Today peer-to-peer (P2P) lending platform Zopa is one of the most high-profile ambassadors of the booming UK fintech scene. Launching on the market back in 2005 with a brand new model for consumer loans, the firm has today lent more than £1.5bn with 53,000 lenders on its books. The journey has been far from simple however, and in the latest episode of the FinTalk podcast we talk to co-founder and executive chairman Giles Andrews about the growing pains of entrepreneurship, good timing and why realism is as important as optimism for startups.
Listen to our discussion today or check out the full transcript below.
How did you join the Zopa team and what did the idea look like at that point?
I got a call from a guy called James Alexander who was a friend from business school I’d stayed in touch with. He was part of a small group of a dozen who left online bank Egg at the end of 2003 to explore ideas in financial services. Three of them settled on the idea that ultimately became Zopa, which they christened at the time as ‘eBay for money’ or a ‘bond market for consumers’. I was running my own business at the time – a consultancy that did a couple of things including helping startups access funding. It was at that point I got a phone call asking if I wanted to help them raise some money. I enjoyed the process, ended up staying and here I am 12 years later.
What was the climate like for fintech investment back then?
2004 was an interesting time. We were very lucky because we hit the London funding scene just when the big venture capital (VC) houses were beginning to wake up and look at opportunities again having hunkered down for the previous three years after the dot com crash.
We were also reasonably well introduced. One of the secrets of raising VC is not to make cold calls; it is tempting to call everyone in the universe, but the VC industry works much better by referral. We were very lucky – we went to see about 10 people and either received or were in the process of receiving term sheets from half a dozen. Zopa was part of the first wave of tech startups to get funding after the crash. With hindsight it was very fortunate timing.
P2P lending was a whole new model at that time, how easy a sell was it to investors?
VCs like big ideas. With P2P we were the first to do it in the world and it was a big idea; we were aiming to transform the financial services industry. What I learned about VCs is that they are more interested in ideas that have some chance – even if only a very, very small one – of becoming a very big business. We unashamedly sold the prospect of Zopa becoming a very big business and that became an easy sell.
The fact it was a brand new model was not a problem as they recognised the problem we were trying to solve – giving better value to consumers in a huge market. What they have on their check list is; is there a big market; is there a consumer need and is the team credible and they decided the answer to those questions was yes.
What about winning over your first customers?
That was much more challenging. We raised the money in Autumn 2004 and launched the business in March 2005 to a reasonable amount of PR noise. We got written about nicely as a disruptive new idea but to a deafening silence in terms of customer adoption. We had been guilty of the sin of over-optimism as most entrepreneurs are and take-up of the business was very slow. We were asking people to trust us, a startup in London, with their money, to let us lend on their behalf to complete strangers. We were asking for them to then expect to one get their money back and two get a good return on it. It seems obvious now but it was tough sell back then.
What was the business like at that stage?
We initially stocked the platform up with money from friends and family, begging and borrowing form everyone we knew. That meant we had stock of money to sell. However we underestimated the challenge of cutting through the noise of the financial services industry. We naively thought that if you have the best value and best serviced loan in the market on the internet, people will find it. Actually financial services businesses, particularly pre-crisis, spent a huge amount of money marketing their products so it was hard to find borrowers.
That meant the first wave of lenders wasn’t very happy – we’d persuaded them to part with their money and then didn’t lend it out. When we eventually sold out that first wave of our customers’ money to our borrowers, it was not replaced. Then the challenge became, ‘how do we get new lenders to believe this proposition and trust us with their money?’.
We existed in this state of living hand to mouth with low levels of adoption for the first two or three years.
Were you convinced the idea was going to work or were there doubts?
We were optimistic entrepreneurs and I consider myself an optimistic entrepreneur, but there were periods of doubt. 2006 was a particularly dark year – one year after launch. We were getting nowhere in the UK and we weren’t new anymore so therefore not an interesting story. We’d raised more money to launch the business in the US but couldn’t find any lawyers that could tell us whether what we were doing in the UK was legal in the US. Then to cap it all in the summer of that year our founding CEO Richard Duvall suddenly became unwell and very quickly died of pancreatic cancer – so the business was not in a happy place at all. A lot of us were looking at ourselves and asking what we’d got into.
In some ways I was slightly an outsider in the team as I had been brought in by a mate to help him do a job raising money and had then stayed having been successful in that because I thought it was a great bunch of people and a great idea. But it wasn’t my idea and I was probably less bought into it than others at that point. As a process of us all having to confront where we found ourselves and the scale of the business as it was then, I was deemed the natural person to run it as I had more of an entrepreneurial or small business background than others in the funding team and therefore I began to feel more invested as it felt more my own.
When did the business start to gain real momentum?
Something very significant happened: the financial crisis in 2008. That was the turning point and the making of the business. One way to think about our business is as sitting in the bank spread – the gap between what banks pay their savers and charge their borrowers. Before the crash that spread was extraordinarily small – firstly because the world was awash with cheap money and people were doing crazy things with it. Secondly – though the product is well publicised, its connection with spreads is not – there was the banning of payment protection insurance (PPI), which happened at almost the same time as the crisis. That means banks had to suddenly make profits on loans, which meant they had to reprice them. This meant our job of providing value either side of the spread became much easier.
Also the timing was good because we were then three years’ old and, although we had not lent a lot of cash in that time, our average loan maturity was three years so we could point to loans going through a full cycle. We could show a really good credit performance at a time when the world was doing crazy things and banks were going bust. For this little startup to have lent its money prudently and safely, providing investors with a positive return was something we could sell.
What do you make of the UK fintech scene’s health?
The UK has a fantastic opportunity in fintech because we’re good at the ‘fin’ and we’re good at the tech. Our funding ecosystem is perhaps not as well developed as Silicon Valley but it is well developed enough to help these businesses prosper. You’re looking at some businesses that are genuinely transformative – we’ve led the way in certain industries. There are now 2,000 P2P lending platforms in China for example.
The sector did get a bit over hyped as is the habit, but now the pendulum has probably swung too far the other way. I think the sector is in good health however. There are businesses that will steal significant share from incumbents.
What would you be doing in fintech if not p2p lending?
Insurance. If banking is regarded as old fashioned, insurance is positively antediluvian. There are significant practicalities and difficulties in tackling the insurance sector but I think I’d be interested in doing that if I wasn’t doing this – not that we have any plans to move in that direction.
What’s a good piece of advice for startups you can pass on?
Without wanting to dent the optimism, which is a very important quality of entrepreneurs, realism is also quite useful. Businesses, particularly in a sector like ours that deals so much with trust, take a long time to build. They therefore probably need more capital than you think and it will take longer than you think. As an individual you need to be quite stubborn and have strong perseverance as a quality. My advice would be to think about that quite seriously. Perseverance is an underrated quality.
In the latest episode of the FinTalk podcast, we talk to Celine about the realities of building a financial tech startup, French fintech and women in tech.
It's a good time to be a challenger bank as Mondo, a digital-only bank, has received a banking licence to add further competition to the market that already includes Atom, Tandem and Starling.
In the latest episode of the FinTalk interview podcast series Gary Turner, the firm’s UK MD, talks about the early days of building up the business, why location is no longer important and about the need to make sure kids are creators as well as consumers of technology.
In the latest episode of FinTalk we sit down with the founder of UK remittance firm WorldRemit, Ismail Ahmed.