Published: 12/24/2020

Good morning and welcome to the year's last newsletter post. Damn what a year it has been- I started the newsletter back in Feb, just a couple weeks after the US reported its first COVID case and here we are 9 months later with 223 daily updates and ~120,000 words. For our end-of-year special, I wanted to talk about the breakout company of the year and Vedica predicts that 2021 will be big for embedded finance in India.

2020's Breakout company:

➡️ A month ago, I was reading a popular seed investor's post on what he thought was 2020's breakout startup for the year in the US- it was an online events platform called Hopin that went from $0 in revenue and money raised to tens of millions in revenue and 3 rounds of funding- the last of which valued the company at $2B. And while the Indian company I'm talking about today hasn't raised any capital in 2020- they've grown tremendously and went from being a relatively unknown company to a very well known one.

➡️ I'm not sure if some of you have guessed the company by now, but it's WhiteHat Jr. Yes, yes I know I've been very critical of the company and still think a lot of their sales & marketing practices are terrible and certainly was shocked and disgusted that they tried to silence their critics but the company has certainly executed on their vision in 2020. To give some background on the company- it was founded in November 2018 (just over 2 years ago), raised a $1.3M from Nexus & Omidyar in April 2019 followed by a $10M Series A announced in September from Nexus, Omidyar and Owl Ventures.

➡️ I personally hadn't even heard of the company until this June when a publication did a story on their growth during the early months of the pandemic where they had hit $40M in annual revenue run rate (they did >$3M in revenue in May). At first, I could really believe it until I spoke to an employee at the company who told me that it is was infact true. The company went from <$1M in monthly revenue at the end of 2019 to >$3 in May.

➡️ There were then multiple rumors of the company of the company being in acquisition talks with BYJUs and them raising a Series B, which culminated in the company being acquired for $300M by BYJUs in August. In an ecosystem where exits are hard to come by (and when a lot of acquisitions are more like acqui-hires), WhiteHat was able to pull off a multi-hundred dollar acquisition in less than two years- not bad for a company not as well known at the start of 2020.

➡️ At the time of the announcement, the company said it had hit $150M in annual revenue run rate, which translates to just over $12M in revenue. The company (roughly per my assumptions) grew 4x from January to May, and then grew another 4x from May to July (wow!). Despite their questionable sales and marketing practices, scaling a company that fast is no easy task- especially a company like WhiteHat which isn't exactly the same as other software companies and requires a lot of human capital as well. The company's model has been to teach 1-1 classes to children, and a single teacher can only manage a handful of students- so as they grew rapidly, they also had to train & hire as rapidly.

➡️ Since the acquisition, more was made public about the company which didn't sit well with a lot of people (including me) and instead of addressing it head-on, the company decided to double down on its advertisements during the IPL season and filed court cases trying to silence critics asking valid questions about the company's practices.

➡️ 2020 has certainly been the year of EdTech with billions being invested in the sector. Indian EdTech companies are reaching scales they hadn't before, so it certainly makes sense to me why an EdTech company would be the year's breakout. I'm still cautiously optimistic about the sector as the pandemic has certainly changed the way some part of the education industry works. Let's see what 2021 and beyond has to offer in the sector- hopefully an IPO or two?

Embedded finance in 2021

➡️ To be honest, saying embedded finance will be big in India is not really crystal gazing as such. Embedded finance has been a big thing even among start-ups – everything is fintech – but as was the case with UPI and payments, India is taking a slightly different approach to fintech. This past year was a big year for some of the big building blocks that will enable embedded to really take off next year.

➡️ Just like UPI, India has adopted a public infrastructure approach to other parts of the fintech puzzle. First, this year the country rolled out its account aggregator framework and the first few account aggregators started operating. Account aggregators are technology intermediaries between companies seeking financial data of customers (financial information users) and those holding that data (financial information providers).

➡️ For example, an account aggregator can collect financial information from your bank and share it with a lender, if you are applying for a loan. In a very paper and bureaucratic financial system, this easy access to a user’s financial information, whether it’s bank statements, insurance policies, mutual fund / stock holdings, or tax return by banks, wealth managers, lenders, etc. has the potential to be a massive game changer. The real benefit of the AA framework is that it puts in place regulated and standardized processes for this flow of data. Similar to UPI, the benefits of adoption can potentially scale very quickly.

➡️ The other piece of infrastructure that is in the works in OCEN, the Open Credit Enablement Network. The folks who dreamt and built UPI to be the payment rails in the country are now working to build credit rails. OCEN really builds on top of the Account Aggregator framework, and allow a variety of businesses to act as loan service providers in partnership with banks. These entities have lower regulatory burden than banks and can act as a lead gen / distribution channel for regulated lenders.

➡️ Many start-ups are more likely to be better placed to reach out to customers traditional banks can’t, and can build better integrations and interfaces with account aggregators, etc. Banks benefit by reaching customers they have traditionally struggled to serve, and offering financial services through their platform can make a start-up more deeply entrenched with its users and create a fly-wheel (think what Square or Shopify Capital have done).

➡️ The first big use case of OCEN that is being talked about it cash-based lending for India’s ~63M Micro, Small and Medium enterprises. Many of these enterprises have been poorly served by traditional banks in the past because they might not be asset rich and traditional banks don’t lend against future cash flows. But the AA framework can now allow for more creative ways of analyzing financial data and underwriting loans. OCEN can, in theory, make the disbursement of these loans easier and be more creative in collections as well.

➡️ How the different pieces of this puzzle fall into place and play out will be very interesting to see and I think 2021 will be a big year on this front. We’ve already seen a huge boom in start-ups catering to kirana stores and MSMEs in India. Incorporating embedded fintech solutions to more holistically serve this customer segment makes 100% sense, especially since they have been so poorly served historically. For example, I can definitely see Khatabook offering loans to its kirana store clients, Udaan to small traders and Zomato to restaurants on their platforms, etc. Access to credit is one of the biggest bottlenecks to growth for small companies, and if some of the eco-systems bigger start-ups can start facilitating the growth of their users it can easily lead to a virtuous cycle. I’m bullish on how this will play out!

Feedback & ❤️ always appreciated, see y'all in 2021! BONUS (Tweet of the day): https://twitter.com/Pentropy/status/1341808993837072384

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