The Fintech Startup CRED’s valuation slingshot nearly 3X to $2.2 billion in just 3 months. But the startup posted a loss of Rs 360 crore on a mere revenue of Rs 52 lakh in FY 2020, sparking a debate on hazy business models.
- Credit-card payments app CRED entered the Unicorn Club by raising fresh funds, soaring its valuation from $800 million to $2.2 billion in a span of just 3 months.
- With an operational revenue of a mere INR 52 lakh, Kunal Shah’s CRED spent Rs 727 to earn a rupee in FY20, raising eyebrows over the hazy business model.
- With more than $2 billion valuation and a 5 million strong user base, CRED has still not been able to monetise its operations and is way long off from any plans for monetisation.
- Will CRED outshine the critics or will it meet the same fate as that of FreeCharge?
Bengaluru-based fintech startup CRED has joined the league of unicorns after closing its Series D funding of $215 million in early April. With this new line of credit, the valuation of the startup rose to $2.2 billion. This is a three-fold increase in just three months. In January 2021, the company’s valuation after a Series C funding of $86 million was $800 million. This new development, naturally, has the CRED team bubbling with excitement.
The startup’s founder, Kunal Shah, called it “a massive opportunity” for tapping deeper into the rapidly expanding credit card vertical in India and shaping responsible behaviour. However, at the same time, CRED’s revenue over the past fiscal year has raised serious questions about whether its unicorn status is a bubble waiting to burst.
Watch: Kunal Shah talks about CRED’s monetisation plan
A Unicorn with INR 52 Lakh worth Revenue
The most curious bit about CRED’s unicorn status is that its operating revenue for the fiscal year closing on March 31, 2021 was mere Rs 52 lakh. According to the documents filed by the company with the Ministry of Corporate Affairs, the fintech enterprise posted an income of almost INR 18 crore for the past financial year. However, out of this, INR 17.56 crore came from interest earned on deposits.
In FY19, CRED’s total income stood at INR 3.03 crore, with zero operational income. With a slight jump in its earnings this past year, coupled with an influx of investments, the startup has expanded its expenses across the board. Its direct costs increased to INR 59.14 Cr, registering a 450% rise. Likewise, its employee benefits increased to INR 72.52 Cr, amounting to a 327% rise. These, combined with other expenses such as finance costs, which grew from zero to INR 1.24 Cr, and conveyance, rent, fuel, advertising and legal expenses, CRED’s spent a total of INR 378.29 Cr, clocking a rise of whopping 492% in expenses from the INR 63.90 Cr it spent in FY19.
Even with the revenue it generated from deposit interests, the company incurred a loss of INR 320.31 Cr over the past year. For sake of perspective, let’s put it this way: CRED spent INR 727 for every rupee it earned in FY20.
A Lack of Monetization Model
Many argue that it is not unusual for companies to scale up their spending to be able to scale up operations to a level where they can become financially viable and sustainable. In CRED’s case, that sustainability seems a long way off. Even after securing over $2 billion in investments and expanding its user base to 5.9 million credit cardholders with top-notch credit scores, the company hasn’t been able to monetize its operations.
CRED, which is built as an app for users to pay their credit card bills and earn rewards in the process, does not have a single, clear source of revenue so far. Its earnings are from multiple products – credit card payments, Rentpay (where users can seek monthly rent on credit cards for a small fee), instant credit line CRED Cash, an e-commerce platform known as STORE where purchases can be made using CRED coins and merchant payments gateway CRED Pay.
In an interview in January 2021, CRED founder Kunal Shah admitted to having “no clear winner on monetisation channel”, adding that this was because the company was still only “six months into its revenue journey”.
Meanwhile, lofty valuations of startups still in their nascent stages have triggered questions and debate within the investment circle. The strategy of ‘burning’ investor capital to project rapid growth, even when there is no visible monetization model to make ventures profitable, is garnering scrutiny and criticism. Some are going to the extent of labelling it a Ponzi scheme.
FreeCharge Déjà Vu
CRED’s story seems a lot like that of FreeCharge – an e-wallet for payments, savings, investment, lending and insurance. This fintech startup, which was also the brainchild of CRED founder Kunal Shah, also received funding to the tune of $117 million over the years. In April 2015, Snapdeal acquired FreeCharge for a whopping $400 million.
Two years later, we witnessed the beginning of the fall of an e-commerce unicorn once valued at $6.5 billion. With Snapdeal’s merger with Flipkart falling through and the e-commerce giant’s losses mounting fast, it had to sell FreeCharge to Axis Bank for a mere $60 million – just a little over 10% of what it paid for it.
Will Kunal Shah’s CRED go the FreeCharge way or will this unicorn find its rainbow in the clouds remains to be seen.