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CRED’s plan to acquire Smallcase falls through

The fintech startup switched to a lowball offer amid a downturn in investor sentiment
and questions over Smallcase’s business model.

Ashwin Manikandan Advait Palepu

Delhi Mumbai

16 August, 2022

Unlocked story

L
ast year, CRED founder Kunal Shah came up with an ambitious plan to expand the
fintech company’s wealth management offerings. He wanted CRED to invest in
Smallcase, a seven-year-old stock investment platform backed by India’s leading
brokerage, Zerodha, among others.

Talks between the firms about a deal—which reportedly would have valued Smallcase as high as
$300-400 million—have fallen through after six months of negotiations.

The companies couldn’t agree on Smallcase’s valuation, according to five industry executives
who were either involved in the deal or tracking it closely. All of them spoke on condition of
anonymity.

This comes after Vasanth Kamath, Smallcase co-founder and CEO, said recently that news of a
deal having been finalized was “not true”. 

Questions sent to CRED and Smallcase remain unanswered. 

CRED has over the past couple of years worked towards building an all-in-one financial app for
well-off Indians. To that end, the fintech company has gone from merely allowing users to pay
their credit card bills to becoming a platform for lending, investment and managing personal
finances. Acquiring Smallcase would have broadened CRED’s user base, making it a one-stop
shop for stock investing and financial portfolio management. This would also give CRED access
to data on users who would have opted to invest in stocks through Smallcase. 

Before we look into why the talks failed, a little more context on what led to CRED’s interest in
Smallcase.  

A value buy?
CRED’s core product is a way for users to keep track of their credit card bills and pay them off on
time, earning CRED Coins that they can use to get discounts; it also has an e-commerce store
where brands can showcase their products and offer deals to CRED members. Over the past two
years, it has added options to pay rent and utility bills using credit cards, as well as various
lending and investment features.

Even so, CRED is far from a complete product. Its catalogue lacks robust payments, lending and
wealth management offerings with greater in-house control. 

To address that, the company has been actively looking for investment opportunities.

In October last year, it acquired HipBar, a liquor delivery startup holding a prepaid payment
instrument licence. This would enable it to provide digital wallet and prepaid card services to its
customers. The following month, Shah acquired Parfait Finance and Investments Pvt. Ltd.,
becoming one of the few unicorn founders in India to own a non-banking financial company
licensed by the Reserve Bank of India. In December, CRED announced that it would acquire
corporate expense management firm Happay for $180 million. Apart from that, it participated in
debt platform CredAvenue’s $90 million Series A funding round last year. 

On top of this, the fintech company has applied for a payments aggregator licence, which is
awaiting approval from the RBI. It has also been exploring the possibility of offering buy now
pay later services in partnership with food delivery platform Swiggy, according to an industry
executive.  

With further expansion in mind, CRED approached Smallcase with an investment proposal late
last year.

Smallcase’s offering is simple. It provides a platform where customers can connect with
research analysts (registered with the Securities and Exchange Board of India), who offer
recommendations in the form of a curated portfolio or “smallcase” linked to a specific stock
idea. 

For example, an idea like “rising rural demand” would be represented as a portfolio of stocks of
companies that “benefit from increasing rural consumption”. A “realty” or “housing” portfolio
would comprise stocks of mortgage lenders as well as real estate and construction-related firms
such as cement, steel and ceramic tile companies. 

Customers buying stocks based on these recommendations do not need to go through know-
your-customer verification with Smallcase, since it is not a trading or mutual fund platform.
Instead, it enables customers to link their broking accounts—from Angel One and Zerodha’s
Kite to Upstox and ET Money—to its platform and invest in the curated portfolios without
having to choose each of these stocks individually. 

In essence, it is like a portfolio management service, where an asset manager builds portfolios
of equities and other financial instruments that customers can invest in. A portfolio
management service differs from, say, hedge funds and mutual funds in that every customer’s
portfolio is managed separately, instead of all their funds being pooled together. One of the
limitations of portfolio management services is that they require a minimum investment of Rs
50 lakh; Smallcase’s pitch is to provide a similar service for everyone.

For CRED, Smallcase was a perfect fit. Shah saw it as not just a stock recommendation and
portfolio curation service, but also a platform for real-time updates on stocks and investments.

Smallcase, in turn, could get access to CRED’s 7.5 million users. 

Another factor that led to the acquisition talks was that the two firms have some common
investors.

Zerodha was the earliest backer in Smallcase. It is said to have incubated the startup, providing
office space to its founders Vasanth Kamath (not related to Zerodha founders Nithin Kamath
and Nikhil Kamath), Anugrah Shrivastava and Rohan Gupta. It still holds a stake of around 10%
in Smallcase. Zerodha co-founder Nithin Kamath is also an investor in CRED. The other common
investor is Sequoia Capital India.

Both Zerodha and Sequoia are believed to have played a role in the negotiations between CRED
and Smallcase in the early stages. 

Another common link is comedian Tanmay Bhat, who works closely with Smallcase to promote
its offerings on social media. We have written in detail about Bhat’s close friendship with Shah.

So why did the talks fail?

Unmet expectations
According to two of the five executives cited above, Smallcase and CRED began talks in January
this year. The wealth management company, they say, wanted a $500 million valuation; it’s not
clear whether CRED agreed to this at the outset. 

While early negotiations seemed to be heading towards an agreement, according to an executive

privy to the matter, a fresh wave of COVID-19 infections and the Russia-Ukraine war had
consequences for the global markets. With liquidity drying up, the funding environment became
challenging. As a result, the deal ran into trouble.

One of the executives cited above says Shah offered Smallcase’s founders and investors a buyout
proposal of $200-250 million between March and April, structured as a mix of cash and equity.
Smallcase was also presented with an opportunity to carry on operations under CRED’s
umbrella.

“These were terms that were not acceptable to the Smallcase board,” says the executive quoted
above. “The reduced valuation in the final proposal from CRED was perhaps because the funding
environment had gotten extremely challenging, with technology companies around the world
seeing their valuations tank.” 

A third executive says Vasanth Kamath is now holding out for a better deal, most likely from a
bank or a mutual fund house. “There is a lot of interest in the wealth tech space from big
financial institutions, so he can sit tight and pick the best deal he wants,” the executive adds. 

Around that time, CRED was also finalizing a $140 million round led by Singaporean sovereign
wealth fund GIC, which saw the fintech company’s valuation increase to $6.4 billion from $4
billion in October 2021. This round—its latest and fourth in the past year and a half—was closed
in April 2022, and CRED was expected to use some of those proceeds to fund the acquisition.

For Smallcase, “it was always going to be led by whether a deeper commercial partnership made
sense, and that would’ve been the driver before anything else,” says the fourth executive.  “For
now, Smallcase is prioritizing other growth initiatives. As you’ve seen, they have strategic
investments from Amazon, HDFC bank and DSP Group for similar reasons on the captable from
prior rounds.”

According to the fifth executive, CRED adopted what it called a cash-preservation strategy in
April after closing the GIC funding round; there was apprehension that raising the company’s
next round of funding would be challenging. This person adds that the fintech company will aim
for a valuation close to $8 billion in its next round and wrap it up before the end of the year.

“There is no money anywhere. That is the situation. It is no surprise that the deal collapsed,”
says this executive. “It is in the nature of such large mergers and acquisitions to fail. All I can
say is that there was interest, but there is simply not enough cash in the market right now to
fund a deal of that size.”

Smallcase is said to have Rs 200 crore in the bank, which would allow it to continue without
external funding for at least a year, according to the second executive cited above. 

“As far as Smallcase is concerned, there have been multiple interested investors through the
year and that’s always been plan A—to build a large independent company—if they got the right
financial investor and good terms,” says the fourth executive. The wealth management startup
has over the last seven years raised about $60 million from the likes of Amazon, HDFC Bank,
DSP Group, Sequoia Capital, Zerodha, Blume Ventures and Beenext, among others.

The startup is now focusing on strengthening its features and building its base, but it’s unlikely
to be smooth sailing.  

While the company is said to have over 3 million customers, a recent order by the Securities and
Exchange Board of India against equity research firm Stallion Asset brings Smallcase’s business
model into question. SEBI ruled that research analysts cannot offer model portfolio services and
fined Stallion Asset’s proprietor Amit Mohan Jeswani Rs 28.6 lakh for violating standards.
Experts are now wondering whether the order is applicable to Smallcase. 

According to a leading stock brokerage’s chief executive, a workaround for Smallcase could be
tying up with registered investment advisers, who are allowed to offer stock recommendations
and portfolio management services. But the chief executive adds that such a move could mean
that Smallcase can onboard customers only after conducting full know-your-customer checks
and making these customers sign agreements disclosing risks. Another brokerage’s chief
executive says the settlement order was specific to Stallion Asset and Smallcase need not change
its model unless SEBI clarifies its position officially in a circular. With SEBI tightening its
regulatory standards for intermediaries and fintech services in the investment and wealth
management space, both CRED and Smallcase would have to take their next steps with caution
—and separately for now.

Lead illustration by Rajat Baran/The Morning Context.

Acquisition Cred Deal Investment Kunal Shah Smallcase Vasanth Kamath

Wealth Management Zerodha

About the author

Ashwin Manikandan

Ashwin joins us from The Economic Times he worked across the finance, tech and startup
verticals, breaking stories related to India’s banking system, startups in the new economy, digital
payments, cryptocurrency as well as the insurance sector. He is a graduate of the Asian College of
Journalism and holds a bachelor’s degree in mass communication from the Vivekananda Institute
of Professional Studies in New Delhi.

Disclaimers: The Morning Context has raised money from a clutch of investors,
entirely in their personal capacity. It is quite likely that some of them may be directly
or indirectly involved in a competing line of business similar to the companies we
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