Australia-based venture capital firm Reinventure is attempting to apply the “most functional” corporate venturing model to its relationship with its sponsor, financial services firm Westpac, according to co-founders Simon Cant and Danny Gilligan.
Reinventure was founded in late 2013 using a model in which it works with a single corporate limited partner with a view to investing independently in startups operating in adjacent or potentially disruptive sectors, and it found a suitable backer in Westpac.
Gilligan said: “Simon and I have both worked in industries, both with venture capital and corporates, around innovation and navigating disruption, and also with startups.
“We have basically seen every kind of sin a corporate VC has committed, and we felt slightly frustrated that corporate VC was not more functional. We felt there was a very big opportunity, particularly for markets outside the US, for corporate VC to take more of a leadership position in developing new business models in those markets. So we sat down and designed what we thought would be the most functional corporate venture mode, structure and strategy based on all that experience, and then we proposed that model to a handful of companies, one of which was Westpac.
“They very fortunately had a visionary CEO who got the proposition we were talking about, which was quite a challenging proposition to pitch to him at the time, back in 2013 before fintech was really a word, to say: ‘You are going to be disrupted and all your natural instincts for how you want to respond to that will not work. And as part of a portfolio of responses to disruption you should have an arm’s-length venture capital fund that invests in minority stakes in the companies trying to disrupt you – and you should actively help those companies.’ ”
Reinventure was structured as an independent firm because, as Gilligan and Cant explained, corporates often find it difficult to bring themselves to fund and encourage technologies that would disrupt their core business, and an independent fund removes that obstacle. Westpac provided Reinventure with an initial A$50m ($38m) before the firm closed a A$50m second fund last August that Gilligan and Cant said was 99% funded by the bank.
In both cases, a specific amount was required to place Westpac’s venturing money firmly in the patient capital bracket, as opposed to the yield capital that banks generally deal in, allowing it to be allocated without the need for direct returns, and without the risk that investments could be affected by unforeseen difficulties for its parent. For an example of how this can be a factor, look to Australia-based financial services firm AMP, which shuttered its CVC vehicle AMP New Ventures in January following a strategic review.
Cant said: “It also meant that, by being established as an entirely independent fund, we could pursue things that were well outside Westpac’s current thinking about what was and was not strategic. There are a whole lot of things about the fund’s structure that were specifically designed for us to invest in what would either be disruptive to banking or to adjacencies and therefore may prove to be useful options to the bank in a five to 10-year timeframe.”
The adjacencies in question include data, which Cant and Gilligan pointed out had many of the same properties as money, and real estate technology.
“We have sort of broken up the banking industry into the three layers,” Cant said. “There are those things that sit on the edge of banking, or the customer interface as it were. So there are a whole bunch of platforms and banking is becoming embedded in those platforms. We call that ‘banking on the edge’ or ‘embedded banking’. We have made a bunch of investments in that layer.
“The next layer is the things you might think of as more classic fintech, so lending and payments and so on, and then there is a whole bunch of layers that sit within the stack that are not necessarily unique to banking, although banking is probably one of the major industries that dominate, for example data. There are few industries that would have the kind of rich data that banking has.
“But there are other layers within that stack as well, such as security, the payments communications network – the sort of network bitcoin is looking to disrupt – so we make investments in all three of those layers.”
Fintech has so far been seen as a technology restricted to two or three major centres, particularly in Western Europe, but Reinventure believes Australia also has the potential to be a player, not least because of the position of banks like Westpac, which were not only better positioned than US and European banks to recover from the 2008 crash, but also have access to the fifth-largest retirement savings pool in the world due to Australia’s mandatory superannuation scheme.
Gilligan said: “The VC industry in Australia has gone through a rebirth in the past few years, after a very long drought in terms of active VC funds. I think there has been more VC capital raised in the past 18 months than in the five years before. Almost A$2bn of funds have been raised or announced here in the past three years or so.
“Marketplaces are something Australia seems to do particularly well. Agricultural technology and some biotech also have strong characteristics domestically. We believe, and have invested heavily, in helping create support for a vibrant fintech ecosystem because we think Australia’s financial services sector is one of the most innovative, profitable and large-scale in the world.”