Fintech funds : two questions, two answers.

At Sibos this year, we will talk about Fintech funds, in a session on Thursday morning.
Why is it relevant ?

Exactly one year ago, at Sibos in Dubai, I started my new professional adventure in SBT Venture Capital. You can read about it here.
Back then, aside from the mythical Citi Ventures (must admit never got close enough to understand how it works) and BBVA (credit to them for being there already), no bank had its own startup fund (although maybe Atlante Ventures, from my friends at Intesa San Paolo could exists already).
Certainly, no one (including the one I mentioned so far) had a Fintech fund in place, which is the reason why I believe I joined SBT. There is no real proudness of being the first, as barrier to entry is not that big (if you have the money) but what was interesting was the intention.

I am on a bumpy flight to Moscow now, so I believe this post will be written in a couple of phases (and maybe I two separate posts even) but what I want to wrote about, in case I fall asleep now, is an answer to the following questions :
1- What is the difference between a fund and a “bucket of money set aside to make investments” ?
2- What is the #1 challenge any bank faces once the fund is up and running ?

Answer #1
A fund is typically structured as a separate entity, with a management company (another entity) hired by the fund with the mission to set up the strategy of the fund, find the right companies to invest, and manage the portfolio of invested companies to give a return to the fund (a profit) on the top of returning the invested money of course, plus a compounded interest (called the hurdle).
The management company receives a fraction of the fund to pay resources and expenses, and obviously the partners of this entity are not employees of the bank, and strongly motivated to maximise the profit of the fund as most of the time their reward is strongly measured on this.
I am not making a crash course on how to build a fund, because this is not the point, but I wanted to give some details as this is not the way other banks decided to do this.
Another way of investing in Startups, on paper way simpler, is to set aside in the bank’s balance sheet a money pot, and use it to make investments. Is that simple.
Often, banks call it a fund, as this is what the money is for. To take equity In startups or to buy them, using bank’s capital.
As opposed to the previous case, money is managed by (very senior) employees, the amount of the fund is “declared” but flexible, and one of the challenges (but not the main one as that is #2 answer) is to establish a legal framework for which entity is actually the one taking the equity stake in the companies.

Now : I will be happy to talk extensively about the above to whomever believe this could be of value to them (meaning bring me on board for a while and allow me to issue an invoice) but it s time now to move to the second answer …

Answer #2
In theory, it could be resumed in three words :
Strategic vs profit
Few considerations, before to expand :
No one likes to loose money and banks hated it particularly. If they do by definition, they are in trouble,
Everyone wants to appear (or need, in most of the cases to survive)to innovate or improve its services (true for everyone, banks included),
– More often than not a Fintech startup manages to do cheaper and faster what a bank would implement in the sextuple of the time and at ten times the cost (at least),
– Not invented here syndrome added to fear of change added to “if they do it we can do it as well” makes startup adoption not very easy.

In summary and especially in Fintech, what is strategic for the bank does not coincide with what can – potentially – give the higher return for the money being invested.
So the biggest challenge is to manage the tension between the (product, market, geography, business) strategy of the bank and the fact that if the “fund” does not make a profit, then you might as well use it to sponsor Wimbledon tournament for four years, at least your customers will say thanks to be able to see Roger playing while drinking some champagne at the lounge…

A concrete example : crypto currencies are one of the hottest spots for Startups this year. My friend Chris Skinner rightly pointed out – here – that more funding went to Bitcoin in 2014 than to the whole internet in 1995 (whatever means to compare investments with 20 years ago, but I still think it s impressive).
No bank has made a major investment in crypto currency Startups (I am pretty sure about it as I made a 3 seconds search on Google..) simply because it s hard to tell which role banks will play in this (although at Sibos there is a full Innotribe day dedicated to this topic).
Yet, with a venture capital hat, that seems to me like a wise position to take, providing you find the right startup to invest in.

I took this example which is – granted – as compelling as a bit easy to spot, as the dichotomy between banks strategy and market potential value is obvious… there are more examples, but will talk about it in the Freemium version 😉

Very happy to continue this dialogue on stage @Sibos2014 with some old and new friends.

Stay tuned

Matteo

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