I have recently had this debate with my partners at R66: Why are there not any more global VC funds? Should there be more global VC funds? Does investing globally in one vertical yield superior returns?
The lack of popularity for global VC funds is easy to explain. LPs like to do their own allocation, prefer funds that are more focused and hence more sophisticated in a narrow field (be it a business model, theme, stage and/or geography). Many verticals are not global in nature which leads to in-country investment specialization – take healthcare or most of the retail industry for example – due to specific consumer behaviors, regulatory issues, legal issues. Certain verticals tend to organize around business models that will not work in more than one country. Further, although I could not find specific data on the subject, I suspect that over the years, the few global funds that succeeded in raising LP money may have underperformed compared to country specific funds.
Still, the above reasons may apply to many industries but do they in the fintech industry? For those who have not read one of my previous blog post. For me a) finserv = fintech, b) banks + insurance + asset management ⊂ fintech, or c) lending + capital markets + asset management + insurance + payments ⊂ fintech.
I started R66 Ventures two years ago with my partners. We all share the same trait: an inquisitive mind. This led us to broaden our horizon and we decided to be geography agnostic from the start. I have to admit we had no clue whether such a decision would be value accretive or an abject failure.
Given we only look at fintech, this forces us to be deep thinkers. We spend time analyzing inbound pitches, reaching out to companies we are interested in and circumnavigating the world. I have personally attended conferences and conducted business development in SF, NYC, London, Paris, Milan, Frankfurt, Berlin, Barcelona, Singapore and Hong Kong in the past twelve months and we have talked to companies located in every part of the globe.
What we found surprised us. The degree of similarity across business models, revenue models, technology was surprisingly high. Even when factoring consumer behaviors, culture and regulation which tend to create friction and are a barrier to global integration. One of my peers, Matteo Rizzi, does even more traveling than I do, and he will undoubtedly concur. I also know he is working on an idea that will validate my thesis – don’t ask me, I am bound to secrecy.
Indeed the more you move away from the retail customer in fintech, the more homogeneous the business models become within an ecosystem and the more said business models apply across geographies. See below graph:
As you can see there is a heavy cluster in the upper right hand quadrant. Would be interesting to create a dynamic view of this chart that would show moving trends – i suspect the lower left quadrant population will move up right over time.
Our hypothesis is that the fintech industry is global by nature, in how work flows are organized to deliver products and services to market – past and future – in how technology is built to support the fintech businesses of tomorrow, in how consumer expectations may converge over time, in how payments, the glue of fintech, is becoming increasingly ubiquitous and cross border. In other words, we believe there is alpha to be created by having a global view to inform us on what works in one geography or what does not work in another, to help us sharpen our pencils when we choose to partner with the right team and concept, and to help a team once we have invested. Fintech trends are increasingly becoming global and in-country specialization will make you miss the global view.
Obviously, one cannot be global out of one city and constant long distance travel is just a short term solution. To be really plugged in you have to have feet on the ground either as principal or via partners. As such I predict R66 offices in Europe and Asia in the near future – a natural evolution to effect our global investment theme.
What do you think? Am I too much of a dreamer? Is global investing in fintech fraught with so much friction that the add value I foresee will be neutralized?