The high-tech world was abuzz when Twitter announced on September 12 that the ubiquitous online messaging service provider was filing for an initial public offering. The deal could raise $1 billion or more — the kind of shot in the arm that makes life in Silicon Valley worth living, for entrepreneurs and investment bankers.
At the top of the financing pyramid, a high-profile IPO can send ripples of inspiration and encouragement throughout the technology industry and its legions of entrepreneurs. Twitter was once a start-up, taking seven years from inception to the brink of a stock exchange listing. Google’s IPO in 2004 came six years after that company’s founding.
Yet for all the headlines and focus on IPOs — they are on a pace this year to surpass 200 for the first time since 2007 — they are just the tip of the entrepreneurial iceberg. Start-ups at earlier stages are far more numerous and have become ever more intriguing to established corporations and investors in the hunt for potentially transformative technologies.
The Apples, Googles and Twitters, having reached the pinnacle of public recognition, are hardly being ignored by corporate strategists and technologists who either compete with or piggyback on those leaders’ products and breakthroughs. But, like sports franchises that prefer to scout out and develop their own talent rather than acquire expensive star players from other teams, corporations can find it more fruitful to nurture and privately finance up-and-coming entrepreneurs — who may never go public because they’ll get bought first.
A case in point: Six-year-old mobile payments company Braintree’s agreement in September to be acquired by eBay, to bolster the latter’s PayPal operation, for $800 million in cash. “Banks are doing less in payments,” which as a result has become a venture-funding hotbed, notes Matt Harris, who oversees financial technology investments at Bain Capital Ventures in New York.
Technology-centric industries are creating pipelines, or ecosystems, of early-stage financing and R&D, which is evident in a rebounding corporate venture capital sector. Examples include Citi Ventures, a Citigroup unit in Palo Alto, California, that vetted 800 potential strategic partners last year; and Bloomberg Beta, a $75 million technology venture fund launched in June by the news and information giant.
Nowhere are such ecosystems taking hold and flourishing more than in the financial industry, which takes them well beyond Silicon Valley. A prototypical, collective effort is the FinTech Innovation Lab, supported by the Partnership Fund for New York City and administered by consulting firm Accenture. Top-tier bankers and venture capitalists judge an annual competition that since 2010 has attracted more than 360 applicants. Twenty-five “graduates,” including cybersecurity company Centripetal Networks and digital wallet developer Dashlane from this year’s crop, have obtained capital and entered into business relationships stemming from the program. Lab boosters note that funding of New York financial technology companies exceeded $200 million in 2013’s first half, equaling 2012’s full-year total.
FinTech has launched an offshoot in London, where, on a multi-industry scale, conference organizer Digital Shoreditch, accounting firm KPMG and other sponsors have more than 1,000 start-ups from around the world vying for £1 million in equity.
In a similar vein, Innotribe, a five-year-old initiative of the Swift banking communications cooperative, runs an international Startup Challenge. It had more than 200 entrants this year and awarded $50,000 to KlickEx Corp., a New Zealand–based provider of clearing systems to central and commercial banks. (Read more on fintech innovation.)
Another avenue for getting noticed is the quarterly Finovate showcases; 69 companies made presentations at the September event in New York.
“It’s still a challenge to gain entrée into big, complex financial firms” under regulatory and budgetary pressure, says Robert Gach, head of global capital markets at Accenture. The “fintech” ecosystem smooths that path, while bankers get early insights into new technologies and ideas. “They address real pain points and opportunities for business change,” says Gach, adding that in contrast to the dot-com-fueled boom of the 1990s, “this is not a fad.”
Justin Brownhill and Neil DeSena second that. Respectively co-founder of the Receivables Exchange and founder of the Goldman Sachs–Spear Leeds & Kellogg REDI Products division, they formed merchant bank SenaHill Partners, operating in partnership with Sandler O’Neill & Partners, to bring entrepreneurs, investors and customers together. “In just nine months we have sourced and evaluated over 250 emerging financial technology growth companies,” Brownhill reports. • •
Jeffrey Kutler is editor-in-chief of Risk Professional magazine, published by the Global Association of Risk Professionals.
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