Startups find a new way to grow: loaning out their own VC money

“Everything is going so badly that even my customers have run out of customers,” said Freddy D’Ortiz, who runs a hair salon in a red light area in Bogotá. He is now considering taking out a loan to buy hair products to stay in business. It’s not ideal, he told Rest of World, but instead of making one payment upfront for all his products, credit could allow him to pay in installments, as his customer base stabilizes.

Small business owners in Colombia and Mexico are used to juggling their finances in challenging times. Willing lenders in Latin America are few and far between, even in the best of times. Almost 62% of all medium-to-small businesses in Colombia lack any access to even the most basic financing, and that number is over 80% in Mexico. As the regional economy stalls, one type of company does seem to have money to lend: tech startups linked to the so-called Rappi mafia. 

Rappi, a Colombian multibillion-dollar tech company, began as a last-mile delivery startup and became the largest across many Latin American countries. Its close-knit group of former employees and investors have gone on to rapidly create a whole new roster of regional startups, in part because the Rappi name is so influential among investors. The group is known in business and venture capital circles in Latin America as the Rappi mafia.

Rest of World identified four mafia members running a new breed of startup that has gone from e-commerce platform into lending business in strikingly quick succession — a transition that has traditionally taken regional behemoths like Rappi and Argentine e-commerce MercadoLibre years, if not decades, to achieve. Armed with millions in Rappi-facilitated funding, their customers’ data, and an economic situation that has pushed them into making riskier business decisions, these young startups are trying to turn a downturn into a launchpad.

“The businesses [that Rappi mafia lenders are catering to] have very short operating cycles, so banks or large lenders are never going to approve a loan for them,” Alejandro Villalobos, regional managing director at Cumplo, a company that deals with invoice-backed short term loans for small and mid-sized companies, told Rest of World. By filling this void for small brick-and-mortar shops, these new Rappi mafia companies are hoping to leapfrog their now-giant predecessors into the potentially lucrative lending business.

Rappi’s own path to lending was much slower. Five years after being founded as a food delivery company, it launched a credit card called RappiPay. It then took two more years to reach 800,000 users in Colombia and 500,000 in Mexico. Comparatively, this new cohort of lending startups has moved into lending at pace. The oldest launched in 2018, and the youngest is eight months old, and they all have funding worth several millions of dollars — money they used to launch as straight e-commerce platforms. 

Morado, an e-commerce platform for beauty salons, has raised $7.5 million in eight months and will launch its credit product in 2023. Tül, an e-commerce app to buy hardware and construction products, has raised $205 million since 2020: $181 million of it last January. Frubana, a marketplace for restaurants and their suppliers, has banked $277 million, its last round in June amassing $75 million. Chiper, an e-commerce platform for mom-and-pop corner stores founded in 2020, has raised a total of $65 million.

Beyond early access to cash facilitated by links to Rappi, what also matters to Tül, Morado, Frubana, and Chiper is their practice of data analysis, shared with the Colombian giant. Fabrice Serfati, partner at Mexican VC firm Ignia, told Rest of World that data gathered from online activity can be a “gold mine” for online lenders. “If an e-commerce company has enough data, it can design a risk model and start giving out loans,” Rubén Galindo, CEO of CapitalTech, a fintech company in Mexico, told Rest of World. 

As a result, the playbook for lending followed by these e-commerce startups generally has the same pattern: After a few online purchases on the e-commerce platform, a customer’s behavior is analyzed. The startup then decides if the small business qualifies for an online loan usable exclusively for purchases within the platform. In this way, the lending e-commerce startup can double its sources of revenue: selling products directly through its platform and charging a fee or interest on its loans.

“We use the data we gather from our customers’ behavior,” a Frubana representative told Rest of World. “That information works as a background check to determine if they’re good candidates for a loan.” Frubana Capital, the company’s financial branch, is not a large part of the business yet, but the company’s representative told Rest of World it hopes that “more than 30,000 restaurants in our three markets [Colombia, Mexico, and Brazil] will be using our credit solution” within the next six months. 

Experts agree that these loans are often the only credit alternative small businesses in the region can get. However, they are torn as to whether this is sustainable in the long run, given the risk involved in lending to many small traditional businesses. 

“I don’t think these [startups] will, or should, turn into banks, because lending is not at the core of their businesses,” Brian Siu, general manager for Latin America at Jeeves, an all-in-one financial platform for small and mid-sized businesses, told Rest of World. “If these companies don’t have the necessary experience in the fintech industry, they could face regulation problems,” Galindo told Rest of World. “These Rappi-effect startups have been able to reach specific customers, but they can be jeopardized because they don’t have adjusted risk policies for them,” Diego Tovar, former Deloitte analyst and co-founder of Ubanku, a Colombian fintech, told Rest of World.

These are still early days for this strategy of fast entry into credit, so these startups seem to be cautiously lending less-than-generous amounts of credit to individual shop owners — enough to tide them over but not to resolve any deeper problems. Jesús Antonio Martínez Jimenez, who runs a restaurant in Mexico City, has been using Frubana’s credit for a few months. “I wouldn’t say it is a lifesaver, but it is helpful,” he told Rest of World.