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Summary:

Hot European finance startup Wonga may not be to everybody’s tastes, but it’s doing strong business — and reports suggest it is already testing the waters for its next step, just six months after raising a monster round of $116 million to expand its loan operations.

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Of all the companies featured in the GigaOM Euro 20 — our list of web startups that represent the continent’s biggest and best opportunities — the most controversial was probably Britain’s Wonga. But the reason it left some uncomfortable, however, was not because the company is insignificant: after all, it recently raised a $116 million round of funding, enough to grab anyone’s attention. The reason is because of its business.

Wonga provides short-term loans online (often termed “payday” loans), and that’s something that many see as distasteful and opportunistic. The headline interest rates sound terrible, but the company’s founders say the reality is that they are simply giving people the sort of financial flexibility that banks do not. Despite the controversy, however, the truth behind it all is that while lending may not be a business which is much loved, it is very well-used: recent figures show that revenues for 2010 rose to £74 million ($120 million).

And now it seems like there could be more on the cards. According to this story in the Sunday Telegraph, the company is in the process of talking to London banks about its next steps — which could include a public offering, or taking even more funding.

So what is it looking for?

Talking to banks just six months after it took a monster round of funding could make it look seem like Wonga is trying to cash in on the current acceleration in valuations. But it may simply be a case of preparing the ground for a possible public offering; as the report says, getting the company “on the radar” of potential underwriters.

Although it is known that this was not a formal beauty parade – where a company selects a handful of banks to aid its future plans in terms of either a float or a potential sale – it does reflect that the company, led by chief executive and founder 
Errol Damelin, has considerable ambitions.

A stock market float is not thought likely for some considerable time – perhaps as far off as 18 months from now – but it is thought likely the banks spoken to may be brought on in an advisory capacity for any further pre-IPO fund-raising as well as strategic advice.

In truth, Wonga’s big problem — and the reason it may need to build up even more capital reserves — is expansion. It’s already scaled up pretty well across the U.K, but it’s difficult to take this model to new territories thanks to the number of legal and financial regulations it has to negotiate. Despite this, the company has already indicated that it could be considering a move into Ireland, Canada and Australia: all moves that will be capital-intensive.

So talking to banks may be a way of getting them on side long before filing for an IPO — and it may be helpful in getting them help in international investment that would ease their entry into new countries.

On a side note, it will also be interesting to see if Wonga’s continued expansion has a halo effect for other British finance startups.

With London such a center for banking expertise (and plenty of financial experts out of jobs over the past few years) it feels as if there is a shift starting to take place. It’s been a while, for example, since much was heard from Zopa, another British online lender.

Zopa uses a different model to Wonga: peer-to-peer loans let users lend money to each other, rather than taking cash from the site itself. But it’s been more than four years since the company last took funding, but revenues are now said to be north of $100m.

Perhaps Wonga’s growth will knock on and boost other companies in the same sector?

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  1. LOL, Zopa report a total amount of loans over there life greater than £100M rather than their revenues. Then again they are not lending their own money and report bad debts incured during the process of lending at around .04% so as you say they are a very different business.

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