Fads vs. future: Emerging technology disrupting financial services

Erin Dangler Some of the greatest solutions to challenges in the FinTech industry have come from the minds of visionaries. However, the road from idea to successful business is a rocky one. And with roughly 50% of startups failing in the first five years, a lot of great solutions never reached their full potential and never make it to the customers they could help the most. But what if institutions didn't have to rely on entrepreneurs overcoming the odds to get the answers they were looking for? What if there was another, more successful way to create groundbreaking, solutions focused startups?

James Clayton The way this business model operates, it's a bit backwards from your standard startup idea where typically somebody cooks up an idea, they go get funding, it's their baby, and they run it through to fruition. Right? We're flipping that on its head, where we're saying, we're coming up with an idea, we're getting the funding, we're doing a lot of the legwork upfront.

Erin Dangler And this method of business building doesn't come without its advantages.

Ash Bhatia We try to create startups that are born with a silver spoon in their mouth, because they have access to market, and they have insight that a startup would not traditionally have. And they're able to punch way above their weight. So to just draw that analogy a bit more, what we're trying to create are heavyweight boxers that can win a hundred-meter sprint. And we believe very strongly that this is the best approach to doing that.

Erin Dangler This is Financial Futures, the podcast that charts the frontiers of fintech innovation. In this series, we'll be looking to the future to find out how fintechs and financial institutions are gearing up and developing next generation innovations to meet the challenges and needs of tomorrow's world. I'm your host, Erin Dangler. And in today's episode we are examining the future of business building and the new method organizations are adopting to create fresh startups and bring new capabilities to market. We'll find out what this inorganic model of business creation is, and we'll discover why it's proving more successful than the traditional founder-led model of startups. Plus, we'll take a look at an organization born out of this model, to find out what the process looks like from start to finish. And joining us today in our exploration of the future of business building, our CEO of Shipyard Innovation, Ash Bhatia, and VP of NewCo Investments at FIS, James Clayton. But before we find out how this new system is revolutionizing the way organizations build businesses, we need to understand how institutions traditionally approached the challenge.

James ClaytonWe've seen a bit of a change in how companies are approaching bringing new capabilities to market over the past couple years. A lot of companies, a lot of large corporates of our size anyway, they stood up what are known as internal labs divisions. Teams would come up with new ideas that the business would own a hundred percent of. They would bring on the teams needed to build the technology and build this business from the ground up.

And then when the business became successful, they owned a hundred percent of that business. And off to the races they went. But we're seeing a bit of a change now in the past couple years around how that's being managed. And they're pivoting to an external innovation model or an inorganic model. And the goal is the same, but instead of doing it a hundred percent in house, they're shifting to a partner model where you are able to kind of pair the assets and the expertise of the corporate with third party business building entities that are really adept at building new businesses at speed. We've seen that partnering with external third parties can get us there a bit quicker than if we could do it on our own.

Erin Dangler What you're saying is it's a business that creates startups.

James Clayton Exactly right. So what's been recognized is that the components to build a new business are largely the same, regardless of what type of business you're building. So what has arisen out of the standard venture capital model is a new model called venture studio. And the venture studios are part venture capitalists, they're part business building enterprise. And what they do is, they bring those shared services to the table so we don't have to onboard a new lawyer, a new accountant, a new everybody just for the business in the early days, before we can actually support a full-time employee to do that. What they also bring to the table is entrepreneurial expertise. So the venture studios are pretty plugged into the startup network, so they know the right people in the industry to help found these endeavors. Then they also bring that business building know how. They can move at speed. So partnering with the venture studios who have a bit more flexibility in managing the business and it allows us to get to that point of scale a bit quicker.

Erin Dangler So let's back up a little bit. So let's say I'm a business and I want to create a new business. I come to you, a venture studio. What does the process look like from ideation all the way to [inaudible 00:05:31]?

James Clayton It really starts in one of two places, whether either the corporate like us has an internally generated idea, something that we've cooked up and we want to explore a bit further to make sure the business makes sense. Or the second way ideas come to fruition is through a joint ideation with our venture studio partners. So either way, what happens is we go through an evaluation process, which is essentially building a business case. And what happens then is we take it to our respective investment committees and say, "We've done our due diligence." Once both organizations decide to invest, we pool our funds and then go create a brand-new business. From there, we go and source a founding team. We hand them over kind of all the research we've done, our business case, here's the assets we can bring to bear, and we get them off to the races.

From there, the venture partners kind of take over day to day oversight of the business. And this is where the real value of the venture partners come in is they help these businesses grow. They're kind of their guides throughout those early days in the process. And the real idea for us long term is that over the course of two or three years, we try and scale the business. And when we get to where the business is about to scale, if the business still fits in within our strategic mission, we can then go out, buy the outstanding shares and fold it back into the mothership. If it doesn't quite fit within our strategy any longer, we can keep our shares as is and leave the company running as a private entity. Or if the business just isn't performing the way we would like it to, we can figure out does the business get shut down or sold or whatever the case may be. So a couple different options when we get to that three or four year mark.

Erin Dangler Back in 2015, the Commodities and Futures Trading Commission, which regulates commodities in the United States, they gave a guidance in the market that said they view Bitcoin as a commodity. So they gave a declaration in terms of how this asset should be viewed, treated from an accounting perspective. And when we saw that happen in 2015, we started to see institutional investors start to dip their toes a little bit in Bitcoin. I'm talking about asset managers, hedge funds, corporates, starting to hold Bitcoin on their balance sheet. But we started to see that institutional adoption. We also started to see some of what I would characterize as the emerging super app ecosystems start to offer Bitcoin on their platform. So in 2018 CashApp introduced Bitcoin buy, sell, hold in their ecosystem. And the growth of CashApp's user base started to grow pretty materially after they introduced that capability.

Erin Dangler So what are the advantages of the venture studios model? You already talked about shared services. What are some other advantages?

James Clayton When you compare the venture studio model versus the standard internal labs model, the company that's providing the resources for this business, that's a hundred percent on them. So the benefit there is they own the business outright if it's successful. But the drawback there is they are responsible for a hundred percent of the capital outlay. So what we get in this partnership build model is that we get to spread that risk around a little bit. We're not on the hook for a hundred percent of the capital right up front. But another really important part is idea validation.

So before we can move forward with building this, we not only need our own internal teams to say this is a good idea, but we need an external third party who has looked at this in depth and says, "We also believe this is a good idea." So we firmly believe that having that external validation sooner rather than later is extremely important. Because what we don't want to do is kind of work in a silo, cook up an idea that we all love internally. And next thing you know, we have a Pinto. No offense to Pinto owners out there.

Erin Dangler So we've talked about the advantages. Let's talk about what the challenges are associated with the venture studio model.

James Clayton There's really two big ones, and one is control. And what I mean by control is when you're working in a traditional organic labs model, you have a hundred percent control over how everything plays out. When you move to the venture studio model where you're operating a completely independent business, by nature, they're independent and they have autonomy to make decisions. And for us that's largely by design as well, because we like to look at it as like, "We don't want to put our thumb on the scale too much because we've tried that in the past with internal businesses." And a lot of companies who have had labs teams have seen the same thing, is that the mothership comes in and imposes its will and it just slows things down. But I say it's a challenge because us as big corporations, we don't like to relinquish control.

And you have to have faith in the process. And that's why one of the things that's really important to us that we select the right venture partners to come along with us on this journey, because we're really putting our faith in them that they are going to help operate these businesses in a way that will A, let them be successful, but B, in a manner that will make sense for our business in the long run, since we're trying to buy them back. And the second drawback I would say is when it comes time to buy these businesses back, that could be a bit costlier on the back end, than it would be if we owned it a hundred percent outright. Because as you mentioned before, we only own a portion of the business in the early days.

The research shows a higher success rate with the venture studio model, which means it's less wasted money. So the labs model where you only get success on two or three out of 10, where the venture studio model out of 10, you may get four or five to hit. So yes, you're spending a little money to buy them back, but you also have two more successful businesses than you would have otherwise.

Erin Dangler Right. What I'm hearing too is it sounds like a more holistic approach. You talk about the silo, and this may be a very simplistic metaphor, but the idea of a stool with three legs, there's more support, there's more balance, it's sturdier. So again, forgive the very simplistic metaphor.

James Clayton [inaudible 00:10:15] you're actually right though, because in a large corporation like ours, there is always a number of priorities, and some of them are competing. And there's plenty of initiatives that on the surface are good ideas, but just don't get the attention that is needed to really bring them to fruition. So partnering with the venture studios, they are dedicated at doing just this. Right? And their success hinges on making sure these businesses are successful. So it's just a matter of we get more dedicated time and resources by partnering with a third party who's dedicated to this, versus somebody else who may have other priorities internally.

Erin Dangler Right, who may be already working a job and trying to build something on the side. So how long has the venture studio team been up and running?

James Clayton We're going on a year now. So it was about this time last year we started kicking the idea around and then we got our official mandate January one of this year. So yeah, we've been in business just about a year now.

Erin Dangler Building businesses with the venture studio model offers institutions a host of benefits over creating or buying new businesses in the traditional manner. The capital risk when starting up the business is shared. The startup gets access to the expertise of two established organizations. And even though the cost of buying the business back once they've gained traction might be higher, it will already have proven its viability, making that purchase much less of a gamble. But these benefits aren't simply hypothetical. And with the venture studio's one year anniversary on the horizon, it already has a new business waiting to emerge.

James Clayton One of the projects we're working on with Ash and the team at Shipyard is a business focused on identity orchestration, and the idea is it will be launched around the end of the year. So what we're trying to do is make life easier for enterprises. We're trying to help them streamline their identity authentication and payment ecosystems, which are very fragmented right now. The capabilities all exist, but it's all in disparate places. So we're trying to make life a little bit easier by bringing it all under one roof. But with that said, I wanted to introduce Ash Bhatia on the call from Shipyard. He heads up our venture studio, and wanted to bring him in and let him talk a little bit about Shipyard's approach to venture building.

Ash Bhatia Thanks James. So if you think about us, the best way I would describe us is quite simply a venture builder. What that means is we create companies. We do that for ourselves, but the model we prefer is co-creation. And we work with large corporates, we work with government entities and we work with technology investors. To us, the fundamental belief that guides what we do is that successful companies have the same building blocks. And what we have done to live that truth is we have created components that we think are essential for company building and we bake that into our methodology, into our platforms. And what we do day to day is a set of steps that we rinse and repeat to shape setup and scale businesses. We want to make company building repeatable and we want to make it predictable and therefore consequently make success predictable. The one other point I'd make in terms of describing our approach to venture building is this idea of [inaudible 00:13:38] and drawing from the best of each of those approaches.

So what we're trying to do with venture building here is we're trying to blend what we consider to be the positives. So when we create a company, we don't necessarily avoid partnering, we just do it in a very specific way. And what we are trying to do is we are, by working with organizations like FIS, we're trying to create startups that are born with a silver spoon in their mouth, because they have access to market, and they have insight that a startup would not traditionally have. And they're able to punch away about their weight. So to just draw that analogy a bit more, what we're trying to create are heavyweight boxers that can win a hundred meter sprint. And we believe very strongly that this is the best approach to doing that.

Erin Dangler Can you talk a little bit more about what the partnership looks like in terms of task division? Do you have a chore chart?

James Clayton It depends on which stage of the process we're in. As I talk through previously around there's this evaluation stage, then there's the post-investment stage. So during the evaluation stage, it's a very collaborative effort between us and the venture partner, because we're both trying to figure out, "Does this business make sense for our respective businesses?"

From there, once we get the investment approval on both our sides, the model changes a little bit, where the venture studio team then takes over the bulk of the workload in terms of getting the business stood up and managing the day to day of those entities, where FIS takes a lesser role, more of a backseat and advisory role. So Ash, can you talk through a little bit about what the venture studios do once the investment decision has been made?

Ash Bhatia Yeah, happy to. So as a sort of opening comment there, I think this model does not work if that proactive collaboration is not there. So depending on the stage you're at, each party is taking a lead role in certain activities. So in this case, the founding team that we would put in place would be proactively working with the technology team, the marketing team, the legal and compliance team, the sales, go to market channel owners and the finance organization, in order to seek both buy-in and inputs for shaping of the venture. So even at that stage where we are taking the lead and doing the bulk of work, that collaboration is absolutely essential, because if you don't have that, you're losing one of your big advantages of venture building. We've got this pool of knowledge and information to lean on, so overarching that collaboration is critical.

Talking about individual tasks and the split of responsibilities, once we make that investment decision, there's obviously a number of work streams that kick off. And with each of those, whether it's product, tech, finance and operations, legal and compliance, [inaudible 00:16:33] reporting or any of the other elements of business building, we are looking to build on what FIS already knows about the given market or about the given product area. To just pick one example, when we plan go to market for the NewCo for the startup, we would want to talk to the channel owners at FIS that are already selling these products to that target market. So we either can dovetail on the back of what they're doing or learn from the lessons they've learned, so that we can use those unfair advantages to the benefit of the startup. So it's essential. And broadly speaking, I'd say the collaboration continues throughout the journey.

James Clayton And the last thing I'll add there is, once the business gets up and running, we'll take board seats in the business. So we will have some level of influence over the direction the business heads in, but largely we kind of leave it to the venture partners to make sure the business is humming along from a day-to-day perspective.

Erin Dangler It sounds like the organizational agility, a lot of leaders can come up with great ideas, but what it comes down to is organizations and it sounds like those organizations are partnering together and leaning on each other's strengths. So where do things stand today with the project? Where are you?

James Clayton We've gone through our initial evaluation, we've gone through the business building process, we've gone through the investment committee procedure. So both sides have signed off on the investment. From there we are in the process of standing the business up. Ash, do you want to give the overview of where we are now?

Ash Bhatia Absolutely. Talking about speed, it took us about 12 weeks to do that initial shaping and validation. At the end of that, we knew we wanted to do this, we knew how we were going to do it. And as we stand now, funding is in place, the sort of deal structuring, organizational structuring is done. The initial execs have been brought in. We are also recruiting some additional key members of the founding team. Entities being established, partnership discussions that are happening for those commercial conversations that we want to have. And we are sprinting now towards launch at the turn of the year. But there was a point made earlier about large organizations, people having day jobs, and that's not to be underestimated. Everyone has targets and an organization like us, this needs to succeed, and this is our job. So I think that makes a very, very significant difference.

Erin Dangler So what's critical right now? You're 12 weeks in, you're trying to get this product done by the end of the year. What are you needing to do?

James Clayton Right now founder selection is absolutely critical. The way this business model operates, it's a bit backwards from your standard startup idea where typically somebody cooks up an idea, they go get funding, it's their baby, and they run it through to fruition. We're flipping that on its head, where we're saying, we're coming up with an idea, we're getting the funding, we're doing a lot of the legwork up front. Now we have to go find the right person to run this business. And it's not the person that came up with the idea. So finding the right founding team that understands the industry we're trying to work in, has the drive to go take this business for the next couple years, is really important. So you don't do something like this with the B team. You have to find the right people to run the business.

Erin Dangler I just think that part is fascinating, because I'm wondering if sometimes in a normal startup it's the person that it's their baby runs with it, but sometimes you can be so attached to the baby that you can't see the forest through the trees. So finding an independent founder who can get in on this vision, that may have a different kind of obsession if you will, to get the job done. I mean you're finding the entire team too. Right? You're sourcing all the talent?

Ash Bhatia Absolutely. Everyone talks about talent and the talent war, and it is very much the truth with these particular businesses that get co-created, because a lot of work, a lot of pre-work has happened. It's taken shape. And so what you need is not just an individual with the skills and the energy, but also someone that buys into this vision that has already been formed and then you want them to behave and act like a founder. So there is an element of uniqueness in these individuals. And the sorts of people that we typically have on our venture architect panels are people that have either launched and scaled businesses in corporates, or they're individuals that have launched and scaled startups, but with a B to B to C model, because that's very different to going direct to customer.

The other thing that I'd say is going to be critical at this stage is that mutual trust. So obviously in this relationship, because we trust each other as FIS and Shipyard, but this is when rubber hits the road. There will be elements off the business that we still don't know about and those will turn into knowns. And as they turn into knowns, we're going to have to pivot and refine the business model or the proposition. And I think that sort of trust and that relationship that we have is going to be critical at this stage.

Erin Dangler The way the venture studio model works by almost reversing the organic startup chain of events, means that finding the executive leadership team can be a challenge. By effectively building the business before finding a founder, both the parent organizations and the appointed leader need to develop a strong mutual trust in order to make sure that the startup continues on the right path. But because of this unique approach and the unusual challenges it throws up, the venture studio model hasn't been widely adopted. However, some are starting to see beyond the difficulties of the method and are starting to realize the opportunities it presents.

James Clayton There's a handful of companies that are dabbling with it now, but it's a relatively new model. So the venture studio model only came to be maybe eight years ago, and you're just now starting to see some corporates gain traction with it. So I think we've seen a handful of big name brands announced their work with venture studios in the past 12 months or so. And I think we're just kind of seeing that trend accelerating. So I think over the next couple years you're going to see a big pivot in the industry to this type of model.

Ash Bhatia Yeah, from my perspective, completely agree with that, because obviously this is something we track. These are the sorts of organizations we want to be working with. The one thing I will add to what James said is, there are venture studios that are called venture studios. So you have the corporate's name and then ventures, but very often they are focused on one element of build by partner. They're not focused on startup creation in the way that we've just discussed it.

So the devil as always is in the detail. And I think there's a very, very small number right now that are fully committed to this sort of model. And that has to come from the top of the organization, because it is a certain culture, certain mindset that is required in order to do this successfully. And some of the elements we spoke about being comfortable with not having full control, being comfortable with the fact that not everything is known upfront. These are all qualities that are hard to come by in large scale corporations because they're used to having product market, but they're used to making big decisions, they're used to getting things right.

Erin Dangler:And why do you see this as the future of innovation?

James Clayton So there's a couple reasons this makes a ton of sense and part of it is de-risking the investments that we mentioned earlier. Now what that really means is we can deploy our investment capital in smarter ways. We can test more concepts with the same or less dollars via the venture studio model, because we're seeking co-investment with our partners, which means we get to test a few more ideas and see which ones really, really bubble to the top. And then when it comes time to make the more significant investment in buying the business back, it's already been proven and we have a higher level of confidence that this business will be successful when we pull it in. So those two things are only possible because of this co-investment model. And the other thing that really is important for us and we think is going to be a big benefit to our customers as well is, as we're building these businesses, what it allows us to do is bring our customers in as co-investors. And what we're trying to do is, we want our customers to come along for the ride with us, so to speak. So as we're expanding into industries that we don't necessarily have a big presence in right now, there are other players in those industries that have capabilities that are of interest to these businesses. And what we're saying to our customers is, "Hey look, come in as an early investor in this business, bring some of your capabilities to bear," which means they get to infuse their capabilities in a brand new business that's operating in the industry that they're working in, and allows them to kind of test out new ways of building businesses as well.

Ash Bhatia Just to add to what James was saying, what we are seeing our partners do that they have not done outside of this sort of model is, truly have a path to monetize internal tools they have, that sit behind their firewalls or subscale business units that they have, which no longer fit with their strategy. So this offers them a route to still do something with those investments, but not have it as a distraction for the internal team or the executive group. It allows them to take advantage of certain adjacencies to their core business that they would otherwise not take advantage of, even though they can see that this is something that the market requires. So venture building allows them to do that. It allows them to effectively design a future acquisition that they want to make. So if they're in the market trying to look for a certain capability, this approach allows them to tailor make that acquisition and bring it in. And then one of the interesting sort of play it brings in, is it allows an organization to create a proposition and sell it to their competitors, that the competitors wouldn't otherwise buy from them directly. So being able to leverage assets and investments that have been made, and monetize them and create returns from them would not have been possible, because player A would not buy from their direct competitor player B. But as a NewCo and as a company that they have an investment in, that they [inaudible 00:26:54] those sorts of restrictions or that sort of issue doesn't come up. So there's a lot that the approach creates in terms of opportunity that has not been available through traditional [inaudible 00:27:06] and partner models.

Erin Dangler Any final words on venture studio model or why people should partner with you if they're thinking about starting a new business?

James Clayton I would say to any of our customers that are listening, if you want to learn more about how the model works, we are certainly open to having those conversations. If you're interested in getting involved with investing in one of our businesses that are going to be created or have a good idea that you might want to test out through this model but don't necessarily have the capabilities to do in house, let us know. That's what we're here for. We are certainly trying to expand our horizons, but also we're customer focused as well. So we want to make sure we can help in any way we can.

Erin DanglerAsh Bhati is CEO of Shipyard Innovation and James Clayton is VP of NewCo Investments at FIS. That's it for today's show. Thanks for joining us. We'll see you next time when we'll be taking a look at the next evolution in financial technology and asking what the new generation of FinTech has in store for the industry.