A capital idea 

When Gaurav Hinduja and Sashank Rishyasringa, co-founders and managing directors at Capital Float, approached a few venture capitalists in 2013 for funding to start their digital lending startup,their response was a curt “no”. The reason: The market was not ready for a business such as theirs and they lacked experience in the cut-throat business of loan collection. One of the venture capitalists went so far as to hint in jest that they were overqualified for the job: “Stanford business school alumni aside, you will never be able to do money collection from borrowers on ground.”

Rishyasringa, 36, graduated magna cum laude from Princeton University with a specialisation in economics and finance before doing an MBA from Stanford Graduate School of Business. Hinduja, 37, a commerce graduate from Christ University, Bengaluru, was his batchmate at business school.

The naysayers could not have been more wrong. That was the time when e-commerce was gaining steam in India. Rising sales on online marketplaces meant that sellers on these platforms would need capital to balance supply with demand and expand business. This the two knew. “We were one of the first to go to these e-commerce players and tell them that as their platform grows, the sellers in their marketplaces would need working capital to grow their business,” says Rishyasringa.

As for their lack of experience, prior to his management degree, Rishyasringa was working with global consulting major McKinsey & Company in the U.S. In his role as senior engagement manager,he was advising several Fortune 500 companies, investment funds, and financial institutions on business strategy, governance, operations, and risk management. Six years with McKinsey in New York, West Asia, and India had primed him well for his purpose. Hinduja had hands-on experience in sales, business development, and operations which he gained through his time as chief operating officer at Gokaldas Exports, the country’s largest apparel exports business, which was setup by his Bengaluru-based family (not related to Hinduja Group based in Mumbai) four decades ago. It was sold to private equity giant Black-stone for $161 million in 2007.

And so, with less than ₹1 crore of their own money, the duo launched Capital Float as a non-banking finance company (NBFC) in 2013.Six years down the road, the startup is one of India’s largest fintech NBFCs with 400,000-plus customers in 300 cities and towns across the country. Today the Bengaluru-based company’s portfolio includes a slew of financing products for small and medium enterprises (SMEs) including brick-and-mortar retailers, wholesalers, restaurant owners, manufacturers, and kirana store owners. Besides loans to businesses, the startup also forayed into the consumer-lending business a year and a half ago. Its average ticket size for SME loans is about ₹10 lakh while that of consumer loans is ₹50,000. As of May 2019, the company’s assets under management stood at approximately ₹1,400 crore.

Despite its funding woes at the start,Capital Float is among the most funded home-grown financial services startups. It has raised $107million ( ₹685 crore) so far. It has attracted a string of marquee investors such as Sequoia Capital, fintech investment giant Ribbit Capital,Amazon, and impact investor Creation Investments. Apart from its equity funding rounds, the company has raised a total of $211million ( ₹1,480 crore) in debt funding from major banks and NBFCs.

Capital Float received its first thumbs up from venture capital funds in 2014 when SAIF Partners and Aspada Investment Advisors in-vested $4 million in a seed round. Mridul Arora, managing director at SAIF Partners, says what won the fund over was Hinduja and Rishyasringa’s unique insights into building a large fintech business in India. “Our trust in them has been driven by their credible and successful past endeavours, their granular understanding of the market they were addressing, backed by a strong team that they had built early in the business. Over time, this trust has only strengthened on the back of their fantastic execution.”

The entrepreneurial bug bit Hinduja and Rishyasringa in their early days at Stanford. “We explored different ideas that could fundamentally disrupt a large aspect of the economy. Most of the areas we looked at already had a host of entrepreneurs doing good work,” says Rishyasringa. After much research, they settled for fintech. In the final year of college in 2012, they decided to move back to India and start their own venture. The vision was to build a business on a large scale with technology at its core.

“To understand the ecosystem we spent a lot of time at offices of e-commerce companies: Amazon, Snapdeal, and Flipkart,” says Hinduja. The two got lists of top sellers on these platforms and studied their needs and other aspects: what’s the tenure they are looking at, how they would repay,etc. “The third-party sellers had a working capital problem,” says Rishyasringa. “They needed credit that is very short tenure in nature that they could pay back as they sold online.” Loans available to SMEs then were long-tenure ones. “They needed something like a 60-90 days creditline with a flexible payment option,” he explains.

Capital Float’s first product for SMEs was designed keeping these things in mind. The loan ticket size was about ₹10-15 lakh. The co-founders did not have to wait long to know their business model was sound and they were on the right track. “In the initial days... we came across a loan application from Bhilwara,a town in the Mewar region of Rajasthan. Fora south-based startup it was a little surprising. Our first reaction was, ‘Where is Bhilwara?’ ”recalls Rishyasringa. “It was a small shop in Bhilwara that sold mobile phones. And the shop owner was selling on Amazon and maybe he was making about a few lakhs per month. It was the only shop then in Bhilwara that was selling mobile phones in that area.” The applicant was looking for a loan of ₹10 lakh which he could use to push online sales. Lack of options from traditional banking made him google loans and he chanced upon Capital Float’s website. “Eventually, we ended up giving him a loan and within a couple of years he became the biggest distributor of mobile phones in that part of Rajasthan,” says Rishyasringa.

Lessons learnt through lending to SMEs helped it begin lending to consumers. “Our learnings in the SME space helped us build the consumer loans business because when you are evaluating a business, you are evaluating a promoter as well. The in-house technology and infrastructure is easily portable on to the consumer lending space, too,” says Hinduja. Today,consumer loans account for 40-50% of Capital Float’s business in monthly volume.

Samit Ghosh, who built one of India’s most successful NBFCs, Ujjivan Financial Services,feels fintech NBFCs such as Capital Float are doing good work. “They bring in a lot of new approaches on how to source credit and also evaluate and deliver credit. We, instead of trying to fight them, would rather join them and work together with them. That is our approach,”says Ghosh.

Industry experts point out that micro, small and medium enterprises have offered huge potential for growth to fintech NBFCs but the challenge is to build capacity, not just in large cities but also in smaller towns while keeping the default rate low. “A higher default rate remains a medium-term concern, compensated by higher yields but with more players coming into the business, yields would eventually drop and defaults may not decline... that remains the defining challenge for the space,” says Vineet Rai, chairman, Aavishkaar Group, an impact investment firm.

Capital Float has had to discontinue some products due to a rising default rate. “We were financing cabs for drivers from Ola and Uber, but there were many defaulters. That was a product segment we didn’t understand verywell. It didn’t go as planned. We took a lot of learnings from that and as we grew other products, we made sure we have a playbook to follow,” says Hinduja.

According to filings with the Registrar of Companies (RoC), Capital Float recorded a loss of ₹92 crore in FY18, while its total revenue stood at ₹135 crore, up 154% from a year ago. It wrote off ₹16 crore as bad loans compared to ₹1.8 crore in FY17. The founders say in the short term there will be ups and downs but along-term focus is critical. “The challenge is how fast you can grow while being prudent on risk,” says Hinduja.

Meanwhile, The Economic Times reported in February that Capital Float was in talks with PayU, the Naspers-owned payments company,to raise about $150 million at a valuation of $500 million. Later in May, the daily reported that a complete sale could happen at a lower valuation. Capital Float declined to comment about the deal. However, if this happens, existing investors stand to gain from it. Now, what’s the moral of this tale for naysayers? A little belief is a good thing.

(This story was originally published in the June - September special issue of the magazine.)