Fintech is without doubt one of the most dynamic verticals in the startup space.
If money is just data, then smart founders will find ways to move it around more efficiently than when it was coins, notes and cheques.
And so it has proved.
So what do the banks think?
Well, some of them may be worried. But others are responding by engaging directly with the disruptors – launching incubators, providing office space, investing.
One of them is Germany’s Commerzbank.
It launched its own incubator in March 2014 to make strategic investments in fintech startups at the seed stage.
Seven months later it switched on CommerzVentures as a wholly-owned venture capital entity with a focus on fintech.
The office is in Frankfurt, but the division has a remit to find investable startups all over the world.
CommerzVentures’ co-managing director is Stefan Tirtey, who spent many years at Doughty Hanson Technology Ventures, where he was responsible for investments in internet and mobile start-ups.
That led to directorships at companies from Soundcloud to Plazes to Adaptive Mobile Security.
Tirtey talked to Hot Topics…
What sort of companies is CommerzVentures looking to invest in?
We have a remit to invest in fintech startups all over the world, but initially in the US and Europe. We’re looking at B rounds, but we’re happy to lead and do A rounds as well.
Is there lots of talent around? How many meetings have you had?
I should say the number of companies you meet is not a measure of quality. But unless you meet all companies you won’t meet the right ones.
But probably 200 to 250. A tenth of them we’ve looked at more closely or done due diligence.
The deal flow is good. So far, it mostly originates from London and Germany. But fintech startups are everywhere. In time we expect to see more companies from the Benelux countries, France, the Nordics, Singapore and Israel.
Do fintech startups need to come from established financial centres? Can a Bulgarian have a great fintech idea?
He can. But I guess the reason why Bulgaria may not be the perfect country to launch a fintech company is not specific to fintech. You need access to money and talent – and that applies to any tech startup sector.
But otherwise, do people need a specific finance background to succeed? No they don’t. However, you can’t ignore the existing system, you have to work with it. It’s a classic case of ‘co-opetition’, where you compete with the classical banks but have to be close to them too in some cases.
Take short term lenders. In one sense they are competing with banks for SMB lending, but they also need the backs to finance their loan books.
Most entrepreneurs I’ve met are quite aware of that. It’s not a zero sum game, it’s incremental to what the banks are doing. In many cases, it’s increasing the size of the pie not necessarily taking market share away.
Is there a lot of competition among investors and funds for the best fintech startups?
There’s been a lot of talk about there not being enough money around in Europe – and that companies have to look to the US for growth financing.
I’ve always found that for the best companies, there has always been competition.
Look at Klarna and Wonga: investors were all over them. They had plenty of offers from European funds. So for the best companies, absolutely the competition is high.
How spooked are the banks by the disruption and the unbundling of their services?
You’d be surprised at degree of acceptance by banks and their willingness to cooperate with startups. It’s not ‘us against them’ at all.
Take the example of remittances. WorldRemit just raised $100m and Transferwise got a similar sum. These people operate in a domain banks are moving away from for regulatory reasons – because of money laundering and such. It’s a gap in the market that fintech startups are exploiting.
How big a barrier is regulation to startups?
We would not invest unless we understand that a company is operating inside the law. It’s a must have. And that realisation is shared by the entrepreneurs and their early stage investors.
What we usually see is a young startup with early revenues and a very experienced compliance officer who has long history in the industry. They’ll have launch documentation, including licences, that’s a lot more sophisticated that in most startups.
Does the need for this compliance prevent entrepreneurs from entering fintech as opposed to other verticals?
Well, regulation is a good thing. It protects businesses and consumers, though equally having no regulation can lead to great new ideas. We have to choose as society where we are on that dial
It’s not static. Some markets are moving towards more regulation, others are more startup friendly. That has an impact on money flows too.
Are you seeing a lot of activity in bitcoin?
Yes. Lots of companies are very early stage. Very raw, and with no market proof whatsoever. Some very smart ideas though.
In the other bucket are more mature companies trying to solve the basic functions of bitcoin – wallets and exchanges and so on.
When can we expect to see your first investment?
As soon as possible and as late as necessary. We’re not in the business of doing fast deals; we’re in the business of doing good deals. And we’re prepared to be patient.