Peer-to-peer (P2P) lending business Zopa is one of the poster kids of the thriving UK fintech industry. Launched in 2005 touting a new model for consumer loans, today the firm has lent more than £1.5bn across its platform. Disrupting the status qo is easier said than done of course, and in this episode of the FinTalk podcast interview series 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.
What was the climate like for fintech investment when Zopa started out?
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 sell 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.
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.
Full transcript on PaymentEye