Corporate venture capital for financial institutions

Fintechs and the importance of corporate venture capital investments

The COVID-19 pandemic accelerated change in the financial services landscape and future trajectory for all stakeholders, from global players to smaller fintech companies. However, one thing remains consistent across sectors—the growing importance of leading technology as a competitive advantage for financial institutions.

Instead of viewing fintechs as a direct and disruptive threat, many FIs are seeing them as a source for viable partnerships, talent, and complementary assets. How best to participate in this ecosystem? While there are multiple models available to FIs, including as customers, acquirers, partners, or investors, one stands out—corporate venture capital (CVC)—enabling FIs to develop robust expertise and direct exposure to fintechs.

The evolving marketplace: CVC trends

Despite the recent setback in valuations and funding in early 2022, annual fintech venture investment is still substantial, reaching more than $40 billion globally, and CVC’s participation levels as a percentage of total deal volume and value has also increased, hovering between 35% and 40% since 2018. CVCs are also gradually moving earlier in the typical alphabet-series venture financing pathway, making more and smaller Series A/B/C investments in addition to maintaining large-scale, later-stage investments.

However, consistent with the theme of nontraditional players competing in banking and insurance, more non-FI CVCs are making fintech investments as well. Mature and large-scale fintech unicorns are also rapidly “paying it forward” by creating their own CVC groups. The 2021 economic bounce back and strengthening of capital markets globally has stabilized FI balance sheets and reinvigorated venture financing appetite. However, is all of this investment creating strategic value, or are the FI CVCs prone to fall victim to the stereotype of “dumb money” chasing leading fintech VCs, in addition to larger diversified VCs?

Building an effective corporate venture capital strategy

CVCs can play a key role for firms navigating the dynamics between traditional FIs and fintechs, but it can also bring complexity along multiple dimensions from internally competing objectives to finding less explored market niches to pursue. To be successful as the venture marketplace evolves, financial institutions need to address the following four questions:

1. Why to venture: Commit to a unified objective

While traditional VC investing primarily focuses on financial returns aligned around a fund life cycle, CVC investors typically can invest with financial and/or strategic objectives across varying timelines, viewing investments as a key component of the enterprise’s diversified growth portfolio.

2. Where to play: Identify where to venture in the fintech ecosystem

Choosing where to play for the CVC centers on whether the firm decides to invest in familiar businesses or undefined markets of the future. Each investment decision should be viewed through the following lens: How similar to our current business do we want our investments to be?

3. How to win: Determine the conditions necessary to win in CVC

Evaluating how to win requires the CVC to decide and communicate a clear vision around how investments are selected and funded, how board seats will be allocated, and whether portfolio companies are strategically selected to be part of a broader ecosystem or are independent, diversified bets.

4. How to execute: Operationalize in a manner that will maximize value from the investment

Although the steps seem simple, each choice across the CVC decision chain requires intensive research and industry expertise. To execute CVC effectively, FIs can follow a few key principles centered on deal structure, partner collaboration, internal organization processes, and growth mechanisms.

Navigating the path ahead

CVCs play a key role in allowing FIs to develop robust experience and expertise within the fintech ecosystem. Additionally, by utilizing a CVC arm to invest in potential disruptive technology, FIs can have a seat at the table as part of a future bold play or new market collaboration opportunity with the fintech. For FI CVC groups, maintaining differentiated focus on where to play, how to win, and consistent execution is key to valuable returns for the enterprise over time.

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