Backed by formidable VC firepower and bolstered by a successful marketing and PR campaign, Wonga CEO Errol Damelin is determined to dominate the UK’s short-term lending market and be a force for good.
On the edge of Regent’s Park, spread across two august Georgian townhouses, is one of the fastest-growing companies in the UK, probably the fastest-growing, according to its founder and CEO Errol Damelin.
Fresh from a morning run, Damelin is bristling with energy and confidence, and having recently raised another £73 million in venture capital, he has every reason to be.
Excitedly, he compares Wonga with Google, Amazon and Facebook, all of which rose to pre-eminence by addressing a basic consumer need, investing in operational excellence, and above all, keeping it simple.
‘Google hasn’t changed their basic model of search and AdWords,’ he says. ‘As the web has grown, they’ve kept up with it. In the same way, we’ve stayed focused on short-term credit and helping people solve their short-term cash flow problems.’
Wonga’s offering hasn’t changed a bit since it launched in 2007. You can borrow up to £400 as a new customer, depending on your circumstances, and up to £1,000 as you build your “trust rating”. The maximum lending period is still 30 days and there has been no change in pricing.
But Damelin adds that the back end has become ‘dramatically more mature and optimised’ as the company’s customer base has grown.
Just how many customers there are, like the company’s turnover and profits, are numbers Damelin prefers not to discuss. But its growth can be gauged by the venture money it has raised.
First there was a ‘seed’ round of £3 million in 2006 from Balderton Capital and early-stage investor TAG, followed by an unspecified but ‘hefty’ round of venture debt, then £14 million in 2009 bringing in Accel Partners and Greylock Partners as well as existing investors, and finally the most recent £73 million round led by Oak Investment Partners and also introducing the Wellcome Trust and Meritech Capital Partners.
In all likelihood, that adds up to more than £100 million, most of which has gone into strengthening the company’s balance sheet and allowing it to extend more loans.
Creating a buzz
The involvement of TAG brought in venture legend Robin Klein as Wonga’s chairman. Klein, a very active early-stage investor who has backed big names such as Lastminute.com and Lovefilm, describes Wonga as ‘impossible to ignore, a super, super success’.
It has also attracted a lot of media attention, much of which has been something of a thorn in Damelin’s side.
Newspapers have pointed out that the APR equivalent on a Wonga loan is in excess of 1,000 per cent, but Damelin counters that this figure is no more than a mathematical abstraction, as the maximum loan period is 30 days and interest is not compounded.
A typical Wonga borrower is not the kind of desperate, downtrodden individual in thrall to doorstep lenders and payday loan sharks, but a savvy young professional who knows exactly what he or she is doing.
‘We have never intended to be there for people’s entire lives,’ says Damelin. ‘Doorstep lenders are there for people’s entire lives and for multiple generations – there are families where three generations are always just two payments behind.’
Moral high ground
Damelin gives no ground in defending Wonga from an ethical standpoint, and his attack on other categories of lenders is equally trenchant. ‘If you want to find out what a bank’s overdraft late fee is, say at RBS, you’d better be willing to spend one day on it,’ he says. ‘It is anything but transparent, and very convoluted.’
He also turns his fire on credit card companies which, he argues, are ‘cynical, calculating, constantly trying to keep people in long-term debt’. But however fervently he believes that Wonga is offering a more wholesome alternative, Damelin knows that the argument won’t be won by logic alone.
Last year, he decided to sponsor Premier League team Blackpool FC – a remarkable decision for a company that had been trading for less than three years and an important part of its strategy to present a friendly and approachable face to the world.
The company is beginning to win the PR war. Last November, the Daily Mail ran an article comparing different kinds of lending, which Damelin says was ‘unusually, fairly accurate’.
According to the paper’s research, a Wonga loan compared favourably with taking out an unarranged overdraft at several of the major banks, and comfortably undercut payday lenders such as QuickQuid.
Barriers to growth
Although Damelin says it is ‘inevitable’ that Wonga will one day go global, he’s surprisingly conservative about the likelihood of this happening any time soon.
‘This is a very difficult business to internationalise,’ he remarks. ‘There’s the regulatory component, the data component, and the nature of payments – all are very local. It doesn’t feel like we have “done” the UK.’
And that’s because the vast majority of Wonga customers have never used short-term loans before, Damelin adds. ‘If we only targeted people who had used short-term loans, we would have reached saturation point in the UK quite quickly. But we have created a new market.
‘I think this generation is much more savvy, cash-wise, than they’re given credit for. The public perception is that the younger generation is carefree and doesn’t think, but we don’t see that at all. They understand the real cost of cash and they are able to compare the alternatives.’
Damelin’s own younger days were spent in South Africa, which he describes with a vague nostalgia. He gets more animated when he starts talking about Israel, where he moved after graduating from the University of Cape Town.
‘That is a dynamic, entrepreneurial place that takes its destiny into its own hands,’ he says. ‘I always find it super-interesting when countries do that – without natural resources, they achieve something special. Look at Singapore and Hong Kong, or Silicon Valley. Israel has got that.’
Initially working in investment banking, it was in Israel that Damelin was bitten by the entrepreneurial bug. He co-founded steel wire manufacturer Barzelan, which is still trading. But it wasn’t long before he moved again, this time to London, where he founded a business called Supply Chain Connect.
‘I wanted to do something on a world scale, and I felt like London was one of the places you could do that,’ reflects Damelin. ‘Not many places have the same access to the market, the sense of what’s possible.’
Supply Chain Connect, which provided a platform for corporates to manage their logistics, was acquired by ChemConnect in 2005.
Damelin took time off to decide what to do next, and saw that ‘consumer credit was one of a few industries that was big but had not yet been disrupted by web and mobile’. Wonga was founded in 2006 and launched its beta site in October the following year.
Damelin still believes London is a ‘fantastic’ place to do business, but adds that it is not as attractive as it was ten years ago.
‘In 2000, there was a perception that entrepreneurs were central to the economy. [Tony] Blair made people feel genuinely important. There was taper relief [for those selling stakes in smaller businesses], the Enterprise Investment Scheme.
‘By 2010, entrepreneurs had become less and less important. In the last few years, every Budget has been an opportunity to take more back.’
It’s perhaps ironic that a lending business is reluctant to borrow money itself. Aside from the venture debt raised between the 2007 and 2011 equity fundraisings, Damelin clearly prefers to raise substantial money from VCs, who are queuing up to back the company.
‘We’re trying to build a long-term business, not optimise our return on equity for the next two years,’ Damelin explains. ‘Yes, debt is cheaper and it helps the equity holders, but it also creates reliances and vulnerability.’
In fact, Damelin takes pride in the fact that Wonga funds all advances with its own capital, rather than parcelling up and passing on risk as lenders did in the run-up to the credit crunch to such devastating effect.
‘The way most people operate is they take risk out – we don’t. We take risk, but we get really good at taking risk. If you get an advance from Wonga, it’s our money in your account.’