Conversation with PPDai: Lightspeed Knowledge Series:
As part of our Lightspeed Knowledge Series, we hosted Jack Gu, Co-Founder and Simon Ho, CFO of PPDai (a Lightspeed portfolio company), and 100 founders, investors and senior executives from the Fintech sector. We routinely leverage Lightspeed’s network of portfolio companies in the United States, China, Israel and India to assist and provide guidance to our portfolio companies as well as to expose Lightspeed global portfolio founders, such as Bipul Sinha of Rubrik, Dheeraj Pandey of Nutanix and Nicolas Cary of Blockchain.com, to the founder community in India.
PPDai CFO Simon Ho introducing PPDai to the audience at WeWork Bangalore
PPDai is the #1 online consumer lending marketplace in China connecting borrowers to investors. The platform has over 70 million registered users and 10 million borrowers having originated about $10B of loans in the past year (Q2’17-Q1’18) and recently went public on the NYSE. All of this on having raised less than $70M in total capital making it the most capital efficient fintech company to go public in recent times.
Below are the highlights from my conversation with Jack and Simon:
Inspiration behind PPDai
Back in 2007, Jack was working at Microsoft when he saw an opportunity in a large gap between consumers who had access to credit through formal channels (<10% of the population) and consumers on whom there was no data and hence were credit-starved. As a technologist he felt that using data science and technology to solve the ‘new-to-credit’ borrower underwriting problem would work and so he decided to co-found PPDai.
On driving liquidity and product-market fit
As with all two-sided marketplaces, PPDai initially had a chicken-egg problem in driving liquidity. So in the early days the team focused around finding borrowers because they felt that if they’d have a density of borrowers then investors would automatically be interested in coming to the platform. In order to find borrowers they focused on segments where there was high demand specifically for ‘new-to-credit’ borrowers for whom there were no other options available. On investors, they initially pieced together capital by convincing their friends and family to invest on the platform and over-time it grew via word of mouth as a platform for investors to get better than market savings returns on their capital.
Eventually, Jack and team were convinced that they had product-market fit as they started seeing high repeats in their borrower cohorts early on which gave them confidence to start scaling their lending operations.
Building scale while controlling risk
As Lightspeed, having evaluated and invested in several lending startups, we frequently find that early-stage traction in a lending business is not necessarily indication of what will work at scale as early customer cohorts and unit economics are not necessarily representative of the risk, fraud-levels or acquisition costs of the general population. Jack’s response:
Scaling lending while keeping risk in check is tricky according to Jack. They made sure they capped their monthly growth rate at no more than 10% month-on-month as growing faster than that makes it difficult to figure out risk and defaults in their business according to Jack. Similarly, building the team the right way was paramount — besides tech/data science talent, collections and support was a key component of keeping risk in check. Surprisingly, about half of PPDai’s employees are doing customer support and collections today. They have continued to leverage technology to increase efficiency such as using AI/NLP based chat agents and predictive robot callers as a cost efficient way of keeping engaged with their customer
On market leadership
PPDai’s early team composition was a critical reason of PPDai staying ahead of the competition. Competitors’ teams in China tended to be more techie-dominated but PPDai had a balanced team of bankers and technologists. According to Jack, globally this is the formula behind most successful lending platforms.
On ecosystem factors and the regulatory environment
Alipay was a key enabler for the p2p industry as it enabled seamless disbursal and collection of loans through digital payments. Mobile phone penetration and low cost cloud services suddenly unlocked alternative consumer data and the ability to build complex credit scoring models. In addition, the relatively low-deposit rate environment (offered by traditional banking institutions) in China made platforms like PPDai particularly attractive for investors due to the higher returns available.
From a regulatory perspective, there were few restrictions by regulators in early days. Regulators are rarely ahead of the market and hence it becomes important to bring them along in the journey and stay ahead of any regulatory concerns. According to Simon, doing this has essentially created a competitive moat for the company.
The India opportunity
Both Jack and Simon are excited about opportunities in the India market given the large new-to-credit population and similar consumer demand around mobile-phones, laptops and two-wheelers which they saw in China which were key drivers of digital lending in China and PPDai’s success. The emergence of digital payments and a growing internet user base are catalysts for PPDai figuring out the best way to have exposure to the India opportunity.
Many thanks to Jack and Simon for sharing their experiences with us — we hope to see you again in India soon! Also a special thanks to the WeWork team for providing the venue and logistics support.
