Picking up an investment from a corporate venture firm creates a ‘poison pill’ for RegTech startups, according to a panel at the Global RegTech Summit 2018.
There are heated discussion between investors and companies regarding the impact corporate venture arms have on the market. A major viewpoint is they can increase valuations, and others see them as a bubble which will see the majority slowly fade away. The panel at the Global RegTech Summit which included, senior staff from Enforcd, Banco BNI Europa, Commonwealth Bank of Australia, and Microsoft for Startups, discussed corporate investments and partnerships with startups.
There are a number of CVCs in the FinTech market, with Nationwide being the latest to join, having recently held the £50m first close for a FinTech-focused vehicle. While corporate venture firms work the same was as traditional venture firms, the issues are caused by their exit strategy and if they are just going to acquire the solution instead.
Banco BNI Europa chairman and CEO Pedro Pinto Coelho said, “With my hat as a former investment banker, I believe this is basically a bubble that happened in other industries. The type of internal VC’s model where you put a small stake in the company, basically creates a poison pill where no other investors will come in, whether it’s a VC or another bank. This is because they see that the investor that stepped in first will have always the call option to buy out the whole company.”
The advice he offered to startups was to think twice about raising equity in this manner and only do it if they are desperately in need of capital. This advice is not solely for the RegTech, as it’s also a problem for banks. Technology at the moment is evolving so rapidly that the solution they invested in two years ago is most likely out-of-date, with no real chance of catching up. Investing in this manner just leaves both sides in a worse position.
A better way of investing from the corporate side, would be to inject capital into a startup to support its development time to get a case study for a solution. Following its success, implement the solution to fix a specific issue the institution has, instead of buying the whole business.
He added “I would say, on the incubator side, I believe it would be worthwhile investing in a particular project. Maybe there’s a project that this bank may have and there’s this particular problem. So, invest some money on development time of this particular startup to have a case study. With that case study, the startup will get money and the bank will be happy because there’s a success story behind it. So, I think that would be the way to go.”
Panel moderator Jane Walshe, Enforcd CEO, had to agree with this point of view. The main draw of working with a bank would be if it could provide an add-on. A early-stage company will be much better off with something that the startup can benefit from, like a case study, and doesn’t need the bank to make a sharehold investment.
“From a startup perspective, I want revenue, that’s what I want. Rather than investment because revenue is the best form of money, isn’t it? And you’re only getting investment if you’re not at the revenue point. So, if a bank can help you get to revenue more quickly without you giving up any equity, then that’s got to be better,” she said.
Attaining a CVC’s backing can create a level of conflict of interest internally. While it can bring in some short-term revenue and a potential client, in the long-run it removes lines of revenue. Choosing one client to invest in the company, means you cannot go on to onboard its competitors as clients, Microsoft for Startups CEO Warwick Hill said.
Accelerator problems
However, his main issue wasn’t towards the CVCs themselves, it was towards single entities like banks and large entities trying to onboard a whole range of startups. This method is not sustainable for companies as there is just one client at the end. For example, if a company wanted to get a specific client, they should approach them for that, not go into their accelerator, as at the end they will only be onboarded by that client alone. A better option is going to an accelerator that has various different customers at the back end, and the RegTech company can meet multiple potential customers by the end.
He said, “I think there is a massive bubble in the UK ecosystem and that’s sort of built around incubators and accelerators. And a lot of it is manifesting in enterprises themselves creating this bubble. If you have a look at single entities running accelerators, it’s not viable. It’s not viable from the enterprise, it’s not viable as far as the entrepreneurs are concerned.”
However, going in through a single entities accelerator can be beneficial as it can offer a more direct engagement approach. Walshe stated that sometimes going into a broader accelerator program might mean a company meets a whole host of potential customers, but if they’re too small at that stage it means they can’t engage with them.
Commonwealth Bank of Australia operates its own innovation lab across Sydney, Hong Kong and London. The program works with companies to work alongside its own new products and work together to create the next generation of solutions. However, the bank looks to work alongside other institutions in the same space, so they can work together and help each other overcome challenges.
Commonwealth Bank of Australia head of innovation lab Supun King-Jayawardhana said, “I think the reality is that there is always going to be challenges around conflicts. That doesn’t mean that you can’t manage them. That doesn’t mean that it’s impossible for us to work together when it comes to working with a company that one of the investors is a competitive bank. Interestingly, in the regulation and compliance space, in some respects it should be easier.”
One of the banks Commonwealth Bank works closely with is ING, and together they try to overcome some of the similar challenges they are facing. King-Jayawardhana explained how they have run some experiments on the basis of sharing internal, procurement, and risk challenges to try and improve operations on both sides. The same goes for banks operating incubators or accelerators by themselves. They are tailoring these solutions to fit their own specific challenges, when they could be used broadly across the banking world to fix the same issue of others.
“In our RegTech portfolio, we have worked with companies that have had investments from our peers, our big 4 peers over in Australia, right? But the view that we’ve taken is let’s not compete on regulatory compliance, let’s compete on revenue generating opportunities.”
Banco BNI Europa chairman and CEO Pedro Pinto Coelho added, “I think you don’t need to have hundreds of incubators. The important part is that you actually have VC money to go after, and key clients that you believe could be a good case for you to present a good business case.”
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