How Drip Capital Went from Zero to $1B

Software is coming to revolutionize global trade finance

Drip Capital started as two people with an idea in 2015. Today, they have over 138 employees, have raised more than $45M, and will do more than $1 billion in trade volume since inception by the end of 2020. They have over 2,000 importers and exporters on the platform and have built an enduring fintech startup. They’re on track to be as impactful as the World Bank in terms of helping businesses worldwide get access to credit. They had to search the space to find one that could grow quickly with high LTV and low CAC. But now that they are here, they’re ready to scale their underwriting models to every cross border trading route in the world.

What is Drip Capital?

Garry: Thank you so much for hanging out with me today, it’s always a real pleasure to sit down with founders that we’ve worked with for (laughs) a really long time. So tell us about what is Drip, and how did you get started?

Neil: Drip is a cross border trade finance company. We finance trade between exporters and importers in different countries. We focus on small and midsize businesses in emerging markets that typically don’t have access to working capital. I think back across the journey and, you know, Garry you were obviously our group partner at Y Combinator. I think that one of the most memorable moments you know, kind of early on was when we got the call from you at YC telling us that we’d gotten in. That was very special for us because as first time entrepreneurs, both my co-founder Pushkar and I. It was really kind of the first time that someone had decided to back us, and subsequently we ended up raising almost $50 million from Wing VC and Accel and Sequoia. And that was really important for us to build our company, that first bet on us was one that was really memorable.

Garry: It’s always really really fun to actually be the first money. I remember you guys came with a really simple idea that really resonated with me, that really just fit what we were seeing broadly in the marketplace, which is, there’s so much money all seeking yield. The classic ways to get that yield were still using big books, tables and simple actuarial tables, or things that you had to do maybe 20 or 50 years ago before the advent of modern computing. You guys had the background coming from finance, seeing that sort of firsthand.

How did Drip get started?

Garry: Can you walk me through like what actually drove the two of you to work together? And how did you decide on this particular idea? Because the interesting and unusual thing actually is, you’ve been working on basically the same idea this whole time, and then you found trade finance as the go-to-market later.

Neil: Yes, so just to think back across our journey, my background was both on the CS side and also on the finance side. So I started off after Stanford being an engineer, software engineer at BlackRock, actually building analytics for investing. And I went on to invest on their behalf as a fixed income investor. And one of the biggest challenges we had, and this was back as over 10 years ago, was just getting access to some sort of yield. My co-founder Pushkar and I met during our MBA at Wharton and we sort of went about getting jobs after that. And we sort of kept collaborating around different ideas. One of the challenges that family had growing up, actually I grew up in Hong Kong was that my father in the 80s and 90s, he set up an export business or he manufactured leather jackets and other apparel in China, and sold them to the US, to European retailers. And one of the big challenges was getting enough capital, working capital to grow.

And that’s how you could even find out that this was a problem, right?

Yeah, and it’s been a problem. I mean, for 30 years, as far as I remember, and it still is very much a problem. I mean, things haven’t changed a lot. What we did was we said, well, let’s start looking at customers in the US, and this was the first iteration of the idea. And we said, well, if you’re a small business and you get that first big break from a large retailer, like a Whole Foods or a Walmart or a Target, you’ve got first big order. Well, then you need the money to your raw material, to produce the goods, to ship them and then wait to get paid. It was the first time, so we had read and were told that it’s really important to talk to a lot of prospective customers, ideally in person and, you know, for the B to B companies there’s of course no storefront. And so we found them at trade shows. and so we walked kind of booth by booth to some of these large cross, a lot of these trade shows like the textile trade show, Magic in Vegas and the food, Fancy Food Show in San Francisco. I think we met about 3000 businesses in-person, and we even got kicked out of some of the trade shows, ’cause we have to pretend we were buyers when we were actually soliciting, some awkwardness there.

You just got to hustle sometimes, you know, when you’re trying to get your first customers you might get thrown out of a few trade shows (laughs) I guess, that’s actually a normal experience. There’s nothing quite like meeting your potential customers very, very directly, no one said it was going to be easy, I guess.

We had to really the smallest businesses at the trade shows because it was important, we could talk to the decision maker. So often one person or two person business, like those are the ones that we could get ahold of. Some people got frustrated and they would tell the folks that were organizing the show, and then things got a little awkward. After all that, interestingly, we only signed up five really tiny businesses, small customers, people talk about this today in 2020 but even back in 2015, when we were doing this, this was just way too much money and way too much liquidity, being thrown at businesses, and then there was way too much competition.

And Peter Thiel talks about this a lot. Competition is great for the consumer, but it’s terrible for the business owner.

The interesting thing though is we had at an insight through this first phase, and that was that most of these businesses needed the money to pay their overseas suppliers, their overseas exporters, either to procure them raw material, or because all of their manufacturing was happening overseas and they would just get the finished goods. And so that was a very important insight, because then we didn’t pivot the concept. We pivoted the go to market really, and focused on India, US trade corridor, that’s Indian exporters selling to US buyers or US importers, so my co founder moved back to India where his parents live and started to target some of these exporters, Indian exporters. And interestingly, kind of the first interest we got and the next porters we could serve were suppliers of Indian grocery stores based in the US, that was a pretty narrow niche, I mean, you’re talking about 30 or $40 million of annual trade, but it worked well for us because we could talk to suppliers and the buyers, many of the grocery stores were local here in the Bay Area, and the invoices weren’t too big. They were pretty small, so we had enough money to finance, to finance the trade.

Lending is changing fundamentally: Software eating money

That’s kind of the key thing about lending businesses period, is avoiding fraud means just being able to do your diligence, being able to match what’s going what people say is going on to what is actually going on. And I think that was a really interesting insight, really started off with, that there’s all this data that you can now track, that you can now programmatically have access to, like that used to be totally unstructured, that now you have access to in a purely structured fashion that you can pull from APIs or government reports or accounting statements that were unstructured and now structured. Like they used to be literally paper and pencil or fax, and now they are to a T, properly digitized and in a schema that is actually accessible to software. How could lending not change literally?

No, it was quite an aha moment for us, because what we learned as we were going through this process, and we started to figure out, as you said, like, how do you manage risk? I mean that is sort of priority number one for lending model, and if you can figure out how to manage risk and do it at scale, then the market is massive. We found interestingly with cross border trade, government customs wanted to track what was going out of the country at a very granular level. Central governments wanted to know what money was coming into the country, because they wanted to attract money laundering, digital footprint that we discovered that had really come up over the last, over the prior three to four years, really from 2011 to 2015, where all of this data had been digitized. So that was sort of a huge, aha moment for us when we felt that we were onto something really interesting. And then the second piece on the risk management, we thought, well, we’re sending money to these emerging markets, India, Mexico, and now other countries as well. What if we can also intermediate the payment flow and have the importer or the buyer in the US or the UK and the developed market pay us directly? We can also, we know we’re subject to the US credit or the European credit and the European or the US legal system, and really get the best of both worlds, provide money where it’s needed into the emerging market but get paid back by the developed market buyer. And so that was kind of like the second aha moment we had. And that’s when we thought that we were really onto something.

It’s a really interesting moment to realize, oh, most of the world’s trade still basically happens on like net 30 or net 60 terms. And what that is is actually businesses basically giving credit to other businesses on balance sheet. Why is that still happening when interest rates in real terms when you borrow it from the government is basically nothing or in some parts of Europe negative?

That’s right, I mean we have $18 trillion of trade that happens every year across border trade. I mean, it’s all, most of that, the vast majority of that is financed on the balance sheet of either the buyer or the supplier.

And these medium sized businesses actually have some decent scale, but and the banks should lend to them, but those banks are mainly focused on compliance perhaps or, and definitely not innovation. So (laughs) they just don’t do it, and as a result, these businesses don’t have access to capital. And that actually is a real constraint on the global economy, and certainly for manufacturers, like, I love that not only do you give them credit but it’s actually working capital that is non-dilutive to them that lets them grow their businesses significantly, which is this crazy win-win. Like my favorite thing about investing is finding founders like you who go out and find these places where no one else is operating and then you just unlock, it’s like win-win. This is like net win, everyone gets something from, you have investors who want yield, and this is very, very pure, low risk yield. And then on the flip side, like these businesses are actually what, doubling tripling their businesses sometimes because you exist

Interesting point, so around the bank side, when we looked just at the Indian market, it exports $300 billion a year and half of that, interestingly, half of that, 150 billion comes from SMBs, which is surprising, it surprised us. Similar trend across many emerging markets, but the banks, so 95% of bank of the bank volume or the bank loan books in India go to large companies, only 5% go to SMBs. This divide, where it’s just not a level playing field, small and midsize customers. And the reason is, these banks are used to focusing on large customers, they’re old school. I mean, it took us two months to open a bank account both in India, just a bank, a checking account in India, and in Mexico, you know, these banks have to travel to the business, they have to look at their ledger, they have to assess the value of their property and their land. We realized that we had to build a highly, like automated lending operation. We also realized that there was an opportunity and also a challenge to build sort of the first cross border underwriting model for small SMB trade. And so we sort of set out in 2016, build that first dataset by lending. And the mission we set out on was really that, you know, we want it to be able to raise capital in places where it is abundant in the US and in the Europe where there’s a lot of liquidity, and really funneled that capital to really strong businesses in emerging markets where capital is the largest constraint to their growth.

It sounds like it’s going really, really well. Like from starting out years ago, now it’s on track for a billion dollars this year, is that right?

Yeah, that’s right. It’s from just a about three and a half years ago when we started off financing that at first invoice. We financed a hundred million dollars to date, we’ll be at a billion dollars by the end of the year. We’ve worked with over 2000 exporters and importers, 50 different trade routes, seller, buyer country combinations, 30 product categories. We sell in 10 different languages. We have offices now in India, Palo Alto and in Mexico City as well.

It’s possible for a small startup to have a big impact just by applying first principles: Using data big banks can’t or won’t

I mean, this is the thing that we saw at Y Combinator all of the time, right? It’s the incumbents should be doing this, but the reality is, the incumbents actually can’t hire product and engineering people like you and the people on your team.

Perhaps I would say that, when we think our of ourselves as like a full stack lender, there are sales, marketing and onboarding, and that has to happen in the local geography in the local language, then you need to build the automated risk management piece. that’s building out that model and it takes years to build it out. And to have data that you have to build out a track record where you feel that you can with statistical significance actually manage trade, manage the risk around trade. And then the third piece is the capital syndication where we automatically syndicated those receivables to about 60 different investors. And so there’s these three pieces that are built across tutographies or multiple geographies with automation, and it’s just, I think it was important for us to really kind of build this from the ground up.

I think it’s really interesting to see how India was sort of the first market. And then now all of the lessons that you learned building that successful operation and showing low loss rate and yield, it’s actually totally transferable to another geography and potentially every possible geography in the world.

Yeah, this was an interesting insight that we had. I mean, as we built the risk model, now we’ve had about a half a billion dollars of repayments, you know, losses have remained in the low basis points. And I think we’ve been tested, I think we’ve seen during COVID, probably the biggest most impactful recession to small businesses in the last hundred years. And our performance has held up, it really hasn’t changed much. And so when we think about expansion and now that we have sort of this tried and tried risk model. Another thing that we learned through this process and that is that, really trade, cross border trade, whether you are an Indian selling chairs to the UK or you’re a Mexican export or selling to the US. The way trade works, the processes, the documentation, the communication is very very standardized. And so what we did when we expanded to our second country, Mexico, is we really built sort of a very extended extensible model where we’re add new regions with new languages without minimal changes to our platform. And so now really the plan is really to go global, to scale across many more countries and country combinations across Asia and Latin America, as well as going much deeper into the countries that we’re already in.

Do you ever sit there and look at what you’re doing, and you’re just like, wow! This is, in the end, Drip Capital may well have way more of an impact than a lot of the banking, most famous banks in the world, like may not have as much of an impact for global trade as what you end up doing, which is kind of massively crazy to think about.

Yeah, that’d be really cool. I mean, that is our hope and there’s lot of room for us to grow, but I think we have sort of the foundation now in place.

Was it surprising, along the way over the years, done a lot of office hours, and I’ve just been always amazed at your story because at every turn, it always felt like there was sort of a surprise. It’s like, it’s kind of surprising, but we found out that banks don’t actually use this data, and it’s just been sitting there, or, oh we found out that the kind of financing in the United States that people take for granted for small and medium sized businesses, just totally unavailable for actually billions of dollars worth of transactions just lying in plain sight, you just had to sort of connect the dots. That’s been one of the more interesting things from all the years of working with you.

What advice does Neil have for founders just starting out? Progress is incremental

And some of the advice I try to give first time entrepreneurs is that progress is incremental, and you sort of don’t know what’s next around the corner. And as a result, you really just can’t have everything mapped out on day one, take one step at a time, it’s like a kid building a house with blocks. I mean, you have to put one block in place at a time and build a foundation and slowly built from there. And, you know, for us, it was very incremental. I mean, first there was the idea, then the pivot on the go to market, based on the insight we had, when he got a few early customers, we actually tried to raise debt funding and debt investors didn’t want to invest in us because we didn’t have a track record and we didn’t have any money at all, and so that’s when we pivoted and raised equity funding.

Everything is very incremental. So after that we raised the initial debt, and then as we got beyond, you know, 30 to 40 customers, and I didn’t talk about the scaling part, we kind of skipped over it, But then we had to build very robust systems and processes to scale the business, because if we didn’t do that at the right time, we could lose our share. And we had to show investors that we’d put compliance and certain risk mitigation and AML and all of these other things earlier in our journey than, you know, typically a lot of startups would have in place. And so it was really sort of this incremental step by step, sometimes taking a couple of steps back and forward, and I think the one thing that I realized is that for us it was really about focusing on that one thing, that next step that could move our business forward, and then focusing on how we could figure out the blockers that were there. The bottlenecks figured that out then it was kind of onto the next step and the next, and figuring out how we could get around the next bottleneck. And so

Yep, on to the next.

It’s been very incremental over these years.

Yeah, it’s always something. That’s the, have you had any epiphanies about sort of each year of the journey? It does feel like the second you get good at something you have to hand it off and then figure out the next thing that might kill you.

Yeah. That that’s right. It sort of works like that. And once you figure that out, you want to pass it on to someone who can take that responsibility on and take it out to the next level and then work on the next bottleneck. That’s right. And so it started off with product market fit, now it’s organization building, and it evolves.

Building the org is always the toughest challenge. There’s always sort of that the first step is catching lightning in a bottle, which you actually caught, I think the moment you discovered this unmet need in India, and then since then it’s, the only thing harder than catching lightening in a bottle from my experience is holding onto it. You’ve been riding the lightning for a good number of years. The crazy thing is in terms of the need, it does feel nearly limitless. I mean, you’re just talking about literally the limit is how much global trade happens, period.

That’s right.

This has been really awesome. In terms of things you wish you knew, progress is definitely incremental and a lot more incremental than I think most founders are willing to admit or realize, really. What you want is an an epiphany moment where suddenly everything happens. The actual reality is the 10 year overnight success of getting punched in the face every single day for a while, even continuously. And it’s just different things. Once you overcome something, there’s another thing, there’s another boss around the corner.

No, that’s right.

On taking startup advice

I think when we read the media, it looks like a success in a snapshot, and there’s a long time before that and a lot of things that happen and are happening. It is a journey. I think the other piece of advice that I felt it would have been good if someone had told me early on was really in the beginning, figuring out whose advice to not take to heart. And that’s really hard.

There’s so much advice. in the beginning because my network was folks that I had worked with in large companies and VCs I was pitching. And folks at large companies would say, “Hey, well, one of you two needs to know how to do digital marketing, ’cause like, isn’t that how you’re going to acquire customers? And it was sort of like, “Well, later, but we can learn the basics of that.” And I remember a VC said, well, you guys need a data scientist on your team. You know, we were thinking, well, there’s no data right now to analyze. And so sometimes really taking advice from the right folks and not the wrong folks is I think important as well.

That makes sense. And equals one over extrapolated advice is often wrong in the end. I actually think like from my time at Y Combinator, it was always super interesting to see, like when I was an alum, when I was going through the program and doing office hours with Paul Graham, I think that was a very interesting experience because most people give advice that is sort of near a means. People tend not to give terrible advice, but they also tend not to give advice that is particularly two standard deviations helpful, more helpful than other people. I don’t know, I’ll be embarrassed if PG ever watches this. But PG is very interesting because he will give things that are a little bit “never do that.” then he will also give advice that is “blow your mind, how useful and valuable it is.” And the interesting thing was we would see, and I remember this is 2008, so YC was still very new, we would see teams that had total hero worship of Paul Graham and just do everything that he said, and those companies would always fail. The companies that did well could actually have those discussions, like absorb what was being said, and then all the awesome stuff, they would do that, and the things that were like, “Hmm, maybe that would blow us up”, they just wouldn’t do it at all. There is a discernment. What’s funny is if you’re going to take advice, it’s probably better to get people who are going to give you the extreme advice that could possibly really change your business, also have the discernment of a founder to be able to make up your own mind, and then that way you get all of the benefits and none of the downsides.

Yeah, I think having the conviction to go with one thing and not another is also challenging in the beginning, to have that conviction. And I think it starts to come, that self assurance with time.

It’s been really cool to see you get product market fit and continue to take down one of the world’s largest markets, really, I mean, literally the world market.

Drip Capital is hiring, and you can get yield on your savings, too

I guess in terms of what you’re looking for, like, you’re obviously scaling your team and hiring, where can people find you and what kind of people are you looking for right now?

I think really, sort of, for us it’s three sets of people. I think one is on the customer side, just continuing to gauge with lots and lots of small businesses, partners, larger enterprise partners that work with lots of small businesses. We see a huge opportunity to provide our product through brands and enterprises to small businesses as a channel. The second thing aside from hiring I think is on the debt side, I think what we have developed now is a really attractive, short term liquidity product. We can provide yields of 5, 6, 7, 8% for three months through six month paper. And when you look across the board at banks that are providing basically 0%, to money market funds that are 30 to 50 basis points, and so forth, I think there are very few assets that can provide investors with that sort of yield, and I think the best way to find us is on our…

So they can go to dripcapital.com and do that?

Yes.

As an investor, actually. If you’re looking for yield, it’s actually a really good place as well than, yeah, it’s basically 0% in your savings account right now, and people are dumping it in the overheated stock market, whereas that is one of the most fascinating ways that I think people are probably underexposed to, especially younger people.

I think so, and when you see the volatility of the stock market, it can unnerve people, and I think getting sort of this high yield alternative to a bank checking account is, we’ve seen a lot of interest in the product, particularly over the last few months since COVID has hit.

That’s awesome. Neil, thank you so much for hanging out, man. I always enjoy hanging with you and I feel like I learned so much about how the world actually, the global financial markets end up working. You’re on the ground meeting the people, helping their businesses grow through access to capital, And that’s really, really powerful.

Thanks, Garry. Yeah, thanks for backing us and investing in us back five or six, five years ago when we were just two people. We’re really excited to keep moving forward.

Hey man, just remember me when you ring the bell and when you go IPO, okay. That’s all I ask, a small ask.

We’ll try.

Check out dripcapital.com, great place to put money and get a really amazing yield, and then also an amazing place to work, if you’re a software engineer, designer, product person, I mean, they’re really making something that people really want.