By Luis Valdich, Managing Director and Travis Skelly, Senior Vice President
Seizing the Fintech Opportunity with a Corporate VC
The financial services industry, including banking, insurance, specialty finance, asset management and wealth management, continues to attract significant startup and venture capital interest as it is large and remains ripe for digital modernization. Accounting for nearly a quarter of the Forbes Global 2000, financial services represented 11% and 7% of UK and US GDP respectively in 2015 (according to EGOV and BEA) and accounted for approximately $500 billion in information technology spend in 2016 (per IDC). At the same time, a substantial amount of financial services activity remains manual and paper-based.
Seizing the opportunity to innovate in financial services can be challenging for new entrants. Startups providing financial services directly to retail or institutional consumers need to be well versed in potentially complex rules and regulations and to comply with the applicable laws. Thus fintech startups may need to adapt their business models or acquire the right licenses, which can be lengthy and costly. Startups selling their products into financial services firms face the hurdle of navigating complex organizations and multiple stakeholders including business, technical and legal “buyers”. In addition to the historically long sales cycle for enterprise sales, startups selling to banks may face additional regulatory-driven challenges. For example, in connection with third party oversight guidance from the OCC (the US Treasury’s Office of the Comptroller of the Currency which regulates US national banks), startups that sell into a bank must adhere to the same risk management practices as the bank’s, which may be difficult for an early stage company.
In order to successfully navigate these challenges, startups can significantly benefit from raising capital from a corporate venture capital (CVC) group with three important characteristics:
- A timely investment process that usually consists of a structured approach and investing discretion
- A focus on adding value by:
- Helping the startup establish commercial relationships with introductions and guidance in navigating the CVC’s parent organization and/or introductions to parent’s clients, where applicable
- Coaching the startup on best practices and procedures for providing financial services or selling into large, regulated enterprises
- Sharing subject matter expertise, often in conjunction with colleagues in the CVC’s parent organization, to help refine the startup’s product roadmaps
- A “do no harm” mentality that enables the CVC to stay away from non-standard investment terms that might limit the startup’s ability to operate or raise capital (such as rights of first refusal or exclusivities) and to shield the startup from commercial requests that may overwhelm its limited resources and ability to develop a viable, scalable product
In our view, Citi Ventures embraces this optimal, pro-startup paradigm that, paraphrasing John F. Kennedy’s inaugural address, “asks not what the startup can do for us –asks what we can do for the startup.” Citi Ventures, which accelerates innovation and fuels growth at Citi, combines external innovation with Citi’s 200-year legacy to create a systematic approach for conceiving and scaling new solutions for Citi’s clients and customers. Our unique, interconnected, model goes beyond the Venture Investing function, where business secondees whom we call “catalysts” are actively engaged in driving commercialization opportunities with Citi’s businesses. We also have a portfolio of external and internal engagements to conduct early-stage research and experimentation with disruptive technologies relevant to Citi’s future. And, we’ve built a permanent growth capability for Citi that delivers a robust portfolio of validated, breakthrough internal startups.
Citi Ventures builds deep domain expertise in our five investment focus areas: Financial Services & Technology, Commerce & Payments, Marketing & Customer Experience, Data Analytics & Machine Learning, and Security & Enterprise IT. We bring learnings into Citi and to our clients in order to accelerate adoption of new technologies and business models. We are committed to championing innovative entrepreneurs who are creating a more convenient, safe and valuable financial services ecosystem, and we enable our portfolio companies to grow and scale by helping them refine their products and processes and by making introductions within Citi and Citi’s broader franchise.
If you are trying to reimagine the future of financial services, consider raising capital from a Corporate VC that can help guide you through known and unknown obstacles, introduce you to future business partners, and provide you with the capability to commercialize and scale.