By Sashank Rishyasringa & Gaurav Hinduja
“Challenges are what make life interesting and overcoming them is what makes life meaningful.” — Joshua J. Marine
This quote perfectly captures our journey at Capital Float over the past year, which has been a defining one for us. After five consecutive years of 100%+ YoY growth, we came up bang against the perfect storm of the IL&FS-led NBFC crisis and Aadhaar ruling at the close of 2018. Before, people would often ask us how we, and fintech lending at scale, would weather a financial downcycle. We have lived through the answer to that question over this past year. It has tested, challenged, and validated us in different ways. Looking back, we missed several things and got some right. Most importantly, we learnt a lot about hunkering down in a tough environment and emerging from it, bruised but (a little) wiser for the experience.
A lot has been said and written about Capital Float over the last year, but what we honestly find most valuable is to share our learnings and takeaways from this period. For our fellow entrepreneurs, there may be snippets here which may help you, as we have benefited from others. For our critics and well-wishers, who are both super important to our progress, it’s a state of the union, as these takeaways form the core of the next phase of growth at Capital Float.
#1 Ditch FOMO for focus.
As a digital lender, we always prided ourselves on cracking new markets: finding under-served segments, designing credit products, underwriting new data sources. But over time, as our product variants, partnerships, and experiments kept expanding, it put a strain on our ability to prioritize and focus. As the NBFC crisis unfolded, we were forced to decide where and how to allocate scarce liquidity. At first, we were too attached and that mired the decision-making process. But we came to realize that we couldn’t (and shouldn’t) do everything. Eventually, we pruned ten variants down to four business lines with the highest risk-adjusted returns. In SME: 1) term loans to smaller businesses, 2) advances to merchants accepting digital payments. In Consumer: 3) checkout financing for online shoppers, 4) personal finance and lines of credit via Walnut, our mobile app.
Even after this, one of our board members cautioned us that sustained focus required being “obsessive-compulsive about decluttering from the rest.” Candidly, we are a work-in-progress on this front. But “saying no” (usually to ourselves) has had early results. For example, it’s helped us open up bandwidth in credit, tech, and collections teams to better focus on risk. It’s allowed us to distill the business down to five metrics that we obsessively track against weekly targets. And it’s enabled us to achieve tricky balancing acts at a crucial time, like increasing yields by 300 bps while reducing loss rates in a slowing economy.
#2 Do the hard stuff. (And don’t reinvent the wheel.)
After IL&FS, liquidity dried up almost overnight. At first, we did everything we could to maintain growth. Because as a fintech company, how could we not grow? As it turns out, we needed to do the opposite — slow down, conserve cash, and wait out the storm. It was hard, as originations and book size had been our vanity metrics. But we eventually had to slow down growth, and in some months we even contracted. And… nobody died.
In retrospect, it’s what we should have done all along as a conscious strategy, like most seasoned NBFCs did. It gave us the space to execute our product focus and improve unit economics. It allowed us to position ourselves better for liquidity markets. We steadily built up a ₹300 crore cash buffer, increased our net worth to ₹520 crore, and brought leverage down to 1.8x, with a positive ALM.
Pre-2019, our path to profitability had revolved around growth. But in the midst of an economic slowdown, we had to accept that our cost base needed to be leaner. Cost-cutting is generally a taboo subject, particularly in the world of tech. But we were fortunate to know more experienced founders who openly shared their learnings. Through a combination of business focus, right-sizing, infra optimization and frugality, we brought our fixed cost base down by 30%. It was incredibly difficult at times, but we were deeply grateful for the understanding shown by many for the tough decisions we had to make. It now sets us on a clear path to profitability over the next 6–9 months, independent of how long the macro recovery may take.
#3 Know who to lean on when times get tough.
In the first half of 2019, we got bogged down in a long, protracted engagement with a prospective investor, which fizzled in the eleventh hour. The process had dragged on for six months, during a crucial period for the business and the industry. As founders, it was a lot to internalize at once, and it took us time to reach out to our supporters. But when we did, they became the key to our bouncing back. We closed an equity round with our existing investors soon after. More than the money, the level of empathy and support that we received from our board members made us realize that they were true long-term partners.
On the debt side, we raised ₹800 crores in 2019 almost entirely from banks and family offices that had backed us in the past. Our co-lending model saw a steep jump in growth, with existing and new partners increasing their share from 20% to 50% of SME originations. Here again, many of our debt partners gave us invaluable advice in terms of products and partnerships that we needed to focus on, and were happy to share their experiences and learning's from previous downturns.
During such times, you realise that there is a special kind of team member. They are fiercely committed, back the vision, and have the courage to stand by your side through thick and thin. We are so privileged that Capital Float is filled with such individuals, and they were the single biggest source of inspiration for us to keep ploughing ahead during this time. We also realized that if we were going to ask more of them, we needed to lift our own game. This has meant creating more transparency around our challenges and goals, for example through regular discussions with teams across our cities, and a monthly email to the entire organization sharing progress — good, bad and ugly — on all key metrics.
#4 Over-communicate. (Else others fill in the blanks.)
One of the fascinating side-shows of 2019 was how much we discovered about our own company through social media. For example, within a span of three months we read, with surprise, that our NPAs were in high double digits, we had lost our shirts in the ed-tech sector, had shut down our consumer business, and split up as founders. The truth couldn’t have been more different: our default rates had remained stodgily at 4–5%, we had originated ₹730 crores in ed-tech at a yield of 22% and had lifetime defaults of ₹33 crores (i.e. 5%), Consumer remains at 50% of monthly volumes, and we, as co-founders, continue to see more of each other than our own kids.
In the absence of enough communication from us, gossip and rumour mills had become overactive during a time of general uncertainty. As a company, our approach was to tune out this kind of noise, communicate directly with our partners and focus on business.
We decided with this post to open a broader dialogue, for two reasons. First, we found that these external narratives were an unwanted distraction for our team and partners, particularly as they didn’t reflect reality. Second, we realized that many people in the ecosystem genuinely wanted to know more about our business, out of long-term interest for the sector. Hence we see value in openly sharing what we learned during this cycle, and how it helped us grow as an organization.
#5 Play the long game.
In the past six years, we originated ₹8,500 crores in loans to over half a million customers. Our current loan book stands at ₹1,300 crores. Our gross NPAs are at 5.9%, net NPAs at 0.5%, and Cohort (i.e. static pool) Loss Rates are now at 4.2%. Many customer segments we entered were uncharted territory for traditional finance. Some of our experiments failed. Those that worked now form the core of our long term strategy.
This is our single biggest learning so far — that in lending, you cannot rush time. Data will make you smarter, tech will make you faster, but only time will reveal the mistakes that become inputs for the next cycle of growth. In the frenetic world of tech and funding rounds, waiting is hard work. But we know that we are on to something, and are excited to keep getting better at lending by doing more of it.
It’s a long game, but with a daily payoff. More than banks or fintechs, SMEs and consumers have suffered most in this downcycle. We are privileged to keep lending to them. In the past year, we served a retailer who grew sales over Diwali, an Amazon EMI customer who bought their first phone, and a Walnut user who covered a medical emergency through their 24x7 credit line. From them, we take our inspiration to press on.
Thanks for reading… and until next time.