There have been different reactions to the 6-billion-naira loss reported by Kuda Bank for the year 2021. Despite the clamour, this kind of performance is expected from a business at the stage Kuda is. The idea of trading profit for growth is part of a larger framework called the business lifecycle, and Kuda is in its growth phase.
Most startups fit right into this cycle and understanding this would help look at the Kuda situation from an improved perspective. The neo bank reported a loss of over 6 billion naira and to put it in context, this is about 7 times more than the loss it recorded in the year 2020 and revenues had a 44 times rise. The first thing that comes to mind is that they have very high costs amidst revenue growth. That is not entirely wrong, but let’s look at a bigger picture.
A business is expected to make negative profits (losses) from inception up until its rapid growth stage when sales start increasing rapidly. The stages of a business lifecycle are identified as the early-stage growth, rapid growth, slowing growth, early maturity, late maturity, and decline. From this, we can understand that as a business continues to develop from its inception, losses are expected at the beginning. Let us now dive deeper into the Kuda case.
Kuda has received a lot of attention for its style of banking where it does not charge customers for intra-bank transfers and gives monthly 25 free transfers to other banks . Its loan service which comes as an overdraft for account holders, uses its information on the customer to create a credit profile and decides the level of credit the customer has access to. The bank makes money primarily through interest payments.
A lot of factors contributed to this loss, but they can be grouped into two major buckets, an increase in operating cost and a rise in non-performing loans (NPLs). Overall operating cost (cost related to the core business operations of the company) rose 652% from 2020 driven chiefly by personnel costs as well as sales, advertising and marketing costs. The non-performing loans (borrowed money that isn’t paid back) had an occurrence rate of about 69% leading to falling income.
To learn
It is common practice for Venture Capital (VC) backed start-ups to lose money in their early years (Uber is still not profitable) the rule of the VC game is revenue growth which allows for higher valuations. The idea is that if the companies grow big enough, they will become market leaders and then become immensely profitable.
The losses upon closer inspection are not out of the ordinary, the operating costs was driven by marketing cost and increased staff size (both signs of a growing company) and the NPLs are signs that the company is still perfecting its operational technologies while trying to grow its market share.
Overall, a company’s financial situation should always be put in the context of its operational structure, and a good place to start analyzing operational structure is the company’s stage in the business lifecycle.