E407 | Alokik Advani, Fidelity’s Corporate Venture Capital: Thematic investing and strategic alignment to back FinTech innovators

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1:20This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. Elikic and Jeper, welcome to the European VC Podcast. Thanks very much for having me, guys. Looking forward to it. Just before we dive in, I want to just make sure that everyone is up to speed with who you are, Elikic, and the firm slash company that you're representing. You have a stellar career behind you with both Eight Roads and our good friends of Merrill Lynch and Goldman Sachs behind you. But let's hear a little bit about Fidelity. Yeah, absolutely. So, you know, we set up this function about six years ago, back in 2018, to focus on making strategic investments with Fidelity, the international business based in London.

2:15And that's what I've been doing for the last six years, investing in early stage fintech that has some strategic resonance back. And as everyone can then hear, there's a good reason why my good friend Jeppe is with us here, because Jeppe is our co-host on these episodes where we talk about the intersection point between corporations and venture capital. So Jeppe, welcome as well to the podcast. Thank you so much. Looking forward to this discussion. It's going to be interesting. Alec, maybe we could start with a bit of an overview in terms of AUM or investable capital per year or that type of thing.

2:52Yeah, absolutely. People better understand. Absolutely. So maybe I'll start with a bit of framing. At its core, Fidelity is a wealth manager and asset manager globally. We've been working with the business that looks at that capability outside of the US in general. as a result of which we tend to focus on those thematics, stuff that touches the asset of wealth world. And then we take fintech and you boil it down to those areas. You're sort of cutting out 60, 70 % of the ecosystem. So we tend to look at investments starting as early as Series A usually. I'd say selectively we may do some things in late seed, but I'd say Series A is the starting point.

3:28Aim to do about five to six checks a year. I'd say sweet spot of the first checks are between$3 and$10 million. We're based in the UK, but we look at things quite globally, wherever we have a fidelity presence or an ability to partner with some of those businesses. And as I said, you know, target sector is sort of fintech only. And even within fintech, we tend to be faithful to home. Some of the notable investments we've made, happy to give you some perspective on that. Names like Moneybox, Drivewell, Finborn, SmartPension, Moonfair, Conquest Planning, Silo, 73 Strings, just to name a few. I always love to understand better the strategic relevance, so to say.

4:11What do you mean when you say that? What do you look for? How driving is this? There's always this balance between pure financial and strategic. So kind of how do you think through all those things? Yeah, no, it's a really good question. And I'd say different people across the CBC spectrum do it in very different ways. I know some firms that make the investments to quote unquote learn. some others that do it at the other extreme for financial return and a strategic impact. I would say we're very much at the secondary point, which is we're focused on finding businesses that are going to return capital.

4:43And we also want to make sure that they have some strategic resonance back. And so those dual pillars are really key and core for us. I'd say that when we think about strategic, oftentimes, again, corporate gets stuck by making sure everything lines up perfectly just at the same time of the investment and the contract and everything. Let's be honest, that's technically impossible. You can do that rarely, but not often. So you've got to do it in the right way and ensure that you're playing for a bit of strategic optionality and ensure that it's aligned towards the direction of where you hope to go and where you hope you can create some impact within the corporate.

5:16So for us, I'd say two thirds of our portfolio have some strategic partnership or collaboration with Fidelity and that like. And that doesn't mean that the other third is not going to get there. It's just not for now. So how do you do those rationals when you analyze a startup, whether it's a fit for you guys. Yeah, you know, I always go back to the basics of sort of thematics and research, right? So what we do is, you know, our method, I always describe as sort of joining the dots, right? So we start by joining the dots between the internal ecosystem and the conversations we have inside the building, understanding the issues, understanding the problem statement, and then the external ecosystem of the various conversations we'll have with, you know, a few hundred startups a year and the VC ecosystem and other corporates and other folks that look like us.

6:00Then we connect the dots to see, okay, which are those themes that are kind of seeming to be most front of mind, most impactful, most urgent. And we go from there. Then we go a degree deeper and say like any other VC will go and start doing some research. And that research is a combination of saying, okay, within that theme, what are the specific areas we care about? Right? And there may be some subdomains that we think are interesting. And we don't just stop saying, okay, you know, private asset infrastructure is a theme. Like that's cool, but what do we actually care about underneath it, right?

6:31So we'll go in and we'll look at all the different parts of that value chain from the time someone thinks about investing into private equity through to kind of onboarding, subscription, monitoring, valuation, fund accounting, fund admin all the way through and then, okay, which parts do we like? And which parts do we think are going to be impactful or differentiating? Then we meet all the companies in the space that we meet. And that's how we found one of our companies that we back called 73 String, which is right at the heart of monitoring and valuation for GPs. No, I think that's super interesting, right?

7:00But I also think when you sit down and do this thematical approach, right, there's also something about as you are a later stage, in my opinion, investor, right? Then you have, you know, quite, you know, significant pool of companies to choose from. So how, you know, how about the monitoring of the companies that will be raising their A, B rounds that are of interest? How do they fit your thematic approach? I would say it's the confluence of the two. So because we look at those areas, we'll meet companies not only when they're raising specifically, especially because of the strategic impact. I want to meet them when they're not raising.

7:36I want to meet them to get to know them. I want to meet them to get to understand their capabilities, the founders, the mentalities, the drive, the passion, and keep monitoring them through that journey. So often we're meeting companies at the seed stage, a late seed stage, so that we can invest with them at Series A or Series A. and we're constantly monitoring these things through usual sort of CRM tools that we use like Affinity and other things just to ensure that we're sort of keeping that continuous cycle going but also where thinking about that strategic impact can potentially take longer.

8:06So we want to make sure we're doing that early not when the round is forming and we're being given three weeks to respond with a term sheet, right? So it's important that we have that dialogue early on to be sort of prepared well enough to ensure that that's the right company and the fit for us and we can truly help these businesses. Yeah, for sure. No, and I think, you know, it's also one of the things that you can do for companies and in the way you also, you know, I treat you as a CBC in this perspective, right? It's that, you know, how can you help these companies generate revenue out of the Fidelity base, right?

8:39That is the key kind of point to get to, right? Yeah, absolutely. You know, I always describe it as there are three things I think we bring to a startup. So one is the potential capital, which I think is generally pretty ubiquitous and plentiful, depending on the year and depending on the cycle, but generally available. Then the revenue potential, because that's something that's quite differentiating. And honestly, for many of these startups, that early anchored tenancy, anchored clients is almost more relevant than the capital they can raise. And then the third is the validation and domain expertise.

9:17right the validation that comes from the brand association plus the deep domain expertise that they can get with us is kind of different and i notice this when you sit around the board table often right when you've got generalist vcs that are at some of those board tables they have a great deal of experience but coming from a very broad set of different sectors and companies literally we only look at this domain we only look at asset and world so we go very very deep on understanding those spaces and we have the experiences of the pain points and problem statements that we're facing inside the corporate.

9:48So we hopefully can bring a different dimension of impact and oftentimes they're speaking the language of some of the startups. I wanted to do a bit of a side alley talk into businesses that are related to GPs because I've seen so many, obviously startups and not too many that reach the late stages. Yep. And we had a, extreme boom in the formation of these companies over the last cycle. Surprisingly, I think more of them are alive today than I had expected. But I've been looking at it and thinking, this doesn't seem very scalable to me, especially not like I get why you might have venture as a beachhead market to private equity because venture is a small asset class.

10:42And for that reason, we saw a bigger plethora. We also, there's a huge bunch of these platforms that come from unsuccessful VCs that then decide to build a service provider business to the industry. But given you've invested in both Moonfair and the other company you mentioned, I imagine you have some strong points of view on this. So it's kind of interesting, right? So both Moonfair and we've looked at the private asset infrastructure space a lot. And I call it infrastructure specifically, not tools. the tools may not be here a long time but if you've tried to ever invest into private equity or an alternative asset class the entire experience is really clunky right like it's really painful everything from the minute you're thinking about it to onboarding to how your capital is drawn down to how the dividends come in it's so old-fashioned it's so clunky it's so painful and that's just at a microcosm level you magnify this to large organizations and large investors it probably just compounds.

11:39Then you get this PDF of a report every quarter and you're like, what the hell am I going to do with this? Right? So, so I think the stuff that's more tooling aimed at venture, I kind of put it in three phases. The first set of tooling that I think is not perfect is the aimed at startups. Then you take the tooling aimed at venture, then you take the tooling or infrastructure aimed at broader industry. So we did Moonfair and partnered with Sheffin around his business to think about how are you democratizing access to private equity and that asset class for a much different audience that doesn't have a private bank without a credit switch or dualist and that's really been interesting it's successful that business has scaled really well north of you know three billion of AUM and then we did 73 strings because we're seeing GPs and let's call it more private equity private credit GPs who are dealing with pain and suffering of monitoring and valuation of their portfolio companies on a quarterly basis.

12:34Now, if you look forward, that is only going to happen more frequently and more dynamically as you're going down the retail end of that curve. Because people are going to want more real-time reporting or near-time reporting. They want a sense of secondary pricing in case that has to transact more frequently, etc. So that need becomes really interesting. And what Yan and Abhishek and team are building at 73 Strings, again, is a phenomenal outcome of what they can do given their DNA of coming out of, you know the valuation businesses so so i think there's things that are you know i was also again something probably close to home for you guys we were investors in cap desk with christian and the nominal business made a lot of sense in the cap table management in europe and that business got acquired by cartel right so again you've got capabilities there that are required by certain companies but then it's saying a lot of some of the people that came to be the cap table managers or the angel fund kind of syndicate support have now moved into fund admin because that's giving you more institutional credibility than giving you the sort of small ticket hype cycle credibility.

13:39So again, there's different flavors across that question, but hopefully I'm giving you some perspective. Yeah, definitely. It makes sense. I also understand the framework that you apply. My question where I would maybe push back or just say where I'm, you saw this are of these companies where I was like, this is a platform plate. Like, and we're not going to have seven different providers in Europe. Right. And then you had Carta, which I actually, if I'm very honest, I was kind of looking at it and thinking, Carta is so well established, so well funded. can you really build something that is going head to head with carta and not just have an acquisition strategy as your exit no i think it's i think it's right and you've seen carta who were up a whole bunch of businesses in europe in asia and beyond and that makes sense for them right you're winning you're you need more and more of the client base on the same platform then you figure out what other capabilities sell them from gap table to valuation to you know they tried with secondary markets.

14:49They've tried with a whole bunch of things, right? So I think it's an industry proposition. But to your point, you don't need 20 of them. You need one, two, three maybe. And for us, it became a really interesting strategic angle because Fidelity is one of the global leaders of stock plan services for public companies. But it makes sense to build that relationship before they go public rather than just see them at the point when they're listing. And that was the whole thesis around that cap table management capability. And so there was an interesting partnership that was there in place at the time between Capdesk and Fidelity to try and make sure that they could meet some of those companies that would need to be on a larger platform as they go public.

15:24I'd love to ask you about the later stage market in Europe as well and how you see it. There's some that have described to me that, and you also said this before, capital is typically quite plentiful, but it's not always, you know, for that reason you need, so you said for that reason we need to also come with other things. my negative assessment of it is capitalists quite plentiful at the late stages for the good companies but it's not always from the investors that you would want i know i think it's a really fair question look i to me especially coming out of 21 22 you've sort of seen the when the tide goes out you know who's wearing the swim trunks and who's not right so i think i think that's that's been kind of the nature.

16:13So the companies that are well positioned, got decent scale, either had a very clear path to profitability or always already there, became the ones that in the right thematics became the one that all the growth guys came after. And that makes sense. Then you've got a bit of a crowd effect because everyone wants the same deals and they start bidding them up a little. There's the same folks, say five, seven growth investors are the same folks that are going after all these different companies. We see them come into some of our companies. We've seen them around the other ecosystems around FinTech, but it's largely the same people.

16:47And it's funny because I was having dinner last time with one of the growth investors, just trying to be exactly the same thing. He's like, I see the same five people against me when I'm putting term sheets to companies and either I'm winning some of them or I'm losing some of them. So you're right. It's quite a concentrated market and the capital isn't plentiful across the board. Now, is that a good thing or a bad thing? If you go through the last cycle we've had, there shouldn't be equal capital or enough capital to support every business. No. You should have attrition through the different stages and the different ABC stages.

17:19I felt like through sort of 18 through 22, there was no, the failure rate was very low because there was a FOMO factor that was hitting everybody to support every business, whether it was follow on rounds or new folks saying, Oh, I missed that one, but I'll do the second one. I missed that one. I'll do the third one. And so you need a high attrition factor. that support only the businesses that are stronger and that way you play to your winners. Now, this is where I think, again, you have a little bit of a difference than, yep, I think we were talking about this. The notion where your traditional VC model of saying, you know, say two out of 10, I might win hit rate, right?

17:54Or one out of 10, two out of 10, I like my real hit rate. You know, in a strategic portfolio, sometimes you can have a slightly higher win rate, probably not a hundred factor, not a hundred X win, but you can have a higher win rate going, you know, four to ten times because of the impact you are able to have and then that, the validation that that provides to the industry. Like I know that in one of our companies where we signed up to be a strategic partner, a client with them, they got five calls from competitors of ours and they're saying, great, now we can work with you. And that was fantastic, right?

18:27And it helps them tremendously. So that's where they get that validation sometimes from. It's not always perfect, but when it works, it works. There are some interesting elements here, right? Because where we came from was kind of, you know, fidelity in the boardroom and what you contribute with. And now we are talking, you know, growth round. And here you are seen as a CBC, right? So 25 % of investments done in growth phases come from the CBCs. But how do you see yourself? Do you see yourself as a VC in this competition or a CBC? Do you face the normal, you know, I don't really want to corporate on the cap table because of my exit and so forth?

19:07I think branding by badge is almost like in all instances kind of puts you in different camps and different buckets, right? So we are strategic investors, but we're also very financial oriented strategic investors. And the first purpose is to make returns happen for my shareholder fidelity. And then we want to make sure we have a strategic impact as well. And that's where we differentiate ourselves sometimes from other folks. Also, we wear the risk. So me and my team, we're wearing the risk and we're accountable to make sure we make the right investments, do the right diligence, we execute the right deals, we write the right checks, we're on the boards and we're making an impact happen and we're making a strategic impact.

19:44And we champion that inside the building. We don't just write the check and chuck it over the wall and hope it lands by somebody else at Fidelity catching it and most times it's going to be an egg going splat, right? Because of priority or purpose or resource or something or the other that happens in that world. So that's where I think there's a little bit of a difference. You do face a stigma and we do face a stigma because oftentimes CVCs are underperforming or let's call it over-promising and under-delivering, right? And the worst thing you can have is a big brand on your cap table that isn't a client and is not doing anything for you.

20:19Then you're truly dead weight. And then the person who's a founder is just explaining to a whole bunch of people like, why is this person on your cap table and they're not even a client? They must really not like you. So what does that tell you in the market, right? And so you have that stigma. I think oftentimes we get this saying at early stages, you don't want a CVC. I actually think that's a bit of a fallacy saying, yeah, you're coming later when we're at Series B. Series B, you don't necessarily need that revenue validation as much. Now, I also know that at Seed, if I take a Seed stage company and I put them through our building, that company will be ping-ponging all the way through the organization.

20:49We'll go through 50 meetings of learning and innovation theater, but they'll never get a deal, right? And so you'll take 12, 18, 24 months of sales cycle and they'll never go anywhere. But at a Series A stage where you've got a little bit of validation, you've got some product market fit, you've got some ability to prove that you can engage with larger organizations, that validation can be hugely transformative. And to me, I always like that dynamic where you're able to have CVCs alongside financial investors in the same rounds because you're able to get the best of both around the board. So to me, it's complementary.

21:24It's an and-and outcome. It's not an either-or. No, and I think what you're saying there, I fought a lot in my early days as a CBC to get on the best deals. And I think for me, it was a lot of mingling with the GPs around Europe. And I think that is where magic happens when you bring the corporate world also into the board and then have it in the combination with VCs. But do you do in Fidelity an extra effort to build your co-investor network? We do. We absolutely do. and we're very and we have co-invested with all kinds of folks across the table you know the early stage investors other CVCs other financial investors growth investors etc we've invested across the board and we do very actively build that network and we're all we're very honest think this is our space this is what we know think about us within that space no point having me as a co-investor in a payments deal I understand it but it's not my space I'm not that I'm not somebody who can make any impact happen So if we play to the strength and be honest about the strength, and then also think about how it aligns to the direction of the firm to actually engage, embrace, or drive the outcome.

22:37Now, that might not always go perfectly. That might change over time, et cetera. But at least you're aligned towards that outcome and can truly help that company. So I think the toughest times we've had is either we've, there's two outcomes that I think where it misfires. either you're too early and the company is too early in engaging with a large corporate or you own too big a stake if you own too big a stake as even if it's minority you're basically lender of last resort and nobody else is going to come in as a co-investor in even subsequent rounds you know it's like oh you own 30 35 of a company it doesn't make any sense so so you've got to get that balance just right where you want to be minority and oftentimes i always use this analogy of it takes a village, right?

23:19So you need multiple people around the table to make this startup a success. And so you need strategics, you need financials, you need corporates, you need other folks in the ecosystem to all help this company grow and scale. No, I think it's getting the basics right, right? You know, you understand the VC business and how that is done, right? Before you start engaging. I think that's right. You're not going to flip it over. Yeah. Do you see any places that European corporate venture capitalists maybe don't get those basics right? You know, where you see the, might be the ownership mistake or the over-promising, under-delivering.

24:01Is there anything that you say, well, this is my message to the market, could you maybe fix this? I've been asked by several large organizations who are setting up CVCs. How do you do it? Give us some perspective, do different things. And I always start with the basic question. Why are you doing it? Right? And if the first response is not to make money, it's going to fail. Because that has to be the DNA. Otherwise, you're not at the table with the same mindset. And even if it's the second impact is to bring some innovation in, then to create strategic impact, etc. But the primary principle of investment should be for return.

24:40Right? then you can do everything else around. So that sometimes gets lost, but it's also the incentives. The incentives are miscued oftentimes in corporates, right? Because they don't have skin in the game in the same way. The investors and the corporates don't necessarily have skin in the game the way the financial investors, the VCs do. So if you're not incentive aligned towards the same outcome and you don't get the downside impact of writing a check and it going to zero, fine, I can keep doing it. Interesting, right? So some of the data points we normally use here on the show is that 82 % of Nordic CVCs, they're there for strategic gains.

25:19That's what they say, according to a survey. And for me, it's a little bit about the hen and the egg. For me, I'm here because the average lifetime of a CVC is 3.7 years. I need to cure that. for me, when you say you should be there for financial returns, I totally agree. But it also comes with a quite large financial spend to do a fund, right? What are your thoughts on that? How do you then get started if you don't have that, right? It's so interesting because you must think about it from a returns perspective first, that the impact part will happen, it'll come, et cetera. But you're kind of approaching the problem slightly differently.

26:09You don't have to be an investor to be a consumer of the capability. You can do that anyway. You can build a partnership if you want to. You can have a revenue share. You can do all these things. You're doing an investor alongside for two different, a level of governance and returns. And if that's not the case, then it doesn't make sense. It's just really important to get that message right. And that's where I think that oftentimes you get CVCs that misfire. I also feel, like you were saying, that 3.7 years is kind of an interesting time period. It's pretty short. And I oftentimes use this analogy that most times when corporates get into venture, it's out of FOMO when the market is pretty frothy.

26:50And then they get out when the volatility starts. So it's kind of reverse. You're almost buying high, selling low. When you should actually be going the long way and staying the course for longer rather than the other way. Then you compound it in financial services with regulation. Then you compound it with bank holding issues. Then you compound it with puzzle impacts for banks. You compound all these different things. So it's a wholly different set of factors that financial institutions face on why or how they may be able to hold investment or not. What kind of reserves they're going to have to hold against it.