Asaak Investment Memo

13 September, 2021
Investing

Who, Where, What, When?

Company: Asaak

Location: Uganda

Industry: Fintech

Investment: Angel invested in May 2021

Summary

Asaak offers mobile financial services to the unbanked in Africa. It is solving an important problem in a large market, has strong traction, and is led by a talented founding team with ambitious plans to become Africa's first digitally-native bank.

Adam, Sachin and I made a direct investment in April 2021 since Adam and Sachin were in contact with the founder.

If you want to read our accompanying article on African Fintech, click here.


Introduction

In a place like Sydney, house prices are a constant topic of conversation. Whether you're a mid-thirties couple or a recent university graduate, I'll bet my avocado toast that house prices have made you anxious before.

This anxiety is commonplace, but deep down, us Sydneysiders know we'll be ok. Why? Because we have access to credit.

Unfortunately, this luxury isn't enjoyed by everyone. In fact, in some countries, people struggle to get loans for everyday goods like motorcycles and phones.

This is a struggle that many Africans face, as the majority have neither a bank account nor access to credit.

This creates an enormous burden on those who need goods like a motorcycle to make a living, but find themselves paying 50% of their income to rent one.

This is a complex problem that wont be fixed easily. But one man – Kaivan Sattar – has wild ambitions to play a role in fixing it.

Kaivan started the fintech startup Asaak, which offers mobile financial services to the unbanked in Africa. From starting out in micro-loans for products like motorbikes, Asaak is building the first full-stack digital bank for all of Africa.

This memo will give a glimpse into why the three of us invested into Asaak and why we think Asaak is tackling an important problem.

If you want more context about fintech in Africa, check out Adam's article here.


The Problem and the Solution

Asaak is solving a problem that has been heavily documented in development economics study and represents a major market opportunity.

Problem

1.7 billion people across the world lack access to credit, with many of them being in Africa. This creates a poverty trap as the unbanked struggle to access loans for simple things like motorcycles (bodas) which provide the dominant source of income for youths and thousands of families in countries like Uganda. In Uganda's capital, we estimate there to be 350,000 bodas, and across Africa, 100M people use boda taxis every day.

But despite this, Boda drivers lose 50% of earnings to paying rent on their vehicles since they don't have access to the credit to purchase them.

This issue exists because African banks have insufficient information to assess whether customers can repay loans.

Solution

Asaak have a brilliant solution.

They're using a proprietary credit-scoring algorithm that taps into mobile-phone data and ride-hailing app data. This leverages the rise of mobile in Africa as over 85% of Africans are expected have mobile connection by 2025.

So far, Asaak has introduced boda loans, fuel loans, personal loans and smartphone loans. Most customers come for boda loans, but stay for additional products, building their Asaak Credit Score. Further, boda loans are asset-backed to reduce risk and improve unit economics.

But it's not just the product that excites us, but also the market, novel distribution method and team.


The Market

Asaak is starting by targeting the Ugandan mobility market. This is an ideal market because Uganda has the highest rate of self-employment globally, 15 million unbanked adults and $1.5 billion a year in mobile transactions.

Asaak then plan to expand to neighbouring countries such as Tanzania, with 1 million bodas, and Nigeria, with 8 million.

The end-state for Asaak is not just to dominate the mobility market in a few neighbouring countries, but to provide a digital financial services stack to all of Africa. This creates a market of 350 million unbanked people and over $50 billion in revenue.


Competitive Advantages

Three components give Asaak a competitive edge:

Rapid turnaround time

Applications for Asaak loans take less than 10 minutes. The turnaround time is four days. The closest competitor takes 28 days. This has led to high net promoter scores and high referral rates.

B2B2C customer acquisition strategy

Asaak's competitors (Watu Credit, Tugende, Tala, Branch) focus on B2C customer acquisition.

Asaak's edge comes from partnering with four large ride hailing and eCommerce apps including Uber, Bolt, SafeBoda, and Jumiao. This immediately provided 30,000 leads.

In addition, Asaak's fully digital solution has allowed Asaak to provide smaller loans than brick & mortar competitors which have higher overheads.

Novel credit-scoring strategy

Asaak's partnerships with ride-hailing platforms provide income data, character references, and guarantees. This is a unique input into credit scoring that banks don't have. This is combined with behavioural assessment data, credit bureau data and regulatory approved eKYC process.

This has culminated in a 2.6% default rate on a  2.7-5% interest rate per month. That's right — per month!

At a loan-to-value ratio of 82% with liquid collateral, a default scenario would see Asaak quickly sell collateral at a discount, recovering principal, interest and fees. To further lower risk, debt collection is outsourced to reputable firms.

With 1,160 loans and 28,000+ payments from September 2020 to April 2021, Asaak has proven product-market fit. They've learnt to give assets rather than cash and to lend through partners who dramatically lower their customer acquisition cost, provide valuable data for underwriting, and legally guarantee loans. ****

It's time to scale.


Product Roadmap & Scalability

A frustration of ours is when founders cannot articulate a long-term vision and a rough plan to get there. This was not the case with Kaivan, CEO of Asaak.

Asaak has a roadmap in place to expand to loans for savings, insurance, eCommerce credit, financial education, bill repayment and bike repairs. These loans will be collateralised against initial boda loans to reduce risk and providing economic viability through asset-based lending.

Asaak have a $10M term sheet from a private credit fund and plan to partner with on-demand courier services, end-to-end logistics platforms, and on-demand trucking companies, providing an influx of new customers. Kaivan expresses plans to expand into the Kenyan, Rwandan and Tanzanian markets.


Traction/ Unit Economics

Asaak's strong revenue growth and margins provide significant opportunities as its products develop.

  • 79% MoM growth in loans in the 9 months post-COVID.
  • 1,160 loans issued with a repayment rate above 96%.
  • Interest rates 50% lower than loan shark alternatives.
  • 300% increase in revenue from June to January, crossing 92K a month June (1.1M per year annualised).
  • Lifetime customer value of $2400 is significantly larger than customer acquisition costs at $25 (due to Asaak's partnership model).
  • Net profit margins range from 9.5% for motorcycle loans to 72% for fuel loans. These strong margins alongside low CACs indicate a strong path to profitability.
  • Asaak has 4 mobility partners. Increasing this number to 10-15 has a potential to create a $1.4B lending opportunity.


Team

The team have a deep passion for the problem and aren't new to the space

CEO, Kaivan Sattar: We've had the pleasure of chatting to Kaivan and he is a man on a mission. He's been working on Asaak for 5 years and has had a passion for financing in developing nations for years. At NYU he conducted his senior thesis in micro-financing researching alongside Grameen Bank and has deep expertise in data science.

CBO, Dylan Terril: A former investment banker with former roles at TikTok and Doordash with experience in building and scaling teams.

Rest of the team: Kaivan has a focus on hiring local African developers and operators who are close to the market Asaak is servicing. The team cumulatively speak 20 global languages.


Notable Investors

When we see people more experienced than us backing a company, it's a promising sign. Asaak has raised $4.4m to date.

  • Social Capital: A venture capital fund advancing humanity by solving the world's hardest problems. It is led by Chamath Palihapitiya one of the world's most renowned venture capitalists and an inspiration to us.
  • 500 startups: A venture fund uplifting people and economies through entreprenuership. 500 startups has invested in over 2500 companies including Unicorns such as Udemy, Canva and Grab.
  • Hof capital: A venture fund trying to make the future a reality. Hof capital has invested in some of the world's biggest companies including Alibaba, Stripe, Uber and Klarna.


What could go wrong?

As much as we love Asaak's mission, the company is still in its early days presenting a few risks:

1) Execution: Asaak's roadmap to becoming a digital bank is long and complex. It requires scaling, lending to new products and new markets.

2) Political climate: The political climate of Uganda and Africa is unstable. Internal conflict and corruption are commonplace and may affect Asaak's lending business.

3) Institutional competition: Across the world fintech is challenging traditional financial institutions, however incumbents have the capital and scale to introduce their own digital offerings.

4) Partnerships falling through: Asaak relies on partnerships for its data and customer acquisition. Changes in regulatory conditions or partner sentiment may be a single point of failure.

Conclusion

Asaak is helping solve the $200B credit gap in Africa and improving the lives of the unbanked by providing access to capital. The market is ripe for disruption. As the first digital lender in Uganda, if Asaak can execute its product roadmap and replicate its model in new markets, it will be a force to be reckoned with. We are thrilled to support this opportunity.