October 18, 2017

Countering West Coast Pull, by Helping Finance Start-Ups Sell in New York

The term “fintech” covers a group of start-ups, often funded by venture capital investors, that aim to apply new technology in areas like online lending, investing and payments. These start-ups have surged in popularity among investors as banks have had to focus on complying with regulations and rebuilding capital.

The FinTech Innovation Lab is a so-called accelerator that annually gives a half-dozen start-ups the chance to interact with top financial firms, hone their products and learn how they can fit into what Accenture, a management consultant, estimated was a $270 billion technology budget for banks worldwide.

Tim Estes, the president of Digital Reasoning in Nashville, which uses artificial intelligence to spot compliance and reputational risks for banks in routine employee emails, said that going through the lab program in 2012 was “transformative for the company, opening up doors across Wall Street as advertised.”

As Digital Reasoning won business from Wall Street, it opened a New York office near Union Square, which now has about 30 employees and is the firm’s second-largest office. Goldman Sachs and Credit Suisse Group have become investors.

Mr. Estes said Goldman was an early customer, two years after the investment bank’s chief executive was attacked in televised congressional hearings over a subprime debt sale that one Goldman staff member had described in an email as a bad deal. As firms like Goldman realized other such “time bombs” might be in their email files, “everyone wanted a better bomb detector,” Mr. Estes said.

Another start-up that won business through the lab, in 2012, was True Office, which turns compliance training into a game experience for employees. Adam Sodowick, the chief executive of True Office, had first met Maria Gotsch, a lab co-founder, at a dinner event at a Flatiron district loft. Morgan Stanley signed as a client and invested in True Office, which eventually moved its headquarters from Boston to New York and was acquired in 2014 by the New York Stock Exchange. The exchange resold it this year.

The best-known firm to go through the program, in 2015, was the blockchain start-up Digital Asset, shortly after it recruited Blythe Masters, a former JPMorgan Chase derivatives pioneer, as its chief executive. Accenture soon invested in the company, which aims to improve Wall Street trade processing.

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The New York lab is one of hundreds of incubators and accelerators that have sprung up throughout the country to help start-ups, such as Y Combinator in Mountain View, Calif; Techstars in Boulder, Colo.; and Plug and Play Tech Center in Sunnyvale, Calif. Though many programs require start-ups to give them an equity stake of 5 percent or more, the New York lab gets only 0.5 percent.

The lab began in 2010 as a way to bolster the New York City economy after the 2008 financial crisis. It is co-sponsored by Accenture and the Partnership Fund for New York City, an arm of the nonprofit Partnership for New York City — a business-backed civic group formed in 1979 by David Rockefeller.

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Nicky Goulimis gave a presentation about her start-up company, Nova Credit, during Demo Day. Credit Harrison Hill/The New York Times

The lab is designed for companies that want to become partners with big financial institutions, rather than compete with them. One goal, said Mr. Robinson, an investor at RRE Ventures since 1994, is to “expose the big banks and insurers to early-stage companies doing interesting things in this area.”

Jean Donnelly, the executive director of the Boston accelerator FinTech Sandbox, said, “New York has come up pretty quickly as No. 2” behind Silicon Valley in fintech venture investments.

Accenture says data from CB Insights indicates that Silicon Valley’s lead in fintech debt and equity financing has narrowed. In 2012, the gap was 4.5 to 1, as valley fintechs raised $1 billion against $225 million for New York fintechs. In 2016, the gap was just 1.1 to 1, with $2.65 billion for Silicon Valley and $2.41 billion for New York.

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Some West Coast venture investors acknowledged the city’s progress. The gap between Silicon Valley and New York has narrowed, said Pat Grady, a partner who focuses on fintech at Sequoia Capital in Menlo Park, Calif.

But he added: “If you want to build the next Apple or Airbnb, you come to Silicon Valley. The unmatched talent, risk-taking culture and relentless optimism mean that you have a better chance of outsized success here than anywhere else in the world.”

New York can be fertile ground for “business to business” start-ups selling to banks, Mr. Grady said. But some of the largest United States fintechs, like Social Finance and Credit Karma, cater directly to consumers and have potentially larger markets, he said.

So how does the FinTech Innovation Lab work?

Every year, the staff and a sponsor committee choose 20 to 25 start-ups from more than 100 applicants to meet with about 35 banks and other sponsoring institutions. The sponsors, in turn, collectively choose six to eight winners for the three-month program.

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Banks that once had to be “browbeaten” to participate in the lab are now waiting in line to check out the start-ups, said Matt Harris, a partner in Bain Capital Ventures. Lately, out-of-town banks like KeyBank in Cleveland and U.S. Bank in Minneapolis have joined.

Companies selected to participate this year included Cutting Edge, Nova Credit and BehavioSec. Cutting Edge, a cybersecurity firm, helps protect customers’ locations and identities on the internet. Nova Credit processes and provides credit data from foreign institutions on individuals so banks can lend more readily to immigrants. BehavioSec helps confirm customer identities by analyzing how they type, click and swipe on their devices.

The lab featured 19 events over three months, including meetings with Mr. Kravis and James Gorman, the chief executive of Morgan Stanley. Mr. Kravis stressed the importance of company culture, and Mr. Gorman fielded questions about Wall Street’s use of artificial intelligence and how investment banks do business with start-ups. There was also a practice pitch session at the office of the private equity firm Warburg Pincus.

This year’s lab culminated with a Demo Day on June 22 at a packed 215-seat auditorium at Bank of America’s New York office. Each entrepreneur was introduced by a Wall Street mentor and then gave a brief pitch for his business.

Mr. Robinson and other venture investors strolled a hall with exhibit tables for each start-up. David Reilly, a senior technology executive at Bank of America, said the program was useful because big banks “can be exceptionally difficult to sell to.”

Still, none of the three New York fintechs that raised the most financing in 2016 were alumni of the FinTech Innovation Lab, according to the Accenture data.

In one of last year’s largest New York financings, Oscar Health Insurance, the lone New York fintech unicorn on the CB Insights list, raised $400 million. Oscar was co-founded by Joshua Kushner, the younger brother of President Trump’s son-in-law, Jared Kushner, and backed by the younger Mr. Kushner’s Thrive Capital.

Other New York fintechs that raised the most money in 2016 included the online student lender CommonBond, which raised $612.5 million, and Payoneer, a global payments platform, which raised $180 million.

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Article source: https://www.nytimes.com/2017/08/06/business/economy/fintech-startups-financial-services.html?partner=rss&emc=rss

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