#025: What’s really going on at Creditas?
Inflation, rising interest rates, and a bearish market are forcing startups to adapt — and nowhere more so than LatAm
Olá technopolists,
The down market has fuelled a big investment announcement at Ualá and regional surges in crypto adoption. Food delivery brings intrigue, with clandestine political lobbying and a new A-list investor.
Plus, with lending businesses occupying an essential place in LatAm’s startup ecosystem, we’re taking a look at Creditas’ financial results to see what’s really going on in their business — and what clues it gives us about the market writ large.
🏦 Greed amidst fear. Ualá, the Argentine fintech unicorn, announced its plans to spend $150mn in LatAm in the next 18 months to make the most of market uncertainty. We don’t have specifics on how the money will get used, but CEO Pierpaolo Barbieri mentioned two things: (a) ambitions to grow Ualá’s user base to 25mn in 5 years and (b) that most of the investment will focus on Colombia and Mexico. Reading between the lines, it seems like Ualá is preparing to spend a pretty penny on acquisitions. They’ve already started: since raising $350mn from Tencent and Softbank in July last year, they’ve made 3 acquisitions – one which gave them a banking license in Mexico (ABC Bank) and another in Colombia (Wilobank). Since they’d likely want to avoid an IPO in the current down market, Ualá is doing 2 things: letting potential sellers know they’re open for business, and openly declaring war on Nubank for neobank supremacy (though they’re starting very far behind the Brazilian behemoth, which just hit 70mn users). Does fintech now have its Pele-Maradona rivalry? Not yet, but perhaps someday. (Reuters)
⛓️ Booming blockchain. According to recent data from Chainalysis, LatAm is the second-fastest growing region for crypto in the world with crypto transaction volume growing 40% year-on-year, only behind MENA. The push is coming from businesses as much as consumers, as both try to find inflation-protected places to put their cash. LatAm has become a crypto lending hotspot, with recent reports from Canadian-based lender Ledn that LatAm now makes up half its lending portfolio. In Argentina, state-owned energy supplier YPF is moving into crypto mining; despite the Argentine government’s previous attempts to curb currency holders selling the peso en masse, YPF is manifesting the motto ‘in a gold rush, sell shovels’. Brazil continues to see crypto become part of the formal economy (and the law): Brazilian firms set a new record, with over 12,000 businesses in the country declaring crypto holdings, while Brazilian federal law enforcement issued an additional 20 arrest warrants for the man behind a $767mn crypto pyramid scheme. (CoinDesk)
🥑 Dark kitchens in the limelight. Virtual kitchens — the behind-the-scenes restaurants powering delivery platforms like Rappi and iFood — are big business, and they just got a little bigger. Foodology, a Colombian dark kitchen platform, bagged a fundraise that’s making headlines because of its ticket size and star power. Their Series B totted up to $50mn ($20mn equity, $30mn debt), and this time, a16z’s investment clout is being overshadowed by another investor: Maluma, the Colombian reggaeton superstar whose investment in Foodology is his second major food delivery play after recently partnering with Rappi. Foodology plans to use the money to double down on Brazilian expansion, where they’ll run into direct competition with CloudKitchens, Travis Kalanick’s dark kitchen venture that raised $850mn last year from Microsoft. Per reports from the FT last week, Kalanick is hoping to surreptitiously protect the interests of his sector through the formation of a new industry body called the Digital Restaurant Association (DRA). Top of the DRA’s agenda is a profit-battle-cum-personal-grudge: limiting the amount that delivery platforms (like Kalanick’s first child, Uber) can charge restaurants in delivery fees. (TechCrunch)
What’s really going on at Creditas?
An experiment in combining What’s Not with Stat of the Week since we’re tackling a big story.
📉 Lending growth — and losses.
Creditas, the Brazilian lending unicorn, has released their financial results from the first half of 2022. It’s rare that we get to glimpse into the financials of private companies, so we’re taking a deeper look to understand their experience and what it reflects about the market.
Remember: lending is big business in LatAm, but it’s also highly risky. Fintech captured 43% of LatAm venture funding in 2021, and lending in its many forms comprises (and touches) a huge portion of fintech — just look at the long and growing list of lending unicorns (see: Creditas, Xepelin, Konfio, Credijusto, Stori). Yet the cautionary tales of collapse at more mature lenders keeps unbridled optimism in check (see: Credito Real, Unifin, AlphaCredit) – or so we would think.
So, what’s happening at Creditas?
First — to their credit, Creditas is celebrating undeniably positive growth: revenue grew 3.5x to $163mn while their loan book grew 2.5x to nearly $1bn in H1. That’s the second year in a row that revenues have more than doubled.
But there’s one big caveat that makes Creditas Not Hot this week: profits are down — way down. Operating margins plummeted from 41% in Q2-21 to 10% in Q2-22, while net losses nearly tripled.
Creditas says the losses are a result of 3 things: accounting changes, interest rate rises, and plain-old portfolio underperformance. Here’s a look at the relative impact of each:
On accounting: Creditas finally updated its accounting methodoloy to be fully compliant with a 2014 international standard (IFRS-9) that forces lenders to recognise losses earlier. It’s mostly a change in accounting definitions, so there’s nothing funky about their fundamentals – every lender will eventually have to comply, so everyone is taking the hit.
The other two, though, say more about Creditas’ business in the current climate.
On interest rates: Creditas is getting squeezed because 70% of the loans it issues to borrowers have a fixed interest rate, while all of the money they borrow is on floating rates that follow the Brazilian central bank rate, Selic. Selic increased sharply this year, and Creditas had to eat the costs because they couldn’t pass them on to borrowers. That squeeze will persist as long as the rate hikes continue steeply.
Finally, on underperformance: a third of the increase in losses is due to Creditas’ portfolio maturing and performing worse than they anticipated. They simply underestimated losses that eroded 9 percentage points (28%) of their margin. It’s definitely not fatal, but it’s large – a signal that the lending unicorn needs to update its risk engine.
So what?
1/ Creditas should be cautious not to let growth ambitions offset its risk-reward balance. When lenders like Creditas try to hyperscale, they have to do 2 things simultaneously: streamline their risk assessments and find lots of new customers. The former can typically be solved with tech, but here’s the rub: finding new customers often means taking on riskier customers, since low-risk customers probably already have access to loans at good rates. That means lenders need to run faster just to stand still – and even faster to grow. Creditas seems to be feeling this: they underestimated losses to the tune of ~$16mn in the first two quarters of the year.
2/ Net income is moving in the right direction… So far, much of the profit impact is due to things out of Creditas’s control, and there is a good chance that the worst is behind them with interest rate hikes and accounting changes. Creditas claims customer acquisition costs (CAC) are also stabilizing, and they haven’t had to make any layoffs this year, either.
3/ … but the margin squeeze isn’t over yet. There are two factors likely to continue hurting margins for Creditas. The first is interest rates; they’re still likely to increase (though more slowly than the past). They issued huge amounts of new debt in 2021, and since most those loans are fixed-rate and won’t mature until 2025, they’ll continue to feel the impact for a while longer. The second is bad debt and defaults. Creditas underestimated the risk in their portfolio in H1 of this year; as we bare down a period that some are saying could be recession, there’s still probability that their lending portfolio will feel some pain. New debt issuances are lower this year than last – a smart, defensive move in the current climate, but one that makes it tougher to offset losses from old loans with profits from new ones.
4/ Venture debt on the horizon? Creditas has raised $310mn this year, but they burnt $116mn in their first 6 months. At that pace, the $310mn would run out around the end of Q1 next year. Public markets are unlikely to kick back into full strength by then, making an IPO less likely — which means they’d need to look elsewhere for venture funding. Raising venture debt would be attractive for the same reasons as other unicorns like Kavak: they could avoid equity dilution from a down-round (which Creditas’s own founder warned about in May) while using their loan portfolio as collateral to negotiate better interest rates. Given the amount of time required to close these deals, we shouldn’t be surprised if exploratory discussions have already started.
Smart links
Atman Capital announces new US-LatAm fund - with a twist for LPs (TechCrunch)
Prosus goes ‘on the offensive’ with former SoftBank LatAm leader (Neofeed)
Foxbit, Brazilian crypto exchange, begins global expansion (Neofeed)
Endeavor names 4 new advisors from LatAm unicorns (Brazil Journal)
List: Top 250 fintechs of 2022 (CB Insights)
Miami prevails in FT-Nikkei ranking by expanding appeal beyond Latin America (FT)
Lunch with the FT: Elon Musk eats Mexican food (FT)
Deals (October 3-10, 2022)
M&A
🇧🇷 Arco Educação, a Brazilian edtech platform, completed its acquisition isaac, a Brazilian fintech for schools, that values the company at ~$150mn; Arco had previously owned 25% of the company
🇦🇷 clicOh, an Argentine ecommerce logistics startup, acquired Logysto, a Colombian logistics startup, for an undisclosed amount
Early stage
🇨🇴 Foodology, a Colombian dark kitchen platform, raised a $50mn Series B ($20mn equity, $30mn debt) from a16z, Wollef, Kayyak, Chimera, and reggaeton artist Maluma
🇲🇽 Solvento, a Mexican mobility fintech, raised a $5mn seed round led by Ironspring Ventures with participation from Quona Capital, Proeza Ventures, Dynamo Ventures, Zenda Capital, Susa Ventures, 9yards Capital, and Supply Chain Collective, and angels
🇧🇷 Tipspace, a Brazilian gaming platform, raised a $3mn seed round led by Upload Ventures
🇧🇷 Aevo, a Brazilian innovation software, raised a $2.6mn seed round led by TM3 Capital with participation from KPTL
🇨🇱 Yourney, a Chilean coaching platform, raised an undisclosed amount of seed funding
Ad hoc
🇧🇷 RankMyApp, a Brazilian adtech platform, raised an undisclosed amount of venture funding
Did I miss any deals? Let me know!
Tweet of the week
Colombian President Gustavo Petro recently met with Nubank CEO David Velez to discuss his new tax proposal, a sweeping set of progressive reforms that includes a controversial wealth tax. The wealth tax was going to hit entrepreneurs hard, so the startup ecosystem worked with Colombia’s finance minister to propose a lower burden for startup founders that seems to have reached mutual agreement. On Twitter, President Petro touted Velez’s support of the new proposal, and Velez responded:
Translated to English:
Petro: The second richest man in Colombia [Velez] agrees with our tax proposal. Whoever earns more should pay more. This is called tax and social justice and whoever believes in these concepts has a social conscience.
Velez: That's right, President. But there is a limit. Remember that the businessman is the goose that lays the golden eggs. If we get too many eggs, the chicken dies or goes to another place where they treat it better. I leave it to the experts to decide that limit is