Mind the Gap

Europe’s economic success is intrinsically tied to the health of Small and Medium-sized Entreprises. Today, Small & Medium-sized Enterprises (SMEs) represent more than 99% of all European non-financial corporates and employ over 90 million people — almost 70% of total employment in the EU-28 non-financial sector. On top of which, SMEs generate ~60% of total gross economic value added. (Eurler Hermes)

What’s the problem?

Obviously, as early stage investors, we are excited about the implications of this — the potential for small businesses to continuing ‘co’-driving, as it may be, the global economy. The word ‘continue’ poses a problem in this scenario, as it hinges on the growth of these companies, and for growth, SMEs need more money than they have access to, and faster.

(For a glimpse into the scale of this problem — In developing markets, nearly 50% of SMEs still have unmet credit needs — in total, between $2.1 and 2.6 trillion of unmet financing.)

This gap, which results from both demand and supply side problems, is perhaps more pertinant than ever. As the path from mom-and-pop shop to corporate becomes less and less linear, the banking needs of small and medium enterprises have evolved dramatically, and the financing system has not thus far evolved appropriately.

Aside from the disproportionately small share of credit SMEs receive from the financial system — a trend that is present in both developed and developing countries, and to varying degrees, all the way up to the level of microlending and ‘banking the unbankable’ — the financing that does exist is not only insufficient, but is also:

1. Expensive (think predatory lending)

2. Complicated (think lack of transparency, lack of dynamism, delays)

So … What’s the Future?

Data, data, data..

Data (access to, use of, implications of) is, per usual, the star of today’s show. It’s splashed across the news, it’s driving creation of new enterprises and investments therein, it’s revolutionizing century old industries, and it’s driving global conflict. Nearly 92% of Fortune 500 Execs are increasing investments in big data and AI, with 55% spending more than $50million therein. (NewVantage)

So with big players putting their money where their mouth is, investing in innovation and technology like never before, and new, technology-and-data-driven specialist players are entering the scene, the SME banking landscape, and access to financing, should be experiencing a shift in the right direction… right?

There is an issue of data timeliness in this equation that has, thus far, inhibited a seamless integration of data into business models, particularly in the case of large, institutional players like banks, and into the efficacy of fintech challengers to sufficiently meet the financial needs of SMEs, in real time. Creating a ‘data-driven’ culture, with fully, or largely, data-driven decision-making processes, remains an enormous challenge for large behemoths and fintech startups alike.

Why?

1. Big data is slow
2. Big data is clunky
3. Big data is hard to adopt
4. Big data is not one size fits all

In short, despite making the investments in the technology itself, and putting the systems in place to enable data driven decision making, there is a lever missing from the equation in the manipulation of the data itself — there are simply not enough brains to manipulate all the data in time to act upon it. And if an organization depends on data scientists to generate their queries, creating a movement at scale is going to be a long and slow journey, running consistently behind the market and customer needs.

Enter: Real-time analytics

With real-time access to data-driven answers, the problem of the business itself outpacing the ability to generate a (still relevant) data-driven response to a customer problem is resolved.

Take the case of SME lending — providing real-time, financial-information based credit scoring, credit worthiness evaluation and loan issuance is a revolution in the process of SME financing, both in terms of process (efficiency) and efficacy (accuracy).

Ventech is excited to have invested in Capcito, a fintech startup created out of the problem faced by four entrepreneurs looking to grow their business, one of the biggest challenge millions of entrepreneurs are facing today: it is too expensive and complicated to boost a SMB’s cash flow when needed.

Together with co-founders Mattias Axlind, Henrik Dyberg and Niklas Möller, serial entrepreneur and investor Michael Hansen launched the Sweden-based fintech startup to radically simplify the process of securing growth financing for SMEs.

Capcito currently offers three types of financing to SMEs: factoring, invoice discounting and business loans. Capcito’s differentiation lies in application of real-time analytics. Its digital financing platform with automated credit assessments provides a dynamic credit limit is calculated instantly when an invoicing- or accounting software is connected with the platform.

So to bring the tech talk back down to earth: the 6,000 businesses connected to Capcito have access to a credit which is continuously refreshed based on real-time data — and doesn’t cost anything when not used.

As conscious investors, we are clearly excited about the Total Adressable Market here: The factoring industry is turning around €1.7 trillion a year in Europe, with over 21 million SMEs falling into Capcito’s addressable market — a market has been growing at around 10% YoY for some 25 years. The appetite for this product is clear via both (1) the emergence of alternatives for SMEs to traditional players and (2) the (correlated) increasing reluctance of SMEs to use factoring services provided by large players (focused on larger customers, providing low value-add services based on stale, complex pricing models and long, bulky contracts). Indeed, the future looks bleak for banks in terms of their relationships with SMEs — new competitors are expected to drive a cut in banks’ profits from consumer lending by 60% by 2025 and revenue from loans to SMEs — the largest singular revenue stream for banks — is estimated to drop by 35%. (McKinsey)

Looking into this influx of new players ready to take advantage of this market opportunity & corresponding increase in choice of providers for SMEs, our market and player analyses reaffirms a confidence in Capcito and their ability to capture and retain customers built upon:

• Their Data Viability: Leveraging the power of dynamic analytics, Capcito’s connectedness to real-time accounting data allowing them to score and offer loans in real time with their proprietary scoring engine.
• Their Transparency & Flexibility: This use of real-time data gives end users an updated offer every day, which suits growing companies with flexible needs. Capcito’s technology lends itself to a flexible pricing model in which companies only pay for the actual days the credit is used… be it 5 days, 5 months or 5 years.
• Their Integrated Business Model: Capcito is offered through local Enterprise Resource Planning (ERP) partners, with integration into existing invoicing and accounting applications; as a result, customer acquisition and brand and awareness costs remain low.
• Their Stacked Product Offering: Capcito not only offers factoring, but also invoice discounting and business loans. This comprehensive product offering allows the firm to meet different needs in different ways, with several different entry points.
• Their Tr(Action) : In an increasingly competitive industry, Capcito has gained significant traction in the past 12 months through fast growth and a 500% increase in active clients. Thus far ~EUR 80 million have been paid out to growing businesses through Capcito’s automated financing platform.

(Tip for entrepreneurs : No better way to show ability to execute like execution itself.)

• Their global ambition: Capcito has clear ambitions and intentions to grow outside of Sweden in the coming years.

(Another tip for entrepreneurs: Seeking global capital from players like Ventech is a great way to actionably communicate your ambition and appetite for globalization — and a great way to show the fund that you understand their value-add and the value of the partnership)

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For more on Capcito : https://www.capcito.com

For more on Ventech, our start-up partners, & how we choose eachother : http://www.ventechvc.com/

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Thanks for following along, and as always, let us know if you’d like to discuss any specific areas of interest, have any questions, or are looking for early stage capital !

- The Ventech Team