Anglo African Ventures (Ventures) is the Fintech start-up investment division within Anglo African Enterprises (AAE). We look to invest directly in and establish strategic partnerships with Fintech start-ups whose technology can be sold into the wider AAE Client base.

AAE is an Information Technology firm, headquartered in Mauritius, who service the major banking groups and telecommunication companies within the South to East African corridor. We are the leading player in Cloudification, Big Data Analytics, Digital Transformation and the Internet of Things (IoT) in this area.

This is where the unique value proposition of Ventures can be identified. Not only can we offer Fintech start-ups capital injection to grow their business, we can help them scale into one of the most dynamic Fintech markets in the world. Africa is a continent that has embraced connectivity. Mobile phone penetration stands at 70%, against a world average of 51%.  It is this surge in mobile adoption that is transforming how the investment community view Africa as an investible location.

As a new venture in itself, what can Ventures learn from the current Fintech investment approach currently adopted by UK based corporations? The quality of Fintech start-ups emerging from corporate backed Incubators and Accelerators programs is testament to the central role they play in facilitating innovation. Some of these programs recently exhibited their start-up community through a “Demo-Day”. Those attending got to see what disruptive and disintermediating technologies they have been nurturing these past months.

Those recently “demo-ing” include Incubus at PwC’s 1 Embankment Place, Startupbootcamp InsurTech in Spitalfields, RISE the Barclays’ Accelerator Demo Day as run by Techstars held at the 02 Centre and Accenture’s Fintech Innovation Lab held at Central Saint Martins in Kings Cross.

The 4 Models of Investment

Most corporate backed Incubator and Accelerator programs follow the Matchmaker Model[1], whereby the key stakeholders are the corporates who fund the program. The overall aim is to incubate and support start-ups that complement the demands of the corporates’ client base and incorporate them into their infrastructure. It also gives the corporates an insight into the emerging types of disruptive technologies that could challenge their business models.

Within the Matchmaker Model, Ventures has identified four sub-models that reveal how the major banking groups are approaching Fintech investment. They are;

• The “Traditional Accelerator” Model
• The Competition Model
• The VC Model and
• The Collaboration Model.

The ‘Traditional Accelerator’ Model

The most familiar model for Bank and Fintech collaboration is the “Traditional Accelerator” model.  The most prominent example of this is the Barclays Accelerator program run in partnership with Techstars and based in Mile End, London. It provides Fintech start-ups with the standard package for most corporate backed accelerators: a 13-week program combining investment and mentorship.

In the case of the Barclays Accelerator, participating companies congregate in designated office space, provided by Barclays, with access to mentors and an investment of $20,000 managed through Techstars, for up to 6% equity stake in the business.

Barclays and Techstars jointly select the participating start-ups. Barclays identifies areas within its business where it foresees the most technological disruption while Techstars provides technical guidance on whether the start-up can do what they say they can do.

The key stakeholder within the Traditional Accelerator model is the corporate which funds the program. The objective is to incorporate the start-up into its infrastructure and to bridge the gap between the start-up’s technology and demand as identified by the corporate, making the technology available to service their clients. The process also gives the sponsoring corporates insights into the emerging types of disruptive technologies that could challenge their own business models.

This year Barclays Demo Day, held at the 02, saw eleven start-ups pitched to those in the finance industry eager to understand the technology behind the huge changes about to hit financial services. Companies such as Cuvva want to re-model the car insurance business to mimic the success of AirB&B; they offer flexible on-demand, by-the-hour car insurance via a mobile app. thereby turning idle vehicles into an asset for their owners. ForwaldLane gives insights into the future of Wealth Management, whereby Artificial Intelligence is used to make financial decisions meaning that such advice is not just the preserve of the super-rich.

Of huge significance was the inclusion of a team called Smart Contract Templates (SCT). Their technology is able to connect legal prose with business logic thereby simplifying the legal documentation process. This results in legal agreements being executed automatically as “smart contracts”. SCT are a team from within Barclays, proving that Intra-vation (Innovation germinating from within a major corporation) can work.

The Barclays approach has clearly worked with the Techstars relationship adding significant value to their ability to support potentially disruptive technologies. A number of the companies who presented, including Seldon and Tallysticks, announced agreements with Barclays to integrate their technology into the Barclays platform. This is supportive of the Traditional Model and the programs process of selection, acceleration and ultimate integration.

Deddy Gan, Head of Barclay’s Accelerator, further emphasises the importance of innovation emanating from a particular place: “We recognise that innovations will come from the start-up ecosystem. We want to partner with high performing entrepreneurs to identify the emerging technologies and bring them back to Barclays. Together, we want to redefine the future of financial services”.

Accelerators need to be more than simply a cost centre. They need to harbour applicable technologies of the future. Evidence of their success comes through the integration of the technologies into the processes of the major banks supporting them. Conversely innovation is based around trial and error or, as some in the corporate world may call, “failure” no matter what lessons may be learnt. The “cover-your-ass” corporate culture promotes caution as decisions could affect those whose time horizons and risk appetite are different from that of a start-up. As Thomas Eddison once famously said, “I have not failed. I’ve just found 10,000 ways that won’t work.” This approach can be equally applied to the different type of investment Models being pursued by the corporates.

The Competition Model

The Competition Model resembles the Dragons’ Den process of identifying and selecting suitable Fintech companies.  The most prominent example of this model is the UBS Future of Finance Challenge, a global competition to seek out radical innovations for their investment and banking Clients.

Before the final, which is held in Zurich, four regional heats take place in London, Singapore, New York and Zurich.  This year saw 620 start-ups from 52 countries compete to win $300,000 worth of prize money. They also got to attach their brand to UBS, one of the great banking institutions with the credibility this brings.

This model prevents the huge costs associated with a physical, fixed, full time Incubator / Accelerator space. It allows the banks’ regional offices to gain insights and develop a view on emerging, potentially disruptive, technologies.  This open and very public competition has proved to be a great way to create a ‘buzz’ around early stage companies where getting noticed has been exceptionally difficult.  For UBS it associates the bank with innovation.

As Oliver Bussman, UBS Group Chief Information Officer, recently commented the Competition Model was ‘… a great investment to bring the two different eco-systems together, [that of] UBS and the Fintech community…’[2] acknowledging the difficultly in integrating innovation within a traditionally conservative banking culture.

The winners of the competition, which is in its infant year, reveal the areas that the hosts’ view as the most susceptible to disruption. Aesthetic Integration, are a solution that automatically analyses financial algorithms for glitches in an attempt to ‘revolutionize the safety, stability and transparency of global financial markets.’

If securing the next big disrupter is a numbers game, then the Competition Model could be the way forward for banking institutions to get exposure to a large number of ideas – and gain valuable insights across the Fintech space. The Competition Model is also being pursued by Citibank and Santander.

The VC Model

The Venture Capital Model comprises banks investing capital into companies after the early start-up phase.  This potentially reduces the investment risk to the investor. This can be summed up as a ‘quality rather than quantity’ approach.

Where the “Traditional Accelerator” and the Competition Models typically target early stage or post-incubation start-ups, the VC Model invests in companies who have gone through a previous funding round (Series A etc.) and are more established. The most prominent and successful example of this approach is Santander InnoVenture.

Boasting a €100million war chest to capture the most interesting Fintech businesses, they have received an incredible 820+ applications since they were funded in July 2014.  This has resulted in seven significant investments. The odds are clearly stacked against Fintech applicants and the bar is set much higher.

This model acknowledges that the investee Fintech companies need to be substantive entities in their own right, able to stand on their own feet, with an offering that has momentum and whose technology is proven.

The model also accepts that companies need to be given time to develop outside the corporate ecosystem.  In the example of Santander InnoVenture they can add significant value through potential partnerships with Santander and other financial institutions. In choosing more advanced, established businesses, Santander accepts the higher valuation investment costs in return for companies who can drive the technology forward themselves. Such independence may boast the greatest chance of value creation through integration into current banking practices.

Such a highly selective approach has revealed where Santander believes most disruptive opportunities are. Out of their seven portfolio companies, two deal with mobile payments (MyCheck and Cyanogen), areas that have seen declining investment since 2014 as the space consolidates. Investing in established players, as Santander InnoVenture have done, is clearly the smart move.

They have also invested in Elliptic, which identifies illicit activity on the Bitcoin Blockchain.  Another investee company is Ripple, whose solutions lower the total cost of settlement by enabling banks to transact directly without correspondent banks. According to a recent PwC report it is now the Blockchain (or private and public networks) where most financial services companies are looking to invest.

The Collaboration Model

The Collaboration Model sees banks who normally compete with each other in all respects, openly collaborating with each other to share ideas and technologies.

The approach is evident in the recent announcement of the Kickstart Accelerator, a collaborative effort by five of Switzerland’s finest banking and business brands: banking titans UBS and Credit Suisse as well as EY, Swisscom and Swiss Life.

Kickstart Accelerator is currently recruiting its first cohort (applications were due on April 30^th 2016) so there is no opportunity to analyse the selected start-ups and investment decisions.

Certain entry requirements remain, such as having a Minimum Viable Product (a product or website that has been developed with sufficient features to satisfy early adopters) and an entrepreneurial mind-set. The accelerator will be run along the same lines as the “Traditional Accelerator” Model (outlined above). However, it appears that the start-ups will be at a more embryonic stage than any of the other models discussed.

This collaborative approach is not unusual. Accenture’s Fintech Innovation Lab boasts 16 of the world’s top financial institutions as participating partners.  It provides Accenture with insights into what is required by these corporate clients. Accenture also uses this approach to develop an understanding of where technologists themselves see the greatest opportunities within Fintech. This approach may encourage an investor-led method of collaboration whereby start-ups are cultivated by syndicates of interested investors looking to sell them into bigger banking organisations. What is also does is place Accenture at the centre of an innovation ecosystem that compliments their core business, Management Consultancy.

The Kickstart Accelerator hints at a new, more integrated, level of open collaboration within the banks and came about due to Swiss government pressure.  A damming report from Ernst & Young (2016) highlighted the Swiss government’s lack of support for innovation within banking. As a result the Swiss financial markets watchdog, Finma, pushed through a raft of new initiatives in a bid to stimulate further growth and innovation in the country’s emerging Fintech sector. The result was Kickstart Accelerator and open collaboration.

An Incubator Model that Keeps Evolving

Most corporates now realise that closed innovation, by itself, does not work. The two ecosystems of corporate and start-up cannot effectively synthesize as the bigger suffocates the smaller through too many KPI’s. This realisation has encouraged a shift in the landscape of corporate innovation towards a focus on the Incubator/Accelerator Model. This shift has been hastened by the pace of change within the start-up scene as more investors enter the space. This has been accompanied by the race towards greater digital transformation from within the banking sector. It can be seen in the different investment approaches detailed above.

Where can Ventures be most effectively positioned? We possess insights into what our clients want and can offer technical support to help start-ups scale. We can provide commercial insights into an emerging market where mobile phone adoption has the potential to transform economies, pull people out of poverty and develop a consumer class. We can identify the pressures being placed on African regional banking groups. The mobile phone has changed the way people engage with finance. As we operate within the finance and technology space Ventures, through AAE, is uniquely placed to analyse which Fintech start-ups have the greatest chance of success.

[1] Clarysse, B., Wright, M. and Van Hove, J. (2015) ‘A Look Inside Accelerators’, Nesta, p. 14.

[2] YouTube. 2016. The UBS Future of Finance Challenge in 2015. [ONLINE] Available at: https://www.youtube.com/watch?v=vQAQZmvM9wM. [Accessed 23 April 2016].