Mark Francis Talks Embedded Lending | Curiosity Code 004
30 Jan, 2024
In this episode of the Curiosity Code podcast, Alex delves into the dynamic world of fintech innovation in the Asia Pacific region with guest Mark Francis, a seasoned professional in executive search and fintech industries. Born in Hong Kong and having a rich professional journey across Asia, Mark shares his unique insights into the evolution of the fintech landscape, highlighting his transition from the corporate world to entrepreneurship. He discusses the founding of Silverstrand and Cleverly Search, leading to his venture into fintech with Zettel—a platform addressing the financing gap for SMEs through innovative lending models. Mark also touches on his involvement with Tyros, a private investment firm, and shares his perspective on current trends and challenges within the fintech industry, particularly the rise of embedded lending and the impact of regulatory environments across different Asian markets. Offering advice to new entrepreneurs, Mark emphasizes the importance of a clear path to profitability, a strong founding team, and realistic valuations in today's competitive and rigorous investment climate. This episode provides a deep dive into the complexities and opportunities within Asia's fintech sector from a veteran entrepreneur and investor's viewpoint.

Alex: Hi there, I'm Alex and this is the Curiosity Code podcast. Let's dive together into the dynamic world of fintech innovation with the most interesting people in the industry. And our guest today is Mark Francis. He's coming to the show to share with us the experience within the executive search and fintech industries in Asia Pacific region. Welcome to the show work.

Guest: Thank you so much for having me, Alex. Really looking forward to speaking with you about. Yeah, based in Hong Kong at the moment and it's a very cold five degrees outside, so I'm very glad to be inside talking with you on this podcast.

Alex: Happy to have you here as a guest. It's a pleasure. Let's kick off the conversation by exploring your professional journey. So I see that you're original from UK, started the career in UK and then you end up. Somehow you end up being in Asia. Can you just high level from 30,000ft attitude walk us through your journey?

Guest: Yeah. Happy to give you a bit of background. So actually the thing that's maybe not shown on my profile is I was actually born in Hong Kong, so for me, I actually grew up in Asia. Yeah. So I grew up in Hong Kong, spent a bit of time in Malaysia as a teenager and my first job out of university was in China, in Shanghai. So I've always had an interest in the region. I've always sort of had close ties here. I do have a british passport and obviously a british accent. My dad was british, so I spent time obviously in university there, worked in London for a short while, but Hong Kong actually has always been home. My parents came here in the 60s, my mum came here in 1964 from what was then seller and my dad from Wales in 1969. So I've always had close ties here and I think also being a mixed race myself, being a eurasian kid, it also fosters a kind of globalist view on how the world works and how you enjoy working with people of different cultures. So Hong Kong, although it is still 90% hand chinese, there is still 10% of the population would be sort of ethnic minorities and other sort of passport holders. And that does create still quite a dynamic melting pot of cultures. So that's kind of how I ended up here and I guess also says a bit about me too.

Alex: Interesting, interesting journey. I didn't know that you're originally from Hong Kong. It's quite a surprise in terms of your professional progression. Can you speak a bit about that?

Guest: Sure. So after university in the UK, I went and spent a year in Shanghai to learn Mandarin. So it was a language exchange. So you go there, you teach English, and in return you learn Mandarin. Because this was sort of 2005, Hong Kong had just been accepted into the World Trade Organization. There was a lot of excitement around China becoming part of the global markets. So I kind of wanted to tap into that feeling, that zeitgeist. I think also Hong Kong had gone through something similar in the, which my parents had experienced and sort of by this time, it was soon after SARS, which was a sort of a pandemic we had in Hong Kong 20 years ago, whereas China felt like this sort of land of opportunity, particularly 20 years ago with the World Expo and the Olympics coming to the country. So that was kind of the first experience from there. I soon came back to Hong Kong just because I had that experience, but I did want to come back to the city because Hong Kong is very unique in many ways. And yeah, my first sort of role in Hong Kong was working in executive search, as you pointed out at the beginning, working for a boutique british search firm where we were primarily working with the biggest investment banks around the world, helping them to find mid to senior level individuals in global markets divisions. So that was a crash course in business, in dealing with high achieving and extremely intelligent individuals, very competitive and also at times very demanding. So it really taught me a lot in terms of work ethic, in terms of dealing with individuals older than you, perhaps with a better academic background than you, certainly earning more than you, and sort of understanding how to connect with those individuals, build relationships and rapport quickly, obviously engender trust as well, and from that try and create success. So I think I learned a lot. The industry back then was, this is before we had smartphones where you could be available 24 hours a day. This is before even LinkedIn was a thing. So they were put in a room with a phone, a Bloomberg terminal, to be fair, and an Excel spreadsheet, and then they said, go make some money. So that was a real kind of baptism of fire. But I have to admit, I think that it really set me up well for the rest of my career. I don't think the industry works like that at all now. It's actually a smarter industry now. You don't have to work quite as hard because you can work smarter. So it's a good thing, but there was a lot to be learned from it. So, yeah, my background. So I spent about five years with that company, and then in 2012, they made the strategic decision to move the HQ, the headquarters of Hong Kong, to Singapore. They offered us roles in Singapore, but myself and the other senior consultant in Hong Kong said, thank you. We were going to stay here. We had family ties, and that was actually, I guess, the kickstart that we needed to set up our own business. Sometimes you need a push to sort of jump out of that plane, and that was that push. So myself and Dennis Lowe, we'd worked together for five years previously, we identified there was a complementary skill set where he was slightly older, married, was about to have children. I was sort of younger, unmarried, and didn't have that kind of responsibility. There was a natural balance between somebody willing to take a bit more risk and somebody more risk adverse. I feel that you do need that to run a successful business. And that was the sort of beginning of that journey. So that would have been over twelve years ago now. We set up a company called Silverstrand, which was still doing executive search for financial services, but this time was more focused on what we call the buy side. So that would be the organizations like family offices, funds, as well as proprietary trading companies. So many of these organizations were sort of twelve years ago at the cutting edge of using technology, using algorithms to sort of trade and monitor the markets. And we did a lot of good work with them. So, yeah, that was kind of the first experience and taste of entrepreneurship.

Alex: So that's cleverly search, right?

Guest: This was Silverstrand. Yeah, this was Silverstrand success. That was twelve years ago. So basically we had quite a bit of success with Silverstrand. After around five years, I believe it was, was in a position where had some excess capital, had a little bit of time available, and saw an opportunity to set up another company, focusing on the built environment. So working with large property developers, engineers, architects, ESG, as well as sustainability sectors. So actually set up a completely separate legal entity, which was called cleverly Search, hired a different team and set about targeting this market, replicating the approach, the philosophy that we had at Silverstrand in terms of doing things with integrity, working hard, but working smart. More importantly, looking through the longer term, not trying to focus on short term results, but actually taking a long term view on delivering success to your clients, the best experience to the candidates, and obviously utilizing any technology or tools to give you an edge. So we took that kind of philosophy and applied it to cleverly search. And yeah, look, it was great. It took one business to profitability. The second also came to profitability about two and a half years after that. So was then in a position where I built, bootstrapped, but built two profitable companies. When many founders will fail at one, it's hard enough to do that. And obviously, two is already a pretty good step. But both of those were recruitment companies. So I felt that had some ideas on how to do it in the recruitment industry. But could you take these kind of ideals and replicate it in a different sphere? And that was kind of what led to Zettel, which I imagine is going to be your next question. So Zettel is coming up for its 6th year since sort of the incorporation of the business. The reason that Zettel exists is that as a founder and business manager for these two recruitment companies, obviously at times there were opportunities where you needed to have access to financing to improve either your cash flow or your working capital, or you just needed growth capital for new ventures and opportunities. And as you can imagine, six years ago in Hong Kong, there weren't really many options available to you unless you raised equity capital from angels or high net worth investors. It was very hard to get financing because banks didn't really want to deal with SMEs, particularly small SMEs, without physical assets to post as collateral. They want to deal with companies that have real estate property or large inventory holdings that could be post as collateral. They didn't want to work with these asset light businesses like a recruiting and staffing firm. And the alternative lenders in the market back then were really focusing on supply chain financing and trade finance, which, to be honest with you, is already a trillion dollar market gap. There's a huge opportunity there. So what we sort of identified was that asset like companies were being underserved. They were being underbanked and underserved. So given the network that I've kind of built in my work as a recruiter, particularly in the financial services side, I reached out to one or two people that I knew to say, could we build a lending business tailored to asset like companies and engineer a credit model? Basically working backwards. We know that this company doesn't have physical assets to post as collateral. What do they have? They have invoices. And typically, even though you might have a ten person consultancy, you may have contracts with large listed companies, even sometimes the government. So they are obviously good end debtors. So we looked at it and we said, well, look, there is somewhat of a credit arbitrage here where you're providing capital to the small privately owned company. But actually the receivables that they have are with relatively low risk, investment grade quality credit companies. And that was kind of the genesis of the business. So the first person that I approached about this is now our CEO, Shan Han, very talented serial entrepreneur himself, ex trader and research analyst. I sort of sought him out, given that he was both a trader as well as a coder. And I said, can we build this type of business? And he said, yes, this is definitely doable. Very soon after that, after a few months, we got introduced to our third co founder, Matt Roberts, in Singapore. We were introduced by a japanese VC. He has a lot of experience with structured finance and securitization at major banks in Europe. He'd also been involved in the private debt markets for many years. So he understood credit and risk at a much deeper level than certainly myself, but also even Shan. And basically the founding team was. The three of us spent a number of months going through different data sets that we had, building a credit model which would be tailored to these types of businesses, and then basically testing it with Silverstrand and in essence, cleverly and obviously some of the use cases that we had. And then we officially went live in 2019. So we're going to be coming up to five years of revenues in the summer this year. It's been a wild ride, as you can imagine. We set up just before the protest in Hong Kong, then we had three years of COVID and then we've come out of COVID and we've had a bit of a first half of last year was obviously a bit of a financial mess, rising interest rate environment, macro conflicts going on, issues with inflation. So really we've seen a lot of very challenging markets and we've come through it with a few cuts and scars and bruises, but with a very robust business that works. And now we have clients in five countries in the region. Main markets been Singapore, Hong Kong, Philippines and Malaysia, with some lending done to Australia. And we work with a group of SMEs and startups all across the region, and it's fantastic. Talking to entrepreneurs every day, understanding their needs and supporting them is kind of the joy of what we're doing. So obviously there's a lot more, but kind of, in a nutshell, that's been the journey.

Alex: That's impressive. So how you transitioned from your role in corporate world, then being a founder in your first business and recruitment, and then you are suddenly in a technology business and it's still in the same industry. You're so well rounded and so well aware of what's going on in the industry. I see that you're also involved as a partner in terrace. Can you speak a bit more about that? I see now how it fits in the bigger picture, but let's add a bit more of color there.

Guest: Yeah, I think look, as you've already realized, there are synergies in a lot of the things that I do. It's not completely out of the wheelhouse, but it's looking at it from a different point of view. So Tyros is a private investment firm. It was first set up in about 2016. When we first launched, myself and the other partners, we actually set it up as a co working space in Hong Kong. It was a co working space looking to offer low cost co working solutions. We saw the opportunity in the market. Wow, eight years ago, and it made sense. We basically set up sort of a no frills office, so nothing like Google. It was a simple office, but the idea was you could come in, you've got, obviously, coffee, tea, water, your pedestal desk. Everything is set up for you. You just plug and play. And it did work. It worked initially. But as unfortunately, time has shown, there were other players in the market that were running at a significant loss to gobble up the market share. The main one, of course, being weWork. And they basically opened a wework just down the road from us. After about six months or so, we were, I think, charging hk$3,000 per desk for the whole setup. They came in and offered two and a half desk. And of course, their offices were phenomenal. It was like working in a Google office. But as we soon found out afterwards, if you're paying $2 to make one dollars for your customer acquisition costs, it doesn't make sense longer term. And as time has now proven, the business model was never set up, really to succeed longer term or be profitable. So, unfortunately, Tyros, I would count as initially a failure. It was a failure. And I think for founders, you will at some point deal with failures. And it's important to sort of bounce back from those, because I think the learnings I took away was I should have shut the business down sooner than I did. Once WeWork had come in and we could see that we were losing business to them, we should have immediately cut our losses. I think we dragged it out longer than we should have. But in essence, we shut the business. We sold all of the assets that we had. So there was obviously inventory that we had, all of the furniture, for instance, and we still had the legal entity, the bank account, but also we had this list of contacts of entrepreneurs and other individuals that we had engaged with during the two years or so that the business was up and running. And that in itself did have a value. And it's really interesting. I look at Zettel, the CEO, and even the CTO both worked in that co working space. So although it didn't bring me any material rewards immediately, as it turned out, two of the individuals, there are now two of the C suite staff at Zettel and other founders I've stayed in touch with, I've still been very close to. So what we did is we decided that we would turn the business into a private investment firm. I'd already been an active angel investor going back even to sort of 2012 2012 or so. So I've always been quite excited 2012 2013. I've been excited and being an entrepreneur and backing others and instead of doing it as an angel investor, basically pivoted into this limited company in Hong Kong. So there's a few other general partners that are involved now. And in essence, we invest precede up to pre series A in companies across fintech, HR Tech, ESG and Web three. And again, you'll see the synergies. So obviously Fintech Zaddle would fit that bucket, HR tech Silvershram would fit that bucket. ESG cleverly would fit that bucket. And we've invested in other companies, of course, separate to those. But that's the synergy that comes through. So yeah, look at the moment, we did do two investments last year. I think we're expected to do probably only a couple this year. Like with many other investors, particularly vcs, the market has slowed down. It is much harder to raise funds than it used to be. I think some vcs are sitting on Nav losses now in their books, maybe had to write off some of those portfolio companies as losses or shut them down. Many are also looking to exit on the secondary market and looking to try and find sales. So it's been a very challenging environment, I think for investors like that. Luckily for us at Tyros, we haven't yet had a loss, although we have seen one or two companies that perhaps are not looking as exciting as they were two years ago. But saying that we did make an investment in October last year into an HR tech platform where we see a lot of potential, and I anticipate that there will be another one coming up soon. This year.

Alex: Makes sense given that you have an exposure to entrepreneurs and small businesses and M E from both Zettel and Tyrus. In your opinion, what are the main trends that are in the fintech industry and financial services abroad that catch your mind and your attention as an investor?

Guest: Yeah, so I think, I know you've had a couple of other very talented guests on your podcast already. Fintech is obviously a huge area. There's so many subsectors to it. I'll talk about it from what I know, at least firsthand to some extent. So I think what's really interesting, as I look at it from a sort of a lending perspective, is that there has been this sort of migration towards what we call embedded lending. Embedded lending has sort of been relatively common in Europe for a few years, as well as North America, but in Asia Pacific it's still pretty nascent. There are not many embedded lending fintech companies in the region. As it stands, Zettel is one of the few. And what has sort of happened is when Zettel first set up, it was a direct to business lender. So what that meant is we still have a number of channel partners. They could be loan brokers or accountants, corporate secretarial companies, or even co working spaces. These are organizations that are sort know, tapped into the pulse of startups and SMEs, right. They're speaking to founders. They understand sort of their needs, and they can maybe present a way that they can offer them services. So traditionally, they would refer us a company, or a prospect, as we call it, for financing. We would go through the onboarding process with them, and then if we finance them, there might be some sort of referral that goes to these partners. So that's fine. It is obviously more of a manual process. And that was basically how we grew from the first few years. Now, in 2022, towards the end of 2022, we started to see that there was a lot of opportunity to be had with integration via API layer directly with tech enabled partners, in particular payments processors and POS vendors that were accessing significant amount of transaction data from their merchants that use their platform, and realized that that data set could actually be used to provide financing, be used for us to provide financing. And also when it comes to collections, the collections process is a lot easier because you're not going directly to the prospects, the merchants. You're actually collecting from the intermediary, the partner itself. And it's been a bit of a game changer, really, because that significantly changes your scalability. Because with one partner, you could be looking at hundreds, if not even thousands of merchants. Some of these partners are only in single locales, others are across border. So that has been, I think, a big development. And I anticipate that over the next few years in Asia Pacific, we will see this trend continue. People have already seen technology companies in the US that are starting to become financial services companies, right? Apple obviously offering various lending products or cards. Many other companies are doing the same. But if you even look into companies like Shopify or even eBay, they also now will offer merchant cash advances, or previously, you might call it buy now, pay later, which is more consumer focused, but merchant cash advances in particular. But what's interesting is they actually don't offer it themselves. They offer it in partnership with a fintech company. And that is what is significant, and that's what's happening in the region now is not every company wants to become a lender. They don't necessarily want to have the risk. They also don't necessarily have the expertise, or they don't want to build the tech, because that is then resources that have been diverted away from the core business. So what they would rather do is integrate with a partner that has this expertise, that has access to capital, that has a robust credit and model and process, and then do a revenue share and split the rewards with that partner. And so it's a very symbiotic relationship. They are able to then offer the merchant cash advances or even instant settlements to their merchants, which helps to retain customers in addition to adding a new revenue stream. And then they can offset the risk and the difficulty of doing that by having a partner like us sitting behind them and offering that layer. And many organizations now have API docs that are very clear and open. Everybody knows that this is a great way to scale. Even banks, they have API docs. It's just notoriously difficult to know how to integrate those. And so that's, I think, one major trend that we are certainly seeing ourselves, and this obviously is carried through from other major companies in Europe and in the US that do this already. So companies like Wayflyer, uncapped, Ulend, these are the type of firms that have been doing this with a great amount of success. And in the region there's still opportunity for ourselves as well as a few others that are doing something similar.

Alex: Yeah, lending and payments processing, those are the things that I keep hearing over and over again from expert to expert. What about challenges? I know that we already touched based about what's been happening in Hong Kong and the impact of COVID of course. But what are the challenges in 2024 in the industry, particularly in Asia region?

Guest: Sure. So I think, look, one is always going to be competition, right? Just because you thought it doesn't mean that there aren't 100 other people that are thinking it too. I think competition is one. As I mentioned, there are other embedded lending fintechs in the region, as well as also in Europe and the US. I'm sure at some point they will have eyes on APAC and want to sort of tap into the largest population center in the world with some of the fastest growing economies, as well as two of the top three biggest economies in the world. So I think that that is going to definitely be something to keep an eye out on. Otherwise, look, there could always, you have to stay on top of regulations, right? Government regulations in every market. I think the big difference with Asia versus, say, the US is the US is one federal market, right? You understand the rules work across those 50 states, and that gives you access to huge population and obviously significant amount of capital. Now, in Asia Pacific, the rules may not be the same in every market. Now, clearly there are some similarities with common law jurisdictions like Hong Kong, Singapore and Australia, but that doesn't necessarily carry through to the Philippines or to Malaysia, and certainly not to places like Japan. So it's also important to have a bit of a localization knowledge and been able to adapt yourself to each individual market in the region. So I think challenges are changes at each national market, whether that is a regulatory change, some other financial requirement, things like that, you definitely need to stay on top of. I think maybe the third is more of a lending company in a rising interest rate environment. What we've started to see, and we saw this even as early as the summer in 2022, that was kind of when we first identified that there was obviously more risks to lenders in a rising interest rate environment. There would be more chances of companies defaulting. There'd be more risk of companies having delinquent loans and repaying late. So we needed to be prepared for that. So we did somewhat tighten our credit criteria. We sort of take that view because we are a portfolio manager, right? We're not a peer to peer marketplace. It is a direct lender. We obviously have a number of angels, high net worth and family offices that provide financing to us, as well as institutional credit funds. And then we have a robust credit underwriting process to ensure that we're not too heavily exposed to different sectors. So we look at sector exposure, we look at market exposure, and then also we're looking at macro risk, too. So that's, I think, being a big part of it. Look, looking at our competitors, default rates have been going up. Delinquency rates have also been going up for us. They have also been going up, but within the provisions that we set, which is the crucial thing, so we can stay on top of them. So I think this year that's going to continue because the low and no interest loans that many companies gobbled up during COVID Those are no longer being given out by banks, they're no longer being guaranteed by governments. So what happens when those loans are due for repayment? That will have an impact upon cash flow. It means you can't invest as much in your business. You have to divert more of your sales into paying these back. So that will have an impact. So I think that's probably the other major risk factor, is ensuring that we stay on top of the loan book, make sure we provide finance with the right companies, with the right business models that we can see are going to be sustainable throughout what is probably going to be a difficult 2024, at least the first half of 2024, it's going to be difficult. Clearly, interest rates are likely going to be cut a few times this year. Once that happens, I think that we'll sort of see companies maybe come out of the worst of it, but that means that we would have had close to two years of pretty challenging times for certainly small business owners and entrepreneurs. It's much harder for smaller companies to weather the storm than it is if you're a larger enterprise. So I would say those are probably the main ones for us.

Alex: Sure. So with your experience, entrepreneurial experience. So you founded few companies, you actively run two companies, right? One in recruitment, another one, Pearl and fintech and lending, and also with investment background. And you've been currently investing in startups at seed and precede stage. If you were starting your own new venture, like a startup that is looking for investments, let's say it's precede round. What would your recommendations be to that founder today to 2024?

Guest: Very good question. So I think we touched upon it earlier. It is harder than ever to raise equity capital at the moment, certainly from vcs, venture capitals. There is money available, there's money sitting on the sidelines. We know this family offices have got access to capital. Certain vcs have raised large rounds. There's always angel investors who want to get involved entrepreneurship or have been involved in entrepreneurship. But what are they all looking to see? I think one is they want to see much earlier than previously, a roadmap to profitability. I think this is one of the most crucial differences with where the market looked two and a bit years ago. Companies, investors back then were willing to sort of give a company five, six years maybe to get to profitability because it was a low interest rate environment. Access to capital was easier. So you're willing to take that risk now? I think an investor wants to understand that there was a clear business plan with a clear pathway to profitability within a few years. Now, of course, they don't expect the business to be profitable next year. Do they expect that within three years? Maybe some of them do, actually. Maybe they do ask for that. So that obviously has an impact on how you're going to scale that business. Maybe you're not going to invest every dollar back into the business just to scale it. Maybe you do need to actually put some aside to be able to actually stay profitable. So I think that's one thing that everyone will be looking for, is that pathway to profitability. Second is always the team. I mean, all investors say this, but there is a lot of truth to it. When the times are tough, when you're really struggling, who are going to be the founders that stick it out, who are going to be the founders that really do everything for the business, sacrifice for that business, because that is how they're going to survive and then thrive. I think that's something that you will continue to see is a lot of rigorous due diligence on the founders. Again, I think up until 2022, some due diligence was a little lax, it was a little loose. I think FTX scandal has shown that some of the world's most leading and esteemed investors got burnt by that because they were still actually following FOMo. They followed the herd, and that can be a big problem. So I think that you'll see a lot more rigorous due diligence. We're already seeing that what used to be a three month process would take nine months. For instance, I think Pitchbook data came out and said that the average investment process for the VC for Series A and Series B round is taking nine to twelve months. So the data backs that up. So processes will take longer. With rigorous due diligence, they'll want to see a clear pathway to profitability. The team will be crucial. Do the team complement each other? I guess for myself personally, the only reason I've been able to do what I've done as an entrepreneur over the last few years is that I've always had good co founders. So anything I've been involved in, I've always had a complementary co founder or two who will have skills and strengths where perhaps I don't have those abilities or have weaknesses. That obviously takes a lot of self reflection and that concerns quite hard for people to do, but I think that's certainly something I look for. Is there a complementary skill set across the team? Do I believe in that individual or those individuals? So those would probably be my three main takeaways at the moment. I think otherwise. Valuations, yeah, they're going to be lower than they were. I think gunning for 20 times sales multiple now is just not going to happen. You've got to be more realistic, right? And particularly if you have a pre revenue business, it's going to be a lot harder than it was. I think if I was looking to start up a business now, I might sort of take a smaller precede just to get going, get that MVP up and running, generate some revenue, get to revenue as soon as possible. Once I've got some revenue, go back to do a sort of larger seed or pre series A round, whatever you want to call it. Raise a bit more capital there to really scale that business. And then by the time I'm looking at a series A, I want to be getting close to profitability. Even so, that tells you how quickly you need to do it. So target three years if you can. It's aggressive, but also many startups, most startups fail within three years. So if you haven't got there by three years, then there's a chance you may never get there. So that's probably what advice I would give to other budding entrepreneurs.

Alex: Thank you. Thank you for sharing words of wisdom and for the advice. I think I can wrap it up on that. I'd like like to thank you for being a guest of the podcast. It's been a pleasure hearing what's happening in Asia market and lending and fintech and recruiting. I enjoyed it a lot and thank you everybody for listening. Don't forget to subscribe not to miss next episodes. Bye.

Alex: The episode of Curiosity Code and thank you for listening. We'll see you next time. Bye.