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Prodigy Finance is a fascinating company. It takes elements of micro-lending, as well as some proprietary risk-assessment practices, and applies them to MBA students seeking out funding. The result is effectively a loan network comprising of top MBA students, and alumni (the investors) from around the world — including high net-worth individuals from emerging markets — who can invest in their region’s future business leaders.
Founded by South Africans Cameron Stevens (CEO), and Ryan Steele (COO), the company is a registered LTD in London. This marriage of emerging and developed markets permeates through Prodigy’s student portfolio and business ethos, and originated when Stevens and Ryan attended INSEAD for their own MBAs, and struggled to obtain financing.
What Stevens noticed, he told Ventureburn, was that banks were very bad at assessing risk — particularly for students from emerging markets — because there was insufficient local credit bureau data and the bank’s practices didn’t take into account travelling across borders.
Therefore, when making loan-decisions, the banks don’t recognise the often large salary increases that someone from say Vietnam would experience graduating from the London Business School and returning to South-East Asia.
Prodigy fills this funding gap. Three-quarters of Prodigy-financed students are from emerging markets – which proves the need for foreign-student financing — and shows that the students recognise the value of the platform against bank loans. As an interesting knockoff effect, developing markets are stimulated around the world because 67% of those students return to their regional home country after graduating — taking their new-found skills and network opportunities with them.
What this addresses is the mismatch of vacant skilled positions in emerging markets coupled with huge unemployment rates. The students can return and fill skilled-positions, or even form their own startups. Stevens notes that this trend of seeking job opportunities in emerging markets might not have been the case ten years ago, but it speaks volumes to the growth in those markets. A student’s return provides value to the local job-market, and their skills give them a competitive edge, whether forming a startup or not.
Prodigy-funded graduates have formed about eight startups since the platform’s inception in 2007, such as the online Indian community marketplace for classes, SkillKindle, founded by Tanuj Choudhry, INSEAD student class of 2010-2011, and more recently Russian reward-app Clapp founded by Shukhrat Yakubov (INSEAD ‘12J).
Given that the average investment period is around 4.5 years (completion of MBA and work experience), there hasn’t been too many loan-cycles in the company’s history. This means that there could more startups coming from Prodigy-funded graduates in the next few years if we accept that people wait a few years after business school to start their own company.
So how does it work?
Prodigy proudly claims a 0% default rate, and this is due to its innovative risk-assessment practices, a built-in social pressure and its legal model. It’s effectively a three-headed machine: one financial, one social and the other legal.
The financial head sees a proprietary predictive scorecard analyse a student’s credit, existing debt and potential earnings after graduating (regionally worked out). This effects what Stevens calls an “intelligent loan-decision.” Because Prodigy only targets the top 50-100 business schools in the world, they are only offering loans to a top-tier, and low-risk, “pre-selected pool” of students because a certain level of screening is done via the admissions process.
The social head works on the pressure to repay the investor pool made up of alumni. MBA programmes and top schools have an ecosystem that places huge value on the ‘network’ at those institutions. Because the alumni effectively invest in a class of students, for example Oxford 2013, there is an innate social pressure on students to not turn their back on their ‘network’ by not paying. It would effectively be “business-suicide”. To give a sense of this pressure, investors can see the profiles of the students they have invested in on the Prodigy website, as well as their repayment status. This adds a human element to Prodigy’s risk assessment that they’ve found to be very effective.
The third and final head is Prodigy’s impressive legal model that allows them to enforce legal action across 150 countries. This, combined with agreements with the universities to assist and track students post-graduation, means that Prodigy has all its ducks in a row should a student ever default and legal action is necessary. To date though, their track record is unblemished.
Expanding to other programmes or regions proves a touch trickier for Prodigy due to regulatory challenges, yet it has plans to do just that. The company is currently speaking to top universities in South Africa, India and Russia, and expects to launch a programme in one, if not two of those countries in the next six months. It also plans to launch its first non-MBA programme at the London School of Business later this year. It will be interesting to see which elements of the model work applied to regional universities and other programmes, and especially whether the social pressure holds as much value.
A true Business model
By targeting the top 50-100 business schools, Prodigy is accessing a loan market of around US$1.2 billion per year. The foreign sector makes up for around US$450 million of that figure. All loans are conducted in the currency of the school tuition. Each class of students is listed as a bond on the Irish Stock Exchange which can be sold or traded should the investor wish to redeem early. There is currently no secondary market though, which Prodigy is in the process of trying to establish.
Students are charged between 6%-12% based on their affordability and risk, and the investor gets a return of around 5% per annum (healthy for European markets), while Prodigy charges a two percent management fee.
The investor pool is currently in the low hundreds due to regulatory challenges, but Stevens would love to lower the minimum investment amount (currently 10 000 euros) to broaden the investment-base to younger alumni. What’s most telling is that the investor pool is not just made up of people from developed markets, but also a healthy mix of foreign ex-students. Stevens states that these are high-net worth families and individuals from Africa and other emerging markets.
This, to me, is the crux of what is exciting about Prodigy. The model facilitates a platform for individuals from emerging markets (whether MBA-holders or not) to invest in the next generation of business leaders in those emerging regions. Where the bank-model would never have given out loans, Prodigy’s model, for example, allows a Ghanaian to invest in a young, talented Ghanaian, to enable them to help grow Ghana’s market by filling a skill-shortage there, or starting their own company.
It’s a beautiful cycle. Ex-foreign students are given the ability to facilitate investments into future foreign leaders, and those future leaders are given access to some of the best schooling in the world. Prodigy is an example of this unto itself — founded by two South Africans who attended INSEAD, who, despite having HQ in London, have created jobs in South Africa as the largest operations office is in Cape Town. It’s all quite Romantic.
Prodigy is one of those companies that provides true value to the global economy and marries the developed and emerging world under the umbrella of education and job opportunity. If that’s not exciting then I don’t know what is.