An Investor's Opinion on Collaboration and Co-Creation

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Interview with João Freire de Andrade, Head of Venture Capital at BiG - Banco de Investimento Global who we met at the WebSummit 2016 in Lisbon last week. João talked to us about the Portuguese startups scene, investing in startups and how this will change banks.


What can you tell us about the startup scene in Lisbon, especially regarding fintech?

While we are based in Lisbon, we are often flying to London and Berlin and are active there to get more impressions of startups. So, many things take place outside of Lisbon for us and we are looking to invest there, too.

How would you compare, say, London and Lisbon in this regard?

Regarding fintech, in London as the European finance center, huge amounts of money are spent on the transformation of the banking system. It’s a hype and valuations are high - it is much more expensive to set up a company there, beginning with the rents, software developers, business developers, everything. But you have the other side as well: the market is much bigger, there are a lot more decision makers able to ship your product to the whole world immediately.

There are, right now, many startups in Lisbon that know they will need a certain connection to the London scene, but set up their development team in Portugal. For example, the equity crowdfunding service Seedrs was incorporated in the UK but they have their development team operating from Lisbon - which has enabled them to realize a much lower burn rate than London-exclusive startups.

Will operating in multiple locations be the future for startups?

Imagine the fintech scene in Germany: Frankfurt is the financial capital but Berlin is the most active startup city. Financial institutions set up small offices to observe technology in Berlin and travel from A to B by train in a couple of hours. This is the way it is with Lisbon and London: in Lisbon it is a lot cheaper in many regards, you can have a different, cheaper lifestyle and by taking a two-hours flight you are in London. But in Germany you don’t have everything concentrated in one spot while Lisbon, startup-wise, is very focussed on Lisbon. Therefore Lisbon-based startups will to some extent be bound to connect to other European cities for now.

As a VC, what’s your view on the cooperation between banks and fintechs? Do you think that many banks just invest in fintechs to make money from that investment while they are not able to innovate as fast themselves?

We need to really differentiate here. There are several options for a bank. The most obvious one is to collaborate. Instead of doing everything regarding IT and development yourself, why not implement services of a fintech? This fintech might be shipping their cutting edge technology to banks in all of the world and ensure the best possible quality by focussing on maintaining and further developing it. Banks could, for example, implement a fintech’s sophisticated biometric authentication in their mobile banking to offer the customers a better experience. This will reduce costs for banks compared to them trying to build these technologies themselves - probably in a lower quality.

I also see things such as co-creation. This is happening in Germany a lot, for example with Wirecard or SolarisBank – all those white-label banks that enable startups to build services on top of their infrastructure while handling the „boring“ stuff. Thus, the fintechs can take care of what they do best: creating a great customer experience.

Investment has another two sides to it. There are banks investing in fintechs who want to own the larger share of the company to be able to control what’s happening. That’s not our style, we prefer to have a smaller share and, some years later, sell it. We believe this offers much more value to the fintechs as it enables them to build a great product and sell it to a lot of customers or banks potentially.

Imagine the following: a bank invests in a startup and buys 51% of the shares. It can forbid the company to sell their product to competing banks. This would be an advantage for the investing bank but would prohibit the fintech from growing effectively. On the other hand, a bank that invests so much in your company could potentially open up any market in the world for you product. It basically runs down to weighing the pros and cons.

Where is the fintech industry heading?

What are banks going to do? Let’s think about this. When you have very capable founders with many years of experience in the industry, who decide to get out of a company and do their own startup. These people can raise better rounds and invest that in better talents and concentrate on focussing to solve one specific problem better than any IT department of any bank. Banks cannot compete with it. They will be collaborating and investing to get that piece of the pie.

What will the bank of the future look like, then?

For me, the bank of the future will bundle services. There will be different layers of a bank. Start with the banking infrastructure and then add, for example, CurrencyFair for foreign exchange, Cookies for transfers and so on. They will gather all these services, some in white label, some branded, it will all be a matter of marketing and a strong brand spanning over all of it.

You invest not only in fintechs but also in insurtechs and companies from related fields. Which industry has the most potential for disruption.

That’s hard to say. Both fintech and insurtech have the potential to be disrupted. With insurance the pace is a bit slower. Banks were always obliged to keep developing, as it’s another kind of business. Insurances have just started using technology while banks have been using technology for quite some time. Maybe (!) the acceleration of innovation speed will be higher once it has really started in insurtech.

Will blockchain play a bigger role in insurtech than in fintech? For example using Ethereum for smart contracts in insurance as opposed to cryptocurrencies in banking?

I don’t think that, for example, Bitcoin is important for banking right now. Blockchain has super useful use cases for other things. Right now blockchain is more useful to improve some processes like foreign exchange which will work much faster then. For insurance, smart contracts could be really important but you will arguably be running into legal challenges slowing down the process. Until blockchain-based solutions reach the consumers in banking and insurance, it will probably change a lot more internal processes like stock exchange and bank-to-bank transactions. I see a lot more potential there right now.