Market Entry M-préstimo Financial Services
Case prompt: Our client is a large Brazilian conglomerate named D&DA Investments S.A., which is
based in São Paulo. After they hired Antonio Morales, the former Deputy Managing Director of GFO
(Global Finance Organization), the largest international financial institution in the world, D&DA started
to grow aggressively with numerous acquisitions. Recently, however, a considerable proportion of
them started to make losses, and the group's overall profitability shrank significantly.
In the post-Morales era, the group owner, the Costa family, started following a much more hands-on
approach by replacing Morales with Márcia Costa. Márcia, the granddaughter of the company founder
Marcelo Costa, is a former consultant with Ivy League education. As the family's brightest heir, she
launched a massive transformation program aimed at turning the group's business around. As part of
this program, she founded D&DA Ventures. One of the businesses they plan to launch is a FinTech
company called M-préstimo, a mobile loan management tool for SMEs. In Brazil, SMEs refer to "small
and micro" enterprises, instead of "small and medium-sized" like in most other places. Depending on
the companies' financing needs, assets, and business plans, the tool creates a loan application strategy
for its users, who are not usually very capable of financial planning.
As a former consultant of our company, Márcia, on the other side of the table this time, hired us to
assess such a startup's feasibility. She wants us to judge whether that company is worth launching.
Question #1: How would you approach this case?
Possible clarification questions:
This is an exciting story. Thank you for sharing all of the context with me. Understanding the background
would help me to frame my approach effectively, but before I start doing that, I would first like to clarify
a couple of points.
• Does D&DA Investments have any particular objective with this investment? It can be either
financial or strategic.
• Have they ever been involved in the finance industry, or launched a similar digital platform?
Interviewer answers the clarification questions:
D&DA's primary objective is to become a significant player in the Brazilian FinTech space. They see this
as a gateway into the tech industry. So, it is highly critical to set up this company successfully. They also
want it to be profitable within the first three years, and to gain a cumulative EBITDA of R$80M within the
first four years.
Regarding their experience, finance is one of the few sectors that D&DA had not operated in, in the past.
They are also new in the tech space. However, Márcia mainly worked for the banking clients in her
previous role as a consultant in our firm, and after getting her MBA, she spent three years in Palo Alto in
a VC fund focusing on the FinTech startups.
Market Entry M-préstimo Financial Services
Interviewee builds the framework:
This makes sense; if they lack experience in the industry, then entering it with an innovative company
may quickly help them gain mileage. We, of course, need to analyze the context and the opportunities
in detail, though. So, as a starting point, I would like to set a framework as follows:
1. Strategic fit: We briefly covered this, but I would check if this investment meets the client's
overall strategy. To do that, we can approach it from two different perspectives:
a. Internal
i. Vision: Will this investment help them to grow in other areas of the technology
sector?
ii. Capabilities: Is D&DA resourceful enough to run this app?
b. External
i. Customers
1. Who are the target customers?
2. How can we segment these customers?
3. Does our solution address these customers' needs?
ii. Competition
1. Is there any other player doing this in Brazil, or in the world?
2. What is D&DA's competitive advantage over these players, if any?
2. Financial assessment: Can we reach our financial goals with this investment?
a. How profitable will the business be? At this point, we need to understand the main
revenue streams better. But just to have a framework, for now, we can lay out the
following profitability structure:
i. Revenues
1. Number of customers (SME businesses)
2. Revenue generated per customer
ii. Costs
1. One-off investment cost to launch the app
2. Running cost of the app:
a. Fixed costs
b. Variable costs
3. Risks: Finally, what might the risks associated with this investment be?
a. Competition: Would the established banks welcome such action? Is there a risk that
these banks start their mobile loan platforms?
b. Demand: Will there be enough demand for online loan applications?
c. Strategic: Would a potential failure in this business deteriorate D&DA's future
expansion in the tech space?
How does this framework sound?
Market Entry M-préstimo Financial Services
Interviewer comments on the framework:
It is quite reasonable.
To start with your very first point, we have some information about the distribution of well-accepted
startups across industries, and FinTech comes up at the top of the list. Please find the details of the
analysis in exhibit #1.
Exhibit #1: Distribution of early stage startups by industry in the world and in Brazil, 2019-2020
Interviewee interprets the exhibit and asks further questions:
That is very interesting. It looks like FinTech and consumer goods are significantly more dominant in
Brazil than in the rest of the world. This is good news for us. It seems like there is a considerable
demand from both the consumer and the investor sides.
On the other hand, I would like to understand the supply side better. You mentioned that Márcia has
previously worked in the FinTech industry. Still, I would like to dive deeper into the D&DA organization
and investigate whether they have sufficient resources to run such an initiative. Do we know if they
have launched a company that is comparable in size or function?
Interviewer responds:
Yes, Márcia is not D&DA's only source of confidence about this investment. The group COO, Silvio Pascale,
is a former banker who led the digital banking unit of Brazil's largest bank in the past. Under his watch,
the bank launched numerous products and received the Digital Bank of LATAM reward for four
consecutive years. He transferred most of the key people in his team when he moved to D&DA three years
ago.
Market Entry M-préstimo Financial Services
Interviewee continues to analyze the external factors:
It looks like the D&DA organization is quite competent in the finance sector. Interestingly, they have not
been involved in this business before.
As a next area to understand, I would like to know who their potential customers will be. I would like to
know how we can segment them, and which of their needs we will solve. Do we have any information
on that?
Interviewer provides information:
Based on our initial understanding, the customers will be small and micro enterprises (SMEs). D&DA
targets almost all companies in that category, given that they all need financing. SMEs make up 30% of
Brazilian GDP and 60% of total employment. Most of them rely on loans to sustain and grow their
businesses. While doing so, the most significant support they need is advice on when, and which, bank
to apply to maximize their solvency. On top of this, the government recently launched a new grant
program to encourage SMEs to procure high-tech products and services to accelerate the countries'
adoption of digital technologies.
Interviewee continues with the competition:
I understand, then it is perfect timing to start such a service. At this point, though, a question to clarify
is about the competition. Do we know if we have any existing or potential competitors providing similar
services? If so, what does D&DA think its competitive advantage would be?
Interviewer answers the question:
Currently, there is no other company providing precisely the same service in Brazil. There are some
similar applications in Europe, the US, and Japan, but not in Latin America.
To protect them against a potential entrant, D&DA plans to make exclusivity agreements with the partner
banks. They have already discussed this option with several banks and received a greenlight.
Interviewee continues:
Very good. Qualitatively, the investment looks promising. I would like to continue to the financial
assessment to evaluate the feasibility from a more quantitative perspective.
I want to see whether the business will be profitable, but we need to understand the revenue streams
first. Do we know how exactly they plan to generate revenues?
Interviewer responds:
There will be two primary revenue sources:
• Annual subscriptions paid by the SMEs: R$1,000
• Commissions are taken from the SMEs and the banks based on the approved loan amounts: 0.5%
of each party's total loan amount.
Market Entry M-préstimo Financial Services
Interviewee digs deeper to revenues:
I understand. Then, we should estimate revenues for both sources. Do we know how many SMEs we
should expect, and how many loans would be approved in total?
Interviewer asks interviewee to estimate the figures:
The client was also curious about that and wants to hear our estimation.
Interviewee makes the estimation:
I understand. To start with the annual subscriptions from the SMEs, I would like to estimate the total
number of SMEs served as follows:
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 # 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑠𝑒𝑟𝑣𝑒𝑑 =
𝑇𝑜𝑡𝑎𝑙 # 𝑜𝑓 𝑆𝑀𝐸𝑠
∗ % 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑡ℎ𝑎𝑡 𝑎𝑟𝑒 𝑑𝑖𝑔𝑖𝑡𝑎𝑙𝑙𝑦 𝑙𝑖𝑡𝑒𝑟𝑎𝑡𝑒
∗ % 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑤𝑖𝑡ℎ 𝑒𝑛𝑜𝑢𝑔ℎ 𝑙𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡 𝑤𝑜𝑟𝑡ℎ 𝑡𝑜 𝑝𝑎𝑦 𝑅$1K 𝑓𝑒𝑒
∗ 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑒𝑠𝑒 𝑡ℎ𝑎𝑡 𝑐𝑎𝑛 𝑏𝑒 𝑠𝑒𝑟𝑣𝑒𝑑 𝑟𝑒𝑎𝑙𝑖𝑠𝑡𝑖𝑐𝑎𝑙𝑙𝑦
Here, the logic is that the SMEs that would use our service should be capable of using mobile or digital
apps, and should have enough loans planned to pay us R$1K every year.
Then we can multiply this by R$1K to estimate the revenues from subscriptions.
Regarding the commissions, we can leverage some data on these SMEs' average loan amount, if we
have any. Here, we can utilize an essential factor: since the SMEs that are digitally literate with a high
amount of loans are mostly the ones big in size, we can look for some data on the average annual loan
amounts of SMEs broken down by average revenues. Do we have any information on that?
Interviewer answers the question and shows exhibit #2 and #3:
That is a reasonable estimation. The segmentation based on revenues would address your point about
the proportion of companies that can afford our service. We have that information in exhibit #2. You can
assume that companies that have more than R$95K average loan outstanding can afford our service.
On the other hand, we do not know how digitally integrated these companies specifically. Yet, we have
a study by the McBean Group, a consultancy, showing the digital integration level for SMEs in Brazil.
Please find the results of that report in exhibit #3. The client thinks that any "fully integrated" firm would
be capable of using our service.
Market Entry M-préstimo Financial Services
Exhibit #2: Average loan outstanding by SME type in 2020
Exhibit #3: Digital integration level of SMEs in Brazil
Interviewee interprets the charts and continues:
This information is very useful. Since the cutoff point is R$95K, we can consider that approximately half
of the SMEs employing 20-49 people fall into our target segment, given that the average amount of loan
outstanding for that segment is R$95K. Hence, we can assume that all SMEs with 50 or more
employees, and half of the SMEs employing 20-49 people, would be on target. This would give us
approximately 500K firms, but we may not reach all of them for operational or commercial reasons. Do
we have an estimate on what proportion of these firms on target we can serve?
Interviewer responds:
Sure, you can assume that we will reach 5% of them in the first year, and eventually serve 20% of the
total market, gradually increasing our reach by 5 percentage points every year. And you can use 500K as
the number of firms on target.
Interviewee continues with the calculation:
I understand. Then, if we recall our equation from before, it is fair to estimate the following:
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 # 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑠𝑒𝑟𝑣𝑒𝑑 =
𝑇𝑜𝑡𝑎𝑙 𝑜𝑓 𝑆𝑀𝐸𝑠 in the target segment (in terms of number of employees)
∗ % 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑡ℎ𝑎𝑡 𝑎𝑟𝑒 𝑑𝑖𝑔𝑖𝑡𝑎𝑙𝑙𝑦 𝑓𝑢𝑙𝑙𝑦 𝑙𝑖𝑡𝑒𝑟𝑎𝑡𝑒
∗ 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛 𝑜𝑓 𝑡ℎ𝑒𝑠𝑒 𝑡ℎ𝑎𝑡 𝑐𝑎𝑛 𝑏𝑒 𝑠𝑒𝑟𝑣𝑒𝑑 𝑟𝑒𝑎𝑙𝑖𝑠𝑡𝑖𝑐𝑎𝑙𝑙𝑦
Market Entry M-préstimo Financial Services
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 # 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑠𝑒𝑟𝑣𝑒𝑑 𝑖𝑛 𝑦𝑒𝑎𝑟 1 =
500𝐾
∗ 18%
∗ 5%
= ~4.5𝐾
If we multiply this by R$1K, this will make us R$4.5M. We will increase our share by 5 percentage points
every year and reach maturity at year 4. We can expect the following as the revenues from the
subscription for the first four years:
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑓𝑟𝑜𝑚 𝑠𝑢𝑏𝑠𝑐𝑟𝑖𝑝𝑡𝑖𝑜𝑛 𝑖𝑛 4 𝑦𝑒𝑎𝑟𝑠 = 𝑅$4.5𝑀 + 𝑅$9𝑀 + 𝑅$13.5𝑀 + 𝑅$18𝑀 = 𝑅$45𝑀
On the other hand, to estimate the commission revenues, we can calculate the total loan amount by
each segment and then multiply it by 1%, which is 0.5% from each party. Again, we can do this for 5% of
total firms for the first year, gradually increasing it to 20%.
𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑖𝑛 𝑦𝑒𝑎𝑟 1 =
(# 𝑜𝑓 𝑓𝑖𝑟𝑚𝑠 𝑤𝑖𝑡ℎ 50 + 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑜𝑎𝑛 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 +
𝐻𝑎𝑙𝑓 𝑜𝑓 𝑡ℎ𝑒 # 𝑜𝑓 𝑓𝑖𝑟𝑚𝑠 𝑤𝑖𝑡ℎ 20 − 49 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 ∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑜𝑎𝑛 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔)
∗ % 𝑜𝑓 𝑆𝑀𝐸𝑠 𝑑𝑖𝑔𝑖𝑡𝑎𝑙𝑙𝑦 𝑖𝑛𝑡𝑒𝑔𝑟𝑎𝑡𝑒𝑑
∗ 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
∗ 𝑀𝑎𝑟𝑘𝑒𝑡 𝑠ℎ𝑎𝑟𝑒
550𝐾
= (220𝐾 ∗ 𝑅$453𝐾 + ∗ 𝑅$95𝐾) ∗ 18% ∗ 1% ∗ 5%
2
= (𝑅$100𝐵 + 𝑅$26𝐵) ∗ 18% ∗ 1% ∗ 5% = ~𝑅$126𝐵 ∗ 18% ∗ 1% ∗ 5% = ~𝑅$11𝑀
If we calculate it for four years, this will give us the following:
= 𝑅$11𝑀 + 𝑅$22𝑀 + 𝑅$33𝑀 + 𝑅$44𝑀 = 𝑅$110𝑀
In a total of 4 years, we can generate R$155M (R$45M + R$110M) revenues.
This sounds high at first glance, but of course, we need to investigate the cost structure, as well.
Interviewer provides information:
So, we do not have the detailed cost breakdown, but we do know that the client will have R$10M initial
investment cost, and that they will operate at an expected EBITDA margin of 67%. How would you
proceed?
Interviewee makes calculations:
Oh, I see. Then we can expect to have around R$105M EBITDA in a total of 4 years. If we deduct R$10M
from this, our net profit would be $95M.
Market Entry M-préstimo Financial Services
That amount is higher than our target, R$80M. As the last point, before we conclude, I would like to
investigate potential risks.
• First, if this is such a profitable business, I wonder if any other player in the market is planning
to enter the space.
• On the other hand, it would be worth validating the value proposition with the potential
customers to see whether there is enough demand from the SMEs.
• Lastly, we covered this before, but it would be useful to assess how much of an arm a possible
failure would bring to our digital transformation journey.
Do we have information on these points?
Interviewer elaborates on the potential risks:
So, at this stage, we think that some of the established banks may try something similar. But as a
conglomerate without any organic connection to any specific bank, the client believes that they will have
a competitive advantage of carrying the image of an unbiased loan manager.
Regarding the market validation, we ran a survey with 100+ SMEs to gauge their interest, and can confirm
that there would be enough demand for the service.
On your last point, the client is aware that this is a startup and not a low-risk initiative. They also know
that this is not caused by the plan, but by the nature of the business. So, I would not worry about that.
Interviewee concludes the case:
Alright then, great. Therefore, we can recommend that the client proceed with this investment for the
following reasons:
• This company can bring up to R$95M profit in the next four years, which is R$15M higher than
the client's goal of R$80M.
• The client has a team capable of implementing such an initiative.
• Customer interest has already been validated, and we have a competitive advantage over the
potential new entrants.
Going forward, I suggest the client to design the operating model of the business and launch the
company.
To share
Market Entry M-préstimo
Exhibit #1 Financial Services
Exhibit #1: Distribution of early stage startups by industry in the world and in Brazil, 2019-2020
To share
Market Entry M-préstimo
Exhibit #2 Financial Services
Exhibit #2: Average loan outstanding by SME type in 2020
To share
Market Entry M-préstimo
Exhibit #3 Financial Services
Exhibit #3: Digital integration level of SMEs in Brazil
