Moving Towards the Fintech Age

The Banking and Financial Services industry is witnessing a rapidly changing landscape, with the rise of fintech companies being the catalyst. Traditional banking products, services, and channels are losing relevance as customers, increasingly influenced by social media and technological advancements in other spheres. There is immense, and largely unfulfilled, demand for better customer experience and convergence in services. Mobile-internet based banking services are being rapidly adopted, resulting in bank queues shortening by the day. Service levels are no longer the differentiating factor. A customer experience that is efficient, convenient, personalized and streamlined at every touchpoint is what sets financial institutions apart. The changing regulatory environment and other macroeconomic indicators have also contributed to making this a never before opportunity for the rise of fintech start-ups and their disruptive digital banking solutions.

Digital banking has influenced world economy manifold. Alternative Lending is probably the greatest innovation by fintech companies if you were to ask millennials. The traditional banking system has extremely rigid norms and mandates a cut-off credit score to qualify for a loan of any kind. Young adults, the self-employed, and people who have moved cities/countries have little or no credit history if they have not taken a loan previously or do not have a credit card. Such people would have a zero FICO or CIBIL score. In emerging economies alone, individuals, as well as institutions, rely on cash nearly 90% of the time. This increases the cost of servicing customers for financial institutions while leaving little or no usable data to assess the creditworthiness of such businesses and individuals.

Fintech startups like the UK-based Aire; Kabbage and Lending Club in the US; Data signs, Capital Float, Rubique, Finomena, OptaCredit and the likes in India have recognized the need for democratizing the credit score. Consequently, they have leveraged the power of Big Data, machine learning and Artificial Intelligence (AI) to assess creditworthiness. App-based lending services have used these techniques to assess “intent to pay” rather than the conventional “ability to pay”. This has helped transform B2B and B2C lending for Micro, Small and Medium Enterprises (MSME) and individuals. Forbes estimates, the 1,000 fintech companies in the world have collectively raised US$105 billion in funding and are currently worth nearly US$870 billion. Investment in fintech firms has more than doubled between 2014 and 2015, with California and New York in the US, the UK and France being the global hubs. They are followed closely by India and China, primarily because of a large population and a fast-rising middle class. In India, experts predict, as people and jobs become more mobile, alternative lending – rather than staying on the fringes – will be the new ’normal’.

It wouldn’t be too far from the truth if one stated that Alternative Lending is the poster-boy of fintech industry. It is worth noting, however, that the young adults living in urban areas aren’t the only beneficiaries of digital banking. It has also started touching the lives of the rural population in emerging economies, which were, so far, unbanked. According to a McKinsey Global Institute study, 2 billion people globally do not have a bank account or access to credit., At least 200 million MSMEs in emerging economies have little or no access to credit, impeding their growth. This gap between demand for credit and its supply is estimated to be at US$2.2 trillion. For governments, the predominant use of cash leads to leakage (estimates peg it at one-third of cash payments), enabling corruption and affecting the efficiency of delivery of government aid and subsidy.

Access to a smartphone, connected to an ecosystem of thousands of mobile apps running securely over a cloud computing infrastructure, provides the much-needed basis for a suite of basic financial services. A digital wallet (linked to a traditional bank account) can be used for payments and remittances, wages and government subsidies, transacting at stores and paying utility bills and school fees. All this at a finger’s touch saves time, money and effort, that too at no risk and greater convenience. Fintech startups can partner with financial institutions to provide digital banking solutions, at costs 80% to 90% lower than the cost of building brick-and-mortar bank branches. Over time, based on the database created by transactions made through digital wallets, credit risk may be assessed for providing loans. As the use of digital payments and other digital products increases, the benefits to all users increase, creating network effects that can further accelerate adoption. According to studies, in Kenya, the use of M‑Pesa mobile money system grew from 0 to 40 percent in the first three years of its launch in 2007—and rose to 70 percent by 2015, much faster than traditional banking could ever hope to achieve.

Uniquely poised among the emerging economies is India with the third-largest smartphone market i.e. 314 million mobile web users as of 2017. Faced with the herculean task of delivering on its promise of financial inclusion and transparency, the Indian Government is relying on innovative digital solutions. Hundred million new mobile wallets have been created in India in the past one year by fintech start-ups that did not exist a decade ago. More than a billion citizens have been brought under the digital grid through India’s Unique Identification Program (UID) in five-and-a-half years, which is probably the fastest digital service growth in history. In a massive exercise, the government has also opened more than 200 million bank accounts linked to the UID to deliver government welfare funds including wages and pensions, aimed at reducing leakage.

The widespread use of digital finance can uplift the GDP of emerging economies by as much as 6%, or US$3.7 trillion, by 2025. Close to 1.6 billion unbanked people can gain access to formal financial services if the India example can be replicated by fintech start-ups in other countries. An additional US$2.1 trillion of loans can be provided to individuals and businesses. Governments can potentially save US$110 billion each year from leakage. Together, the resulting growth in aggregate demand could create 95 million new jobs.

The global economy witnessed a lackluster 2016. With uncertainties surrounding the policy stance of the new administrations in countries like US, UK, and France, 2017 is expected to be a year of moderate growth too. The huge opportunity created by fintech start-ups has the potential to jumpstart the global economy, creating a win-win situation for financial services businesses as well as emerging countries. The demand created by emerging markets, in turn, would be enough to fuel businesses worldwide. Traditional Banking and Financial Services firms are now beginning to take note of this. Investment Banking behemoth Goldman Sachs, for the first time in its 147-year history, has entered into the world of retail lending by building a technology infrastructure called Marcus by Goldman Sachs, a new online personal lending platform, where credit-worthy borrowers can apply for fixed rate, no fee personal loans up to US$ 30,000 for periods of two to six years.

While this is an unprecedented chance for the fintech start-up community to impact every life across the globe, there is also the risk of handling exponential amounts of sensitive personal and financial data pertaining to individuals and businesses. Especially when financial institutions and/or governments are involved, this may well turn out to be a double-edged sword. While competition may be tough, making margins wafer thin, investing in top-notch security infrastructure may eventually turn out to be a greater differentiator than innovativeness alone. Following established industry practices such as performing KYC, due diligence and AML checks along with fair interest rates will ensure healthy growth for this sector. Fintech startups must remain wary of going down the microfinance route, which started with great promise but faced issues due to lack of transparency, poor governance, coercive recovery practices and high lending rates. This opportunity can only turn into a remarkable success story if fintech startups stay close to their core competence: accessibility, ease of use, low cost and innovation.

Founder’s Huddle – Funding challenges

The world of startups is powered by creative ideas. The only other factor as compelling, is the capital. Almost 90% of startups fail in the initial stages or just do not grow beyond an idea for lack of funding. A business  must be fuelled by funding at various stages of growth along with reaching targeted milestones.

And when it comes to funding your ideas, one size does not fit all. Therefore, raising funds can be confusing, often overwhelming. You may take years to come up with an idea, make a prototype and perfect your pitch to investors at the end all it takes is nod in the right direction to make a business out of it.

           How much to raise and how to utilize the funds are the next most crucial questions an entrepreneur faces. For most start-ups, Seed funding and Series A are the most difficult phases since their pitch does not factor-in financial planning.

A Harvard Study attributes raising too much funds too soon as one of the Top 10 reasons why most startups fail. In addition to this, every business has its own cash-burn rate and entrepreneurs need to be wary of accelerating too fast and too soon. Judicious utilization of funds not only ensures you don’t run out of cash but also that your venture has robust fundamentals to be able to seek the next round of funding.

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Understand Startup Finance and Fund-Raising

Spark10’s Founders’ Huddle aims to address all such problems that founders face. Our cases driven program is  conceptualized and designed to help entrepreneurs solve their problems based on similar issues that other startups and businesses faced in the past.

FOUNDERS' HUDDLE is a program that brings some key experiences of past startups (alive or dead) in form of cases that you will analyze and discuss during the session. By the end of the session, our aim is to give you the tools and method to determine for yourself the right way to approach your problems in your startup.

To begin with, we have created a program to help you understand startup finance and funding.


Fund-Raising Hacks (2-day case-based workshop)

Here are the few things we cover during these two days:

* Determining the viability of your idea/startup (Should I really start or continue this business?)

* Determining your operation strategy using financial statements (What should I do next - expand or stabilize?)

* Determining how to value your idea or startup (How much is my company worth?)

* Deciding what terms and which investors are good for you

* Understanding the fundamentals of investor pitches (What numbers should I show?)

This Post Should Make You Wiser About Fund-Raising

A disclaimer before I begin. Actually a few of them.

  1. I am not a financial expert. While I’m fairly good at financial management and analysis, I cannot be considered an expert in the field.
  2. I am the type of person who tends to give more importance to things other than money – things such as principles, values, creativity, fame and such fairy tale-ish immaterials.

I might have said this in my tweets (@raviwarrier) many times before or in person when I speak to startups and entrepreneurs, “Forget the money. If you create value, money will come!”

When I was 16, I was asked by a girlfriend, “Do you want money or fame?”, and I replied without much thought, “Fame!”. I followed it up with, “If I create some value for the world, money will come!” That was 22 years ago and it still holds the same mantle in the principles’ shelf.

But there are a few things that need to be understood clearly. And at no point, am I ever saying, “Money is bad!” like the antagonists in Ayn Rand’s novels. (Being a capitalist, I can see no ill in making money based on the value you create!) And I can only hope to make you understand by using anecdotal examples.

Illustration 1: Mo’ money, Mo’ problems

Do you remember a time, perhaps a birthday or some festive moment, where the elders of your family, gave you money? In all those years, there must have been one where you received far more money than you expected. What did you do with the extra cash? If you were like most kids, you probably spent it on stuff that you can’t even remember today.

Extra cash does that to people. And since people run companies (including startups), extra cash affects them as well.

If you scan the business literature, you’ll see many case studies of executives of companies making, in retrospect, of course, the stupidest of decisions that either tanked their companies or brought it to the verge of collapse, just because they had huge cash reserves. These executives may have decades of experience in running business, but when they get extra cash, even they turn into imbeciles.

And if seasoned CEOs and board members can make mistakes, startup founders are never on safer grounds themselves.

One of the principles of sound business management is to always balance your cash reserves. Apart from a lot of financial and business reasons, the underlying (and perhaps unspoken), reason is to stop executives from making stupid mistakes.

Illustration 2: Value is (still) like the bullion in Fort Knox

In 1971, the world (led by the United States) left the old method of calculating exchange rate – based on the gold reserves and the ability of the International Monetary Fund to make available loans to bridge gaps. What we use today is the Bretton Woods System. There are multiple reasons why we moved away from the older method, but the primary reason was that the economies of the world were becoming much bigger (and thus more valuable) than the gold reserves that the countries could hold or had held.

We wouldn’t be living in a world that’s economically advanced if we had continued the old way, but there’s an argument to be made for the other side. While we are in an economically advanced world, we are also in an extremely fragile economic world. We are all living in a matryoshka of bubbles.

And the reason (with the last recession of 2008 to testify for it) is the over-valuation of things.

Startups are no different. In an article that I wrote a short while back – “The Indian Startup Bubble“, I questioned how a company that’s a few years old be valued in billions? Especially, when they don’t have the value to support the proverbial “exchange rate”?

It’s nice to have a billion dollar company, especially when you are a Gekko fan and the guy with certificates that say you own a piece of the pie. It’s also good when you want to have blinders and avoid reality checks. (I have been called cynical for this, but at least I’m not blind!)

We have rationalized for our wanton desires. And we have played the game. I don’t blame most them because that’s the only game they know. Heck, we are in the game ourselves! The only thing that saves me (or us) from getting washed away in the torrents is that we still think and want to think a bit like old-schoolers.

The value of the company: not the perspective one of the Gekkos, but the real one, is still based on some tangibles. You may be able to sell your company to a greater fool, but eventually, someone is going be left with only non-magical beans.

Illustration 3: Purple’s not going to make you rich!

I get a bunch of people (especially first/second-time entrepreneurs) who tell me in conversations about fund-raising, “We want W because these other companies got X, Y and Z respectively. If they got it, so can we.”

I used to tell this to people but eventually stopped. My last such conversation was two days back with one startup that we are considering for the next cohort. I used to tell people about luck and the factor it plays in a lot of things, including the success of your business and fund-raising. Another big factor is the set of things that you cannot see.

Most entrepreneurs, to use a crappy analogy (why don’t I?), think like this: “That guy’s baby was purple and she turned out to be a rich person. My baby’s also purple and so, she’s going to be rich too!”

A student of logic should instantly see the flaw in those statements! But somehow the same student of logic, cannot see the obvious flaw in that reasoning when they become entrepreneurs asked about their valuations.

I guess, one or both of these sentences are true: “Love is blind!” and “Love makes you stupid!”

Illustration 4: You sold it? You broke it!

One of the first things that we were told in our entrepreneurship class during our MBA was a statement that was drilled into us like a multiplication table is drilled into a seven-year-old. As soon as we started the first class on the first day of the module, our professor goes (something like this), “The day you’ve been invested in, is the day you’ve sold your company! Period!”

In cohort one, I had a conversation with a founder about this. And I told him, “it doesn’t matter if the investor holds 5% or 95% of your company, his stake is still heavier than yours.” Take for example, if the (only) investor with only 5% holding in your company suddenly decides to pack his bags and leave, demands that he paid what’s owed to him. Of course, this is hypothetical and there are agreements to stop things like this from happening, but imagine if this was your story. He wants his money… right now!

So what he’s holding 5 percent? He can still rock and sink your ship!

I knew someone long time back who were rented a place to stay. They stayed in the lovely apartment for years and after a long time, the owners came back to the country and asked this family to leave. This family demanded a huge sum to vacate the place. The owners had no option but to pay them. (Of course, this is a really simplified version of the story). The laws are in place. The agreements were in place. Morals and ethics are well understood, but the owners couldn’t do sh*t except pay the family to leave. I’m sure you got the gist of this story!

Illustration 5: Size does not matter!

Another thing that I learned in that MBA program’s entrepreneurship classes, was the simplicity of logic behind something that seems so obvious once you read/hear it.

“49% of millions is far better than 100% of $0”

See? So frigging logical, right? And yet, entrepreneurs get anal about giving away equity.

Of course, giving away equity because you can’t afford to pay salaries or for something you can’t afford is stupid, but giving away equity to someone who can help you make the pie or make it bigger is a no-brainer.

Let me use another analogy (be warned, it may also be crappy!):

Let’s say, for some reason, one of your hands are in a cast. You feel like eating a cake and hence decide to bake one. But since you can’t use one of your hands, whipping and kneading are not possible. And your friend comes along and says, “I can help you whip the eggs and knead the dough, but I want a slice of the cake!” What would you do? If you are rational (as the economist would have you believe), you’d say, “Sure buddy!” “A big slice?”, he goes and you respond, “Obviously!”

Now, why is it that it makes sense in this story, but not in real life when your startup is concerned. (that’s why the quip on economists!)

It’s Over (Phew!)

All these are things that I observe almost every other day in my interactions with startups, founders, entrepreneurs (though I still don’t know why I keep using all these words in unison). My intention with this post was to hopefully, help you understand, in the simplest of ways, the fallacies that surround fund-raising notions, ideas and activities.

Don’t say you weren’t told so!

Got comments? Want to rant? do that below! Or just follow me on Twitter (@raviwarrier)



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