Capital Float, a financial tech startup that wants to make it easier for small businesses in India to get loans, has raised a $13 million Series A led by SAIF Partners and Sequoia Capital. Existing investor Aspada also returned for the round.
Founded in 2013 and based in Bangalore with offices in New Delhi and Mumbai, Capital Float has raised a total of $17 million to date, all within the past twelve months. Capital Float will use its Series A to expand into more cities, improve its tech platform, and launch new products.
The company is also using its equity to finance loans, but plans to open up to other sources of capital by partnering with banks and individual investors. It makes money through a combination of interest and fees.
Surfing India’s E-Commerce Boom
So far, Capital Float has loaned more than $6 million to small businesses in 12 Indian cities. Its founders, Gaurav Hinduja and Sashank Rishyasringa, say the number of applications it processes increased by 10 times in 2014, with Capital Float now receiving about 200 loan requests per month.
Capital Float’s growth has been fueled mainly by India’s rapidly growing e-commerce market, which is expected to be worth $43 billion by the end of this decade. Seventy percent of its applicants are vendors who sell goods on marketplaces like Snapdeal, Flipkart, Amazon India, PayTM, or Myntra.
While e-commerce applicants are currently Capital Float’s largest vertical, the company also intends to launch products tailored to offline businesses, such as small manufacturers and business service providers.
About 20 percent to 30 percent of applicants are approved after the platform accesses their suitability based on 2,000 data points. In addition to the usual metrics, like credit bureau scores, Capital Float’s technology scores applications based on online data, including customer feedback and transaction history from online marketplaces. It also does psychometric assessments: in other words, applicants are asked questions to judge things like their ability to scale a business, attitude toward credit, and how they compare to competitors.
Capital Float’s use of data from online sources, including e-commerce marketplaces, is similar to the system developed by Alibaba affiliate Ant Financial for its new credit-scoring system, called Sesame Credit. Like Ant Financial, Capital Float is also tackling the problem of financing entrepreneurs in countries with fast-growing industries, such as e-commerce, that are underserved by traditional financial institutions.
Closing The Financing Gap
Hinduja and Rishyasringa said they became interested in financial tech while studying for their MBAs at the Stanford Graduate School of Business. They were intrigued by U.S. companies like Lending Club and On Deck, as well as Brazil’s NuBank (another Sequoia investment), and wanted to build a similar service in India.
Rishyasringa says that formal lending institutions in India provide $140 billion in loans to small businesses each year, but there is still a funding gap of $200 billion dollars. He adds that there are currently about 30 million small-to-medium businesses in India. Together they employ a total 69 million people and many are based in smaller cities, which Capital Float plans to expand into.
“The entire financing industry in India is based on very traditional, rigid processes,” says Rishyasringa. “If you are a young, fast-growing business with an emerging financial model like an e-commerce model or startup, it is an uphill battle to get funding.”
It is even more challenging for entrepreneurs who want to secure working capital, since they may not have property to pledge for collateral and are therefore ineligible for long-term loans.
Businesses that have a hard time securing capital from traditional banks end up turning to friends and family or private moneylenders that can charge interest rates of more than 40 percent, making loans difficult to pay back.
Capital Float founders say it offers interest rates similar to banks, or about 16 percent to 18 percent, but a much faster application process.
Potential lenders typically get a response to their online applications within seven days, compared to about two months for a traditional bank. Private moneylenders, however, are able to approve or reject an application in as little as two days, so Capital Float’s hope to speed up their application process to the same timeframe.
“Our objective is for these businesses to access financing as easily as they would be able to sell on Amazon or eBay,” says Rishyasringa.