What breeds success in financial markets technology? The backstory of why we started Illuminate…
Sitting on a plane heading from London to the other beating heart of financial markets (aka New York) I thought I would put down my thoughts on what actually helped to make the winning companies I’ve been fortunate to be involved with in the past successful. This has not only informed the Illuminate investment thesis, it’s also defined the core Illuminate DNA.
Spoiler for those who just want the punchline: It’s making sure your product solves a real problem and having a trusted industry advocate in your corner. You can never underestimate the power of relationships in financial markets.
Problems… Solutions… Network…
Illuminate’s approach is to look for companies with solutions to clear and pressing business problems across financial markets and the broader wealth and asset management space.
These companies broadly fit in one of two buckets; either “fintech for financial markets” (think risk platforms, trade surveillance, trade settlement, compliance and many others… basically the stuff that only markets people care about!) or enterprise tech that targets financial markets participants as a core market (think data privacy, cloud architecture or data management as examples of enterprise level challenges that are pertinent to our financial markets friends).
There is another core component of the Illuminate DNA — our network. I have seen first-hand on both sides the value of having a trusted industry advocate and the transformative impact this can have on young businesses. This is why we have invested in building industry networks that can deliver value all the way across the investment cycle. We use these networks to collect industry problems (WE LOVE PROBLEMS!!!!), to validate potential solutions, to stress test market sizing, for pre-sales meetings, and to raise industry awareness of the best in class solutions we see. This is not restricted to the companies in our portfolio, but all of the viable companies that have useful products across our entire pipeline.
Creating virtuous cycles; aka the value of the power of karma to a specialist investor
We believe this constant feedback loop builds a virtuous cycle that benefits all participants. Whether that be the pipeline of companies we meet (not just our portfolio), our industry partners, informal network or, of course, our LPs — there is value here for all stakeholders. To use a car metaphor (being a car guy), of the c2,000 companies we saw for our first fund we invested in just 12. The ‘exhaust’ from this is a series of landscape views of the many potential solutions being brought to market against the unprecedented post crisis challenges of our industry.
Just because a pipeline company doesn’t fit our “Goldilocks” definition of “just right for us” (you can read more about how we think about investments here) it doesn’t mean it’s not a relevant solution for one or many of our industry partners and broader network. When we make those connections between partners and pipeline companies — even if it doesn’t benefit our LP’s today — we become a little more informed, our network and goodwill become a little stronger, our pipeline grows a little wider and those benefits should compound back over time. Give value to the network and the network will give back to you…
That’s great but why even start a fund in the first place?
As a specialist investor we established our firm because we believed that we are entering a sustained period of generational change in financial markets infrastructure. The industry faces an unprecedented need to re-architect to meet the compounding needs caused by a seismic shift in available technologies, post credit crisis operating controls, and a plethora of other regulatory and compliance challenges. The people and firms in our network are crying out for solutions to the many and varied problems they face — whether that be in relation to cost, control, capital, compliance or of course competitive advantage. Why then would we target raw technologies that are still searching for a problem to solve when we can de-risk our investments by validating solutions and picking what we believe will be the emerging winners in their category?
There are few budget holders we know who wake up looking for AI or blockchain or Robotic Process Automation for the sake of it. They wake up worrying about the business problems they face. For companies with technology that can solve these problems, from anti-money laundering to compliant data management, there are multi-billion-dollar opportunities to go after… if you can successfully navigate the industry’s notoriously challenging sales cycles. This is where we think we can help make a difference by using our network to open doors.
Our approach isn’t typical of a venture firm
Now we recognise that this model isn’t for every VC and also probably not for every size of fund. In fact, the skew of returns in VC seems to imply two things. You either want to be a massively successful firm with billions under management or you want to be a smaller and recognised sector specialist. What we certainly don’t want to be is lost in the noise of the generalist masses where “spray and pray” investing seems to have, for the most part, failed to deliver satisfactory returns.
So, what might make these two types of investors in the same space successful? I think that at each extreme you have very different value propositions:
1) The mega funds with great track records who see near total deal-flow.
They can pick their companies from a holistic universe but importantly they can also afford to get into deals at multiple stages, perhaps Series A through to E because they have deep pockets. That not only allows them to join emerging winners but also in some cases to come in late and “collect logo’s” which all feeds the image that they backed even more big winners. Massive management fees (large fund AUM multiplied by small percentages) enable them to run impressive operational teams and tech networks to connect new technologies into large firms to test for fit against problems in their own way. This is great but perhaps not the model for the world of financial markets focused fintech which is less IPO driven and where most exits are realised through industry consolidation events.
2) The specialist funds with the strongest networks can see the best deal flow in their specific niche.
At the other end of the wings are the small specialists that don’t have that luxury of late entry but do have the luxury of great early deal flow in their own specialist spaces. They aren’t just betting on tech — they, like we, are choosing from strong deal flow in their specialist niches and then connecting these businesses back into their networks, formal or informal. This is how Illuminate has been set up. We are betting on solutions and the power of our own network to help bring these companies to market and hence de-risk those companies on their journey to broader adoption.
To me this is how solutions get adopted in our space
Technology only gets you so far. Having the industry network to connect to is what will ultimately determine which companies win out, as it did when I was the little guy peddling my wares for the T-Zero post-trade business at Creditex which ultimately got acquired by ICE.
If I had to sum all of this up into one key lesson it would be this: never underestimate the power of the go to market strategy. In financial markets, now as ever, this is all about relationships both formal and informal.
Illuminate was set up specifically for this purpose. To invest in and connect industry leading solutions to the people in the industry who need them. If you are an entrepreneur building a business in this space, or an operator looking to stay ahead of the curve and keep a finger on the pulse of what we are seeing then we would love to meet!
