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Start-up funding: Better prudent than sorry later
Azhar Abdul Wahab (JP/Arief Suhardiman)In this digital age, heavyweight investors race each other to become the first backers of high-profile start-ups, showering them with eye-popping amounts of money
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Azhar Abdul Wahab (JP/Arief Suhardiman)
In this digital age, heavyweight investors race each other to become the first backers of high-profile start-ups, showering them with eye-popping amounts of money.
Flush with cash, imprudent start-ups usually spend a lot of the money to lure customers with big discounts. The investments, which can continue flowing in for years, are mainly spent on getting customers and research.
In reality, however, most tech startups continue to struggle to make a profit. As the companies burn through money to attract customers, investors patiently wait for their share of profits.
This common practice receives a critical assessment from Azhar Abdul Wahab, a businessman and former banker, who dismisses it as “cash burning”.
“One day the investors will ask them, ‘So where’s the return I’m entitled to?’” he says.
He recalls the credit card business bubbles that happened in the early 2000s. Banks offered generous rewards and discounts to lure new customers. However, promotions did not always translate into immediate profits.
Then in the 2000s, many banks waited for the substantial returns they had expected but they never came. Instead, they lost money. Several banks have made a profit only in recent years. Such promotional business schemes, Azhar says, are too risky and can be unsustainable.
His many years in the banking industry have taught him the need to be prudent. A bank needs a lot of money to open a branch office and to hire new staff, making it harder to generate the revenue it badly needs to compete with other banks.
A Malaysian national, Azhar began his career with the Qatar National Bank (QNB). In Indonesia, the bank that QNB acquired was Bank Kesawan, where he was chief business director until 2017.
The QNB bank managed to open 33 branch offices, but it was too small to compete with other local major banks with thousands of branches across the country.
After resigning from QNB, Azhar established an online loan platform called Danai.id in 2018.
As a veteran banker, Azhar firmly believes in the principle of prudence when it comes to running a business. So, he started Danai.id small. It runs a collateral-free loan scheme, providing funding up to Rp 35 million (US$2485.71) for creditworthy employees of partner companies. Payments of the loan, with a tenure of up to 36 months, are deducted from their monthly wages.
Nonbank online loan providers like Danai.id have been mushrooming since the Financial Services Authority (OJK) issued Regulation No. 77/ 2016 on IT-based lending schemes. They vie for the market share that mostly consists of the low- and middle-income brackets that have no, or limited, access to the bank, offering fast and easy collateral-free loans.
Lately, the scheme has earned a bad name from illegal online loan sharks that resort to unethical debt-collecting methods. Aware of the repercussions, Danai.id plays it safe, establishing a partnership with private companies to give the online lending service.
“If people stop seeking loans, we [nonbank online lenders] would be finished,” Azhar says. Dana.id practices stringent vetting of its prospective borrowers for their creditworthiness with background information from their employers.
He sees a prospect in other services, such as digital payments, which has become increasingly popular since being incorporated in ride-hailing apps Gojek and Grab. It has encouraged many new e-wallet start-ups to flourish ever since.
Azhar, however, does not plan to build his own digital payment service from scratch. Instead, he prefers to partner up with the existing players, so as to avoid being involved in unhealthy price wars, which is common to find in a battle for loyal users among tech giants.
No one can predict what the future holds for these tech behemoths, how these tech companies will make profits and how the digital economy will eventually take shape, says Azhar.
“Small companies like mine just need to follow the tech giants,” Azhar says. “Just wait and see the end game.”
Compared to other types of fintech start-ups, the peer-to-peer lending business is relatively more stable, says Eric Hendrickus, an investment analyst of Central Capital Venture. These start-ups do not necessarily need physical expansion, meaning they can save their capital funds for lending services only.
There is also a high demand for payday loans, and that means they can minimize spending on promotion and marketing.
“These small start-ups can gain higher profit margins from their high loan interests,” says Eric.
The business can look appealing to investors who want to diversify their investment portfolios. “If you already have various kinds of investments, such as real estate, bank deposits and mutual funds, then you can expand your investment in the peer-to-peer lending business,” says Eric.
