Russ Kliman, global head of SEI Ventures, the corporate venture capital (CVC) arm of US-based financial services firm SEI Investments Company, has expanded from a focus on seed deals to later rounds, he told Global Corporate Venturing.
SEI Ventures was established in 2019 to disrupt the financial services industry and typically invests across series A and B rounds, with a ticket size ranging between $1m and $10m.
The unit takes minority stakes in companies operating in areas like wealth management, capital markets, insurance, lending and credit, banking and the blockchain, looking at technologies such as artificial intelligence, cloud services, cybersecurity and virtual and augmented reality.
For the better part of SEI Ventures’ first year, Kliman was running it as a one-man operation, before bringing in Jennifer Ciotti – who had already been at SEI since 2013 – as programme manager and jointly forming a strategy.
Kliman said: “Early on, we were maybe leaning towards seed and series A. As we started to meet more companies and understood where they are within their maturity model, I think what we recognised is that given the maturity of an SEI and the maturity of the clients for which we serve, seed level was probably not the best fit from a just a maturity model of the technology.”
One of the unit’s early investments was in an early 2020 seed round of undisclosed size for ForwardLane, the developer of an artificial intelligence-powered software platform providing personalised intelligence and insights for wealth managers, asset managers and commercial banks.
Regarding the tension between competing mandates to generate returns and bring strategic value that any CVC has to grapple with, Kliman said: “If I was going to look at the spectrum, I would say we are kind of smack dab in the middle.
“As a strategic investor we seek a balance, we want to ensure the financials are rational and you’re not going to drive off the cliff six months after we invest and we are also not singularly focused on the 10-times return.”
“We want to make sure you have sound financials that can answer key questions: can you continue to reinvest in the business? Can you continue to attract and retain strong, diverse talent? Can you continue to innovate? Can you deal with unexpected events like covid-19? And do you have a path to profitability that is realistic and not the proverbial hockey stick?”
The financial services sector is one of the most highly regulated in the economy, and SEI Venture’s risk appetite is on the high end.
“SEI’s DNA has always been very innovative and comfortable with risk,” Kliman said. “We spend on average 8% to 10% of revenue on research and development. When you think about traditional financial services, that type of focus on innovation and comfort with experiments and risk is quite unusual.”
SEI Ventures’ approach to technology risk places prospective investments into three categories, or ‘horizons’.
Horizon 1 prospects are the most investment-ready companies, which have technology ready to implement within 18 months. Consequently, they also carry the highest standard and need to have plans regarding business continuity, disaster recovery, multi-tenancy, multi-currency or multi-jurisdictional issues, and need to be able to deal with SOC 2 compliance and cybersecurity.
Horizon 2 companies are between 18 and 36 months out in terms of implementation. While they may not have all the elements required of a Horizon 1 company, they do have the foundational blocks to get them in place in time.
Horizon 3 companies are further out, but do not necessarily need those foundational blocks just yet because the investments will not be implemented imminently.
Kliman said: “We view [capital allocation] even across [the three horizons] because if it is a Horizon 3, they tend to be more early stage and tend to have smaller capital raises, whereas a Horizon 1 will tend to be more mature and likely leans towards more later stage, so the cheque may be a little bit bigger because of the strategic value we seek.
“You probably see the ticket size varies but you will see the allocation across the horizons. You may have a higher number of smaller bets in Horizon 3 and lesser number of bets at Horizon 1 but bigger ticket sizes.”
Kliman identified a focus on environmental, social and governance (ESG), artificial intelligence, cryptocurrency and digital assets as some important macrotrends that have emerged in the financial technology space.
Those issues force investors like SEI Ventures to explore and figure out ways to capitalise on them for their clients, who are increasingly reacting to consumers’ hyperawareness of their practices, particularly in the case of crypto and blockchain-based products.
The challenge then becomes how to help clients integrate crypto assets into their business and operate in that space, and how to sift through prospective target companies which may be doing similar things, identifying the ones doing something different that can bring value on a strategic basis.
