Archive for October 30th, 2007

80s all over again?

Published by Udhay Shankar N on October 30, 2007 in Ecosystem and News/ Events.
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Merrill Lynch has a fascinating analysis on the various striking similarities between this financial cycle (mostly in the US) and the one in the late 1980s. Have a look at the article - just the charts should be enough to provide a lot of food for thought.

  • The late 1980s was a cycle characterized by a synchronized global expansion, but in the context of a fatigued US economy and strength back then in Europe and Asia.
  • A cycle fuelled by tax cuts and highly accommodative monetary policies early on, “new paradigm” views on the equity market bull run, and a massive housing boom that morphed into a bubble and credit excesses that turned into a crunch.
  • As was the case this time around, the Fed moved in the latter stages of the cycle to hike rates aggressively and invert the yield curve. As is the case today, practically every reason was cited for why the yield curve didn’t matter any more (nice call).
  • Back then, the Asian stock market that caught everyone’s attention was Japan – today it is China.
  • We also experienced a wave of LBO-financed merger and acquisition activity that certainly also took hold through most of 2005 and 2006.
  • Of course, we also had a faltering dollar in the late 1980s and rising commodity and gold prices igniting concerns over the inflation landscape – concerns that we can now say were overdone.

Peer to Peer Lending – India feasibility?

Published by Mukul on October 30, 2007 in Ideas & Companies.
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At Canaan US, we have invested in a peer to peer lending company – Lending Club. The company launched itself on Facebook and in last three months, it has facilitated $1 million in loans. The value proposition is for people taking unsecured personal loans of smaller amounts (~ $5000) and also for lenders getting higher returns on their surplus money in the bank (obviously at a higher risk – question is if risk fits into lenders risk appetite)

Business Model:Money is made by brining down the cost and eliminating bank from the chain

Peer2PeerLending

I thought to share my viewpoint on the key enablers of this business in US and would like to know your feedback on the India opportunity

• Scope of brining down cost of providing loan using technology - In US, the spread for a bank giving unsecured personal loan is around 10%. This spread consists of cost of providing loan (assessing and tracking) and Bank’s profit margin. The numbers are similar in India. Depositors get somewhere around 4-5.5% on saving accounts and personal loan interest rates are in the range of 15-24% depending on the profile of borrower. So the spread is north of 10%

• Ability to assess the risk profile of borrowers using technology

Firstly, using Credit Reports – Unlike US, this had not been possible in India because lack of data sharing between various banks. However; with CIBIL this has changed. RBI has made mandatory for all banks to report defaulters. Recently, I took an education loan for my brother from State Bank of Bikaner and Jaipur and to my surprise they checked my loan history from CIBIL database. With time, we all will have a credit report which can be used to assess the risk profile of individuals based on past history

Secondly, using social information about an individual’s community, associations etc – LendingClub has started with borrowers from different communities e.g. Harvard Alumni, Army Communities. In India, this is something not new. MFIs have very well tried this concept (of community based lending) through Self-Help-Groups and able to lend millions of dollars to rural people. The loan amount is as small as 4000 rupees. I think this can be extended to urban, young, educated class as well. Imagine my Facebook Lending Club application (with all my professional and social nodes) shows me as a defaulter - I think I would not like that for a small amount.

We still need to do some math on the market in India. I don’t have credible numbers as of now. However; unsecured personal loan market is growing at a rate of 30% (home loan is growing at 20%) and has been source of rich profits for some of the private banks. And personal loan market is still dominated by young, educated, urban people whom I think should have internet and mobile access.


Any views on why this business can work or fail in India – Challenges, Issues, Positives?

Great read: SaaSy security suits small businesses

Published by Pukhraj Singh on October 30, 2007 in General and Ideas & Companies.
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Absolutely credible and intuitive assessment of the consolidated and de-productized information security market by David Cowan of Bessemer Venture Partners. David has hit the bullseye here, beautifully explaining the current and underlying bottlenecks ailing the business of information security. Personally, I feel this is a brilliant take on the future of the IT security industry. People have already shunned the idea of another killer security product and information security outsourcing (infrastructure management/MSS - whatever) is going nowhere.

Now, imagine the proven Indian offshoring model combined with SaaS! Companies like Wipro, which has a well-established security consulting services arm, has this whole market for the taking if they can streamline their messy operations. However, this is a tough bet for ground root entrepreneurs as it requires an elaborate operational setup and infrastructure.

Read here.