How Zeta acquired Unicorn status in the very first round of funding

In the startup world, hitting the $1 billion mark, which accords the “Unicorn” tag, is a milestone. Enterprises typically reach the feat at series C or series D, or three to four funding rounds later. Zeta did it at the first one itself.

On May 25, the six-year-old banking tech firm raised $250 million from Softbank, at a post-money valuation of $1.45 billion. “This is the first time we have raised institutional money; this is the first time “I” have raised institutional money,” Zeta co-founder Bhavin Turakhia beamed on the conference call.

That Zeta grew bootstrapped is uncommon in startups where founders usually rake in millions in venture capital to grow fast in the early years. Putting that with getting in Softbank as the first investor (Softbank usually invests in later stages) makes the firm an outlier.

Softbank’s interest is a function of the magnitude of the problem Zeta has set out to solve, participants in the space said. Zeta is modernising banking, a core industry that has long relied on legacy tech, with modern cloud-based API-first technology. It offers core banking tech, which banks use to launch banking products for niche customers – from credit to risk profiling to mobile apps.

The space, known by many names such as neo-banking, cloud-banking and challenger banks, is one of the moonshot sectors globally. Since 2010, more than 310 neobanks have launched around the world, attracting an estimated 39 million users globally as of January 2021, according to Insider Intelligence. It is also one of the main baggers of capital within the larger fintech universe.

Put against Turakhia’s solid credentials, it was an obvious outcome for Zeta. Mumbai-born Turakhia has been coding since age 10 and launched his first startup at 17. He sold Directi, a domains and web hosting business, for $160 million in 2014, and used the money to launch other firms, Zeta being one of them. He now lives in London and shuttles between Dubai and Bengaluru (or at least used to pre-pandemic) to “keep a tab on global innovation”.

Challenger banks

“Banking technology has been, funnily enough, the last frontier in terms of disruption,” said Turakhia. “If you think of any other software--whether it is CRM, accounting, ERP or HR--the software that we use today didn’t exist 20 or 30 years ago. But in banking technology, all the banks globally continue to use legacy technology platforms that have been around since the 1970s.”

The problem has had banks frowning globally. Some of the core tech platforms that power banks, such as FIS, SWIFT, Jack Henry and finserv, need a refresh. Even though prominent banking institutions have developed their own digital banking services--811 by Kotak or YONO by SBI, Digibank by DBS, being a few examples–-upgrades to core internal applications have long been in offing.

Source: Zeta

 

In a nutshell, Zeta offers banking tech solutions to banks, which they use to launch specific products for niche customers. For example, HDFC and Axis Bank use Zeta for a specific reimbursement account for corporate employees. Some banks have also launched credit cards, with experimental terms, on Zeta. The company says this helps banks test new products faster and without having to set up new infrastructure on their own.

India has seen some early strides, led in part due to Aadhaar, which showed that API-based architecture is faster and cost-efficient. This birthed startups like Setu, an API infrastructure provider for financial firms; and Open and Niyo, two neo-banks that offer banking functionality in a more automated and “digital” fashion. Major investors like Tiger have given their stamp of approval. According to experts, the ability to collect, analyse data and understand consumer behaviour-– besides faster disbursal of loans and banking services-–is a strong moat for neobanks.

“We’re seeing a steady rise in challengers who either provide ‘last digital mile’ services, or partner as neobanks with smaller commercial banks to compete with the larger ones,” said Vijay Mani, Partner-Core Business Operations, Deloitte India. “Using more nimble technology, they offer better digital products and better customer experience. This is forcing incumbents to re-look at their technology stacks, and make changes to allow for more agility and better system performance.”

Globally, too, the space is a hot one. Nubank, the biggest neo-bank in Latin America, was recently valued at $25 billion. Most Asia Pacific countries like Hong Kong, Taiwan, Singapore, Thailand and Malaysia have either rolled out, or are in the process of rolling out, virtual banking licenses to bidders. Even legacy e-commerce players like Alibaba, WeBank have stepped up digital lending play through a neo-banking platform called MyBank. In only four years (to 2019), MyBank had disbursed $300 billion worth of loans to 16 million small companies.

Building block by block

Turakhia, along with co-founder Ramki Gaddipat, launched Zeta in 2015. The enterprise started by building modules that power various functions in a bank. It got its first customer in 2016 in the form of RBL Bank, which took up Zeta stack to offer prepaid cards to some of its corporate customers. It was hardly any time since the platform took off that the company bagged a massive client.

“In 2017 we nailed a strategic partnership with one of the largest financial institutions in the world, Sodexo, based in France. Sodexo has globally 350,000 corporate customers and 13 million users. They selected Zeta as their de-facto platform to power their payments across the globe,” said Turakhia. A year later, Sodexo made an undisclosed investment in Zeta, valuing the company at $300 million.

By this time Zeta had a ready product and customers that were taking it to clients across the world. The firm then embarked on a global expansion spree, launching in Italy, Spain, Brazil, and Vietnam and Philippines over 2018-2019. At the same time, local business continues to grow. Indian banks had begun seeing the value-add Zeta brought to their business and started partnering for niche client offerings.

By 2020, the firm’s roster had grown to include Axis Bank, Kotak Bank, IndusInd Bank, as well as HDFC Bank, the largest private bank in India. As of date, Zeta works with 10 banks and a bunch of other payment institutions including Visa and Mastercard.

That said, tech adoption and penetration by traditional banks has been a debatable topic, said Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas. “Some NBFCs (non-banking financial companies) in support with FinTech entities and otherwise are doing a very good job in terms of going deeper into the economy and ensuring financial inclusion, but it is still early days. In my opinion, fintech’s penetration and reach in the finance sector would be of focus in the coming days and would evolve.”

Zeta Factsheet

Launched: 2015

Founders: Bhavin Turakhia, Ramki Gaddipat

• Investors: Sodexo, Softbank

• Valuation: $1.45 bn

• 70 per cent stake held by promoters and employees

• Banking customers: Axis Bank, Kotak Bank, IndusInd Bank, and HDFC Bank (total 10 banks)

• End customers: Aditya Birla Group, Bharat Pay, Mobikwik, Ebix, Junio

• Presence in 8 countries

 

Disruption in offing

“The monopoly of legacy banking institutions has remained an unchallenged hegemony for long. With the rise of new-age, agile, digital only banks it will be exciting to see the ensuing battles cum collaborations,” noted Keshav Bagri from VC firm Bertelsmann India, an active investor in fintech lending space with bets like Lendingkart and Repeek.

“Overall the biggest beneficiaries will be the consumers, especially the unbanked segments who get an opportunity to be a part of the formal financial system and experience true innovation at its core.”

The storied entrepreneur Sachin Bansal of Flipkart, too, is launching digital bank Navi albeit through a different route which involves him taking a full-fledged banking license.