The increase in corporate venture funds is leading to more capital becoming available to startups – but strong entrepreneurs should be wary according to Blackfin Capital Partners’ founding partner.
Managing director Paul Mizrahi told FinTech Global that the venture market has been awash with corporate venture capital, with many of the large insurance companies and banks launching their own venture funds.
The rise of corporate VCs, or venture capital firms that are formed within big companies, has been on the up as those companies seek out potential partners and possible future acquisitions.
Corporate venture groups deployed more than $1.2bn in 198 deals to the entrepreneurial ecosystem in the second quarter of 2016, according to a MoneyTree report.
It found that, including the second quarter, corporate venture had invested more than $1bn into the entrepreneurial ecosystem for ten straight quarters.
It marked the sixth straight quarter of more than 20% of all venture deals having corporate venture involvement.
He said, “The movement puts a lot of money into the market, but for strong entrepreneurs it is not the most attractive model.
“If you are very strong FinTech company, and you’re disrupting the market, you don’t want to team up with one of the incumbents, especially not at the early stage.”
The corporate venture capital has the potential to reduce the business’ ability to ‘really disrupt the market’ and be independent with ‘a completely new approach,’ according to Mizrahi.
“I see a lot of money being put into corporate ventures, but I am very sceptical of this model.
“15 years ago when there was a first internet bubble and all of the telecom companies set up corporate ventures, I think none of them were successful.”
Mizrahi suggests that same thing will happen with all of these banking and insurance cooperative ventures.
On the other hand, with many successful venture firms seeing FinTech as one of the main themes to invest in, he is surprised by the lack of specialist vehicles.
“I think that in the financial industry, some of the topics are extremely complex and you need the specialist knowledge. So a specialist FinTech fund makes sense.”
Recognising the need for a specialist vehicle in the European space, combined with the founding partners’ entrepreneurial backgrounds, and investor demand, Blackfin launched its first ever venture fund last year.
The fund, which is looking to raise up to €120m, will focus on all aspects of banking, payments, wealth and asset-management, brokerage, insurance, and financial software and technology.
“We have been pondering the fund for a while because we were all previously entrepreneurs. We have a number of existing investors, carried over from our private equity funds, which have expressed an interest to invest more specifically in the venture end of the market.”
Blackfin was founded in 2009, with the view that there were no financial services sector-focused funds in continental Europe, despite their popularity in the US and UK.
He said, “If you look at Continental Europe there is very little expertise in financial services and no sector focused funds.
“The generalist’s buyout funds, in general, don’t look at the financial services sector, or only to a very limited extent.”
FinTech startups possess the ability to help potential problems addressing banks and insurer companies, response to regulatory issues and constraints, reduce costs, or provide new ways of doing processing, calculating and processing risk according to Mizarhi.
He adds that ‘FinTech’ is a very vast space: “Some types of opportunities are very consumer driven and they are opportunities which attract interest from many of the VC funds, so they are very competitive and, in some cases, the prices have been extremely over inflated.”
On the other hand, there are a number of issues which are a lot more complex and technical, “requiring a lot of expert knowledge” and “very specific industry experience”, which are particularly attractive to Blackfin.
Mizrahi added, “Contrary to ten years ago, when all the large banks and insurance had plenty of money and were driving the innovation themselves, today they are much more resource-strapped and very focused on internal matters and internal problems.
“This leaves much more room for new companies to enter. If you put these factors together there is a unique scenario, which explains why it is such a hot topic right now.”
Anything related to regulation or compliance is set to spearhead Blackfin’s FinTech investment strategy, according to Mizrahi.
“These companies need to comply with regulatory reporting, both with the regulators themselves, and also to investors, so needless to say that regulatory requirements in the asset management industry are growing dramatically.”
At the same time, the business need to understand exactly how to sell these products to asset managers, understand their decision cycle, and what kind of business model is good for them, he added.
“You need to have a real understanding of the industry to be able to help a company like that grow.
“Another topic which is really interesting is the whole insurance space. If you look at the market now, there is still relativity few InsurTech companies in the market, and I think that will change dramatically in the next few years.”
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