Ulu Ventures, an early investor in tech unicorns SoFi and Palantir, has increased its stake in Zebit (ASX:ZBT).

US based VC, Ulu Ventures, is fast gaining a name as a top picker of potential unicorns in the tech space investing in  the likes of Palantir and SoFi in their early stages.

The venture capital fund recently raised $184 million for its third fund, well beyond the $133 million target set and more than double the amount raised for its previous fund.

It also increased recently its stake in US based, ASX-listed BNPL/e-commerce platform Zebit (ASX:ZBT) making it a major shareholder in the company with a stake of almost 8%.

As one of the fast growing hybrid e-commerce / BNPL plays on the ASX, Zebit does things a little differently and this is exactly what Ulu founder and CEO Miriam Rivers likes about the stock.

The company offers its own custom BNPL services tied to its eCommerce site.

Zebit is the only eCommerce company which allows purchasers to make a 25 per cent down payment on purchases across 100,000 products and finance the remaining amount over six months.

But the central feature of Zebit’s business model is that it’s built to serve consumers with lower credit scores who can’t access more traditional methods of payment financing.

And that’s something which is very close to heart for Miriam Rivera.

Ulu has made over 150 investments since its founding 13 years ago, which includes companies in the fintech and blockchain space – some of which have reached unicorn status such as Palantir and SoFi.

Stockhead spoke with Rivera from her base in Palo Alto, California, to get her insights on why Ulu had invested into the ASX-listed stock.

Although born in upstate New York, Rivera revealed that her childhood experience growing up in a migrant family from Puerto Rico had shaped some of her investment philosophies.

“Ulu Ventures is a financially driven investor-first fund, but I believe that your life experience gives you access to opportunities and markets that others who grew up rich might ignore,” Rivera told Stockhead.

She points to Zebit’s customer base, who are people that usually pay way more interest on credit cards and loans than much wealthier customers.

“Zebit serves an underserved customer base where we think that credit risk has been mispriced,” she said.

“The Zebit platform creates a vehicle for these people to purchase things they need, and build a good credit score at the same time.”

Zebit’s business model

Many of Zebit’s customers have poor or no credit history, but in the US those customers comprise a potential addressable market of more than 120 million consumers.

It’s also a segment that’s either not well understood, or heavily stigmatised.

Investors might naturally get a little concerned about bad debts, but Rivera believes that Zebit’s business model gives its borrowers an incentive to make full repayments.

“Zebit is giving people an opportunity to have the things they want to buy the most and which they actually want to pay for, which is a good incentive to become a good credit-worthy customer,” she said.

According to Rivera, Zebit works like a traditional general store where credit is extended to the local community and provides a new way of extending store credit to buyers.

In addition to serving the credit needs of almost half the US population who have difficulties in accessing credit, Zebit, as the merchant of record, also earns the full retail margin on each product it sells.

This is possible as it sources goods at wholesale, and sells them at retail prices on the website.

Zebit’s credit risk, says Rivera, tends to be lower than other BNPL plays because it requires a down-payment on every purchase and has decision models at the point of sale governing to ship an order or not.

“Predictable” bad debt

Bad debts are of course a big topic for BNPL plays but a well understood part of doing business.  According to Zebit CFO Steve Lapin, the “sweet spot” for Zebit’s growth is a bad debt percentage in the mid-teens.

Lapin told Stockhead recently that Zebit could easily operate with 10% bad debts right now, but that also means “we would be limiting the number of customers on our platform at the expense of long-term growth.”

Rivera believes that Zebit’s bad debt position is predictable and aligned with the Company’s growth objectives.

“That’s a little different from other players in the BNPL space, who may have less predictability and higher loss ratios,” she said.

Being misunderstood leads to mispricing

Many ASX-listed companies have aspirations of listing in the US where there is greater access to capital.

Giant Afterpay (ASX:APT) for example, has announced its intentions to list on Nasdaq as it attempts large-scale expansion in North America.

Rivera says one of the reasons Zebit is listed down under is because the ASX is more open to smaller companies than the US capital markets.

“In the US, it typically takes over a billion dollars in revenue before you can become a public company, so I think that’s hurting innovation.”

“But Australia seems to be open in supporting companies that are at an exciting part of the growth curve like Zebit,” she told Stockhead.

Asked why investors should look seriously into investing in Zebit now, Rivera said the company might currently be misunderstood by investors.

She pointed to Google’s journey from being an US$80 IPO price company all those years ago, to the US$2,400 price now.

“I think Google was misunderstood back then, and I think there is time for the markets to become familiar with Zebit to understand the difference between BNPL and our e-commerce model, which is how to appropriately price risk,” she said.

Incidentally, Rivera was Deputy General Counsel of Google back when the company only had 160 employees.

In that context, Rivera believes the Zebit shares are  mispriced. And just like Google, she believes it will take some time for investors to understand Zebit’s business model.

For the full year FY20, Zebit knocked its prospectus forecasts out of the ballpark, posting revenue of US$87.7 million, or 6.7 per cent ahead of prospectus.

In March, Ulu Ventures increased its stake in Zebit.

“We increased our stake because we think it’s a great company that is becoming more and more predictable in its margins.”

“That will ultimately result in the public markets beginning to understand the business and hopefully reprice the stock,” Rivera said.

This article was developed in collaboration with Zebit, a Stockhead advertiser at the time of publishing.  

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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