Alex Manson (SC Ventures): Corporate venturing is more than CVC

0:00We acquired the conviction that the way to do this was not inside the bank and actually not entirely outside the bank, but in and outside at the same time. And that's where we started building ventures outside the bank, but backed by a bank and a bank rate and institutional rate to kind of prove the point and start experimenting with the business. How do you leverage as a corporate that unfair advantage, right? The value creation, your right to play in the field? The risk governance framework is part of the answer. We do this consciously because this is our DNA, the DNA of operating a regulated business.

0:28where that DNA plays a role in preserving trust, in fact, in building trust in the context of new technologies and new businesses, such as digital assets, but not limited to it, then that's when we have a really important role to play.

0:39Andreas Munk Holm:When you choose to build as a corporate, you always have to figure out where do we balance ourselves or balance these young, new, fledgling enterprises with the real venture model. Can you reflect a bit on where you are on that spectrum and how you would advise people to think about it? We're not going to justify doing something stupid by calling it strategic, right? So we're going to try to really smart things, meaning ultimately I have a path to profitability and ultimately I have a path to good returns. Good returns, what does that mean? It means adequate given the risk I'm taking. Financial is non-negotiable.

1:14It's a binding constraint. You don't return your capital, then why should you exist?

1:19Andreas Munk Holm:Seven years ago, Standard Charter's leadership team had an uncomfortable conversation. The bank was great at what it did, but the things it did best might not be what the world needed in 10 years. The answer wasn't a digital transformation roadmap. It was instead an experiment. They called it SC Ventures and they gave one person the mandate to figure it all out. Alex Manson has spent those seven years building, breaking and rebuilding, and he's now written it all down. Nothing ventured, nothing gained is the most honest account I've read of what it takes to rewire a bank's DNA. Today, we go through all of it, the build, the partner, the invest.

1:53Andreas Munk Holm:And alongside, as always, on our CVC episodes, we have our dear friend, Yapa Hoya, who's our in-house expert on corporate venturing. Welcome to the podcast, guys.

2:06This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured.

2:12Andreas Munk Holm:So, Alex, I just set the context here. Did I get it somewhat correct? Was this the honest diagnosis that led to SC Ventures? It makes it sound a little top-down. as in the boss said and the bank, like the bank is a person and he makes it sound like it's all about me, which obviously is never the case. It can't possibly be the case. It's about a number of individuals and things involved. But I think the first diagnostic is completely correct, which is the bank that I used to, still part of, but I used to run a business unit for is an old bank. It's been around for a long time, 170 plus years, and we should have every intention to be around for another 100 and something years.

3:00And that implies continued relevance, meaning being a bank that not only copes with what's going on in the world, but really thrives on it and continues to be relevant to clients and serve clients that really want to be served and provide what they need. And that's the starting point of Estee Ventures. We came to the conclusion that clients were asking us to do a number of things which we knew were technologically feasible, but weren't doing in the bank. We couldn't do in the bank because the bank wasn't set up to do that in a particular way. And that could be about integrating financial services in people's lives seamlessly, as seamlessly as a digital bank or indeed other forms of financial services.

3:42mind. It could be about supply chains and SMEs and using data more to the point in the context of operational risk management and underwriting and only serving SMEs, which are such an important part of the GDP of the markets where we operate. It could be about infrastructure. People expect it's in the AT, they expect 24-7 everything, including and not limited to payments and liquidity and all of this. And that's obviously not how banking works. We're playing holidays and weekends. The point was a bit of a disconnect between what clients and, you know, I'm going to say markets and societies at large are expecting from financial services and what financial services actually do.

4:23And that's, that's where indeed top of the house and indeed the bank, if I can, if I can put it, you know, treat it like a person, um, decided that, you know, we need to do something about it. We need to think really hard about how we are going to be relevant and, um, and not just really super usable, just as critical and indispensable as financial services are today in the world of tomorrow. And we also acquired the conviction that it was really hard to do it all inside a bank because we're entrenched in some ways. We set up in a certain way. All the reasons why we couldn't do these things is not because people aren't wanting to do the right thing or trying to help their clients.

5:02Everybody is mostly, but the setup is there. where the business model is what it is. Incentives are what they are. And when it comes to human behavior, which is a very important part of corporate transformation, obviously. And so we acquired the conviction that the way to do this was not inside the bank and actually not entirely outside the bank, but in and outside in the same time. And that's where we started building ventures outside the bank, but backed by a bank and a bank rate and institutional rate to kind of to point and start experimenting with the business also.

5:37Andreas Munk Holm:Yeah. And as that, we'll go through each stage, so to say, or each part of the business model of being a CVC unit, because we'll talk both about building and partnering and investing. So this is going to be exciting. Yeah, but I just want to ask you before we get into how SC Ventures builds, if you could set the scene for our listeners. When a big corporation decides it wants to build a new business from within, what does that normally look like? So you have this situation that you have these large corporates such as a bank, right? They decide to build a new business. They want to leverage and preserve everything they have built for decades, right?

6:14And then they're trying to do something fundamentally different, right? They want to create something that is quick, fast, and moving with the existing times and not with legacy, right? There's been built a ton of models for this, right? There are venture studios, there are innovation labs, so many, and they all compound real learnings. And I think the essential part is how do you leverage as a corporate that unfair advantage, right? The value creation, your right to play in the field, right? And then you create something that stands alone, right? And then it comes to bridging the corporate, the ways of doing with this new startup life.

7:02And there's a way for the success of this. It's not just doing it with operational autonomy. It's giving actual structural access through a given mandate that, for example, here Alex can work with. And I think that is the essential. right now you know i'm really really looking forward to see you know and hear what alex is right he has spent seven years trying to figure this out how does that look like for standard charger and i'm i'm really excited to to learn more alex where whether that and also the hardest parts in this right where are all the learnings in this um well we can start without and uh and uh And I knew it would take some time and I knew it wouldn't be easy, but maybe one of the biggest learnings is how long it takes to prove any point.

7:57How long it takes in implying an element of resilience at the individual level, but also capital and the power and the ability to set yourself up so you fund yourself. and return capital with adequate returns. So you have the right to exist for some period of time because it will take some period of time to go to the point. So in as much as I guess we knew all this when we embarked on the silent shares, I think there's a reckoning now that it's been not quite 10 years, right, eight years and it feels like a long time. And yet we're still the baby building babies in so many ways. and the jury's out as to how much we've really transformed the industry or the bank.

8:45Have we had an impact? There's no question about this. Have we transformed bits and pieces already of the organization? Absolutely no question. Yes, we have, but there's so much more to do and it feels at times that after almost a decade, we're just getting started, which is exciting, but also perhaps the hardest lesson I would share here. The other lesson is one of, it's going to sound pedestrian in some ways, but it's really important. I'm going to say the word governance, right? The zone of, okay, we have a clear purpose in mind. The bank wants it from the top. But we're going to have to design something that is both in and outside.

9:28We have some conflicts by design that are hopefully very constructive and productive conflicts that need to be managed. And that is, I'm going to say, work that shouldn't be neglected. There's no charter per se, but there's a governance framework to use nice banking language, which is important to think about when you're going to build independent companies backed by a very large established institution. And I'm going to split them between the risk and compliance side of things, and then the business governance side of things. And the risk and compliance is, I'm going to say, it's going to sound relatively simple, but it's not that simple to execute, which is you want risk policies and processes that are adequate for what it is you're doing.

10:24So a deposit taking financial institution as a bank isn't regulated the same way as a payment company isn't regulated the same way as a lifestyle app, which may or may not be regulated now. But if you apply the same policies and procedures of the large bank to everything you're doing, it's obviously not going to work. And it's certainly not going to work when you explore new fields such as digital assets and blockchain where a number of concepts just do not exist within the existing framework. So there was an element of defining the framework to risk manage ourselves, bearing in mind there's a few non-negotiable, no shortcut areas, there's a financial crime compliance, cybersecurity, but there's also an element of being appropriate for what it is that we are doing, depending on the nature of what we're doing and depending on the skill of what we're doing.

11:13And then the second part is the business governance, which is you have a little startup which is trying to justify its right to existence, which is long way of saying survive. And it would be very difficult for such startup to respond, report to dozens, sometimes a lot more people of, I'm going to say, people in a bank want to know something about it. You know, I ask you about your financials, ask you about your compliance, ask you about this audit, ask you about, you know, this and that. And so an element of realizing that the venture has to be an independent company, which is not completely independent because at the beginning we see it, So we control the board.

11:51So management reports to the board. We control the board. So it's pretty clear who's boss, but we manage it via the board. Right. And if something's material enough to be escalated to the broader business, then the board has to do it. And we've codified that responsibility. But in normal circumstances, it's not material. And so ex-pursive person in the bank doesn't really know about something that is immaterial in the little venture. It does need to know that the right people on the board and managing it. And that's the governance framework which we put in place. Without these two things, combined with the conviction and the will from the top of the bank, including the board of the bank itself, it would be very hard to build anything.

12:36And certainly anything that's sustainable and that is going to scale, which is obviously the objective, because once we know we're onto something, we want to scale some of these capabilities and businesses And so they're no longer that immaterial, they become increasingly material. And so that governance gets tested. And that's the key point of our journey.

13:00Andreas Munk Holm:Alex, one thing that many struggle with when they choose to go about the build strategy inside of their venture unit is leveraging the mothership's core assets. So the customers, the balance sheet, the data. How have you done that? Because you've incubated 35 ventures, more than that, actually. I think there's not a lot that have had as good a success with this as you have. So could you share how you were able to unlock that, especially given the level of regulation that there is inside banks? So first, thank you for calling it a success. You made my day. I really appreciate it. I'm a little more measured in the sense, first, I'll always be a little relentless and anxious.

13:46That's part of the job. And in second, I actually think the jury's out, as I said earlier. So there's a lot of these babies are going from startups to scale-ups, which is a very interesting evolution in the first place. From being a scale-up to having an actual impact on an industry or bank is, again, quite a step. So we're still working on it. Part of the answer to your question is in the previous governance point I just made, which is we have regulations, we have balance sheet, we have operating constraints. Generally speaking, operating constraints are non-negotiable. We operate within the risk appetite of a large bank.

14:25As long as we're immaterial, it's immaterial anyways. But still, some things are non-negotiable still. cannot send money to North Korea, cannot just take an extreme example, but there's a lot of a lot of other ones. And so we need to operate at bank rate or institutional grade. We did not build any fly-by-night fintechs that will come up with the answer quickly because that's the job, but then come up with the banking operating constraints later. And as a result of which we're a little slower and we're a little more expensive than others, but we bank grade on day one. Won't apologize for the speed at which we do things.

15:05It's obviously faster than a big bank, but it's also slower than the preferable garage startup because we're not, you know, we have to operate at bank grade. That's, you know, that risk governance framework is part of the answer. We do this consciously because this is our DNA, the DNA of operating a regulated business. In some ways, it's our competitive edge as well. And if that DNA isn't differentiating, then perhaps someone else should do it. But where that DNA plays a role in preserving trust, in fact, in building trust in the context of new technologies and new businesses such as digital assets, but not limited to it, then that's where we have a really important role to play.

15:46Andreas Munk Holm:In the past, the trade-off that you, instead of being six months about getting an MVP to market being 12, as just a random example here, that might have been one problem. But in today's day and age where you can Vibe code anything, are you seeing that it is becoming a harder constraint to survive with? Or are you still finding that even in this age of AI where you can go unlovable and code your own little thing, it is actually still quite okay to operate in the old fashioned, more correct way. You know what I mean? Yes, it's not binary here. It's not okay, not okay. I think it's okay as a function of the circumstances and the stage at which you're at.

16:32And part of what I haven't described, you know, I said you should have policies that are adequate or appropriate for what it is you're doing. There's also an element of timeline on it. So for what it is you're doing at a certain point in time, Meaning when you're three people building a prototype to see if it gets support to get to the next level, certain type of bank rate mess is appropriate, but you don't have to go all the way. By the time at the other extreme where you live, you've been set up as an operating venture in your business and onboarding customers and providing services in the market.

17:09It's a very different conversation, right? And so the whole evolution means that you have to evolve the constraints, the requirements on the venture over time. And so they're fit for purpose as a function of, again, what the venture is doing, but also the time in the life cycle where you're at. Moving to the other side of your question, which is success versus non-success. I mentioned the idea of independence and having to prove yourself and survive. And most people will frown in the context of most corporate ventures. Well, that's not really a question, right? The corporate will buy it back. And so why, you know, that's not such a big deal, right?

17:52Money isn't scarce. It might be finite, and it's scarce at some point, but ultimately it's not an existential problem. Corporate venturing that way doesn't work. I don't think it does. It's one of the convictions I stick to. Of all the exits that a venture can have, we tell the management of the ventures not to rely on this one. And we tell them, guys, you're going to have to, guys and girls, by the way, but you're going to have to find your own customers because you can't get access to the customers of the bank. That's just illegal, right? The bank might go to market with you. We can help each other.

18:29But generally speaking, you have to prove your point with customers. market decides. I don't decide, the bank doesn't decide, market decides. And then as a result of this, you'll find your own funding. And you'll show that you have a right to exist. And in so doing, show that we as C-Ventures as a platform have a right to exist because we need to get VC-type returns on the VC-type risks that we're incurring. Otherwise, we don't have a right to exist. Proving the point commercially and financially is absolutely critical because now we know we are onto something real and we have a real company. And that real company represents some ways an option but not an obligation for the bank to adopt.

19:10In some actually rare cases, the bank might want to buy it back. And we've just announced one such deal recently, but that's actually really one of the many options. In most cases, the option is to adopt news, plug into it to provide financing or other services from the bank's perspective, or it is the other way around. The venture provides services to the bank and the market at large, all of which we're doing across a number of the ventures. The point is, we know it's real because it's not somebody's pet project where somebody's senior decided it was a good idea to pursue. And so we're throwing money at it and keep believing in it because the senior guy wants

19:53Andreas Munk Holm:What you just said about you wanting to become customers and partners of those startups that you accept is, of course, the next thing we'll get into, which is partnering, meaning the venture-clienting side. Before we go there, though, I would love to just ask you one thing, because this is a tension point I've often seen. When you choose to build as a corporate, you always have to figure out where do we balance ourselves versus or balance these young, new, fledgling enterprises with the real venture model. So do we need to make sure that everything is always kosher and fundable by the VC ecosystem?

20:36Andreas Munk Holm:Or can we build startups that are not these are fit for SME world and we will acquire it at some point? Most likely it's never meant to go that massive venture route. Can you reflect a bit on where you are on that spectrum and how you would advise people to think about it? I think anything we do, anything, any corporate bills should be market, meaning fundable by anyone. But there's a difference between being fundable by the venture market and being fundable and growable, so to say, on non-venture financing. Because venture, of course, looks for this 1 ,000 next opportunity. You don't need that necessarily as standard charted.

21:20So I said the market. I didn't say the venture market per se, right? So meaning, and that's the difference. So forget about corporate venturing. If you're a startup, VC money isn't necessarily appropriate for every type of startup, right? VC money is going to push you in a certain direction. It's going to expect certain multiples, push for growth in so many ways, instill a lot of discipline and good governance on you, but also it's not the right type of governance for everyone. And so I'm staying away from is venture capital money the right thing for your startup or not, which is, you know, you could have a separate podcast on this and I'm probably not the right person to be on it.

22:02No, actually, I think we very much are. But if I broaden the VC to the market, meaning financial and combination of financial and strategic investors, but let me characterize these investors. We're not going to justify doing something stupid by calling it strategic. So we're going to try and do really smart things, meaning ultimately I have a path to profitability and ultimately I have a path to good returns. Good returns, what does that mean? it means adequate given the risk I'm taking. So VC type risk means, you know, north of double digit returns. All these investors, whether they're quote unquote strategics, as in banks whom we work with and are interested in what we're doing, co-design with us, our commercial anchors for us, our co-investors with us in JVs, that's a form of investment, or indeed financial investors, as in we have VCs on the cap tables of some of our ventures.

23:06The point I'm making is unless you built a company that is geared to be accountable to such investors, you're probably not building a real company. company. And not building a real company implies, meaning I'm going to build you and I'll buy you back. At this point, incentives for founders are completely different. Incentives for everyone around the ecosystem are completely different. The way it's perceived in the market is completely different. And as a third party investor, what would I invest in this? Because I've just surrender my destiny in the hands of someone else. And if we do this, which can, you know, sometimes, by the way, there's a justification sometimes for building something on the side with a view to integrate it, but that's product development.

24:02Product development done differently, but it's still product development or business development. What I'm looking to achieve, I guess, is apply a Darwinian method to the existence of the venture. In other words, the ventures we have now are the ones that have survived so far and have made it from seed to startup, to scale up some of them. But to result, as I said at the beginning, we'll see because they need to keep justifying themselves by being market and being fit for purpose, et cetera, et cetera. And that weanian mechanism is critical in knowing if you're onto something or not, which is why I'm insisting it needs to be market.

24:49Andreas Munk Holm:So now let's go from build to into partnerships, meaning venture clianting. And Jeppe, I'm going to ask you as our in-house expert here, just to set the context, what does it mean when a bank says they're partnering with fintech? And where does it maybe sometimes disappoint on both sides? I think, you know, so when I started in venture back in 2007, it was still early for the banking sector. A lot of stuff has happened within banking over the past two decades. And I think especially when we look at, you know, corporate fintech partnerships there, there's a lot of change been going on in the past decade, right?

25:25And sometimes, you know, we just undercount how much real collaboration has been going on. the banks has changed we can clearly hear that on what Alex is saying right and it's just you know we are taking the commercial part of it more seriously it's genuine they are co-building the banks creating real products that are reaching customers right we have seen many exits in the space so far right so it's it's really really interesting but the tension is still there right and its structure. As Alex said before, there are underlying regulation, compliance, all of that, the bank needs to. And what the startup wants is commercial momentum.