The Great Unraveling: How VC Gold Rush Drowned India’s Pioneering Fintech Lenders 

India’s first wave of fintech lenders, including pioneers like Capital Float, Zestmoney, and Lendingkart, ultimately failed because the core venture capital mandate of “growth-at-all-costs” was fundamentally incompatible with the disciplined, risk-averse nature of lending; pressured by investors to scale rapidly, these startups adopted asset-light “platform” models where they originated loans funded by partner banks, but to secure these partnerships, they had to provide risky first-loss guarantees, creating a vicious cycle where they bore the default risk without a robust balance sheet to absorb it, all while successive funding rounds diluted founders’ stakes and eroded their incentive for long-term survival, resulting in a massive, unintentional transfer of wealth where venture capital dollars subsidized loans for Indian consumers and provided risk-free profits for traditional banks once the underlying loans soured.

The Great Unraveling: How VC Gold Rush Drowned India’s Pioneering Fintech Lenders 

The acquisition of a company for $200 million should feel like a victory lap. But when Amazon absorbed Axio, the company formerly known as Capital Float, the financial echo was not of celebration, but of a eulogy. It marked the quiet, sobering end of an era for India’s first wave of fintech lenders—a generation of startups like Capital Float, Zestmoney, and Lendingkart that promised to revolutionize credit but instead became a cautionary tale in the fundamental mismatch between venture capital frenzy and the sober science of lending. 

This wasn’t just a few businesses failing; it was a specific, high-stakes dream—the “buy now, pay later” (BNPL) and digital lending utopia—souring into a $160 million lesson. The story of their unraveling is not one of a single fatal blow, but of a slow-acting poison administered through misaligned incentives, a dangerous transfer of risk, and a grand, unintentional transfer of wealth from Silicon Valley to the Indian consumer. 

The Promise: Disrupting the “Fuddy-Duddies” with Data 

A decade ago, the promise was intoxicating. Traditional banks and Non-Banking Financial Companies (NBFCs) were seen as relics, relying on cumbersome processes and narrow metrics like CIBIL scores. In marched the fintech pioneers, armed with a new gospel: “fancy data.” 

As chronicled by experts like Arundhati Ramanathan, their pitch was compelling. They would look beyond the traditional score, leveraging thousands of alternative data points—from an entrepreneur’s GST filings and digital transaction history to their social media footprint and e-commerce behavior. They would use algorithms to see creditworthiness where traditional lenders saw only risk, democratizing credit for the underserved millions of small businesses and young consumers. 

Capital Float, Zestmoney, and Lendingkart were the golden children of this movement. They attracted massive venture capital, with Capital Float alone raising nearly $160 million, achieving valuations north of $350 million. They were hailed as the vanguard of a new financial India. But this revolutionary promise soon collided with an immutable truth: lending is not a tech game; it’s a risk game. 

The Fatal Flaw: The Platform Model and the Illusion of Risk 

The core of their undoing lies in a critical distinction, perfectly framed by Shivashish Chatterjee of DMI Finance: the difference between balance sheet lenders and non-balance sheet, or platform, lenders. 

• Balance Sheet Lenders: These are entities like banks and NBFCs (including DMI Finance). They lend out their own capital (or capital they’ve borrowed). Their profit is the interest they earn, but their loss is direct and painful when a borrower defaults. This forces a natural, deep-seated discipline around risk assessment and underwriting. 

• Platform Lenders (The Fintech Model): The early fintechs largely avoided becoming balance sheet lenders. The regulatory capital requirements were heavy, and growth would be slower. Instead, they opted for asset-light models: 

• Zestmoney acted as an originator, earning a commission for sourcing loan customers for other lenders. 

• Lendingkart experimented with co-lending, where it would fund a small portion of a loan (say, 20%) while a partner NBFC funded the rest. 

This was the genius—and the trap—of their model. They could scale rapidly without the regulatory shackles of a traditional lender. But it created a dangerous illusion: they were in the business of lending without actually holding the primary risk. Or so they thought. 

The Vicious Cycle: How VC Incentives Broke the Lending Model 

Venture capital operates on a “blitzscale” mantra: grow at all costs, capture the market, and monetize later. This ethos is fundamentally incompatible with prudent lending, which is inherently about caution, patience, and preparing for rainy days. 

This mismatch created a vicious, self-destructive cycle: 

• VCs Demand Hyper-Growth: To justify soaring valuations and secure the next funding round, founders were pressured to show explosive growth in Gross Merchandise Value (GMV) and loans originated. 

• Corner-Cutting on Underwriting: To achieve this growth, underwriting standards inevitably softened. The “fancy data” models were tweaked to approve more and more borrowers to hit targets. 

• The Guarantee Trap: To convince partner banks and NBFCs to fund these increasingly risky loans, the fintechs had to provide a crucial sweetener: first-loss default guarantees (FLDGs). They promised to cover the initial losses if the loans went bad. 

• The House of Cards: They had thus created a perilous situation. They were originating risky loans, promising to cover the losses, but without the robust capital buffer of a real balance sheet lender. They were playing with fire, and the guarantees were the gasoline. 

As Rohin from the Two by Two podcast aptly described, it became a “stone rolling down a hill, getting bigger and bigger, till it’s not rolling down hill.” The momentum was thrilling until it wasn’t, and the stone crushed everything in its path. 

The Founder’s Dilemma: When Skin in the Game Vanishes 

Compounding the structural problem was a perverse evolution in founder incentives. In the early days, founders have significant equity and their financial destiny is tied to the company’s long-term health. But as a startup raises multiple rounds of capital at inflated valuations, founder ownership gets heavily diluted. 

Shivashish Chatterjee pinpointed this devastating dynamic: “The companies are becoming more and more risky and the founders have less and less incentive for their long-term survival.” 

Imagine being a founder with a sub-5% stake in a company that is careening towards a cliff. The pressure from your board (your VCs) is to keep the growth engine floored to chase a mythical “liquidity event.” The personal financial incentive to make painful, conservative decisions to ensure the company’s survival a decade from now evaporates. The system was set up for a short-term blaze of glory, not a long, steady burn. 

The Irony of It All: The Great Transfer of Wealth 

The most startling conclusion from this decade-long experiment is where the money actually went. It did not create lasting, valuable tech giants. Instead, it orchestrated one of the most significant, unintentional subsidies in recent Indian financial history. 

Hundreds of millions of dollars in venture capital were funneled into customer acquisition, tech bloat, and, most critically, covering loan losses through those guarantees. This effectively meant that: 

• Indian Consumers accessed cheaper, easier credit than they otherwise would have, subsidized by VC dollars. 

• Partner Banks and NBFCs enjoyed a risk-free revenue stream. They provided the capital, collected the interest, and were made whole by the fintechs’ guarantees when things went south. 

As Rohin framed with poignant irony, “That decade was a nice transfer of wealth from venture capitalists to Indian consumers and Indian banks. And we should be thankful for that.” 

The VCs and their portfolio companies absorbed the monumental losses, while the traditional players they sought to disrupt emerged richer and more powerful. 

The Legacy: A Mature, Sober Ecosystem 

The dream of using “fancy data” wasn’t entirely wrong; it was just premature and misapplied. The legacy of Capital Float, Zestmoney, and Lendingkart is a more mature, sober fintech ecosystem. The lesson has been learned: you cannot disrupt lending without embracing the fundamentals of risk management. 

The new generation of fintechs understands that to be a true lender, you must ultimately have skin in the game—you must be a balance sheet lender or a truly aligned co-lender. The regulator, too, has stepped in, tightening norms around digital lending and guarantees, forcing the industry to grow up. 

The first fintech lenders were the pioneers who charged into the wilderness, map in hand, convinced they had found a new route. They ultimately discovered that the old trails, carved by centuries of financial prudence, existed for a reason. Their expensive journey, while ending in acquisition or acquisition-by-fire-sale, has provided an invaluable map for those who follow—one clearly marked with the dangers of conflating growth with stability, and the non-negotiable discipline of the age-old business of lending.