🤦🏻‍♂️ The founders quit

Hey Founders,

Welcome to The Runway Ventures — a weekly newsletter where I deep dive into failed startup stories to help you become the top 1% founder by learning from their mistakes with actionable insights.

Let’s get to it! 🚀

☠️ 1 Failed Startup: ZestMoney

🚀 The Rise of ZestMoney

Founded by 3 founders (Lizzie Chapman, Priya Sharma, and Ashish Anantharaman) in 2015, ZestMoney was a BNPL (Buy Now, Pay Later) platform that allowed consumers to make purchases and pay for them in instalments without needing a credit card.

• The Problem — Millions of people in India were facing the lack of traditional access to credit due to the low credit card penetration.

  • 💳 Low credit card penetration meant many people didn’t have credit scores.

  • 🙅🏻‍♂️ Without credit scores, traditional banks were hesitant to offer small loans due to low or negative returns.

  • Because of that, many Indians couldn’t afford purchases and access financial products.

• The Solution — ZestMoney democratised credit availability by using alternative data points to build credit profiles for consumers, enabling them to make their first online purchases and access financial products previously out of reach. Its BNPL solution solved problems for 2 parties:

  • 🕺🏻 For consumers — People could shop for various products without needing a credit score or card.

  • 🛍️ For merchants — Retailers (i.e. Amazon, Flipkart, MakeMyTrip) could get more customers with higher conversion rates.

🏔️ At its peak, ZestMoney had a registered user base of 17 million and was live at 85,000 retail touchpoints across India.

💰 The company raised over $130 million from high-profile investors, including Goldman Sachs, Ribbit Capital, and Omidyar Network, and was valued at $445 million in its last equity round in 2022.

It seems that ZestMoney was poised to become the largest BNPL platform in India, but was it? Here’s when everything collapsed during a funding winter 🥶👇🏻

📉 The Fall of ZestMoney

The collapse of ZestMoney began when the acquisition deal with PhonePe fell through in early 2023. This was the final nail in the coffin as the company had exhausted nearly all other funding sources.

The failure to secure this deal led to a series of unfortunate events…

📌 Here’s what happened to ZestMoney:

🎢 Startup life is full of the highs and lows, just like ZestMoney. Despite its innovative approach and significant traction, the company still died due to regulatory changes and a tough funding environment.

Want to learn more about ZestMoney’s downfall?

• Goldman Sachs-backed ZestMoney, once valued at $450M, to shut down

• BNPL startup ZestMoney to shut down

• ZestMoney founders leaving troubled fintech firm post PhonePe deal collapse

⚠️ 2 Mistakes

Mistake 1: The business model didn’t make sense

For BNPL business models like ZestMoney, it deals with 3 parties (Consumers, Lending Partners, Merchants). Here’s how it makes money with an example:

• 🕺🏻 Consumers

  • You bought an iPhone for $1,000 at no cost. You just need to pay it back in instalments over a 3-6 month period without any interest.

  • 💵 1st revenue — You’d be penalised for a fee if you delay a payment.

• 🏦 Lending Partners

  • One of its 27 lending partners would disburse $1,000 to pay for your iPhone.

  • If you default, ZestMoney will be liable.

  • 💵 2nd revenue — ZestMoney will take a $50 cut as the fee for its service (i.e. KYC checks, customer service).

• 🛍️ Merchants

  • Merchants will be paid $950 immediately.

  • They agree to take the hit because they can push the purchase.

As you can see, ZestMoney only made money from 2 sources of revenue with thin margins. This business model was highly risky for 2 reasons:

• 💸 High default rates

  • The whole BNPL business bets on its capability to evaluate consumers’ credit risks based on alternative data. If the credit scoring algorithm fails, default rates increase, ZestMoney would be liable for these debts.

  • 🤯 According to The Ken, ZestMoney’s default rate was sky-high at 13%. Typically, BNPL companies need to keep it below 2.5%.

  • That means ZestMoney was liable for all these liabilities, which was one of the reasons why PhonePe rejected the acquisition.

• 🔥 High customer acquisition costs

  • ZestMoney spent lots of money to run ads and deploy employee workforce on the ground to get customers.

  • ZestMoney spent around ₹1,000 rupees to acquire a single customer.

  • It needed each customer to have at least 4 BNPL loans per year to make money, but its customers opted for 2 loans on average.

  • It wasn’t enough to cover the costs, hence losing money.

Mistake 2: Single point of failure

🧑🏻‍💼 One of the biggest risks in fintech is regulation. Today you’re running smoothly, tomorrow your company might be dead if there are disruptive changes in your country’s law — which is what happened to ZestMoney.

📉 After the Reserve Bank of India tightened regulatory scrutiny on BNPL companies, suddenly ZestMoney’s monthly loan disbursals fell by 75%.

No loan disbursals, no revenues, high CAC, high default rates, and mounting debts and liabilities. The regulatory changes are probably the single point of failure that killed ZestMoney.

🧠 3 Lessons Learned

Lesson 1: Don’t rely on funding to run your business

The current BNPL business model is very risky. However, it doesn’t have to be this way for non-BNPL businesses. If you can bootstrap from Day 1, you’ll have full control and won’t need to rely on investors to support your business.

Lesson 2: Anticipate and prepare for changes

Changes are the only constant in business.

If you’re operating as if everything stays the same in the next 3-5 years, then you would be very disappointed. Adapt well, adapt fast.

Lesson 3: Have corporate governance in place

Right after PhonePe declined the acquisition, all the founders hastily resigned and quit the company — as if they no longer wanted to deal with the shit (I mean ship… 🚢).

This shows that the founders already had a plan to exit if the acquisition fell through, raising questions internally. When they left, new management took over, but the ship still sank.

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That’s all for today

Thanks for reading. I hope you enjoyed today's issue. More than that, I hope you’ve learned some actionable tips to build and grow your business.

You can always write to me by simply replying to this newsletter and we can chat.

See you again next week.

- Admond

Disclaimer: The Runway Ventures content is for informational purposes only. Unless otherwise stated, any opinions expressed above belong solely to the author.