If my thesis on the growing importance of Corporate Venture Capital, b2b business models and finserv (banking or insurance) Incumbents as strategic partners for fintech startups – in lending, capital markets, payments, asset management and insurance – then it is of the utmost importance for said startups to know how to engage with their future investors/customers/partners. To be clear, for the purposes of this exercise I will assume there is a business/technology rationale and intent to partner.
The most optimal way to know how to engage with someone is to learn how they engage with you.
A finserv Incumbent will engage you along three vectors: a) the venture investing vector, b) the innovation vector, and c) the business vector.
Answering questions around what, how, who and where along these three vectors is paramount to your future success. Answers to many of the questions I am mapping out below will help you gauge not only the mechanics of engagement but the culture of the strategic partner you are dealing with and if that culture fits with your vision.
Your goal is to figure out how difficult the road ahead is and what to do to maximize success. Remember that dealing with a finserv Incumbent is eminently more difficult that dealing with an independent venture investor.
As a rule of thumb the more abstracted, specialized and sophisticated each of these vectors are, the easier it will be to achieve your goals, assuming business alignment and intent are present. Picture a finserv Incumbent where there is no venture or innovation team per se and where all decision will be made on balance sheet by business leaders with little understanding of early stage technology or business models and you will readily understand that your path will be rather arduous.
Here are a few pointers I recommend fintech entrepreneurs pay heed to when interacting with a bank or an insurance company. Answering these questions will lead you to better understand what beast you are dealing with.
1) How does an Incumbent invest in startups: Does the group you are dealing with have a dedicated team specialized in venture investing or a generalist team that takes care of any type of investment? Is the venture team investing on balance sheet or are they organized as a separate entity? How much capital is dedicated to venture investing? Who sits on the Investment Committee, only the venture team, only executives, a mix? What can they invest in and what cannot they invest in? What makes them consider making an investment? Can they invest without a commercial or strategic rationale?
2) How mature is an Incumbent’s venture investing practice: How many investments have they made? What is their due diligence and investment process? How long does it take? How deep is the due diligence process? How much capital is left to make investments in the next 3 years? What is their reputation? Are they specialized enough to know venture investing is as much of an art as it is a science, if not more?
3) How does an Incumbent approach innovation: Do they have an innovation group? Is it centralized or decentralized – especially important if you are dealing with a global incumbent? In case there is a central innovation group and decentralized teams, who is the decision maker when considering innovation projects? Is the innovation group divided into specialized teams?
4) How mature is an Incumbent’s innovation group: How long has the group been in existence? How many projects has the group worked on? How many projects can the group work on simultaneously? Does the group work on projects with early stage startups as well as established service providers? How savvy are they with your technology? What is their reputation in the marketplace? Are they leaders, “me too” players?
5) What is the role of the business group involved: Do they have decision making powers when contemplating an investment, when contemplating a commercial agreement? When do they get involved – early in the process, late? Can they contemplate a commercial agreement without making an investment?
6) How mature are the Incumbent’s business groups when dealing with startups: How many startups have they dealt with? How many commercial agreements have they completed? Where they front line or did they rely on Venture and Innovation? What is their reputation? What is the average time for them to go to market with new projects? How is their incentive, top line or cost wise, with your particular business? Are they urgently in need of your business solution?
7) Interaction between Venture, Innovation and the Business groups: Who leads, who follows, who reports to whom? Is the interest in interacting with your startup initiated by Innovation, by Venture, by the Business group and what are the implications? How will Venture or Innovation help you navigating potential commercial agreements with Business groups? Who has “skin in the game” compared to the others? Who has more “skin in the game” than others?
8) How is the decision making process influenced: Who are the decision makers, the gatekeepers and the champions? Where do they sit in the org chart and among the Venture, Innovation and Business groups.
9) Motivations of each of Venture, Innovation and Business groups: Are the motivations aligned? What are the goals? Pay special attention to how aligned the Business group is with Venture and Innovation. Do commercial imperatives trump innovation imperatives? Do long term strategic imperatives trump short term commercial ones? How do these motivations and imperatives apply to you and your startup?
10) Reporting Structure: Who do Venture and Innovation report to? Directly to the CEO, the CFO, the Board? If not who do they report to? Does Venture report to Innovation? Are both Venture and Innovation hidden within the bowels of an Incumbent or do they have the necessary and required exposure and support from C-level executives?
11) Explore the role of legal, compliance and regulatory: How convoluted will be the legal and compliance process? Will you be dealing directly with legal and compliance or will you be shielded by Venture, Innovation of the Business group? When will legal and compliance be involved? Are they well versed in the legal arts of early stage investing? Will they bring a bazooka to a knife fight? How much of a burden will they impose on you? Will there be a regulatory approval hurdle to clear?
12) Explore the role of procurement: Assuming there is a vendor management or procurement group, will you need to clear that hurdle too? What will it mean to you, how many resources will you have to engage immediately and over time? What type of data will you need to provide? Are they gatekeepers or decision makers too?
13) Explore who will be in charge of a commercial project implementation and integration: Will the Business group be responsible? Will they have the skills and understanding required to fully digest your technology and business model? Will they rely on a separate IT or operations group? If so, how does the IT/Ops group interact with new vendors when implementing and integrating? How mature and sophisticated is the IT/Ops team? Have they engaged startups in the past or are they more of a “we build our own stuff” outfit?
14) Explore how your future finserv Incumbent partner interacts with the broad ecosystem: Are they aligned with independent hackathons, independent accelerators? Who are their natural peer partners – other banks or insurers they have invested with in the future or entered in JV or commercial agreements with? Who are their natural competitors – those they will not want to deal with or invest with or JV with? Which traditional VC investors have they invested with in the past? Which non-bank companies do they partner with? Does partnering accelerate your chances of additional partnerships?
15) Gauge how you will need to adapt: Inevitably, you will need to adapt based on answers and observations you glean along the way. I do not mean adapting in fundamental ways such as radically changing your business model or your technology, and if that is a requirement then you should think twice about the costs and benefits before engaging fully. Rather I mean marginal adaptation to clear certain understandable hurdles around technology delivery for example. How much professional services will you need to incorporate? Will you need to localize to a certain geography? Will your partner’s compliance thresholds lead you to tweak your technology? The sooner you get clarity on the need to adapt and how you will need to adapt, the sooner you will be able to quantify and qualify the associated costs.
16) Explore post integration life as a startup partner: Are the rules of engagement well defined? Will there be periodic reviews? How will you be reviewed? Will the relationship be balanced? Who will participate? Will the champions, gatekeepers and decision makers that you identified during the pre commercial phase be the same?
I realize I have mapped many questions. My purpose is not to scare a fintech entrepreneur. Do realize the end goal is a potential prize of investment, referenceable client, commercial agreement and cash flow generation. In other words, the rewards are overwhelmingly worth the pain of discovery and engagement strategy building.
Additionally, even if there is a demonstrable strategic/commercial rationale, answer to the above may lead you to realize you are not ready for that particular finserv Incumbent as a partner, or that they are not ready for you. That type of epiphany may save you form serious heartburns down the road.
More specifically, dealing with a finserv Incumbent is unique from the point of view of regulatory, compliance and legal complexities as well as the type of individuals you will encounter (business leaders may not know how to engage with a startup, IT/Ops may not be up to par knowledge wise). Knowledge will allow you to mitigate more effectively.
Finally, remember that the mature service providers and vendors that sell to banks or insurers are very sophisticated and know how to sell, to whom to sell, how complex it is to sell. As a fintech entrepreneur you are competing with these mature service providers with limited resources. You need the smarts and the framework to close that gap and become a sophisticated “enterprise” focused fintech startup in your own right.