Here's what Europe's biggest venture capital fund looks for in a company
The rise of cheap tech combined with smart people being laid off during the recession has led to a wave of startups trying to re-imagine everything from lending to wealth management, using technology to do things faster, better, and cheaper.
Antony Jenkins, the former CEO of Barclays, warned this week that financial services are heading for an "Uber"-style disruption at the hands of these leaner, meaner startups.
And, like Uber, the companies that can crack the code stand to be worth billions - good news for any investors who take a punt on them.
Index Ventures, Europe's biggest venture capital fund, hasn't missed this trend. Partner Jan Hammer is the fund's point man when it comes to fintech, leading Index's investment into 2 billion dollar fintech startups - Dutch payment company Adyen and international money transfer service TransferWise.
Business Insider caught up with Hammer at Index's London offices recently to talk about where he sees fintech going, what Index looks for in an investment, and how it's dealing with increased competition from other investors looking to back tech startups. (You can read Hammer's thoughts on whether we're in a tech bubble here.)
Check out the edited highlights below.
Business Insider: What, for you, is the most interesting part of fintech at the moment?
Jan Hammer: We spent a lot of time trying to slice and dice the system. You may have seen those infographics that split the financial services industry into silos. They really go by category - savings, foreign exchange, lending, and so forth. Those oversimplify what's happening in the sector.
We at Index try to think about what are the next generation of companies and we try to think about it in different dimensions. Are we trying to serve the banks, are we trying to play other players in the system on a B2B basis, or are we trying to cater to the consumer.
Just to pick a few examples: will the consumer want their dedicated FX or savings all in one place or will they want something more integrated?
The second interesting question is how the business world and the consumer world intersect. Under the hood of a bank you've got operations, compliance - lots of very legacy, old technology. But in many cases the consumer businesses just have a front end. So does one start selling that service to the other? Or should we be thinking: can we create companies that provide a common service layer across these very complex functions?
On the business side - are there propositions that go all the way? Are there companies that can truly replace the existing models, whether they're banks or something else. But again, I think it's oversimplifying to say, 'We're a new lending startup, banks aren't lending so therefore we're going to be the winners.'
I would argue that fintech presents a huge opportunity. Incumbents have not delivered or broken promises and not kept up with consumers. I'd also argue that banks are not going to disappear tomorrow.
BI: What do you think will happen then? Do you think banks will work with some of these startups? Or there'll be an ecosystem big enough for everyone to get on without destroying each other?
JH: I can't predict the future, but I would guess that we're going to get a mixture of all.
We're going to get some that act as the Amazon Web Services - some of those banks may transform to provide that or it may be newcomers. Not just hosting and infrastructure. One that applies to all fintech startups is KYC [know your customer] compliance.
If you think about it, there's a huge amount of duplication. You're sending your utility bill to TransferWise but also Funding Circle - maybe there's an argument for an industry wide platform.
BI: So finance as a service, in the same way we've seen with software?
JH: For example. The other thing is there may be a certain amount of convergence between the new startup world and the banking system. There may also be, and we're already seeing this, convergence between the new startups. Ambitious entrepreneurs are saying I'm in this category, what's the next category?
JH: They're certainly one of those innovative companies. They include two trends that I've mentioned - one is the Amazon model, and the other is the new service aggregated provision model. They either provide it out as a service, as you say, or they have their own customers and say, 'Come to the supermarket! On our platform, we host all these different products and services.'
BI: More broadly, what's Index interested in at the moment?
JH: I guess more generally one of the huge trends is data and information. What's happening: the world is more mobile, you've got a shift in adoption where a lot of new products and services are adopted by the millennial generation, and, as a result, lives are far more online than offline. All that traffic and interaction is creating a lot of data and information. But the question is, what do you do with it?
Recently we made an investment in a company called Collibra, a software company. This is a global business out of Brussels and it sells what they call data governance software.
Collibra is the librarian that organises the library cards for your data set - where do I find this data, who can use it, who created it. We think there's a big future for companies like that which sit on top of the exhaust of data.
Even more broadly, it's this mobile representation of everything we do, very often aimed at the millennial generation. Whether it's the sharing economy, whether it's the way we purchase or exchange goods and services - food ordering, transportation. Making our existence mobile is a big theme.
BI: Are there any investments in the works at the moment?
JH: We've got a lot in the works but unfortunately we can't talk about those that we haven't yet announced.
We're seeing quite a lot. In general terms, there probably hasn't been a better time to be an entrepreneur. It used to be harder to start a company because you didn't have access to large customer bases that you can now address through the app store, for example.
The world is very connected, so whereas European companies set up 10 years ago would focus on their own market, and the same thing for the US, now companies go global very fast.
I would add that if you're starting a company you don't need to 'own' all of your product. You don't need to have an IT person, you don't even need to have servers, you don't need to have your own email. For those things there are Gmail, Dropbox - there are tools.
BI: Are you guys facing more competition to get into deals?
JH: Clearly we are very humble and we always think of competition. We don't take opportunities for granted. For that reason we're present in multiple European cities, the type of investors we have at Index speak different languages, we spent time on the ground.
We also do things like invest cross-stage rather than saying, "We only invest in companies when you achieve X million pounds in revenue." On the contrary. We track them from the time they're born and invest from seed to late stage growth. So we do a lot of things to make sure we're there for entrepreneurs.
BI: There seem to be more US funds looking to Europe now? Are you having to work harder to get the deals?
JH: There are two components of the answer.
One, in a way it's great to see US funds come to Europe because it's a validation of the opportunity. 10 years ago we wouldn't have seen that and the reason why we're seeing that now is because European companies truly go global from the get go.
Clearly there are a number of sectors and themes where Europe has the cutting edge - I would call it thematic expertise. Go back to fintech, this is why I spent the vast majority of my time on fintech, it's because the ecosystem here is very fertile.
You've got a lot of the old players here, you've got willing and cooperate regulators, you've got capital for startups, you've got people with entrepreneurial spirit, and you've got people with qualifications in that sector.
The second part is more on a firm to firm competition level. This is our backyard and, therefore, backing a European entrepreneur is a key priority for us. For the folks you're referring to, investing on an incidental basis in maybe one or two, maximum 3, companies in Europe, for them it's a nice to have.
Very often we invest in a Series A and then a US firm comes in at Series B or C. That's great! It's a both a validation and [the company] gets better access to the US.