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Worth $806 mn, Cred's Rs 52-lakh revenue sparks valuation, business model debate

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Credit-card payments app Cred, which was recently valued at $806 million, posted a loss of Rs 360 crore on operational revenue of a mere Rs 52 lakh in fiscal year 2020, triggering a debate on social media on valuing startups that grow fast but have a hazy business model outlook.

Worth $806 mn, Cred's Rs 52-lakh revenue sparks valuation, business model debate
Credit-card payments app Cred, which was recently valued at $806 million, posted a loss of Rs 360 crore on operational revenue of a mere Rs 52 lakh in fiscal year 2020, triggering a debate on social media on valuing startups that grow fast but have a hazy business model outlook.
Cred, whose FY20 financials were first reported by Entrackr, also earned Rs 17.5 crore from interest on bank deposits, bringing its overall revenue to Rs 18 crore.
Compared to FY19, a period during which the company had been in existence for about five months, the numbers represent a jump of nearly six-fold of expenses and losses. (The company clocked expenses of Rs 63 crore and had zero revenue in FY19.)
The year-on-year jump was led by a sharp increase in marketing costs from Rs 19 crore to Rs 180 crore – the company signed up as the IPL title sponsor last year – as well as an increase in employee expenses, from Rs 17 crore to Rs 75 crore.
The Entrackr report, which simplified Cred’s numbers by saying the company spent Rs 727 to earn a rupee in FY20, invited a host of comments both in favour of the company’s business model as well as against it.
Built as an app that allows users to easily pay their Credit card bills while also earning additional rewards, Cred has 6 million customers – a lucrative base of high-spending customers. According to latest RBI data, India has 60 million credit cards in issuance.
“The use of accounting metrics developed in early 20th century to measure performance of 'analog'/capex heavy companies, applied to measure 21st century digital capex-light data or IP heavy companies, never fails to amuse me,” Sajith Pai, VC at Blume Ventures, wrote on Twitter. “You can’t evaluate performance of a business whose value is far out in the future by metrics exclusively for measuring the past. There is a lot that accounting metrics capture, and lot (like the value of intangible investments) that they don’t.”
For instance, Pai, while criticising the report as “clickbait”, said: “Why not also mention that Cred processes ~20% of all credit card payments in India, a fact that is far more critical for future performance + valuation.”
Lofty valuations of early-stage startups -- which often grow rapidly by “burning” investor capital even as there is no visibility of the ability of the business to make a profit in the near future -- has become a subject of intense debate in investment circles. Some have gone so far as to call such startups Ponzi schemes, as they are able to grow only because of their ability to attract new investments and often, failure to raise more capital leads to doom.
But others point out that companies that use easy capital to scale up are often able to evolve to the point where they are able to become sustainable.
Analyst Deepak Shenoy pointed out that CRED’s user base is its intangible asset and it will become clear only in hindsight if the company is successful in monetising it.
As of now, Cred does not have a single biggest source of revenue and now runs multiple products: Credit card payments; Rentpay (monthly rent on Credit card for a small transaction fee); Cred Cash (Instant Credit line), STORE (an ecommerce marketplace to use Cred coins); and Cred PAY (merchant payments).
In an interview with CNBC-TV18 on January 4, founder Kunal Shah said that the company was “six months into its revenue journey“, and that there was “no clear winner on monetisation channel”.
In its filings, Cred said that the company was focused on growing revenues and working towards profits.
“Your company has invested in the development and functioning of application ‘Cred’ and is collaborating with various entities to enable its customers to avail discounts/offers through the Cred app. During the year under review, the Company has incurred a loss of INR 3,60,31,15,535. However, the Management is continuously taking efforts to bring about the revenue and also to reduce expenses to have profitable track record,” the company said.
Cred also set up two separate entities to enter the investment advisory space and accounts aggregator business.
“During the year under review, your Company also incorporated 2 (two) wholly owned subsidiaries by the name of Dreamplug Advisory Solutions Private Limited and Dreamplug AA Tech Solutions Private Limited to venture into investment advisory and accounts aggregator business, respectively,” the filing said.
The company has been on a marketing blitzkrieg since the past year, especially through the IPL season for which it was an official sponsor.
Shah had told CNBC-TV18 that the IPL helped “create market awareness, gave us tailwinds.”
Cred also launched a highly-talked about digital media campaign involving several yesteryears’ stars such as Madhuri Dixit, Anil Kapoor and Govinda among others.
The company counts marquee names as its backers, including the likes of DST Glbal, Tiger Global, And Sequoia Capital India.
It has raised $228 million in its two-year existence, announcing a massive $81 million Series C round in early January.

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