Having recently raised what is estimated to be the largest Series B funding round for a fintech firm in Southeast Asia, Indonesia-focused lending platform Kredivo says the process was far from smooth sailing.
The company was forced to look beyond the region to raise the majority of its fund, as it found that there were simply very few investors in the region that specialized in doing Series B investments.
“We had to go outside because there are just not enough local funds in that $200-300 million range to fill the Series B gap. So for us, that’s probably the reason it took longer than it should have to close the round,” said Akshay Garg, CEO of FinAccel, the operator of Kredivo.
In the end, Kredivo raised $30 million in its Series B round of funding. While it managed to seal a deal with one local investor in MDI Ventures, the venture capital arm of Indonesia state-owned telco firm Telkom Indonesia, the other new backers in the round were two foreign investors: UK’s Atami Capital and Australia’s Square Peg Capital, which led the round.
The way the round panned out, Garg said, Kredivo was fortunate to be able to close investments from top-tier investors due to its high metrics and healthy valuation. Other startups have not been so lucky with its Series B rounds.
“That’s actually why in Southeast Asia, in particular, the biggest of what they call ‘the valley of death’ is considered to be the Series B stage, because it’s just really hard to raise funding,” he said.
Now with the Series B proceeds finally at its disposal, Kredivo, which counts 500 Startups, Alpha JWC Ventures, GMO Venture, Jungle Ventures, and Openspace Ventures as its Series A investors, says it will look to expand its business in terms of product line, as well as geographical presence, with Thailand and the Philippines its most likely expansion targets.
Could you explain the structure of Finaccel or Kredivo? Are they the same entity?
They are exactly the same entity. In fact, the whole company is just two entities. There is a parent company in Singapore and there is an entity here. The reason we have two different brands is that we always viewed ourselves as creating a series of products in the credit space. Think about FinAccel as just a company which is creating a platform of products. One product is Kredivo, another one is Lime. Tomorrow there might be a third one. So the idea is really just to incubate a series of products that make people financial lives better. It’s as simple as that. So Kredivo is not a different company. Kredivo is just a consumer brand.
The way we have positioned the funding is “Kredivo raises $30 million”. Well, the only reason for that is people don’t really know us as FinAccel, people know us as Kredivo, which makes sense because that’s what the consumer brand is. But the funding is for the company, not for Kredivo. The money goes to the company and we will use it primarily for Kredivo, but also for expanding into new product lines.
How does Kredivo differentiate its offerings in the over-crowded fintech lending space?
Yes, the space is crowded. It seems like there’s a huge number of these fintech lending companies, mostly peer-to-peer. We differentiate ourselves in three different ways. When you think about lending, 90 per cent of the companies are basically peer-to-peer lending. And that’s really where the big crowding is. We are very different in a couple of areas: One, even though we have a peer-to-peer license, we are not a peer-to-peer business. We don’t run a retail business. We have a lot of borrowers but all of our lenders are institutional. So we are very unique in that regard. Most of the other peer-to-peer lenders might have hundreds or thousands of lenders – we just have 15, because each one of those is an institutional lender, which are typically writing very large checks.
The major difference I would say is that our product is completely different from any of the other peer-to-peer lenders. When you apply to the others, you are applying for a loan, which gets approved or rejected at that point in time. You want another loan, you apply again. We are not that – we are a credit card. You apply once and then you get approved or rejected and you get a credit limit of up to Rp 20 million. If you’re approved, you just keep on buying. We are approving you as the user, they are approving the loan individually.
The third big difference is we are charging probably the lowest interest rate in the market. One of the things we are very proud of and something we want to stay very true to in the long terms is that we want to be the lowest cost source of non-bank financing. We charge 0 per cent if you pay back in 30 days. If you do an instalment then you’re basically paying 2.95 per cent per month, which is exactly what the credit cards used to charge until July last year when the regulation changed. So we’re not as cheap as credit cards, but after credit cards, we are literally the lowest cost source of financing in the market.
Could you take us through the fundraising process? How challenging was it given that Series B fundraising in Indonesia is still quite rare?
First of all fundraising is never easy. We’ve had it relatively easy by most standards. I think as a very high-growth, high-quality company with very strong metrics, we’ve had a lot of incoming interest. At the same time yes there is a massive Series B crunch in this part of the world. Five years ago there was a huge Series A crunch, that’s when funds like Jungle and Openspace and Vertex and all these guys came in, but these are $100 – $150 million funds, they write Series A checks, they don’t do Series B. Right now there are no Series B investors in Southeast Asia.
Typically those that come in at the Series C are the private equity firms. They would write a check size of $20-$25 million at a minimum, so that would be the private equity players like Temasek, General Atlantic and KKR. But at Series B, people have to write $5-10 million checks. Who’s there? Noone. So Series C is very well covered. But for Series B, there is a huge gap in the market. That’s actually why in Southeast Asia, in particular, the biggest of what they call “the valley of death” is considered to be the Series B stage because it’s just really hard to raise funding. We have to go outside because there is just not enough local funds in that $200-$300 million range to fill the Series B gap. So for us, that’s probably the reason it took longer than it should have to close the round. Because if someone is not based here, then there’s always a communication challenge.
I think we are definitely an outlier. We are not just lucky, we are a combination of lucky as well as one of the highest quality companies out there. Because our metrics are very strong, we have been able to raise money from top-tier investors, who have come in at a very healthy valuation, despite the fact that most of them are not local.
Kredivo is said to be MDI’s biggest investment. Is this investment strategic in nature? In what ways will Kredivo and Telkom capture synergies between them?
We think in Indonesia, MDI has one of the sharpest teams. The fact that they wrote a very large check into us also gives us a very strategic partnership with the Telkom Group, which is the largest listed company in Indonesia. We bring fresh innovative ideas to them, they bring business development opportunities to us. It’s a win-win for both parties.
I’d like to think we have been very selective. We have three new investors in the round. We had six institutional investors in total who gave us offers to invest, so we turned three down. And the reason we chose who we chose was because we respect investors who go deep with us, who think about the long-term, with whom you also have a very good personal and professional chemistry. Their team went very deep. They spent a lot of time with us. They focused a lot on the value they could bring to the table. There’s a lot of things that we can do with the Telkom Group. They have some of the biggest digital properties in the market. There’s T-Cash and there is a need for credit scoring, for example. I can’t comment specifically on the ones we are working on right now.
Given Kredivo’s valuation, is it poised to become Indonesia’s next unicorn?
I don’t even think that far. First of all, is the valuation high? I don’t think so. I think we might be in the top 1 per cent of valued companies in Southeast Asia because I think that’s also because our metrics are very good. So it’s not high based on the metrics. Its high relative to the competition. It’s a pretty healthy valuation. Could we be the next unicorn? I don’t know. We just want to build the greatest products for our customers. If we focus on building the right products, we will hopefully become a unicorn. If we do that, then along with a lot of good luck, we might become a unicorn.
Do you see IPO as a possible fundraising option for Kredivo? Or would you prefer to stay private?
I have no comment on that. An IPO really serves two big purposes. One: it opens up access to even greater funds, two: At the end of the day, all an IPO is a way for a company to raise money and for a company two unlock value. So shareholders in the company are going to sell to the public. Actually, we do believe that over the next two to four years, an IPO could potentially be an opportunity to raise even more money for the company to expand further. Is it a goal in itself? No.
What’s starting to happen increasingly is that companies are staying private longer and longer, because there are more private investors. Will we IPO? Potentially, as a way to fundraise more and to provide an exit for our investors, employees – we are the probably only company in Southeast Asia that gives out stock options to all our employees. It’s a possibility, it’s not a guarantee. We’ll see. If we can stay private and still raise the same amount of money, then we would not do an IPO. But if our board thinks that is the best way of raising more money, we’ll consider it. But if we do it, it will probably be in a market like Hong Kong or Australia. Those markets understand technology and digital a lot more. Indonesia as a stock market tends to be very focused on commodities, primary things: cement, steel, real estate, things like that. A lot of investors here don’t really understand the digital business.
How do you see the fintech lending competition in Indonesia? There are so many players emerging so fast. Is this a good thing, or something to be wary about?
I think it’s something we need to keep a very careful watch on. It is good for consumers, yes – now we have more options. What’s not good for consumers is I think there is a lot of irresponsible lending. We’ve been lobbying with the OJK, saying “you have to start creating some rules around the interest rates at which people are lending at”. Finally, just last week, the Indonesian Fintech Association – which we are a part of – has signed that letter, agreeing to a bunch of good practices, common ethical practices. The fact of the matter is, we are probably the only company in the group of 20 or 30 signees which has not had to change anything internally in order to comply with that code of conduct. But other companies in that group have had to change something, which is why it has taken 6 months for that code of conduct to be adopted and signed.
So I think it’s good for consumers because they get more choice, but I think they also need to be careful about what they are signing up for. There are even companies out there charging 1 percent per day. It’s crazy! How is the government allowing this?
What about the hundreds of unlicensed P2P companies? Do you think regulators would be more proactive to stem the trend?
I actually feel like the government should be really clear about the fact that if you are not registered, you cannot operate. They should make it a criminal offence. You can’t just set up a lending company and just start lending at 1 percent a day, without any kind of approval. You can do predator lending.
But I think the government is doing a lot. OJK is very progressive. In Southeast Asia, they are the only ones outside of Singapore that have created a peer-to-peer lending regulation. It’s fantastic. No other market has it. We know that the government sector always moves a little bit slower than the private sector, and that’s okay. They are doing a lot. They’ve created a great set of regulations and now they are catching up to some of the other problems and they will fix it.
There has been quite a few fintech lending raising Series B an above. Do you think it’s easier for fintech, particularly lending companies, to raise higher stage funds compared to other verticals and sectors? If so why?
I think lending is right now a fairly hot sector, there’s a lot of interest which is also probably helping companies raise money, more than some of the other sectors that’s for sure. Well, it’s just following what is happening in the world. In the last five years or so, if you look at the US, UK, there are huge companies that have been created in this space. Lending Club, Cabbage, Funding Circle, these are all billion dollar companies, unicorns. So I think the same thing is starting to happen here in Indonesia. These are just waves that come in from abroad. So for sure, I think it’s a high growth sector.
Tell us about your expansion plans. Philippine and Thailand, why these and which first?
First of all, we define expansion in several different ways. One is product/business line. Today there is only Kredivo, but we’re incubating some new things. Lime is a trial product but we might think about some other business lines as well. So we’re looking very closely at what the needs of consumers are.
As far as geographical expansion is concerned, yes we are evaluating that. The markets we’re looking most closely at are Thailand and Philippines, just because in these markets there is also a big need for credit, these are also fairly large economies. In general, our view is the regulation is progressive there, where lenders like us can set up. And then we can partner with local banks or consumer finance companies to start lending. Why not, let’s say, Vietnam? Vietnam is a very challenging country to operate in. Linguistically is a completely different language. Legally, because it was a communist country, historically regulations seem to be very tight. And it’s also quite far away. We might take a deeper look at Malaysia.
Indonesia will continue to be our core market. We don’t see ourselves becoming a business like Grab, which is present in six or seven countries. We see ourselves a lot more like Go-Jek, primarily Indonesia-focused and has a lot of services here.
Would that happen in the near future?
I’d say six months. Because geographical expansion would mean we have to set up a company there, then there’s the legal side, because as a lender you need to go through the regulation. We’re not an e-commerce company so we can’t just set up a shop and just start selling. So it would take anywhere from three to six months. So it would take us up to six months to expand to one other country. It’s going to be one of the three: Malaysia, Thailand or the Philippines.
Is an acquisition something you might look into, either to strengthen your position in the market or expand into other verticals or sectors?
Not right now. We’ve got our hands pretty full and I think we have a pretty big focus on building things. We’re not looking at any acquisitions right now. But I think if something interesting comes up, we will happily consider it.
What kind of runway does the Series B fundraise give Kredivo? What time horizon do you foresee for your next round of funding?
It gives us a lot of runway. I can’t tell you the exact number of months, that’s confidential. Let’s just say that we ended up raising more than we needed, because we got a lot of interest. So, while we raised enough to cover our financial plans, we’ve also been able to raise more than that. It allows us to expand into new business areas, hire faster, do even more in terms of our business plan.
We think we are going to raise a Series C in about one year from now. That doesn’t mean that is our runway. The fund we raised is for far longer than that. But I think based on what we are achieving right now with our business plan, I think we are going to raise a Series C within one or one and a half years. It will probably be a $50-100 million round, something like that. By then we’ll be in at least one other country, maybe even two. So that’s two or three countries including Indonesia.