CRED – an Asset Class in the making

There are 2 things that I love about CRED – first that it reminds me to pay my credit card bill. Second that it’s breaking the status quo when it comes to product design. Having said that, I am confident that CRED trying to sell merchandise and products to its customers is not going to work. I am also confident that slot machines and raffles are not what credit cardholders of India are looking for. However, I DO believe what CRED has is unique and powerful.

While it is public knowledge that CRED is planning to venture into investment advisory and account aggregation business by registering Dreamplug Advisory Solutions and Dreamplug AA Tech Solutions, I want to talk about a new potential avenue for it – CRED as a new asset class.

On one side, CRED as a platform has the top 1% of India hooked onto it. On the other it has access to the network of some of the fastest-growing brands in India. And that is where I believe lies a unique opportunity to create a new asset class. Moreover, CRED users will get bragging rights as investors of upcoming popular brands.

Most of the fast-growing products in the market require a lot of working capital. There are two primary ways to get access to that working capital today – Equity & Debt. Both of these are a fairly expensive way to get it. While founders do-not want to give out precious equity to finance their purchase orders, interest on working capital loans on the other hand could range anywhere between 11% – 22% or even more depending on the nature of business.

I can think of 3 ways to structure the working capital loan that CRED could felicitate for these businesses –

  1. ARR financing (for subscription products)

    Although this applies only to products with subscriptions, it need not be a physical product and can be pure software as well.
    Problem – Most of the subscription products have half-yearly or annual plans that the company provides at a discount. Although on the surface it may seem that they do this to lock in the user and build a habit but the real reason they do this is to finance the working capital. However, for their end consumers, it’s a bad experience. In a world where monthly and annual plans cost the same, everyone will go for the monthly plan.

    Solution – CRED users could invest in these by paying a discounted ARR upfront to the company and then receiving the revenue from MRR every month.

    eg – Say a subscription product has monthly recurring revenue of Rs 100. If every customer is to shift to an annual plan, the company would give them a 20% discount, and therefore the effective MRR will come to Rs 80. CRED users could invest in this alternate asset by bidding for a discount rate lower than 20% using their CRED coins. The starting bid will be defined by CRED’s underwriting engine. Market dynamics will automatically take care of the lowest bid. In today’s scenario, a bid will not go below the 8% range, given there are safer instruments to invest in below that range. Say the winning bid was 12%. So the winning user will pay this company Rs 90*12 = Rs 1080. And then for the next 12-months receive Rs 100 from the company i.e. Rs 1200 making approximately 11% on the investment within a year.

    What happens to the investor if the company loses the subscriber whose monthly payment is being passed onto the investor?
    If it’s a growing company, they can always replace the churned subscriber with a new subscriber. If products like Flock or Slack wants to raise funds via this instrument, would CRED users not be willing to invest?

    I believe growing subscription products are one of the safest and newest alternate asset classes to invest in and sooner or later someone will capitalize on it. CRED has all the necessary distribution to make this happen.

  2. Smarter debt at better rates

    Companies get to raise debt capital from CRED users at better rates than banks. CRED users on the other hand get a new instrument to invest in that gives better returns than traditional FDs and debt Mutual Funds. Let’s fix the interest at 9% making it lucrative for both parties. CRED as the trust agent in between will need to underwrite businesses and give ratings to help its users make sound decisions. This would mean that the brands who want to raise debt capital via CRED users will need to open up their financials to CRED. CRED can also decide to have tiered risk profiles with different interest rates for the companies seeking debt financing, where the safest one will be able to raise debt at 9% while riskier ones at slightly higher %ages. Since the idea is to not get into high risk or volatile territory, the variance in interest rates will be minimum. This can be gamified by letting users bid on the interest rates using their CRED coins.

  3. Royalty

    Say a high growth company needs to raise 1 crore in capital to finance a purchase order. In CRED’s world, they can obviously raise it via smart debt as described above. Another option could be a royalty deal. Under this, the business pays a certain percentage from every sale to the investors until a certain multiple on the principal is returned back.
    eg – In the above example where the company needs to raise Rs 1 crore, a 10% royalty deal with a 2x multiple to be paid within 5 years will mean that the company would need to be doing a revenue of at least 40 crores every year. If this was to be a debt financing, it would be equivalent to a 14% interest loan. However, this is more risky and uncertain than debt, primarily because sales are not the same every month and can vary. A good use case for such instruments could be for people with distribution a.k.a influencers who are CRED users. They could choose this option to invest in companies and then boost up sales via their distribution and get returns on their investment quickly.

CRED could choose to let it users invest in these instruments directly or create different asset class based on risk and nature of businesses and let users invest in the bundled asset class. The opportunities are endless when you have the tech-savvy population who wants to grow their wealth on your platform.

This post takes a rather simplistic approach to describe the possibilities CRED has on hand and more so on purpose. Off the bat, there’s a lot of legal stuff that will need to be taken care of. CRED’s reputation will obviously be on the line if an investment goes bad, so product design and messaging would be very crucial to execute this. I won’t be surprised if the great minds at CRED are already working in one or all of these areas given that they have all the spare parts to bring this new asset class to the market.