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Choosing your Startup sector and avoiding pitfalls in Fintech Startups with Bala Parthasarathy, CEO MoneyTap

Bala Parthasarathy, CEO MoneyTap chats with Shripati Acharya, Managing Partner, Prime Venture Partners.

In this conversation, they chat about how entrepreneurs go about choosing their startup sector, some areas Bala encourages entrepreneurs to look at, common pitfalls of Fintech startup ecosystem and a lot more. 

In the past, Bala has co-founded 3 successful and 1 failed technology startup; Co-founded Angelprime (now Prime Venture Partners). He started Snapfish from scratch and helped build it to a $300M revenue & profitable business spanning 22 countries, sold it to HP in 2005.

Podcast Transcript:

Shripati Acharya  0:22 

This is Shripati Acharya, Managing Partner at Prime Venture Partners. Welcome to the podcast series with Prime Ventures. Prime is an early stage VC fund investing in technology and product focused businesses. Today we have with us Bala Parthasarathy, Co-Founder of MoneyTap. Welcome Bala.

Bala Parthasarathy  0:35 

Thanks Shripati.

Shripati Acharya  0:36 

Bala and I go back a long way to our days in IIT together when we were in the same hostel as undergraduates. Since then our paths have overlapped in a number of ways. And it feels like a long time but at the same time it's a total pleasure to have you with us Bala.

Bala Parthasarathy  0:51 

Thanks. We're both still young at heart.

Shripati Acharya  0:53 

Indeed! So, let me just jump right in Bala. You were a successful entrepreneur in Snapfish, when we Co-founded that together. And following that, you were my partner at Prime, as an investor. And then you decided to take the entrepreneurial plunge back again in 2015. So, what is the rationale behind that? What was your thinking?

Bala Parthasarathy  1:15 

Two things. Firstly, when you are a Venture Capitalist, you're playing the role of a coach or a team manager. When you're an entrepreneur, you're out on the field facing all the balls that come by. And I felt that there was one more game in me to go out and play in the field. So, that was a personal reason. But honestly, the serious reason was the fact that the market is so huge on what MoneyTap is trying to tackle, that the opportunity was just too mouthwatering for me to pass up. So, it was just one of those personal passions that caused me to jump.

Shripati Acharya  1:47 

I'd call it the operational itch to get into the thick of actions. Can you tell us a little bit about MoneyTap itself?

Bala Parthasarathy  1:54 

MoneyTap is India's first line of credit on an app. And, it's a consumer product, where any consumer can download the app and apply for a credit line. And what a credit line means is that you get approved a credit limit against which you can borrow money either as cash or credit card or as Amazon or Flipkart vouchers or even point of sale. Where you can borrow money in pieces as much as you want as little as you want. And you can pay it back in two months or three months or 36 months or whatever you want. It's a very flexible product, aim to give credit to the near prime, not to the upper end of the society but to the middle class and the lower middle class.

Shripati Acharya  2:34 

So, how did you think of this as an opportunity area, an area which you wanted to get into?

Bala Parthasarathy  2:38 

Back in 2015, when we were looking at this space, and we spent about 6 months researching it. There was a lot of winds blowing in the right direction. So firstly, it's well known now but smartphones were starting to take off, data was not yet taking off. But that was a bet that we placed that somebody like Jio would come and make data ubiquitous and cheap. So, that was number one, because that was a new way of reaching customers. Secondly, we researched the market and India is very very credit starved, it was, it is and they think it will continue to be in the near future. So, the demand for a product like MoneyTap was just huge. And it was just very obvious as soon as we went out into the field and started talking to the people. And thirdly, the financial infrastructure required for providing credit on an app, was being put in place. And because of our stint in Adhaar, we could see that coming. And a lot of those efficiencies, improvements that one needs in order to make credit easy were also in place or coming very soon. So, all of this basically pointed in the direction of obvious opportunity that one could not pass up.

Shripati Acharya  3:43 

So, a lot of tailwinds for starting that business from macro environment and perhaps say, fairly acute need for capital in that segment you're targeting. So, just taking a step back and looking at FinTech as a whole. So, what do you see today in 2019 as some of the exciting areas for entrepreneurs to go after?  Some areas are probably fairly crowded and a lot of investment has gone in. What are some of the areas which you would encourage some of the entrepreneurs to look at?

Bala Parthasarathy  4:09 

At the risk of wanting more competition more people entering the space, I still continue to believe in FinTech. On the whole if you look at like mega areas like retail or food or transportation. These have been disrupted for a while now. And still its a big open space, even retail, which is E-Commerce. Transportation is being disrupted by Ola, hospitality is being disrupted by OYO. And FinTech if you look at it in terms of rupee value, it's a very, very significant amount, we're talking about lakhs of crores of rupees. And this remains to be a sort of a wide open area at a very big picture level. There are lots of reasons for it, partly because of regulation, but this happens to be an area which is ripe for disruption. First of all, encourage entrepreneurs to enter FinTech. Now, within FinTech, there are many many domains, payment is obvious one which gets a lot of attention. So, by payment, I mean both of a consumer side, like PhonePe and PayTm's of the world. As well as, on the acceptance side, which is companies like Ezetap, and Pine Labs and others, which are sort of accepting BharatPe payments of different sort either card or UPI. So, one domain is payment, and payment, I'd still think it's open, even though obviously there are a lot of players in there. The second biggest part is insurance. I think insurance is the most exciting area, honestly, if you ask me. And we looked at insurance seriously about four years ago as potential area to go but, I think that was probably too early at that time. And now I think probably will be the right time to enter insurance. And I think insurance tech has got a long way to go. Companies like Acko are doing some interesting work there in disrupting that space. So, I would say insurance is a second one. And the area that we are in lending is of course, a huge one. And interesting thing about lending is that there is a real business model in lending, people have made money, people who continue to make money in lending. So, this is sort of a third big area and then there is sort of the infrastructure for finance which companies like Open, etc are doing which is to help the existing providers, existing banks and others operate more efficiently. So, the whole B2B kind of space as well just also open. So, I would say all of these are open for disruption.

Shripati Acharya  5:41 

So, we'll put you on the spot a little bit, how does an entrepreneur go about choosing? So, if you were starting again in 2019? What are some of the leading indicators or some of the trends you would like to see which favor success in starting some things?

Bala Parthasarathy  6:31 

The playbook we used was you need to approach with both a top down level and a bottom up level. So, when I say it was four areas that's kind of a top down view into it. I think if you spend about two three weeks, one can get a fairly good picture on what are the top down areas, what are some of the broad potential gaps in the segment. Even in a crowded area like payments are still open areas, FinTech lending, for example, there is consumer lending and SME lending. The consumer lending itself is a huge space that’s what  MoneyTap is in.  SME lending which is another very, very big open area, which is very under-penetrated. Insurance has got many, many spots, so on and so forth. So, I would first take a top down view and see what are the potential areas that one can look at. So, that's one vector. The second vectors are a bottom up once you've identified area to go and talk to the players, talk to consumers, talk to customers, if it's going to be SME, for example, your have to talk to SME customers, that's going to be a B2B play, talk to the existing ecosystem. And understand sort of the pain point at the ground level. So, understand the problem that one is trying to solve. So, that is I would say a step two in exercise. Step three in exercise is to look inward, saying what do you bring to the table and it's a very important one. Because there's an open space, that doesn't mean that you can do it. So, one has to take an honest look and say, What do you bring? Are you a techie? Are you a business person? If you are either one of them? Can you get the other one? If you are techie? Can you find a Co-Founder who's a business person, or vice-versa, you're a domain specialist. You know something about the area, I would say, What is your team capability? And exactly what do you bring to the table, that is going to give you a competitive advantage. So, this will be the third thing. And the fourth thing is sort of put it all together into a pot and say what is sort of a unique angle? And I think Sanjay Swamy, a Prime Venture Partner always puts it very well, which is to find sort of a thin wedge to enter the space, because you are a new player entering an existing market, you need to have an angle for the consumer, for the customer, for your partners, that you bring into the table. For example, the credit line was an innovation on our end, which was new, that was something did not exist, we're doing something differently. It could be a product, it could be a tech innovation, it's got to be something different, some sauce, it can be small, but it has to be something unique. So, you need to find that and that is sort of the creative angle of it. This is something, it has to spark in you. It might do it in a day, it might take another month, me and my Co-Founders to come with the idea of a line of credit being a unique angle. So, once you have identified this then there is a last and important step which I would not forget. Which is to put it altogether into a business model and say, "Hey, is this going to make money someday.?" So, if it's going to be just a pure idea that, it might do well, it might be an open space and you might solve a real problem. But I fundamentally believe in the longer term that, if you don't have a viable business model, where you have a path to generate revenue, you've a path to generate profit, then I don't think you should start today. People might have gotten away with it in the past without a business model and just selling hype. But today, I would not start a company without having a clear picture of how to generate revenue and how to generate profit. It doesn't need to be on day one, but you need to have a very clear and a solid belief, that would happen sometime soon. So, I would say these are sort of the recipe for building a company.

Shripati Acharya  9:45 

So if I may just paraphrase you're saying first get a hang of the market, look at a top down view get a bottom up view, talk to a lot of potential customers, try to actually find if what exactly is the problem statement there. Think of a product, where there is differentiation, where you can use that to enter the market, and then think of course of your own potential, like why you question and then finally answer the business model question, like how would this product or solution make money? So, what are some of the hurdles or pitfalls? And maybe you can make it specific to FinTech here, which you see because you've had an inside view of a number of companies, both as an entrepreneur and an investor of having seen a number of companies at fairly close quarters. So, what would you say are some of things to watch out for here, which turned out to be common pitfalls?

Bala Parthasarathy  10:32 

So, there are some things which is generic, which is nothing unique to FinTech. So things like for example, making sure that there is enough capital, making sure that you have the right team. So, these are very generic, they'll apply to any startup. So let me skip those. Those are, you can go and Google it and find those information. But, let me focus on FinTech and let me focus on India, which are not Googlable that easily. So, the number one thing you need to look at in FinTech is regulation. So, if you are in payment, you need to know what NPCI is doing? What NPCI is going to do? if you are in lending you need to know what RBI is doing? What are all the regulations in it? If you are in mutual funds you need to know what SEBI is doing? You need to know your insurance, you need to know, what the insurance regulator is doing? So, the regulation is a very, very big part of any startup in India. The larger players have an inherent advantage here because they have armies of people who've been managing the regulators and understanding this for decades. As a new entrant, in other countries, you might be able to get away by like flouting regulations, like some of the transportation guys did or Airbnb did in the US. Where you just kind of wing it and then deal with, you get some scale and then deal with the regulator later. I would not advocate that in India, because regulators are pretty strict in India, and it's very hard to wing it in India. So I would say regulation first, understand what the pitfalls are. Second is you need to understand the existing incumbents and especially in finance, the incumbent is usually a bank of some sort, and Indian banks, especially the private sector banks tend to be very, very well run. And they might not be the cutting edge in technology, but they really know what they're doing. So, this is not one of those things where you just kind of thumb your nose at them and say, I'm going to crush you, and so on and so forth. So, you need to have that respect and also understand, what they bring to the table and find a way to sort of partner with them. In a lot of cases, one has to partner with them, you realize that sooner or later, or if you're going to compete with them understand exactly how you're competing with them. So, the understanding the ecosystem, understanding the regulator, and understanding some of the nitty gritty operational details like KYC, for example, it almost every form of FinTech there will be some KYC and anti money laundering, understanding fraud. Fraud is a super important part of all of this. So, it's not just about having the best machine learning technology or best marketing team and so on and so forth. One has to understand in finance, some of these nitty gritty of all of these things, I would say this, this is what is unique.

Shripati Acharya  12:06 

So Bala, one of the things which I think about, is like what is a normal or a good target growth rate for a FinTech startup? How should they think about growth? Is it the same as in other companies “grow as fast as you can”? Like, how do you think about it?

Bala Parthasarathy  13:12 

So growth is like a super important thing for every entrepreneur, every startup, and it's really critical to get off the ground and grow fast. So, I would say you have to prioritize growth, over efficiency in almost all cases. So, if you need to maybe overspend a little bit of money, provided you raise money, or be inefficient in some way, if you need to do some "Jugaad", that is okay. So, I would say growth is important. And the reason why growth is important is because in FinTech, it's all about scale. So, in the ecosystem, and you are going to be in an ecosystem, whether it's insurance providers or banks or anybody, you talk to regulators, they want to know your scale. So, that's the first question they will ask. And these institutions, typically tend to have very very large scale. So, at MoneyTap for example, until we hit the first 500 crores of a book, we did not get any respect. People would say whatever you are is an experiment. So, they will dismiss you as like a science experiment, until you get some scale and now that we crossed 1000 crores a few months ago, people take us very seriously in the space. So, the numbers are very important and you cannot not disclose the numbers either. And it cannot be vanity metrics, like number of installs and number of downloads, they don't care. So, the financial world they want to know the "Dandha", what is the money? How much are you doing? How much loans are you disbursing? How much a book, depending on whatever your area is. You need to get to scale in order to make certain things work, open certain doors, etc. So, I would say in that sense, growth is super important and you should prioritize growth over efficiency. However, there is a catch. So, the catch here is that because FinTech tends to be very leveraged, it also is very ripe for things like fraud. It's ripe for things like delinquencies. So, in the lending space, for example, if you enter, delinquencies is everything. MoneyTap operates at a 1.2% delinquency, which always impresses people. Whenever we talked to banks or lending institutions. They asked this number and this is a number they say, Okay, now you are doing something right. Because if you let your delinquencies and risk and fraud get out of control, then your partner's, everybody tends to dismiss the whole technology. They're like, Yeah, you got technology, or you're basically giving away free money. So, in other businesses, for example, you can give away Coupons and Vouchers and so on and so forth, and just put on users and some other metrics, just to build a community or build usage. But in finance, you cannot let go of the fundamental financial discipline, whether it's fraud or delinquency or whatever that be. So, I would say, the mantra should be “Prioritize growth over efficiency”, but you've also got to “prioritize delinquency and fraud over growth”. You cannot prioritize it the other way or any other way around.

Shripati Acharya  16:03 

Essentially, if you actually have some things you're not working, namely, your ability to identify fraud, or your ability to collect, loans and so forth, you can lose a lot of money very, very quickly in FinTech's. When you look at the competition in the lending space in which MoneyTap broadly operates. How are you differentiating? What is unique about the MoneyTap offering here?

Bala Parthasarathy  16:23 

MoneyTap is unique in the sense that as a new product, we created a new category called a line of credit which provided a different type of convenience to the user. And this is new, it was new when we entered. And what is new about us is that we are doing this at scale today. We're doing it at 1000 plus crores book, dispersing about 2500 crores a year, and we plan to do book of about 4000 crores next year. So, scale matters, product differentiator matters. But in general, my advice to people who are entering FinTech is that I would not worry too much about competition because the market is highly under penetrated. So, whenever such a under-penetrated market exists, they will be a number of players. Existing players are there in lending for example, people don't think of them as competition. But HDFC Bank like owns 40% of the market, Bajaj is like the "behemonth". So all the FinTech startups put together will be like a tiny fraction of the market today. So, it doesn't matter. The room for growth is just enormous. And there are many, many public companies which exists already today, HDFC bank is public. So, are like that 100 other NBFC's, which are public, which we don't even know about. And so, the market is so big, and it's so under penetrated. I wouldn't worry about competition. But having said that, you do need to bring something to the table, and you need to scale it like what we've been lucky enough to do with MoneyTap in order to have game.

Shripati Acharya  17:44 

On that note Bala we'll call it a wrap. But thanks a lot as always for a terrific conversation and wish you the best for MoneyTap.

Bala Parthasarathy  17:51 

Thanks Shripati.

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