The Silicon Valley model doesn’t work for corporate FinTech accelerators

Amy Neale, Global VP at Mastercard Start Path, explains why Mastercard has moved away from the classic early-stage tech accelerator model, in a research interview with FinTech Global.

At a time when almost every traditional financial firm across Europe, the US and Asia is taking steps to get to grips with FinTech, startup engagement is becoming an increasingly important part of R&D strategies. One of the most prominent approaches to this is well-publicised corporate accelerators that ape the approaches of Silicon Valley outfits such as Y Combinator or Techstars. But a divide has already emerged between those institutions seriously engaging with the future of finance, and those which are largely just spectators.

Having engaged 100 companies through its startup programme over three years, Mastercard Start Path Global VP Amy Neale has more experience than most of what works and what doesn’t. She explained to FinTech Global why the payments giant, which looks to work with startups across the sector as well as retail tech, has moved away from the classic early-stage tech accelerator model.

Breaking away from the Y Combinator model

The startup accelerator model made popular by the likes of Silicon Valley stalwarts such as Y Combinator and Techstars aim to take startups from concept to their seed funding round. The idea is to offer the right kind of founders the chance to quit their jobs for a couple of months, bunker down in an office space and go hell-for-leather building and launching something that might attract investors at the end of term demo day before a host of VCs.

Household names such as Airbnb and Dropbox got their break this way through Y Combinator, while Twilio and Uber, the most valuable private company in the world, are Techstars alumni. This approach has been replicated around the world by other accelerators, corporate incubators and banks alike. “We were really replicating the Techstars and Y combinator model,” said Neale, speaking about Mastercard’s initial efforts in startup engagement. “We set out as the classic corporate accelerator model. We had a physical space and we selected very early-stage companies to come in and work with us in that space over a three-month period.”

When it comes to developing FinTech startups through a large financial firm’s corporate accelerator, however, this approach is not always fit for purpose. The success to date of businesses such as Uber and Airbnb has been built upon their ability to quickly rack up tens of millions of consumers regularly using their platforms. By contrast, the startups that banks and financial companies aim to develop and partner with through their accelerator programmes will often have a much longer sales cycle -especially on the B2B end of B2B2C. Rather than chalking up as many app downloads as possible they are targeting large financial institutions and banks themselves, which move slowly and take a long time to pass decisions. A three-month development blitz and five-minute pitch deck isn’t enough to get these types of businesses up and generating revenue.

The shift to more mature companies

After a year working with early-stage startups Neale claims Mastercard Start Path realised it needed to shift its focus to later-stage companies which stand to gain more from working with a corporation of its size and experience. “Over the course of that first year, we learned a great deal about working with startups in our organisation,” said Neale. “One of the things that we learned was that for a corporation the size of Mastercard to do more meaningful work with companies, we needed to move to the later stage.”

“We shifted the model to make it much more tailored to the needs of companies that are already on the path,” she explained. “Companies that have taken on some capital and have a product in the market, with early reference customers that we can not only educate but also do meaningful work with.”

The purpose of any corporate accelerator programme is, ultimately, to benefit the incumbent as well as the startup. A large institution can offer an abundance of resources and education to a young company but with many corporate accelerators opting not to take equity stakes in startups there needs to be real collaboration, that is valuable to the corporate, to make it worth the effort. Many early-stage companies, traditionally taken on by accelerators, are just not yet at the point where they can practically contribute to a financial incumbent. “At the end of the day our end goal is really a win-win situation,” added Neale. “We want to add value to the companies we work with and also want to create opportunities for Mastercard.”

Corporates are beginning to realise they need to work with later-stage startups

Keen to replicate, or at least to be seen replicating, the approach taken by Silicon Valley startups, many big institutions still look for earlier stage companies in the hope of finding new disruptive technologies at their earliest stages. But Neale argues: “Very early stage company that haven’t launched a product and still don’t have customers are actually tough for a corporate to work with in a meaningful way.”

“We need to have validation. Indicators such as investment are a great measure that an element of due diligence has been done. It’s very likely that if a company has raised a series A it has probably got traction in its home market.”

Neale believes that more corporates will follow its path and shift to targeting these later-stage businesses with which they can more easily foster mutually beneficial relationships.

A virtual programme is more international

Office space, often adorned with Steve Job-esque quote and the odd bean bag, is a hallmark of the startup accelerator. Providing a space for founders allows them to bypass one of the greatest costs young startups face and concentrate on development. Leading tech accelerators now receive applications from every corner of the planet with young teams prepared to relocate for intensive three-month stints in the heart of tech hubs.

Mastercard Start Path, however, has chucked out the ping pong tables and treadmill desks to instead run its programme entirely virtually. Neale explained: “we no longer have a physical space for startups to move into; we’re completely virtual. Startups can take part wherever they are in the world. We realise a company that has raised money is not going to move the team from their home location so we set up to the programme to accommodate that.”

This approach also enables Mastercard to leverage its massive global presence. In an era where FinTech companies are landing funding outside of the traditional US and European tech hubs in regions such as South-East Asia, Africa and Latin America, global brands can utilise their reach and help develop innovation specific to underserved regions or build ties with under-the-radar businesses not picked up by traditional accelerators or investors.

Collaboration beyond ‘cookie cutting’

Early stage companies across different industries face broadly similar challenges – hiring, finding market fit and pitching to investors being among the typical issues. This enables accelerators to offer a standard curriculum to all their members. Later stage startups, however, face far different challenges.

Mastercard has scrapped the core curriculum, with Neale saying: “We’re taking a different approach to each of the startups we work with. Start Path is dedicated team of eight people with either a tech background or a startup and investment background. They become the mentors for the programme and we tailor a plan for that startup.”

This collaboration beyond the ‘cookie cutter’ approach to working with startups also extends to Mastercard’s financial relationship with the companies. Rather than taking a token 5% stake in every startup it works with in the hope one might make a 100x return, the company takes an option to participate in a startup’s next round. This serves to create a working relationship with the startup where Start Path can help to increase the size of a traditional VC-led funding round when it’s useful to the company.

“It’s not in our interest to have small pieces of equity in hundreds of firms for the sake of it,” said Neale. “We’re not doing this purely to be a venture investor. We’re actually getting to know them and seeing if we can support growth. It’s also to see if there’s a strategic link between our organisations. If there is, perhaps we’ll participate in the next funding round when we definitely are looking for equity.”

How to measure success

The validity of these programmes will lie in the results and how success is measured by individual companies and, ultimately, if these engagements are preparing the business for the future and directly impacting their bottom lines in a positive way. Neale outlined that for Mastercard Start Path the value startups take from the programme is its priority and said, “The value that startups see through that programme is really important for us. What did it do for the startup and would they recommend it?”

Beyond this she says the company measures the success of the programme on the ongoing relationship with startups and value for Mastercard’s customers. She explained: “the second thing is: are we actually working with startups on tangible products? Are we doing pilots and seeing opportunities to prove our concepts with them? Are we thinking about co-development and shared data market?

“A third part is around investment. We’re trying to be smart about it but we want to make investments that we’re able to see a return from,” said Neale. “And the final piece is: are Mastercard customers getting value form this activity as well?”

It is still relatively early days for FinTech-dedicated accelerators inside incumbent financial institutions but the end goal must remain increased revenue for the business in the future of the rapidly evolving space. “The idea around testing new technology and stacking up collaborative projects is all driven towards bottom line opportunities,” emphasised Neale.

© 2017 FinTech Global & Investor Networks Ltd

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