MC Interview: We played a good game, we have no regrets, Co-founder Lizzie Chapman after resigning as ZestMoney CEO

The BNPL startup, last valued at $450 million, has weathered a series of challenges in the last 6 months- from adapting to new regulations for digital lenders to a sale with PhonePe that collapsed, capped by the founders resigning earlier this week from their operating roles, making way for a new management team. The company is also looking to raise fresh funds from its existing investors.

Chapman stressed that the 18.5 percent stake held by the founders will never be sold and was confident that the business is in good hands.

In a candid interview with Moneycontrol, Chapman spoke about her biggest learnings from ZestMoney's journey, the next steps and what she would have done differently as an entrepreneur.

Edited Excerpts:

What’s going through your mind right now? Have you been able to take it all in? How have the last few months been for you as an entrepreneur?

It has been quite tough, obviously. But, I think we're really proud of the way things have turned around in the last couple of weeks. So, whenever you go into a transaction, like a merger, there's risk, there's always risk involved. So I think while it's a shame, it didn't happen, we really believed in bringing together Zest and PhonePe but what we have done is make the best of a bad situation.

I think the hardest thing for everyone at Zest was having to obviously let go of some of the team which we had to do. But we're actually pleased with the way we managed to negotiate a structure with PhonePe such that everybody is happy. It meant that we could place quite a lot of Zest people at PhonePe. It also meant that we would have no existing liabilities in the business.

PhonePe was very helpful in making sure that Zest was in good financial health and it means that as we stand today, the company is actually in a very good position. I know it's a bit of a dramatic story that the founders are leaving, but the founders are actually leaving at a time when the company is now quite stable. So the future feels bright, actually. The management team, the investors and the founders are actually very positive about the outlook.

But if the future is bright, why leave? The founders own 18.5 percent and have skin in the game. 

We're not really going anywhere. We're still collectively the largest shareholder, and that's not going to change. We're not ever going to not be the largest shareholder. We are huge supporters of the new management team and we're huge believers in their ability and their ability to run the show. We just want to do it from a different position. We don't want to be doing it day to day anymore. We want to be doing it as mentors.

The world of digital lending has been very trying for a couple of years. So I think we've become very wise and very old. We've aged and now it's time for the fresh new talent to pick up the baton and we want to be there to help them and support them. We're still going to be around for the next four months, working full time, and then even beyond that. It's our legacy, after all.

For the founders to step down, did the push come from the investors or the board?

No, it did not. The investors as I said, have been mostly working on this idea for an internal round and working on getting alignment amongst all the investors.

The timing of the exit (founders’) is also interesting. If things are turning around, if the existing investors are infusing more funds, then why would you exit? Wouldn’t you feel vindicated to rebuild the company that you founded?

It's funny, we almost think the opposite. We wanted to leave the company in good hands. We wanted it to be safe and secure and not leave the company when it was in a risky situation. So we're feeling very confident about that.

Will the new management, or the new team, ever have full autonomy if they know that the founders are always going to be watching their back?

If you speak to folks who've worked at Zest, I think you'll hear consistently that it's a really unusual culture, it's a culture with a huge amount of trust and autonomy.

Obviously, they will be incentivised. Obviously, all these guys have significant equity as well. So it's actually perfectly rational, but I think most of all, they're actually just really up for the challenge. They're really excited about the future.

The LSP (Loan Service Provider) TSP (technology service provider) model, which is emerging, is new and is being shaped as we speak, by a number of players and they (the new management team) want to do that. We felt like we did the first wave of innovation, and now we're ready to sit back and sort of improvise and let them do the next wave.

If you have to look at this dispassionately, what do you think, was the final straw that broke the camel's back? Was it digital lending norms? Was it the fact that the deal with PhonePe did not go through? Or was it the business model itself? The fact that you seem to have high default rates.

Actually, none of them, I don't think anything broke any camel's back. We're in a good place. We're very positive about this change. We don't see any of the things you listed as a negative. I will pick up on one, which you said–the bad credit costs or losses or something like that, in the business. That's actually completely incorrect. I think somebody wants to put out these numbers, maybe a competitor, but the numbers that have been reported are completely incorrect.

But if we look at your financials, bad loans have pushed the losses up. Some reports say the rate of default was at 13 percent. How do you assess this?

No, that's wrong. You're misreading the financials. 13 percent is absolutely completely off. Our NPAs (non-performing assets) currently are sub 2 percent so you can see how dramatic the difference is. Frankly, if our NPAs had been 13 percent, there's no way PhonePe would have signed a term sheet or entered into buying a company with such high risk. There's also no way we would have got to the volumes that we were doing, and have the lender partners that we have.

PhonePe CEO Sameer Nigam was on record in an interview with us, where he pointed to diligence concerns for why the deal didn’t go through. Were these governance concerns or financial concerns?

No, they were very small concerns and I think you can ask him for more detail. I don't want to talk about any of his specific points. But I think there are very small concerns and definitely not related to the credit costs. That's very, very, clear.

The existing investors are now pumping in funds. Why didn't it happen earlier and how much will they be looking to infuse?

I think the business is in good standing. We did this licensing agreement with PhonePe, so that brought some cash into the business. Also, the business costs have reduced a lot in the last few weeks and months, and the business is actually on the verge of profitability. This is really important. And one of the great things I think that came out of the whole process of going through a merger is we really streamlined the business and got it into great shape. Very, very efficient, very close to profitability. So that the company doesn't need a lot of capital right now.

I think what is happening is the investors are trying to give a vote of confidence to the new team, to the existing team and just generally, make a lot of goodwill about this whole change.

This is just another round where we'll look at some money. It's not going to be huge. It will be a relatively modest amount, and it should happen anytime in the next couple of weeks. The delay or if you perceive there to be any delay, is honestly just that there's been a lot of work we've had to do in the last few weeks, as you can imagine, with the transition.

How has all of this affected your business? Can you put some numbers there in terms of your customers, in terms of the volumes that you were doing?

The business is just in a bit of a period where we need to stabilize everything, and obviously waiting for that money from the investors to come in. So I think once that round is closed, we'll be able to publish or give you guys guidance on where volume is. I think the business has never been healthier in terms of contribution margin and therefore path to profitability. So expect in a couple of weeks, we'll be able to give guidance on that. Plan is to actually reach profitability in the next few months and I mean, fully profitable, standalone, so we would not need any future capital injections.

With so much noise around the sustainability of ZestMoney, how has the new management restored confidence among employees?

I think they've done a great job. What makes me the most emotional is the fact that the team has gone through a lot in the last few weeks…We did a town hall a couple of nights ago, and I can tell you the mood on the channel was very positive.

You have been saying that the company is very close to achieving profitability. What is driving this profitable and sustainable growth? Is the company looking to diversify into different verticals of lending?

I would actually define it more like back to basics. What ZestMoney has done in the last few weeks and months is cut off any of the non-core operations that are distracting.

I can tell you this, we are stopping doing insurance as a business line. A few months ago, it was very important for fintech businesses to be diversified and have lots of different products. I think what has happened in the last few months for Zest and for many businesses, is actually a focus on what are the core competencies, what are the real profits, and the beautiful thing in lending, your core business of lending is always your most profitable.

So all kinds of ancillary businesses will be paused. We did some other things like we made money from affiliates, that's going to stop. We will go back to the core traditional products, which is an EMI product, not in the BNPL space. I get irritated sometimes with the word BNPL because BNPL in India has a connotation of a product that's quite a bad product. So our core product or our original product isn’t BNPL, it is EMI. We're going back to doing a personal loan which is like a cross-sell product. So it's actually quite similar to the Bajaj Finance strategy, if you look at it from the outside, right, you have an EMI product that attracts customers then you sell a personal loan. That is a very profitable business.

The PhonePe deal obviously didn’t work out. But you have an NBFC license which is much sought after. Will the company pursue any other consolidation opportunities over the next year or so?

Never say never. But I would say that it is not the plan, certainly not in the next 12 months. I think that the management, the founders and the investors feel very strongly that there is a great profitability story to play out in the next few months, and there's no point even thinking about alternative options until the company is much stronger and profitable and growing again.

I don't think anybody wants to go back into the world of M&A right now.

Lizzie, Will you start up again?

Of course!

Then, is this a pathway to exit for the three of you?

No, I mean, we're stepping back from our operating day to day roles, but just as we said, we're not going anywhere because we're still collectively one of the largest shareholders and we are, importantly, I would say the biggest mentors and guiding force. We will be holding on to our respective seats, I wouldn’t even sell a single share.

If you want to go back and change something about ZestMoney, what would it be?

I don't believe in regrets. I think everything happens for a reason. We played a good game, we are very proud. It has been a very difficult for the industry in the ecosystem in the last three years

What’s the conversation been like with your lending partners? Have they turned cautious about working with ZestMoney? 

We've been speaking a lot with our lenders, actually, in the last few days to make sure that they're comfortable. We speak to them anyway, all the time. We're a significant partner to them and vice versa. So no concerns. Again, we wouldn't be comfortable doing this if that was a problem. We've always been very transparent, very involved and again, I'll still be here so that I can work with our lender partners over the next few months and ensure there's continuity.

Have you heard from the regulator at all, because you have an NBFC license, are they concerned about the company?

I think we've always had a very, very good standing and very good reputation with the RBI. We've not spoken to them in the last few days, we don't need to because nothing's really changing from an RBI perspective. So no concerns at all.

What would your top two-three learnings be from this entire starting up journey, scaling up journey and now stepping back from operating?

It is impossible to pick a couple. It has been an absolutely amazing learning experience. I have loved almost every minute. I think that running a startup and especially in a regulated industry in a market like this is one of the hardest things you can ever do.

So no regrets at all, I think and my only advice would be to anyone who's thinking about starting out. Don't hesitate. Just try it.