Funding Societies on the SME gap (and how to bridge it)

This article summarizes an episode of Asia Tech Lens’s video series featuring Kelvin Teo, co-founder of Funding Societies.

Kelvin Teo, co-founder of Funding Societies. / Photo credit: Funding Societies

Kelvin Teo, co-founder of Funding Societies, believes success in SME digital lending comes from doing things well, not from new ideas. His view goes against Silicon Valley’s focus on creating big changes and offers a new way to build strong local companies.

Asia does not need innovation

Teo’s plan started with one piece of advice that changed how he thought about building for a market that others ignored.

A contrarian spark from Silicon Valley
Teo says, “I was inspired by Peter Thiel’s talk at Harvard Business School… which was [the idea that] Asia, especially Southeast Asia, doesn’t need innovation. It just needs execution because Asia was so far behind in terms of innovation.”

The five-year crystal ball
With this idea, the next challenge was figuring out what to work on.

Teo says, “We decided to study the top 50 innovative companies in the US in the last five years, because we realized that… Southeast Asia is probably five [to] 10 years behind the US… whatever that’s happening in the US at that point in time would probably be just a bit ahead of the curve.”

From swimming pool to ocean
But copying a Western way of doing business was not going to work. How the market works is different, so the plan had to be rebuilt, not just copied.

Teo says, “In the US, it’s like an Olympic pool whereby everyone is fighting for the split-second… in Asia, it’s a Pacific Ocean whereby you may be just swept off by the waves… the business model in Southeast Asia is a lot more broad.”

The key pillars of a defensible credit business

This focus on getting work done needed a special way of operating. Teo found several important parts that must always work together specifically for a credit business to grow.

• Product fit: Making a loan product that customers actually want.
• Risk fit: Making sure borrowers pay back loans so the business can last.
• Funding fit: Getting money from investors who see the loans as a good investment.
• Channel fit: Finding a cheap and effective way to reach small businesses.
• Tech fit: Turning a hands-on business into a digital one so it can grow and make money.

The challenge of reaching the ‘missing middle’
One of the hardest parts to get right is reaching customers. Big companies can be reached by sales teams and people can be targeted online. However, bringing these SMEs on board is a challenge, as customer acquisition costs remain high.

Teo says, “When it comes to small and medium businesses, they fall under what is called the zone of death for distribution, whereby there’s no efficient way to reach these SMEs because it’s very costly via offline, but it’s pretty inefficient via online.”

To navigate this “zone of death,” the company adopted a mix of strategies:

Acquisitions are a capability shortcut

Western management models fail in Asia