Transactional to Transformational. Christer Holloman

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СКАЧАТЬ gaming techniques to encourage savings, debt reduction and financial education. FreeMonee developed a consumer gift network for retailers to offer gifts to their consumers through their banks. SumUp is a global technology company and the leading mobile point‐of‐sale (mPOS) company in Europe. Thanks to SumUp's technology, small merchants around the world can accept card payments anywhere using a mobile device.

      During these operations, BBVA realized that there was another problem. Due to its corporate and legal implications, the bank's decision‐making process was very complex. There were too many layers of decision‐making processes, which took too long when agility was necessary to be competitive in the ecosystem. That was when BBVA Ventures, the first specific vehicle in the United States, began to take shape. It was set up in Silicon Valley so it could invest in startups at a much faster pace and this led to the creation of Propel.

BBVA Ventures was originally founded in 2012 to provide funding and expertise to promising technology companies disrupting the financial services industry. Until 2016, the group worked with entrepreneurs and co‐investors in the US, Mexico and Europe, becoming a long‐term partner in their success. However, captive bank funds have less freedom, less speed, and not a very good perception from early‐stage companies.

      BBVA was seeing some adverse response to BBVA Ventures, based on the stereotype that some venture capitalists hold against corporate investors. Because they are often gatekeepers to opportunities, BBVA did not always have access to information until potential opportunities were already gone. Startups were wary of corporate venture funds, concerned about conflicts of interest and long‐term commitment.

      In addition, the US Bank Holding Company Act limits the manner in which banks can invest, stating in some instances that banks can hold no more than five percent of certain ventures. For an early‐stage company, that may not amount to much at all, so the bank was sometimes limited to later‐stage companies or forced to remove voting rights and the like to remain in compliance with bank regulations. The net effect of being able to invest smaller amounts limited BBVA Ventures role as investor to be more of a follower than a lead investor.

      This friction was avoided by the establishment of Propel as an SBIC (Small Business Investment Company).

Solution

If BBVA wanted to become an investor with credibility and prestige with access to the top companies, they came to the conclusion it was necessary to do so from a different position than as a balance sheet investor. BBVA made the decision to establish Propel as an independent entity to replace BBVA Ventures for two key reasons. The first reason was directly tied to the mindset of some startups regarding working with corporate venture funds. BBVA came to understand that some startups believed that they could get better support from the traditional venture capital structure than working with a large banking entity. The traditional venture capital model aligns interests with the startup founders given that the General Partners managing the fund put personal capital at risk but also benefit from the success of the investment performance. This financial alignment is typically missing in a corporate venture capital program as it would be unusual to ask an employee to contribute their personal funds to their work projects.

      Secondly, BBVA Ventures had been structured in the highly regulated US banking market so that it was limited to investing only up to five percent in any given financing round, which limited the range of possible investment opportunities.

      The new US fund was a Small Business Investment Company (SBIC), an arrangement to help channel investment dollars to US small businesses. Operating as an SBIC gave BBVA flexibility in stake size, which the bank did not have as a bank‐regulated corporate fund. BBVA became a limited partner, contributing all capital to the fund and accepting delegated management of it. It was a rather unique model, as few corporate venture programs had ever taken that step before.

      In an increasingly competitive fintech venture capital environment, BBVA believed that its increased capital, combined with the traditional venture capital model of Propel, would enable access to invest in the best fintech startups and better support BBVA's vision of using technology to change financial services for the benefit of the customer.

      The shift to Propel as an independent entity made it a more attractive investor for the companies BBVA was interested in supporting and also generated more strategic value from this fund.

      Losing control of approved investments posed a risk to the bank. The new entity would have substantial autonomy, and it took a lot of trust and alignment in the legal structure and governance to make it possible.

      Two important conditions were established as control measures for Propel:

       The investment scope was made clear in that the kind of companies in which Propel was going to invest in were companies that were strategically interesting for BBVA, such as those at the intersection of finance and technology. Based on those investment perimeters, Propel was able to freely construct a portfolio of investments and manage the business as any other venture fund.

       A quarterly Limited Partner Advisory Council was established to review what investments had been made in the last three months, how the portfolio was doing, updates on the fintech market in general, and other strategic insights brought from the Propel team.

Delivery

       ‘Whilst BBVA prefer to invest through Propel, BBVA still retain the option to invest from its balance sheet, e.g. if it is a very large strategic opportunity where they want to take a much bigger ownership stake or doesn't fit the profile of Propel e.g. post Series A.’

      Jay Reinemann, General Partner, Propel

      In February 2016, Propel was officially launched as a fintech Venture Capital firm with a Small Business Investment Company license. The news was announced by BBVA, which indicated that it had increased its fintech fund to $250 million from $100 million and partnered with Propel Venture Partners to manage the investment independently from its offices in San Francisco. This capital would be invested in two funds, one in the US and the other globally to make investments mainly in Europe and Latin America.

      In order to manage this fund, a small team led by Jay Reinemann was spun out of BBVA in San Francisco. The founding team combined executives from BBVA as well as from the startup ecosystem and venture capital and investment banking fields. It was important to have a team that understood the interests of BBVA, had strong fintech knowledge and networks and could build a successful venture fund business.

The team was given authority to form the business to be competitive with the many large established venture fund competitors in Silicon Valley. This traditional venture structure enables the financial alignment to attract great investors to the Propel team and win investments into successful startups.

      Propel's focus is on early stage (seed and series A) investment opportunities at the intersection of technology and finance. Areas of focus included payments, lending, insurance, wealth management, digital banking, personal financial management and new digital channels.

Results

      The launch of Propel in 2016 was met with a positive industry reaction, if not slight confusion about the difference between Propel and BBVA Ventures, a venture arm wholly owned by BBVA. Multiple outlets, including Bank Innovation, Business Insider, TechCrunch and others, covered the news.

      In just four years since the formation of Propel, financial performance has outperformed expectations, with four portfolio companies between the Propel portfolio and BBVA Ventures legacy portfolio that have achieved unicorn status, including two IPO and three exits. СКАЧАТЬ