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Seemingly since its inception, credit card payment business CRED has been subject to heated debates on the company’s business model or seeming lack thereof.

“What is CRED’s business model? How will it make money?” has been the questions du jour in startup circles for a while.

But those may be the wrong questions to ask.

The actual question should be, “Why is CRED valued as highly as it is?”

Even before starting the company, CRED founder Kunal Shah raised a seed round of US$25 million. He then followed it up with multiple funding rounds totalling more than US$200 million, with the last publicly disclosed round of US$80 million reported in January 2021 at a valuation of US$800 million.

If that wasn’t enough, there are now reports reports TechCrunch India’s CRED in talks to raise $200 million at $2 billion valuation Read more that it is set to raise a new funding round of US$200 million at a US$2 billion valuation—a unicorn twice over. All this, barely three years since it was founded and with precious little to show for revenue. In the year ending March 2020, the company reported an operating revenue of Rs 52 lakh (US$71,700) with a loss of Rs 360 crore (US$49.6 million).

To the lay observer, these numbers might seem outlandish. A company with less than US$100,000 in revenue in the last reported financial year being valued at US$2 billion.

But there is some serious money behind this venture. CRED’s investors include marquee names such as Sequoia Capital, Tiger Global, and DST Global.

These VCs are canny operators and some of the shrewdest investors in the globe. So, there has to be some VC calculus wherein these numbers make sense.

The core belief of this calculus is that CRED delivers a decacorn exit. US$10 billion is the magic number for CRED’s investors for a couple of reasons.

If the upcoming funding round values CRED at US$2 billion, the expected payoff would be 5X from this base—a US$10 billion exit.

At a US$10 billion exit, major investors like Sequoia Capital would own roughly 10% each and would therefore get around US$1 billion each. A unicorn exit but also one that would return an entire fund by itself.

The big question then becomes: How does CRED get to a US$10 billion exit? Is there a best case scenario where such a valuation is possible?

Parsing this bull case for CRED requires us to analyse a few key aspects of the VC calculus.

Mindset—No business like show business

The first aspect that we need to grok is the investor mindset. This mindset closely resembles that of a movie producer.

Producing movies and funding startups are more alike than one would imagine.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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