For Alphabet’s CapitalG, offline lending is back in vogue

It’s little surprise that CapitalG, the venture capital fund of search giant Google’s parent company Alphabet Inc, makes tech bets. The late-stage growth VC’s first investment in India was in Freshworks in 2015, a company born in the cloud. Then it invested in Practo, an online healthcare platform, CommonFloor, a real estate platform. And then car portal CarDekho. Companies that believed in an online model for the lifecycle of their product or service.

First Investment

And then it made a puzzling call with its first fintech investment in 2018 in India.

It was in a little-known lending company—Aye Finance. Aye is a non-banking financial company that believes in the age-old practice of setting up brick and mortar branches. Aye takes 14 days to disburse loans and does not rely on tech for acquiring users. All this, even as its fintech lending brethren reach out to users, underwrite, disburse, and collect loans online.

For a cutting-edge digital VC with a focus on tech-first businesses—all 34 of its investments globally are tech or tech-enabled—the Aye investment is as counter-intuitive as it gets.

This is the fintech world’s equivalent of e-commerce giant Amazon buying grocery retailer Whole Foods. First, it puzzled people. But it was soon followed by a light bulb moment for the rest of the industry. The idea of on an online retailer buying an offline retailer suddenly seemed like the most natural thing to happen.

Digital Lending

Fintech lending in India has thus far been mostly about digital lending. They are expected to disburse about $2 billion this year, a mere drop in the credit ocean. But companies come up with new business models as if they were creating a Subway sandwich.

Pick the base—a target segment, then choose the loan ticket size, the next layer is the tenure of loans and type of lending product like a term loan, merchant cash advance, payday loans and the like, then choose whether you like your loans secured or unsecured. The sheer variety of what you can build using these ingredients is endless. And given the insatiable hunger for credit—most pronounced among micro-enterprises—you also have the perfect coming together of product and market.

These conditions have seen the mushrooming of over 300 fintechs, which have raised $1 billion in the last five years, according to Tracxn, a startup database monitor. But not all of these lending companies are healthy. Many fintech lenders have built online models that focus on acquiring users digitally, as well as disbursing and collecting loans digitally. This tech-led model has surged in popularity thanks to its scope for enormous scale and pace of growth.

But a consensus is slowly forming that tech-driven pace of growth is overrated. Instead, the quality of credit is the holy grail in fintech lending. Zouk Loans, for instance, which lent to SMEs, shut shop in 2016. Zouk’s CEO Ash Narain lamented to Tech Circle that the credit ecosystem in India is mostly offline, and isn’t given to automation in its current form.

Which brings us back to CapitalG

Though they have been in India since 2014, CapitalG stayed away from the fintech space until three years later. Finally, in 2017, even as the dust of demonetization—when 86% of India’s cash was banned by the government in November 2016—was settling, CapitalG turned its attention to the fintech sector.

It was a good time to survey the scene, as the VC firm had 9-12 months of data on lending firms’ portfolios post-demonetization. According to analysts, bad loans for some financial institutions reached highs of 30% among the SME and MSME sector. Lenders big and small, offline and online saw stress in some sectors like textile manufacturing, dairy farming, all of which were affected by the non-availability of cash.

CapitalG ran the rule over at least 30 lending fintechs and was able to assess how well companies withstood the ravages of demonetization. Finally, after nine months of searching, it led a $21.5 million series-C round and cut a cheque of about $10 million to four-year-old Aye Finance.

“We looked at Aye post-demonetization. We could see how their business model could withstand shocks, and the return on equity they could get in a difficult period. That helped us gain confidence in their business model,” said Kaushik Anand, India head of CapitalG.


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