Deal focus: Validus takes holistic approach to SME financing

According to Benford’s Law, just over 30% of the first digits in a list of financial transactions begin with 1. For Validus, this law has become part of an anti-fraud algorithm that checks the transaction history of small and medium-sized enterprises (SMEs) seeking short-term loans.

The machine learning-enabled algorithm also performs functions such as analyzing the meta data of electronic documents to spot tampering.

“We create basically a set of parameters or a funnel. What we really want to do is make the funnel just the perfect size so that only clean data passes through,” says Nikhilesh Goel (pictured, right), one of the peer-to-peer lending platform’s co-founders. "When you start, your funnel is very wide but eventually the machine learns and it becomes much narrower."

Validus launched operations in Singapore in 2015 and began lending in Indonesia and Vietnam last year. Matching borrowers with over 250 high net worth individuals and more than a dozen institutional investors, it has facilitated 15,000 loans worth more than $315 million. The company has also raised over $50 million in VC funding, including a recent extended Series B round of $20 million.

Apart from its work on fraud, Validus gives investors comfort through the way it originates loans. The start-up pitches its platform to corporates in the hope that this will open channels to networks of SME suppliers. Working through finance departments, it can also get access to payment-related data that is more reliable in evaluating a loan applicant’s credit health than unaudited financial statements or transaction history.

As a result, Validus has been able to create a quick and collateral-free financing channel for SMEs. This allows it to finance the long tail of a corporate’s supply chain, giving smaller SMEs – which are typically overlooked by banks that require collateral and larger or longer tenor loans – a shot at an affordable alternative to informal lending.

By necessity, much of the work continues to take place offline, although this structure might give the start-up a competitive edge over peers.

“The SME owner is using Facebook and WeChat, but for business he is not. The idea is to catch the SME in the offline world and then bring them online,” adds Goel. “SMEs are underserved because it's a lot more complex but if done correctly, there is a much stronger moat.” 

The next step is establishing a team in Thailand. Goel believes local experience is essential in SME financing. Entering a market right as P2P lending regulations get formalized is important too.

Given the drop in revenue across sectors due to the COVID-19 epidemic, loan demand has naturally shot up. Validus is taking a more conservative approach but it has offered much-needed finance to some SME healthcare manufacturers.

“A lot of these SMEs are financially unsavvy. By the time the guy realizes he's in a hole and urgently needs money, he cannot wait for a bank to take up to five weeks to just give him an answer,” Goel adds.

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• Topics
• Expansion
• Technology
• Financials
• Singapore
• Fintech
• Thailand
• Vietnam
• Indonesia