S1E9 | Truths About Empowering SEA’s 71M MSMEs Through Financial Inclusion | Nikhilesh Goel, Validus Capital

How do you convince billion-dollar institutional investors to trust a relative upstart with their funds in a market with so much financial turmoil? And how do you plan expansions into multiple countries, all of which have entirely different regulations around your business? Where do you even begin building out such a financial portfolio?

Discussion Topics: Truths About Empowering SEA’s 71M MSMEs Through Financial

• Nikhilesh’ story
• The inception of Validus
• Moving from mass to premium positioning
• Localisation of their model
• Hards truths about expansion
• Pressing the accelerator
• Getting to profitability
• Making SMEs’ lives better
• Current scale
• Hard truths about financial digitization
• Validus is secretly an impact business
• A happy childhood
• Hard truths about being a founder

Transcript: Truths About Empowering SEA’s 71M MSMEs Through Financial

Elise Tan: Hi, I’m Elise Tan. I’m your host for today’s episode of Hard Truths by Vertex Podcast. I’m really glad to have Nikhilesh Goel, Group CEO and co-founder of Validus. Hi, Nikhilesh.

Nikhilesh Goel: Hey, thanks, Elise. Thanks for having me. Pleasure to be here.

Elise Tan: Thank you for being here. Validus is ASEAN leading SME-focused, full suite and financial services provider. Their offerings include lending, business accounts, expense management, and corporate cards. Nikhilesh spent 12 years in private equity and corporate finance across Southeast Asia. His expertise includes debt and equity financing for SME companies across various sectors. And it also includes portfolio management and value creation. So, Nikhilesh, I’m really happy to have you here. And what’s new at Validus?

Nikhilesh Goel: It’s a startup, something or the other is always new. But what we’re really riding high off right now is hitting a milestone of having just crossed US $2 billion of total aggregated lending across ASEAN. And having just closed our Series C1 fundraising from leading Japanese and Korean financial institutions.

Elise Tan: Congrats. I think this is definitely a milestone and I believe that you have left something in order to join Validus, what was that?

Nikhilesh Goel: My journey has been interesting. So the first half started off as a classic Indian story, which is about an Engineer who did coding for a couple of years and then jumped into finance after an MBA. I started my career with a private equity fund. Doing mid-market investing out of the blue moved to Vietnam in 2011 and ran the M&A team for one of the largest conglomerates, We raised a billion dollars from bulge bracket firms like Goldman, KKR, and TPG. And that’s when the entrepreneurship bug bit me for the first time, I teamed up with a couple of ex-colleagues to start an M&A advisory business.

We did deals across Southeast Asia with large names including Time Warner, but having worked in financial services all my life, there was always something missing, that I could create multibillion-dollar businesses by pulling cells on an Excel sheet. But as cliche as it might sound, I could not sell a pen in real life. So when I bumped into Vikas, he was building a brick-and-mortar tech business, if you can call it, and I just yearned to be a part of it. So yes, I did leave a private equity career, and an investment banking outfit of my own to jump into this, but it’s been one hell of a ride.

Elise Tan: Wow, you have such a varied career path. You mentioned how you started off as a programmer engineer, and then look where you are now as an entrepreneur. And when did Validus get started? How many years after that journey for you?

Nikhilesh Goel: Seems like a few 100. But Validus was incorporated in 2015. We actively started lending in 2016. I think we took a few years to find our footing, and really figure out what gets going in this market. But it’s only been the last three years that we’ve really started running full steam.

Elise Tan: So how did Validus get started?

Nikhilesh Goel: That’s an interesting story. So Validus was actually started by my co-founder Vikas. We share the same hometown Kolkata. Vikas, who moved here in 2015 started Validus as an SME lending platform, focused on accredited investors. I bumped into him a couple of months after he started Validus loved the business model, and figured it was the right time, the market was big enough. But more importantly, he was something that I could work together with. Joined Validus within a couple of months of it having gone live. And we’ve never looked back since.

Elise Tan: And you mentioned it being the right time, as well as there’s a big enough market. So how did you realise that?

Nikhilesh Goel: This is always a tricky problem. I mean, everybody speaks about the total addressable market. What nobody speaks about is when or how you time that market. So the underserved opportunity in the SME market has always existed whether it is India, whether it is Southeast Asia, or most other developing countries in the world.

The question is, when do you decide it’s the right time to dive in? And I think that holy cocktail is a mix of is the market ready enough from a regulatory perspective? I strongly believe that it isn’t always about being the first to get in. It’s about figuring out what’s the right time to get in. So we waited till a couple of other platforms had gone live in Singapore.

We saw that the regulatory environment was getting ready for this business to scale up and jumped in. The second, of course, is trying to figure out in a marketplace both supply and demand. So while the demand side existed the supply side which is where do we get the money also had to be in place. Singapore, of course, has a lot of high-net-worth investors.

But what we also saw was with the advent of the Southeast Asian demography, a lot of institutional investors were now looking at alternate assets and how to get yield. I think checking off those boxes gave us the right feel that this is the right time and we jumped in.

Elise Tan: I think that’s really smart. I’m intrigued that, you mentioned the supply. And I believe that the investors that you worked with are only accredited investors, are they mostly from Singapore? Or are there other parts of Asia that are also participating in the loans and other products that you provide?

Nikhilesh Goel: So when you look at the P2P lending industry, and we are a subset of the same started off in the US almost 10, 12 years before Validus started, and therefore we had the opportunity to look at their evolution, and what started off as a retail asset class, people contributing a few $100 each, ultimately turn institutional. And that kind of business, when it turns institutional, attracts the big dollars is when you can really scale it up. And we believe that Southeast Asia would go the same way.

The second thought process was that an institutionally branded business always has a little chip on the shoulder, one can always open an account with the retail bank. But as an HNI, you always feel special when you bank with Julius Baer. And we wanted to have the same positioning. So we became the first platform in all of ASEAN, to say that we are open exclusively to accredited investors.

While the positioning was beautiful, what it allowed us to do was to screen investors who of course, had large cheque sizes, but more importantly, had the right risk appetite for this product. So that’s how the journey started. We tested out Singapore, which, of course, is the best market given just the high density of millionaires around to invest in alternate products.

Today, we are at a stage where we run two models, we run a marketplace, and we are not just high net worth individuals, but family offices, hedge funds, and even large banks participate on our platform. The second model is where we have evolved to lending off our own balance sheet. So we have Japanese payment providers, UK-based funds, and even large names like Citi who have given us facilities on our own balance sheet to now start lending and behaving like a full-fledged financial institution.

Elise Tan: I would say that a lot of innovation in Singapore or Southeast Asia, we have actually taken reference from the US. But I think the best people who win are those who managed to make the model more localised. Can you share a little bit about how you have localised the concept to make it work?

Nikhilesh Goel: Oh, absolutely. I think just copying the business model and trying to replicate what works in the US probably works for a very small sample set of businesses. So not only have we localised the model for Southeast Asia, but I would say we have hyper localised it for every single country, what works in Singapore will never work in Indonesia or Vietnam.

So I think the first thing we did was, the investor strategy was, of course, localised. But when it comes to SME behaviour, that is unique in Southeast Asian countries. For every product, we love starting it off in Singapore, it’s a smaller market, it’s a well-controlled market, and therefore perfect for experimentation. Once the product works, we take it straight to Indonesia, which is a huge market. But obviously, with much higher risk parameters across the board.

We believe if we can customise the product and make it a success there, then we can easily localise it for Vietnam and Thailand. So those are the things I think that we’ve done really well. What has helped us do that is a simple principle, let’s create a global strategy. So if we create a risk algo the components have to be the same in every single country.

But then when we go to each country, we make sure that the team is 100% local. We make sure that the CEO, chief risk officer, and head of sales, are financial services champions, or veterans with at least 20 to 25 years of solid SME banking experience in that particular country.

Their knowledge and experience help to localise that model, find the right local variables that tick the boxes, or fit the and test it out. And once we believe that the algo or the product is ready for the market, then let’s just put our money where our mouth is and scale it up.

Elise Tan: I love what you shared, because in terms of expansion and localising definitely the team hiring someone who is local is so important compared to thinking that you could take someone from Singapore and just plug the person in and then thinking that person can get up and ready in a few days, I think that is really impossible and not realistic. Did you start with the right recipe from the beginning, which is hiring locals, and then being able to support them with processes so that they can run from day one, what was the Hard Truth that you discovered with expansion?

Nikhilesh Goel: I wish I could say yes to everything you’ve asked. But I think the Hard Truth is no, I can probably write a book about all the wonderful mistakes we’ve made. And we continue to make. But I think that one of the joys of being a startup is that you’re allowed to make mistakes, as long as they are small ones. I think the first Hard Truth about expansion is that it sounds a lot more romantic and easy than it actually is.

I remember landing up in Indonesia or Vietnam, and then just figuring, okay, how do we start a business here, and in every single country, you’re starting from scratch, from incorporating the company to finding the right people, after finding the right people actually convincing them to leave a cushy banking or financial services job to joining a startup, which probably doesn’t even have an office yet, figuring out the regulatory environment, and getting that coveted license, which often is an extremely complex process, building trust in that market.

We are not a DBS, or JP Morgan, where everybody knows our brand, we are an upcoming startup. So when we land up in Thailand or Vietnam, nobody has heard of Validus, how do we convince the local investor to park their monies with us, so that we can start lending? And finally, lending is one of the most challenging businesses, because in other startups, once you’ve made a sale that’s the job done, you book the revenue in lending, which is just 50% of the job, once you made the sale, which is you made the loan, you have to also get the money back. So how do we make sure that we scale while not losing the money that we’ve lent out?

Elise Tan: Wow. I’ll go to that later. But before we go there, I also want to take a step back when did you know it was the right time to scale up? When did you realise there is the product, that product has been validated, and that there is a product-market fit?

Nikhilesh Goel: That’s an interesting question. This is something that we ourselves grappled with a lot. When do you really know that this is the time to push the pedal and scale up a product, there are quite a few things that need to come together in order for us to get that feeling. And we were actually among the laggards among FinTech lenders when it came to expanding beyond their home country.

We didn’t get the FOMO because we knew in the end, we could accelerate and overtake everybody. Today, we do more volumes on a monthly basis than probably the next two players combined. So what is it that works for us?

I think, first and foremost, looking at the demand side, the SME ecosystem, the channel partners had to be ready to feed the leads into our funnel.

The second was the credit algorithms needed to be robust. More importantly, we needed to believe in them that look, managing $2 million of origination a month and keeping bills low is okay. But can we do the same when the numbers become 100, 150 million a month.

The third was making sure that the other side of the marketplace is as ready and robust as it can be, which is the money, the high network population is good if you want to build a book of 20 $30 million. But when we are speaking about hundreds of millions of dollars, the institutions have to step in. And that takes time, that takes building a credible track record. And finally, and most importantly, what doesn’t really get spoken about is the backend systems processes operations.

We are a financial services business we are allowed to make mistakes, but we have to comply with regulations. We can’t really lose people’s money for mistakes made in our backend. And that was kind of a magical moment when things started to come about. I think there is no real checkbox that everything is ticked. You just know that the time is right we can now take something and really start running with it.

Elise Tan: I think the Hard Truth about running a FinTech company is really, compared to other startups, there’s a limited margin of error tolerance.

Nikhilesh Goel: When COVID-19 happened, there were a lot of pundits and gurus who said, Oh, these P2P lending businesses will completely fall apart, etc. And we were scared. I remember it all started around March or April. So roughly when Q2 came about, that is when we took a really good hard look at our portfolio and we said, wait, the reverse is happening. Banks and financial institutions have taken a step back.

Everybody’s figuring out how to work from home, demand has gone through the roof, interest rates have fallen, investors are crying out for yield and our portfolio is holding well. We said, maybe this is the moment, let’s accelerate and I think since then, we have not looked back. Our Indonesia business has scaled up almost 50x in monthly volume since the beginning of COVID till now.

Elise Tan: That’s incredible. And what’s your grand plan for Validus?

Nikhilesh Goel: I think the grand plan is to break even and become profitable. I think that’s the holy grail. I know that’s what the world and the investor community are speaking about now. But even a couple of years back when the buzzwords were hyper-growth and Blitzscaling, I think we were the only ones who would always tell everybody that we do not want to be the fastest-growing player.

But we do want to be the last man standing. Our biggest market, Indonesia, is already profitable, we made a little under half a million dollars of profit last year. And we are pretty confident that we will be profitable at a group level by the end of next year. I think when a business stops relying on VC money, when it actually starts churning out hard cash, I think that is when at least for me business can be considered successful.

Elise Tan: Definitely. And in our previous episode, we actually interviewed Ben Mathias, our managing partner. He also mentioned that a few of our portfolio companies like Validus, have actually grown more steadily despite all the crazy growth that other startups could be looking at previously, and I think we want to actually learn a bit more about Validus products and how you guys are serving the SME market, and helping them enjoy more services, and maybe even grow their businesses across Southeast Asia?

Nikhilesh Goel: Absolutely. I think it all started with a vision saying that can we finance an SME company quicker than what it takes for a bank to print a form and give it to them to fill? Which means can we make lending decisions in seconds? Can we finish the process in minutes? And can we put money into the hands of the SME entrepreneur within a couple of hours?

We started off with a safe and secure product, which was invoice financing, which is discounting invoices that SMEs may have to large corporates, once that model worked, we went to the other side of the supply chain, which is financing distributors because distribution chains in an Indonesia, Vietnam, Thailand is pretty complex, there are a lot of actors that we can finance, eventually bundled it all together into working capital products.

Today, we’ve reached the stage, when an SME comes online to us to apply for a loan, they give us just two PDF documents which are read by a machine, and then there is an instantaneous approval or rejection process, where it’s the machine that determines the approval, the quantum of the loan and the pricing. And we’ve taken it a step further where we were dispersing a little under 200 million in a month of loans to 1000s of SMEs across ASEAN.

So we asked ourselves, why can’t we open an account for them, disburse the loan to that account, give them the tools to spend the money, which could be bank transfers, which could be cards, spend management, forex insurance, whatever they need, where we make not only fee-based income when they use our products and channels, but we also get data on them.

The data feeds back into the algo, which in turn allows them to borrow more from us. So that was the thought behind launching our new banking product or banking as a service. And that’s taken off really well. So today, we are not just a FinTech lender. But we are a full-fledged or full-suite, full-stack financial services company.

We started off at a stage where every incorporated company was eligible. And when I look at the portfolio, there are services companies, manpower, security guard companies, nail salons, restaurants, coffee shops, you name it. However, approximately 70 to 80% of the businesses in ASEAN are actually what are called household businesses, which means this is an entrepreneur or a family doing a business without even having a company.

So can we go and finance them? So today, very proudly in countries like Indonesia, Vietnam, and Thailand, we are even lending to household businesses, where there is no company, but there is a family or an individual running a business and they qualify for working capital, just like any SME in any developed market.

Elise Tan: Wow. Can you tell us prior to companies such as Validus what was running a business like for SMEs?

Nikhilesh Goel: We keep talking about how life is tough being a startup founder or for a startup. I think life is tougher for an SME. If we take away maybe 10% who are really successful, the broad majority of SME owners are spending half their time just firefighting and half their time trying to grow the business and they are facing challenges on a daily basis.

Imagine if an SME needs to change their bank token, if they need to get a loan they’re walking into a bank branch, they don’t have a priority counter to go to which means they queue up to get a token, wait for hours, speak to somebody, fill a form, submit documents where something is always missing or outdated, resubmit the documents, wait for an answer, and this is all the while you’re trying to keep your head above the water and continue swimming.

So we want to start by financing SME businesses. So the entrepreneur can grow the business, hire more people, and impact the lives not just of the employees, but their families, and their suppliers, which means, we just give them more time, either to spend more time growing the business or just back with their families.

Elise Tan: Yeah, and I think what you have actually changed is really the time needed in order to run the business as well as the access to capital. So it’s not just capital. Can you give us some numbers, how many SMEs you are serving, as well as the kind of average loan amount that has been disbursed?

Nikhilesh Goel: On a monthly basis right now we are disbursing, just under 200 million Singapore Dollars of new loans every month. The number of SMEs is in the thousands1000s. But we just generally don’t publish the exact number of SMEs. The loan quantum varies by product and by country.

So when I look at Singapore, the average loan size would be anywhere between 100 to 150,000 Singapore dollars per SME with a big variance, the smallest loan size could be 20,000, and the largest could be maybe half a million dollars. As we move to Indonesia and Vietnam, the average loan sizes keep falling. So in Vietnam, an average loan size would be anywhere between 10 to 50 thousand,000 Singapore Dollars or equivalent in local currencies.

Elise Tan: Wow. I mean, all these are sizable numbers. Because if you look at in terms of how big the business is, or what the cost of living is, these are sizable numbers. So great. It’s great to know. So Nikhilesh any Hard Truth about lending money via an automated system, or to your customers, anything to share?

Nikhilesh Goel: It takes a lot of courage. I mean, building an algo is the easy part, which is just a set of rules put into a matrix on the basis of which will end, but it takes a lot of courage. I do remember the first time we rolled out an automated algorithm at the end of the week, we found that there were two loans that had been disbursed. And nobody knew who these borrowers were, we had the names in the system.

But nobody in the operations team, nobody in the sales team knew who these borrowers were, or what business they did. And that is when we realise that wait, the business has truly, truly gone digital. The second is convincing the entire ecosystem that this is how the business needs to get to. When I talk about the ecosystem, it’s mainly the lenders. Imagine trying to convince an institutional lender that there is no human being looking at the financial statements, the documents that you are not even collecting the documents that a bank would collect in order to make this lending decision.

We are expecting we have convinced institutional investors to park hundreds of millions of dollars with us where we are making lending decisions purely using alternate data. And while this sounds great, it takes a lot of convincing and a lot of hard work to make the ecosystem believe in this. But like they say nothing works better than track record and numbers.

Elise Tan: Yeah, definitely. Is there a particular case study that, where Validus has changed the life of the business?

Nikhilesh Goel: Oh, absolutely. I mean, I know we don’t talk to borrowers while making lending decisions, but we do talk to our borrowers to understand what their needs are, and how can we develop better products, there are numerous businesses that have come to us and expressed how we’ve made a big difference. There are businesses around manpower services, where they employ maybe a few 100 or a few 1000 contract workers.

But imagine during COVID when projects were suddenly put on hold, the business stopped making revenues but they had to pay their workers. So that is where we came in. Or imagine a restaurant owner or a food shop owner who wants to add another few outlets, but has nothing to pledge to the bank.

We have financed businesses, including primary schools, and kindergartens, so it’s often very heartwarming to see the impact that we create when people come and tell us that look, you helped our business survive or you helped us double the number of people that we’ve hired. And then when we start to compound that thinking about look, the number of jobs that were created, the families that were impacted, it’s a pretty warm feeling.

Actually, this is where we branch away from the pack a little bit where we don’t brand our business as an impact business. Because yes, our business creates an impact, we touch lives, we create employment, and do nation-building, but at the end of the day, we generate yield for our investors. And it’s good if a business that generates yield also does impact. But a business that just creates impact, but doesn’t make money probably will not last the test of time.

I think the last five or six months were very interesting, where every single asset class was in the red, as a complete cohort, whether it was equities, bonds, coins, etc. And during that period, when an investor’s entire portfolio is in the red, we’re the only one still generating that stable 7 or, 8% dollar return that’s when people look at us with newfound respect.

Elise Tan: Got it. I just want to know more about your childhood, and how you are as a person. So would you like to tell us a little bit about your childhood? What is it like growing up?

Nikhilesh Goel: Yeah, I think, different people would have different classifications of their childhood. When I think of mine, I think it was perfect. I never grew up in a privileged childhood, we were a classic Indian middle-class family. There was pressure to do okay in studies, but never really be at the top of the class, which I never thankfully found myself in.

So when I think of my childhood, most of it was spent playing cricket on the streets, most of it was spent traveling around India, with my parents, and just beautiful memories. So, if I think of a perfect childhood it is just not really having any needs and just being happy.

Elise Tan: And you mentioned cricket, I think I read somewhere that you compete or something. Can you tell us more?

Nikhilesh Goel: Yes, I’ve played competitive cricket at various levels growing up. I do believe that team sports are very important. So I have played for school district, and college, and I continue to play Division cricket in Singapore. I’ve broken fingers on both hands. But that’s okay. There are other people in the company who can do the typing now.

Elise Tan: Thanks for sharing with us. So before we end, I also want to ask you what has been a Hard Truth of being a founder?

Nikhilesh Goel: I think there are a lot of Hard Truths. I think preparing to become a founder is like trying to learn swimming or driving by reading a book, you can know all the right things to do. But till the time you dive into it, you just don’t know what it feels like. I do believe that this whole notion of entrepreneurship being a founder is a little over glamorised or over romanticised by the plethora of media, the reality is that it’s a lot tougher, it’s very lonely, it’s very tough when things are going good everybody’s with you, you’re on top of the world.

But the moment the tide turns, and the tide turns, every three months or so, you suddenly find yourself to be very alone. You cannot share it with teammates, you can’t share it with customers, with investors. And that’s when you have to really find the right ecosystems to support you.

Elise Tan: My next question, I was going to ask you, how do you manage it, your emotions and all that when the tide turns against you? But I guess the other issue that can come up is you don’t know who to share with, who could be your good friend, how do you do then? How do you find the right person to share?

Nikhilesh Goel: Oh, yes, I think this was one of the biggest learnings. So in my case, I guess, we were lucky that Validus is not a single co-founder company. So at least between Vikas and me, there are ideas, problems, and sorrows that we can share with each other. The second is, I think having the right network or community to share this with, like I said, you can’t share it with your investors or customers or team members.

But there are fellow founders you can share it with. I do have a couple of founders who I consider friends, and mentors, and one of the best pieces of advice I got was to look every time you take a blow to the chest Yes, you will feel like just like giving it all up and lying down and it is perfectly okay to do so as long as you get up in an hour.

Elise Tan: Yeah, that’s a great one. And if I may kind of connect it with your childhood I feel like your parents have allowed you to be who you are to enjoy both work as well as play. And then you also build yourself an environment where it allows you to be who you are and be kind to yourself as well. And I think that’s really important in a really fast-paced, rapidly changing environment, like running a startup. So with that, I thank you so much for your time, Nikhilesh. I really enjoy what you have shared with us. So hope to see you again.

Nikhilesh Goel: Thanks for this. Best wishes for the podcast and I can’t wait to hear all the episodes once they come out.

Elise Tan: Thank you.

Our Guests: Nikhilesh Goel

Nikhilesh Goel is the co-founder of Validus Capital. He leads the Singapore team and collaborates with the Vietnam CEO to manage the Vietnam team. Prior to founding Validus Capital, he worked in private equity and corporate finance in Southeast Asia for the previous 14 years. His experience includes debt and equity financing in a variety of industries, as well as portfolio management and value creation in SMEs. He also established Taipan Partners’ M&A advisory practice, which focuses on consumer and technology sector transactions throughout Southeast Asia.

He holds a Bachelor of Engineering degree from Nagpur University as well as an MBA in Finance from the University of Delhi’s Faculty of Management Studies. He contributes to the fintech ecosystem by sharing insights on alternative lending, small business financing, and peer-to-peer platforms at fintech and SME conferences on a regular basis.

He was recently named one of the ‘Top 10 Fintech Leaders in 2019 and 2020 – Singapore Fintech Association Awards’, as well as the ‘Innovation Leadership Achievement in Singapore Award 2021 – The Asian Banker’.