in the last couple of weeks, we have had headlines about Fintech firms raising capital at near Billion valuations.
Tala, a California based company, have been around since 2013. They provide micro-lending services to the unbanked based on cutting edge data science capabilities. They recently announced their successful fund raising of $110 Million from several institutional investors namely, GGV Capital, IVP, Revolution Growth, Lowercase Capital, Data Collective VC, ThomVest Ventures and PayPal Ventures.
Some key statistics about Tala are as follows.
- Tala have a mobile application that uses over 10,000 data points to provide credit decisions to its borrowers.
- The average amount lent per customer is $70 and the range of lending amounts is from $10-$500.
- The average repayment term is 30 days with an interest of 11-15% charged.
- They have 4 Million users and have lent over $1 Billion
- They use data from users’ mobile such as texts, and transactions information to understand ability to repay.
- They do a behaviour assessment of the users based on the way they use their mobile.
- About 85% of the lending requests are serviced in less than 10 minutes.
- Repayment rate so far is about 92%, and the main customers are Small businesses that use the loans for operational capital.
In terms of their global footprint, they have successfully launched in three continents. They are in Kenya, Philippines, Mexico and in the US. The fund raise is to help them expand into the Indian market.
It is one thing to have the ability to credit score the unbanked, but it is a different ability to ensure that the credit models would withstand stress scenarios. In many markets, the regulators do not mandate the required amount of due diligence on the lenders’ credit models.
When we invested in a P2P lending marketplace WeLendUs last year, we did a thorough check on stress testing of their credit models. WeLendUs had built a proprietary credit engine, and were able to demonstrate the ability to deal with scenarios where there is a liquidity crunch.
Kenya is Tala’s biggest market, and they have managed to lend over $750 Million to its consumer base there. But over the past year or so, there have been concerns raised over micro lending in Sub Saharan Africa.
The region has about 50% of the worlds mobile money accounts, that represent about $27 Billion worth of money lent. However, there are concerns that this market may be heating up, and consumers getting into a vicious credit cycle.
As per Amrik Heyer – the Head of Research at Kenya’s FSD (Financial Sector Deepening), over two thirds of Kenya’s borrowing consumer base are under severe stress. With over three fourth’s of Tala’s exposure in this market, are they getting too close to the cliff?
I did ask Ganesh (Quona Capital), if he thought we would see a correction in the late stage VC market. He felt, there were some corrections in the capital markets, which may or may not trickle down into private markets – VCs and PEs. But he didn’t anticipate any major corrections, and felt these big cheques may be the new normal.
I do not know what the future holds, but it still feels like we are building a house of cards with many of these firms. Without careful regulatory controls, and ongoing oversight, it may all collapse and lead to prolonged global economic slow down. On the flipside, too much regulations often hurts innovation too.
The market cap of these firms may not be big enough to hurt the globe yet, but a few collapses could hurt sentiments and may just be a trigger. Bringing financial inclusion to the unbanked is a great vision, however, it still needs to be suitably governed for sustained inclusion.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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