Startup Mantra: Providing fintech cover to digital-first businesses - Hindustan Times

Startup Mantra: Providing fintech cover to digital-first businesses

BySalil Urunkar
Feb 03, 2024 08:04 AM IST

Velocity bridges the gap between funding requirements of new age businesses and finance availability

Pune: India is home to more than 10lakh digital-first businesses that focus on delivering services on the web. However, financing for these firms remains to be a substantial gap, with founders continuing to rely heavily on conventional banking that prioritise physical assets and historical financial performance, creating hurdles for asset-light, but data-rich new economy companies.

Velocity co-founders (from left) Abhiroop Medhekar, Atul Khichariya and Saurav Swaroop. The firm bridges the gap between funding requirements of new age businesses and finance availability. (HT)
Velocity co-founders (from left) Abhiroop Medhekar, Atul Khichariya and Saurav Swaroop. The firm bridges the gap between funding requirements of new age businesses and finance availability. (HT)

Alternate financing options are also limited. It is estimated that less than 3 per cent of digital-first businesses in India have secured venture capital, and an even smaller fraction, less than 0.5 per cent, has opted for venture debt. This underscores the requirement for more diverse and accessible financial solutions tailored to the unique requirements of digital-first ventures, as the current options are insufficient to meet the growing demands of these businesses.

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To bridge the gap between the funding requirements of new age businesses and finance availability, three engineers from IIT Bombay have set up Velocity, which provides collateral-free loans to digitally native-businesses. Abhiroop Medhekar, Atul Khichariya and Saurav Swaroop set up Velocity in early 2020.

“Our customers are new-age entrepreneurs, digital-first, and online businesses. We identified that they find it difficult to access loans from traditional sources like banks which do not understand these new-age businesses very well. This is because banks lend to a traditional segment mostly against collateral,” said Abhiroop, founder-CEO of Velocity.

An IIT Bombay and IIM Ahmedabad alumnus, Abhiroop has worked as a VC (venture capitalist) with Elevation Capital (formerly SAIF partners), leading investments in fintech and financial services sectors for the fund. He has also worked as a management consultant at McKinsey for five years before co-founding Taskbob (a consumer internet startup) and scaled it to market leadership in Mumbai.

The big universe

At Elevation Capital, Abhiroop was looking at e-commerce and fintech investments. “In a week, I would have 40-50 meetings and out of these 200 odd companies that I met in a month, typically we ended up taking only one or two forward for our evaluation. Finally, only one of them would lead to an investment,” he said.

That meant a lot of good companies, which may not become very large in the future but could still become good profitable businesses, were left out of the funding pool. For them, the primary source of funding would be the founder’s savings or some money from friends and family to begin the business.

“That’s what led to us identifying this opportunity – a big universe of founders who are working hard, are hungry for growth and capital becomes their biggest constraint. So, the idea to set up Velocity was primarily based on my learnings as a VC,” he said.

Atul and Saurav were part of the top team in Abhiroop’s previous startup TaskBob as well. “Atul was heading operations there, Saurav technology. Though after TaskBob, they had moved on to different roles, we were always excited about ideating and building something together again. So, we came together to innovate on financial services to meet the needs of new-age founders and started Velocity,” said Abhiroop.

Untapped opportunity

Saurav, co-founder of Velocity, leads the fintech’s technology initiatives. He studied energy science and engineering at IIT Bombay and was previously co-founder of Shaukk, a web-based interactive platform, and led technology at startups and Taskbob. Atul, also a co-founder at Velocity, studied chemistry at IIT Bombay and was AVP (assistant vice-president) at insurer Acko.

Abhiroop believes lending to digital-first companies is a big untapped opportunity because these businesses are run in a capital-efficient manner but do not have access to capital. “When people are putting in their own money, they are careful about how and where to spend it. So, we identify them, arrange that capital for them and infuse that capital in the business to unlock growth for this segment,” he said.

Atul said the trio decided to work with what they were most familiar with - online, e-commerce and digital businesses in India. “We looked at the existing products for the segment. We realised that revenue-based financing did not exist in India at that time and that is why we launched it,” he said.

Leveraging tech

Since new-age businesses typically do not have physical assets, Velocity leverages technology to assess the creditworthiness of a business. “These businesses have a lot of data available digitally. Unlike a traditional segment in which you do not have access to data until the overall financials are declared at the year-end, in these businesses, you can collect a lot of data from digital presence on marketplaces, on marketing platforms etc,” Atul said.

“With the customer’s consent, we can securely plug into their data sources and understand their business cycles and their needs very well. Velocity uses their data to build a point of view on the health and creditworthiness of the business and then facilitate financing to it. We are the fastest way for them to get funded,” Abhiroop said.

Velocity offers three products – revenue-based financing, fixed EMI, and overdraft. Typically, in a traditional loan, businesses get money and pay a fixed monthly EMI. “We realised that a lot of these new-age businesses see fluctuations in their revenues. An e-commerce business could have good revenues during festive times after which it declines. Because these businesses do not have cash flow in lean months, we offer revenue-based financing,” he said.

Velocity pioneered this product in India. Here, the loan repayment is tied to a revenue share. “So, if we extend 1 crore of capital to a business, and have, for example, agreed on a 20 per cent revenue share then we will keep on taking 20 per cent of their monthly sales until the time they have paid us back the loan amount,” he says.

For its services, Velocity charges a fixed percentage of the loan extended as its fee. “Our revenue is only the fees that we charge,” Abhiroop said. So, in the above example, if Velocity charges an 8 per cent fee on the 1 crore loan amount, then it collects back 1.08 crore from the borrower’s revenue share. Out of this, 8 lakh is Velocity’s revenue from that transaction.

The second product is a fixed EMI facility for borrowers. A few businesses, like the B2B SaaS industry, have stable recurring monthly revenues not prone to seasonal fluctuations. “For them, we have a fixed EMI offering in which they can get the money upfront and repay in the next 12 months in equal instalments,” he said.

The third is an overdraft product. “It is like a recurring drawdown line available to borrowers. Instead of a one-time financing, they can take the money as and when required, and pay it back every month based on their revenues,” he said.

Velocity has raised 250 crore in equity funding and its major investor is Valar Ventures, a New York-based fund backed by Peter Thiel (former co-founder of Paypal) and Velocity is their first Indian investment. The fund, run by just two partners, invests in fintech companies globally.

The potential

Abhiroop said the world of new-age businesses is vast and there is a big universe of companies they can serve. Its business segments currently include e-commerce, B2B SaaS companies, cloud kitchens and restaurants. “We started working with cloud kitchens and restaurants this year. Beyond this, we are also analysing other sectors that we could get into,” he said.

Since its inception, Velocity has made over 2,000 investments in over 1,000 companies. “The number of investments is high because a lot of these companies keep on taking repeat financing from us,” he said.

According to Mihir Vaidya, co-founder, and co-CEO of Pune-based Zlade, which has raised 7 crore through twelve rounds of funding from Velocity, the company’s quick turnaround time (TAT), fast disbursals, and ease of execution of the entire financing process makes them a reliable and easy funding option for digital-first businesses. “Evolution begins with a revolution. And that is what Velocity has brought to the Indian startup ecosystem. We have been working with Velocity for the past 2 years,” he said.

Currently, Velocity has partnerships with RBI-regulated NBFCs (non-banking financial corporation). “We source customers for them, we manage collections for them, but the lending is on the books of these partner NBFCs. We have also applied for our own NBFC licence,” Abhiroop said.

Saurav believes while historically a lot of sectors have been impacted by technology, its role in financial services is most crucial. And for Velocity, the role of technology and the ability to harness and analyse digital data from sources like GST servers, bank statements, and credit reports etc plays a crucial role in its efficiency and speed of disbursing credit.

“We also monitor the risk on a real time basis through early warning signals. So, I think technology has a role to play across the board,” he said.

Velocity’s financing process is heavily technology-enabled. “It starts with the way we identify these companies, our evaluation in terms of integrating into online data and then building our entire risk models on top of that,” he said.

For the customer also, it is a seamless interface. “They know almost in real time about the revenue flow, the current outstanding etc. So, technology has solved the transparency problem for customers, which was not there in a traditional offline process because people would apply for a loan for days and have no clue about what was happening,” he said.

After starting with e-commerce, Velocity recently expanded to SaaS and cloud-based kitchens. “In 2023, about 90 per cent of our financing was in the e-commerce and D2C space. In 2024, we believe that e-commerce as a share will be around 50 per cent, and the remaining 50 per cent will come from the two new sectors – food delivery restaurants and B2B SaaS companies,” he said.

“The other big area of focus for us is our B2B payments app - Velocity Pay. It is a relatively newer product for us which is showing very strong early signs. So, on a quarter-on-quarter basis, we are growing three times and I think that is a very exciting opportunity for us,” Abhiroop said.

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