Every year, we sharpen our pencils as January starts, and take the time to transparently share with you, our lenders, borrowers, SaaS clients, shareholders, friends and (included in that last category of course) regulators. As any annual letter writer knows, the first step is always to review last year’s letter and see how the year compared with our views.
Who would have imagined that?
And first good news: In our January 2022 letter, we made no attempt at macroeconomic predictions! Fortunately, since we would not have guessed the craziness of the last 12 months. How could we have imagined that turning off the lights and turning down the heating would become our new obsession, or that we would face shortages of staples like mustard? Or guessed that banks, instead of taxing deposits via negative interest rates, would start paying up to 4% to attract money? How could we have believed, more tragically, that war would strike so hard at the gates of Europe as to call into question many of our post-WWII assumptions?
At our own humble level at October, we experienced the effects of this lightning transition in the second and third quarters. Companies became reluctant to borrow, initially hoping for the return of free money… before understanding that the problem was not the cost but the capacity to borrow in a suddenly chilly and more demanding environment, with margins degraded by inflation and raw material shortages.
The changes have been brutal, unprecedented and, inevitably, have shaken up the post 2008 status quo.
Still, our annual loan origination reached €158m in 2022, to some 700 European companies. A better performance than in 2019 or 2020, but lower than in 2021 (€186m). Our first year with no growth in 8 years.
We can nevertheless take the (small) bet that we will pass €1bn lent since our start sometime in the 1st half of the year. We are only 4% away from that milestone!
We can be even more confident of reaching it, as we are announcing more than €100m in new financing from institutional lenders – the key to keep serving European SMEs in 2023 and beyond.
A new paradigm
For the past 8 years, the economic environment was simple: those who were able to create (or promise to create) wealth were overwhelmed by funding proposals, which seem irrational now. Very large companies were being paid to borrow, young companies were valued at more than 300 times turnover despite massive losses.
Now, in 2023, things have turned around. As a platform, October always balances the interest of lenders and borrowers, and the balance of power is now more in favor of lenders. Borrowers must be more accommodating. Even the best ones. And we venture a prognosis: this environment is not going to last 12 months only.
How have we navigated the rough waters?
During this complex year, we focused on avoiding bad decisions, which would have become costly very quickly, while preparing for the future. Here’s what we did.
After a record first quarter, it was painful to experience two quarters of status quo. And yet we raised our lending rates, accentuating the slowdown even more. Why did we do this? Because we knew it was necessary to take into account the future cost of risk (the upcoming increase in defaults) and the new expectations of lenders. Managing a lending platform is about finding the right balance. Giving in to the ease of short-term volume will kill you.
October is a technology company. That means our day-to-day performance is not based on individual decisions but on tools built by a team. In 2022, more than ever before, we have recruited and trained talent to make our promise of better financing companies as strong as possible.
We are so confident that we have built unique technology bricks that in 2022 we also invested heavily in their commercialization and recruited a leader and team for our October Connect business. We have seen how useful our toolkit is for banks, neobanks, credit providers and anyone who needs to assess the quality of a business counterparty.
We have also launched new modules, such as ESG X-Ray. We know that the soundness of a company also depends on the way it approaches the environmental, social and governance issues. We are also convinced that understanding the ESG commitments of a small company requires new tools which are very different from those used by and for large groups.
Finally, we have worked on raising money from institutional lenders, which is so essential today, and we have acquired Credit.fr to strengthen our base of individual lenders (now 40,000 active people) which gave us the chance to welcome Tikehau Capital among our shareholders.
Our strengths are still the same
The crisis has not intrinsically transformed who we are, but the way we put forward our strengths. A few concrete examples.
Our unique mix of retail and institutional lenders, seen as anecdotal in times of plenty, is now a key argument appreciated by our borrowers.
Environmental and social awareness is becoming more and more central. In 2023, our new ESG X-ray will be an indispensable ally for those who share this conviction.
Our fraud detection tools protect us better than ever. Inescapably, fraud attempts are increasing as the economy gets tougher. Hunger sometimes drives unethical behavior. Many of our October Connect clients recognize this and are looking for new protections.
The maturity of our technology allows us to automate lending more and more and thus become a partner of choice for many players wishing to offer simplified access to credit to their own customers (what we call embedded finance in our jargon).
In conclusion, we will remain cautious about our predictions, so as not to have to contradict ourselves in 12 months’ time, but we are entering 2023 convinced that access to cash will be key for our lenders, borrowers and October Connect clients, as well as for us!
Let’s go for it!