Give us a brief introduction to yourself and your role at Propel Venture Partners.
My new role is managing partner at Propel Venture Partners, which is an independent fund with a full limited partner, BBVA, a very large, Spanish financial institution. We started this fund in February. We were previously known as BBVA Ventures.
I have been in the corporate venture capital business for approximately 16 years. I started my career in financial services as a banker – I have been in consulting, I have been in start-ups, I have been with large corporations. I started in corporate venture with Visa, the card association, in 2000, and got a taste for it. I have been with BBVA for four years and have now spun out into Propel.
Give us some insight into why you have moved to a general partner-limited partner structure with BBVA.
We recognise that getting into great investments is really hard in a traditional corporate venture structure, where you have an investment decision body that is usually made up of executives of an organisation. Often the principals responsible for the business do not really have any skin in the game. There is not much of an incentive tied to performance of those investments. This may sound like we are really just trying to find great financial investments, and while that is absolutely true – we think that having a very strong financial focus is the only way that we can survive long term – we are going to have the best possible strategic returns for the investor, meaning BBVA. We have restricted ourselves to be a much more attractive investor for the entrepreneurs and for the other investors.
We have already seen it is making a difference in the types of deals we have access to, the level of engagement we can get with other investors. I think we have done really well, and I am usually pretty critical of ourselves. I still think we suffer from some adverse selection where there are some investors out there, as well as entrepreneurs, that are reluctant to take corporate investment money.
That is why we think this is a better structure for us. For BBVA, the main rationale for trying to get closer to the ecosystem through investments is that they just want to have high-level exposure. It is putting things on their radar, helping executives in the organisation better understand what is coming around the corner. It is not intended to be a glorified procurement department. We are really not looking for solutions for the bank, that they would implement and have a vendor relationship with. We are trying to get intelligence.
It is a bit of a different if we were looking for where we could provide immediate solutions to the bank. We probably would just retain the existing structure, because then we would probably be better aligned with the business objectives. Personally we felt that was a bit too short-term focused. Those types of relationships can certainly happen with any of our portfolio companies, but it is not the intention of the programme.
What is the size of the fund and the plan for investment?
A few years ago we set up a corporate fund that was a dedicated $100m. We have invested about half of that, and in the background have been working on this alternative structure. BBVA also has a US bank in its holding structure, and this requires us to follow a few more regulations that have caused some friction that I know some of my colleagues and other financial-orientated funds from banks also suffer from.
The new fund that was just announced in February is really $250m, which technically consists of the old $100m plus a new $150m. The entire team is currently in the US, but we are in the process of finalising a rest-of-the-world fund, which will most likely be in London.
What types of technologies and new business models are you seeing as an opportunity or a threat to the financial services business?
We stopped using the word “disrupt” because of some of the negative connotations. Now we are using “reinvent” or “reimagine”. Some start-ups employing new business models or using new technologies are trying to disrupt the incumbent industry and take those relationships away from the banks. We have also seen that there are some partnership opportunities where they need each other. Most start-ups do not really want to go out and get a banking licence, and they want somebody else to be managing the funds, to be the custodian of the financial relationship, and they want to provide a better experience on top or a more expanded experience.
From a technology perspective, the core thing changing our industry, first and foremost, is the internet. Most banks already have internet and mobile banking, but on the whole it is not an excellent experience. Customers are not necessarily very happy with their bank’s products.
So first, low hanging fruit – there is a lot to fix in that, just building better functionality and usability of those basic products. When you get deeper, things like machine learning, big data and data analytics in particular are fundamentally changing how we need to be doing underwriting. It is something the banks have had access to and are just starting to deploy. Some start-ups are moving much faster. Customer acquisition is also becoming a science.
There are new business models, such as marketplaces – the biggest ones involve some disintermediation of banks, and we have invested in two of them, Prosper and Earnest, a very different kind of customer acquisition – 100% online for these guys, or remote channels versus the incumbent industry, which is still primarily acquiring customers through the branch networks. And underwriting processes are often multiple factors, vaster than you see in incumbent industry practice.
What about technology like blockchain?
Blockchain is still in its infancy, and there are similar technologies. The industry is starting to explore it. There are lots of innovation teams working on it, but I have not real deployment. Some of the challenges for banks and blockchain is that banking organisations are still worried about the regulators and how blockchain is being deployed, to the extent that it puts the bank at risk.
Give us some insight into the people at Propel Ventures.
Propel is truly a partnership like a marriage. There are three partners. I was the original partner that started BBVA Ventures. In about my second year I brought in an old colleague, Tom Whittaker, and he and I worked together to build the practice. He was most recently at Hartford Ventures, restarting that venture programme over at Hartford. We most recently brought in a guy with a different profile, Ryan Gilbert, who is the third general partner. He is more of an entrepreneur. He is helping us to understand and help our customers much better.
Because of the LP-GP relationship, we are able to attract a different quality of talent, because we have a carried interest programme [a share of investment profit] we are able to incentivise people long-term. Whereas before, in a salary and bonus perspective, while it was good I think the entrepreneurial types are not necessarily going to be satisfied with that kind of structure.
The old structure, while we had long-term corporate incentives, they were not something like the tenure partnership that we have just put together for the fund. No one expects to get rich quick here. When you start modelling this stuff, carried interest really does not come for many, many years. But it is the chance for life-changing success if you can get it right.
How do you work with people in BBVA’s core business in regard to governance, validating investments and then connecting the investment portfolio with the business unit?
It took some years to build trust within the BBVA organisation. Thankfully we have had some very, very forward-thinking executives at BBVA to enable this to happen. It goes all the way to the top of the organisation. The chairman is probably one of the most visionary guys in banking, who has been talking about how the financial services industry needs to change. It needs to become more of a technology or a software business and less of a bank. It is especially his drive, along with the president, and now the head of something called new digital business, Teppo Paavola, who are driving us to make this as an independent entity.
So what used to be an investment committee, where we would have regular meetings to talk about what is going on in the industry, insights that we are bringing out, as well as approve those investments, they are no longer approving any investments. Now they act like any other limited partner advisory board. Because of the LP-GP relationship, and we have skin in the game, they realise we are incentivised to make the right decisions and to be good fiduciaries for the money, which is primarily their money.
The new digital business group is responsible for the innovation in digital for the bank. They are responsible for building new businesses, using brand new technologies, using brand new business models, starting from the ground up. There is an open platform group in there, a digital M&A team. So the venture practice sits within those, and our role in there is to help them strategically, with intelligence, with potential partnerships, with potential leads. So that is their primary interface.
Building new technology and new business models is creating what I describe as innovative new value chains by stringing together different technologies and different start-ups. Give us some insights into the key challenges in doing that?
A lot of it comes down to people, meaning that working with start-ups, small entities, is a fragile business. Often there just is not motivation to be work with a start-up because frankly in most cases it is not meaningful for large entities, for the corporations, just because they have quarterly goals or they have revenue numbers they have to meet, and often a start-up just cannot help them in the short term to meet that quarterly goal.
You need someone who is willing to take some of those resources away from the immediate opportunity and think a little bit longer term. Sometimes that just takes either an executive push or a personal relationship to try to get something started. That is the hard part, so it really does come down to people and motivation, how you set those up in the organisation.
We also have this larger ecosystem the bank has been working on. They have been trying to build that out so that they have lots of access. BBVA also has something called the open talent contest, in which they are trying to engage globally with start-ups. Now it is just focused on financial services start-ups, and there is a cash prize. Not only that but there is also something that the entrepreneurs value, which is a deeper engagement with BBVA, with the executives at BBVA, trying to learn from them, and maybe there is a potential vendor relationship also.
That is part of it. Even that open platform that I was mentioning as part of the new digital business group is something where they are trying to build interfaces so that others can be building on BBVA, and that is just a recognition that 5BBVA cannot necessarily build everything themselves, and instead they want innovation to be built on top of their core systems.
How do you measure your financial and strategic performance?
The financial part is easy. We want to be a fund that not only the bank will invest in, but that would be worthy of external LPs. We may never have external LPs, we may only have BBVA, but we think that only by exercising the rigour of a successful financial fund can we survive.
From a strategic perspective, we have tried many things, not just at BBVA but even at Visa, where we have become very technical about measuring strategic value, breaking it down into many categories, looking at the top line or bottom line, or brand, or even risk. At Visa we looked at risk, or even innovation value. We used to measure these things on a very narrow basis. And there was a system to track quarterly – how are we doing against expectations? We found that while that was interesting, our executives at Visa did not appreciate it. I think what they really came back to was: “What have these companies done for us?”
Often it is not necessarily the business units but the executives themselves: How has it enabled them to better manage the business? Because of new insights or understanding the direction of the industry. If there have been key relationships enabled because of a stronger tie to start-ups, then that is the vendor relationship.
When we were using hard metrics, people were starting to question the metrics. People valued components differently from us. I think they were looking for better underlying stories.
Give us a couple of examples of recent investments you have made.
Propel’s practice has dramatically changed compared with BBVA Ventures. In the past we were participating in rounds alongside traditional venture funds, primarily in the D+ rounds. It was easier to make these investments because traditional VCs were willing to allow our corporate to get in without taking the ownership position away from them. We did not find we were getting enough value from a minority participation. We were not learning enough, we were not in enough of a driver’s seat to help the companies. So now we are taking much larger stakes – 5% to 20%. We are still participating alongside traditional VCs but enter the investment phases much earlier. For us there is a technicality here that some of those banking regulations made it more challenging to invest at the early stage because there were ownership restrictions. The new fund does not have those restrictions.
The first three investments – we have only announced one – are speed investments. The very first, the one we have announced, was Drive Motors – full stack e-commerce for new care sales. They are not working against the dealership, so traditional manufacturers are working with them. It is just that the incumbent dealership industry has not got rid of their branch networks because they have not been able to build out the technology to do car sales online. A car is probably the second-largest transaction you will have in your life, outside the house, and there are all sorts of other financial services-related things there, like insurance, that we think is a relevant e-commerce play for us.
Do you lead the round?
We do not have to. The three investments we have made so far are not part of our core business. We definitely want to continue to invest with syndicates, so what we find is a lot of financial services start-ups or technology companies are focusing on selling in for the financial services industry. They appreciate having a firm with that expertise, so will complement a traditional fund, a more generalist fund, by bringing in particular relationships or expertise from our personal operating experience that is helpful for the syndicate.
What do you do when you are not venturing?
All my free time is devoted to trying to spend as much time as I can with my wife and my kids.