So you’re a growth stage company looking to secure financing that will take you to the next level? Ben Cukier and Eric Byunn have some advice for you.
Mr. Cukier and Mr. Byunn are partners at Centana, a growth equity firm investing in financial services firms and fin-techs. Starting with a broader definition transom other firms in the space, they look for innovative ideas in a range from enterprise software for financial institutions to fin-tech companies. The companies they back tend to be growing quickly with established customers and a profitable business model.
So a flashy idea on its own isn’t going to cut it, you still have to do the old-fashioned legwork and plot a clear development path.
“I spoke with a guy who worked for the company that had the fastest growing app of all time until Pokemon Go came along,” Mr. Cukier said. “They had no business model. I won’t say the name but its one that’s made fun of prominently on the show Silicon Valley.”
The company raised millions but never figured out how to monetize their traffic, he explained.
“Our companies have revenue,” Mr. Cukier added. “They sell generally to large institutions, to or through the traditional financial institution channels. Most of our companies are helping traditional financial institutions get to that next generation of products and services.”
“We think about things in financial services like innovative solutions in capital markets or innovative products in asset management,” Mr. Byunn said. “We think about all those as part of the future of financial services.”
Particularly acute areas are enterprise technology helping big banks and insurers deal with security and authentication, he added.
With 20 years of contacts, Centana can tap into a large network when evaluating a prospective company’s plans, Mr. Cukier said. Those people tell Centana what they need.
“We look at our mandate to invest as where we can add value,” he explained. “We know the innovation people at banks, we know the CTOs and CIOs. They purchase more than payments products. They purchase performance management products which are necessary when they have to calculate stress tests.”
Even with all of the startup activity in fin-tech, Mr. Byunn said there are still many white spaces in the sector. When considering what those are, recognize the situation incumbents face – the security questions around holding money, a plethora of regulatory concerns, and a unique industry structure. That means they are often scrambling across a whole variety of areas trying to keep up with how users are expecting to interact with their banking.
We have unprecedented ability to create data. How can companies leverage that to meet needs in the marketplace? Mr. Byunn looks at this from different perspectives.
That data needs to be captured, stored, managed and analyzed at scale. Also, consider specific pieces of data that have recently been made available and how they can be mined in new and innovative ways to build better underwriting models or to combat fraud.
Mr. Cukier said he sees a nice intersection, and plenty of need, between data generation and analysis in the insurance sector. Low estimates of fraud levels in the space are 10 per cent which, if true, make it an $80 billion problem. Look for patterns in data that can reveal serial fraud activity and you have yourself a valuable product.
When looking at anything related to cryptocurrency, it is helpful to visualize a continuum of cryptocurrency, ICOs and blockchain, Mr. Cukier said. He’s wary of cryptocurrencies as a whole.
“We think cryptocurrency is overblown. It’s a solution in search of a problem.
“There’s nothing legitimate today that it actually solves. It’s great if you want to order a hit on someone or bypass currency controls but there’s no actual practical use for it today… As a store of value, with the underlying transaction costs and volatility, it makes no sense. There’s no inherent value.”
ICOs should be broken down into the digitization of the security that is offered and the security itself, Mr. Cukier said. The security scares him because most ICOs are securities offerings not undertaken in compliance with securities law. They also lack the vetting and oversight companies undergo in the traditional venture capital process, he added.
“It doesn’t mean they are all illegitimate. It’s just there are legitimate ways out there to raise capital. Going through this way may save some costs but I think it’s done often at the cost of regulations.”
“It’s the Wild West,” Mr. Byunn added. “Occasionally good things come out of there but a lot of people get hurt.”
The blockchain is where the value lies, Mr. Cukier said.
“The distributed ledger aspect has the potential to save a lot of money, take a lot of friction out of the system and make some things work.”
It’s still very early stage for distributed ledger technology, he cautioned. The value will come when the community forms consortiums to address industry-wide problems, a move that also fosters acceptance.
When vetting blockchain projects don’t fall off the hype and always look under the hood, Mr. Cukier said.
“There are a lot that say ‘we don’t have a business model so we’re going to call it a blockchain and therefore we have a business model’ and that’s crazy.”
Talk to representatives from enough startups and you can split them into two groups, the ones that say they’re a technology company first and the problem they are solving is in finance, and the financial companies that are using new technology to solve problems. The former essentially say a problem is a problem regardless of the field. At its core, the data is essentially numbers so you can be agnostic.
That is fine if you are partnering with a larger financial institution that understands the industry, the regulations and the players, Mr. Byunn said. If that is not part of your plan, you better have a finance first approach, Mr. Cukier suggested.
“We firmly believe that investing in this area you need to know financial services. We’ve seen many firms invest in things that are failed business models from ’99 and then come back again.”
Such ideas may work if you’re starting with a clean slate and not having to contend with systems, regulations and norms developed across centuries, they said. Look at China for an example. Alipay became so successful because there was no extensive ATM system or competitor set with Visas and MasterCards to deal with.
No need to reinvent the wheel as it works well for the most part, just improve a few spokes, Mr.Cukier said.
“Lot of companies want to change the world and some have gone on to be successful. We don’t need that, we like to say we back workhorses, not unicorns.”