For financiers working in New York City, London, Frankfurt or Hong Kong, California and Silicon Valley can seem of peripheral interest unless your work involves floating or selling technology companies.
But a decade after online payments provider PayPal filed to float on the Nasdaq stock exchange, the established financial services firms whose attention is elsewhere are missing some potentially seismic changes.
Just as the internet, data analysis tools and mobile devices have affected other industries, so traditional financial services are increasingly under strain from the same factors, just as regulatory burdens and leveraged-based profits centres come under strain.
That it was a phone maker’s corporate venturing unit, Nokia’s then in-house BlueRun Ventures, that backed PayPal’s series A round in 1999 shows the power of venturing to create large, disruptive businesses outside core areas. PayPal later drew in established banks, including Goldman Sachs, and well-known venture capital firms, such as Sequoia.
After the listing and eventual $1.5bn sale of PayPal to online auctioneer Ebay in 2002, the so-called PayPal mafia have spawned or worked at a host of other interesting businesses – from Facebook to LinkedIn to Tesla Motors to Palantir Technologies to SpaceX to Ironport to YouTube to AdBrite to Yelp to CapLinked to Square.
A number of those businesses have the potential to be disruptive to financial services – such as Facebook Credits or credit card provider Visa’s strategic investment in Square – as technology creates opportunities in often unexpected ways.
US-listed bank Citigroup’s decision to house its senior corporate venturing people in California’s Silicon Valley, therefore, is a strong signal about where and how to look for innovative ideas and create a culture that will appreciate and implement them.
But there is a second reason to look back at PayPal’s success. One of the interesting points in considering the subsequent careers and investments of the PayPal diaspora is how interlinked they have been after the challenges of setting up a disruptive business threw them together.
Innovation is rarely down to individuals – it might be their vision and drive, but it usually requires people to work with them and provide finance or other business services and products.
Though PayPal prided itself on hiring university drop-outs and those from outside the Valley ecosystem initially, it was nonetheless helped by having big universities close by from which to draw the drop-outs in the first place.
As Steven Lawrence Geiger, chief operating officer of Russia’s Skolkovo Foundation, that is tasked with building an innovation centre on 100 hectares outside Moscow, said in an interview with Voice of Russia: "If you study innovation centres around the world, whether they are Silicon Valley or Boston or Cambridge or Singapore, you will find four or five core elements that together create an environment that allows innovation to happen.
"The first element is people, and that is based around a strong university doing scientific research. And that is what we are building with MIT [to create the Skolkovo Institute of Science and Technology funded by local fossil fuel producers Gazprom, Rosneft and Lukoil]."
He said the other elements were some type of government support, investment money and the physical infrastructure in which people can interact and work together.
The uniqueness of Silicon Valley is the longevity of its innovative capacity around Stanford and Berkeley, and the ability to renew and find fresh themes to back that can disrupt businesses across sectors. However, for corporate venturing units, Silicon Valley is just a starting place, given the potential from other regions backed by strong research centres, including perhaps Skolkovo.
It is this interrelatedness of business development with research – whether funded internally or outsourced to universities or the broad swathe of often venture-backed entrepreneurs – that is the next set of challenges for corporate venturing units, and for us at Global Corporate Venturing, to grasp.
Exploring university-backed entrepreneurs is the brief for a new sister title to Global Corporate Venturing being launched shortly. To suggest ideas and sponsorship opportunities, contact me or Tim Lafferty, tlafferty@globalcorporateventuring.com