Strategic versus financial investment: 6 pieces of advice for fintech startups

While institutional VCs continue to dominate funding in startups, the last few years are notable for the uptick in participation from the corporate venture arms of big businesses looking to back innovative businesses that have strategic value to their companies. In the fintech world, that increasingly means banks – with Santander Innoventures an example of …

by | April 15, 2016 | bobsguide

While institutional VCs continue to dominate funding in startups, the last few years are notable for the uptick in participation from the corporate venture arms of big businesses looking to back innovative businesses that have strategic value to their companies. In the fintech world, that increasingly means banks – with Santander Innoventures an example of a bank that has set up a dedicated fund for investing in financial tech companies. Often investing alongside institutional backers, the different types of VC: strategic versus financial game bring different flavours of support for young businesses.

From a panel of investors across the corporate and traditional VC world at Money 20/20 in Copenhagen last week, here are six pieces of advice for startups. 

1. New way of capturing agility for banks

Asked if Santander Innoventures invests for financial return or strategy, Mariano Belinky, who heads up the investment arm said: “It’s both, but largely strategic. We aim to find companies that can help us increase value proposition for clients and let us learn from those companies and add value. There’s a good symbiosis between a startup and a bank in the sense they have disruptive ideas and agility while we have brand, scale, and regulatory experience. We try to partner with comps that have strong strategic value for Santander but at same time we’re expecting to not lose money.

“We are way past ‘us versus them’: we see 95% of startups as enablers to do better things. Also think for the most part startup si speak to want o ptr with banks to scale, sustin abd scale up. There are a lot of companies going from b2c models to B2B because they are realising they can’t make it on their own.

“Nor do I think I am competing with institutional backers– I want to invest with them. If someone like Ribbit is in a round that tells me that company is a healthy company with the right governors, the right board, that there is someone helping with things like talent and how to build a company that we as a strategic have a blind spot on.”

2. At worst corporate venture can be “like going to a zoo”

Just because the relationship between corporate and institutional investors can be symbiotic, doesn’t mean it always is. Speaking on the panel, Ribbit Capital partner Nick Shalek said the firm has had all kinds of experiences with corporate and with institutional investors.

“There are all flavours and brands,” he said. “But at its worst, corporate venture can look at the startups like going to the zoo: put money in go watch animals but keep as much glass and cages between them as possible.

“There are lot of great corporates and in fintech probably more than other technology categories. These companies need so much credibility, so much time and capital that there is a big potential for corporates to be helpful.”

3. Watch out for the corporate accelerators

Another warning came from Balderton partner Rob Moffat, who suggested the expectation of startups entering a corporate accelerator can be badly dashed by reality.

“The most dangerous part expectation versus reality, is the accelerators,” said Moffat. “The expectation is that you go into a corporate-backed accelerator and that gives you perfect access to all the execs whereas going back to the zoo analogy accelerators can be, at their worst, the perfect sort of zoo example where all the execs from the bank get parade through and say nice things but nothing comes of it.”

That’s not to say there aren’t advantages to working with the right corporate. He says they can be wither a client, a strategic investor with deep expertise of the sector or a partner to help them get to market. He cites the example of Balderton investing alongside Schroeders Asset Management in UK wealth management firm Nutmeg.

“Nutmeg wants to be wealth manager for entire pop of the UK, Schroeders is for top 0.1% of the UK. They have a very different objective but it’s the same asset classes in the end and there are good debates around investment strategy. We’re better on marketing, product side and keeping teams disruptive rather than me-too businesses.”

4. Virtual reality could be big in finance

Samsung is increasingly active in the venture capital space, firstly through Samsung Ventures which invests in different stages of companies and also through its Strategy And Innovation Centre, which tends to look more at early stage companies. An example of how the firm has worked with a startup is the internet of things (IOT) company Smart Things, which is now embedded in all Samsung smart TVs.

So where does that intersect with finance? Well, anyone that’s been following the company knows that virtual reality (VR) is the next big thing it’s focusing on. Speaking at the event, Albert Creixell, head of financial services at Samsung Europe talked about the firm’s investment in WeVR.

“It’s creating VR content in a new way and that will have an impact in finance” says Creixell. “In the last year and a half we’ve been running pilots with banks to work out what we can do together. One of the big banks we work with has this idea of having VR space in city – somewhere like Starbucks. The idea is you could have a VR headset in the coffee shop and you just put it on to start engaging with a bank.”

5. “Don’t think about the exit, things get messed up”

As continues technology disrupts basically every single industry, the demand from corporates to buy startups and try to embed their technology, ideas and talent is escalating. For a cash-strapped startup, exiting to a big company can seem like an attractive option, but Speedinvest partner Stefan Klestil says thinking of the exit isn’t a good idea, even though it’s tempting.

“My philosophy is always – do not think of the exit,” says Klestil. “Because then things get messed up. When we come in there is always so much to do – in the first 12-18 months we roll up our sleeves and become part of the founding team. We’re in Europe and it’s very different to the US situation. If you invest in fintech in Europe you have to be very capital efficient.”

He stance is echoed by Belinky from Santander: “In financial services, always thinking of the exit is dangerous. Timing is longer than normal startup timing. You have regulatory hurdles you have to make, you have credit cycles that are 5-10 years, there’s trust building

“Thinking ‘I will make an IPO-ready company in five years’ is a dangerous proposition. We don’t think about exit either. Maybe we should but we think about building something sustainable that can make it through a credit cycle. There’s a lot of ‘this is another B2c player that can be scaled quickly’ and be sold or IPO’d and I think in finance that can be quite dangerous.”

6. 20% are always tourists

Meanwhile, it’s important as more corporates pile in that not all investors are created equal. Ramneek Gupta, managing partner of venture investing at Citi said:

“I think of the world of corporate venture capital as there being 20% building for the long term, with the right teams, 60% are building for the long term with good intentions but probably not very good at executing. And 20% are always tourists, in there because everything is hot.

“It is incumbent on founders and investors to understand where people are coming from.”

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