Why Fintech’s Future is Still Bright: An Interview with Silicon Valley Bank

Martino Tramontin •

An interview with Craig Fox, Director, Fintech – Venture & Growth Banking at Silicon Valley Bank

Silicon Valley Bank (SVB) is the only bank in the UK focused exclusively on delivering the financial services, funding and debt financing needs of the digital and innovation economy. US expat Craig Fox began his career with Deloitte before joining SVB in 2013. Moving to London in 2015, he is SVB’s UK fintech specialist.

Does SVB have an opinion on the economic ramifications of Covid-19?

Part of the benefit of working with entrepreneurs is they are eternal optimists. To be a founder, it’s a prerequisite. They are more resilient than any other part of the economy because it’s not easy to build a high-growth company – trying to innovate and develop new markets. Their attitude to the Covid-19 challenge will be the same as it has been for Brexit: it’s just one more hurdle for which they need to figure out a solution.

By nature, most of these companies are able to work remotely and still collaborate effectively; they often have geographically dispersed teams, too. They are as equipped as possible to come out of the current situation successfully. 

There is also a benefit in having the backing of institutional money.  If you are lucky enough to have recently raised funds, that gives you capital on the balance sheet to weather the storm more effectively than a traditional business surviving on cash flow. I therefore expect the innovation segment of the economy to be more resilient.

And in these strange times, what is your advice to portfolio businesses?

Both on the equity/fundraising side and the debt side, it’s crucially important to do your due diligence on anyone with whom you’re contemplating a long-term partnership. I say that for one simple reason. It’s easy to be a great partner when times are good and you’re enjoying a 12-year bull run. Our true colours show when the rubber meets the road with a shock like the current environment.

We have the benefit of a 40-year history serving the innovation economy and in that time we have endured multiple economic shocks. Each was slightly different.  The dotcom bubble was very different than the liquidity crisis of 2008-2009, which in turn is very different to Covid-19. In all circumstances, I think the key is to be empathetic.  We try to understand what our customer base is going through, what potential challenges each company faces based on their sector and the market, and then try to offer support wherever we can. 

Our annual Startup Outlook survey always returns the facts that raising capital is hard and being a CEO/founder can be a lonely job. That is particularly true when you’re trying to deal with a struggle – worrying about furloughing staff and trying to grow the company to survive at the same time. Do you double down and keep spending, or do you retrench and take a foot off the pedal? Nobody wants to raise a down round and give up dilution. More than ever, in times like these, the ability to connect founders with their peers and facilitate mind-share is really important. Even though they are virtual, we’re still running round-tables to take the temperature across the portfolio and connect where founders can leverage each other’s experiences.

Entrepreneurs are all eternal optimists. To be a founder, it’s a prerequisite. They are more resilient than any other part of the economy because it’s hard to build a high-growth company. Their attitude to the Covid-19 challenge will be the same as it has been for Brexit: it’s just one more hurdle for which they need to figure out a solution.

SVB’s mission is “to improve its entrepreneurs’ and innovators’ chances of success”. As a fintech specialist and a fintech yourself, what does that mean?

Interestingly, we bank and lend to capital providers (VC & PE funds); and to their portfolio companies too.  So we see both sides. The fact is, banks are commoditised: we’re not going to win business by having ‘a better current account’. So our model is to build teams with subsector expertise and the bandwidth to go deep in that area.  I am focused on the fintech sector and I view it as a success when my founders and CFOs call me about anything other than banking: often the right introduction at the right time can move the needle commercially, personally or professionally. 

It’s our job, and a good mantra for B2B fintechs in general, to become a strategic resource to client companies. In these current times, building supportive and empathetic relationships is more important than ever.

What’s getting you excited in fintech right now?

Payments is a hot space right now. I was recently in a conversation where payments were compared to messaging. 100 years ago, people wrote maybe two letters per week. Fast forward to texting and international reach; as the cost to serve comes down, so consumer behaviour changes. People send hundreds of messages per day.  In the payments space, the cost to serve is reducing; so, we can expect consumer behaviour with micro-payments to change, too. I think we’re only at the genesis of where that sector is headed over the next 20 years.

20 years?!

Yes, I think it’s probably a 10-20 year timeline, but the linchpin will be blockchain. Right now, opinions on blockchain are complex – for example, some think it’s an exceptional record-keeping technology for use cases like land registries, but can’t countenance it for currency. That sentiment will take time to evolve. But the core infrastructure around payments is interesting.  How does consumer behaviour change in a world where cross border payments are instant and free? 

Another major sector with unfulfilled potential is insuretech. Some of the earliest models have been well funded, but the unit economics are still unclear. A crucial debate in the industry concerns the commercialisation strategy: the broker/MGA model allows for companies to build new innovative products without taking balance sheet risk. 

Building a carrier (agency, underwriting, customer service, claims adjustment etc.) allows for faster time-to-market but comes with a dramatically increased regulatory burden and capital cost – and hence risk – but offers complete ownership and control of a brand and its associated customer experience. There have been successful launches using both models, and I think the jury is still out as to which is most effective.

You’re proud of your internationalist heritage. How can European companies globalize – especially in the US, where there are 50 states to deal with, each with their own different federal legislation?

We spend a lot of time talking to our companies about this! The most common process for our UK/Europe based fintechs is:

  1. Build the company in the UK, ideally taking advantage of the FCA’s Sandbox and flexible regulatory environment.
  2. Scale up to Europe. Post-Brexit, there’s one more layer of work to be done: most of SVB’s fintechs obtained a secondary license somewhere in mainland Europe (our portfolio includes ventures with new HQs in Ireland, the Netherlands, Belgium, Germany and France.)
  3. Think about the US, and think hard – because it’s a different animal.

My point is that the US market – and potentially Asia – are sufficiently different that some types of business may use a different commercial model in those territories than in the UK and Europe. We’re seeing some companies, with a great piece of transactional/processing software, choose to enter into partnerships with existing banks and financial institutions instead of going through the complexity of regulation. 

On the other side of the coin, we see that a number of US institutions have specialized in effectively renting out their license infrastructure to these startups. It enables the newcomer to generate traction without all the cost and time expenditure of setting up the regulatory framework under their own license ahead of migration; and it gives the incumbent partner new services and visibility of an interesting technology.

There is a pilot by which some 15 state regulators are looking to create a reciprocity agreement which would make scaling significantly easier, but for now US regulation remains a huge hurdle. That said, a barrier to entry is, of course, also a moat. Going state-by-state is painful, but any subsequent competitor would also have to endure the same pain.

Covid-19 will undoubtedly have an effect. We can expect a bumpy ride in the next 18 to 24 months, but I expect the UK to continue to be the primary spot for solid fintech companies.

The regulatory support of the FCA, alongside the success of Open Banking, have made London a great environment for fintechs. Are we still a great place to do business?

I don’t see that changing. London and the UK will continue to be a hotbed for fintech disruption. As well as the FCA, a regulator with a fundamental stated goal of driving innovation and competition; we have good financial core infrastructure. Talent is widely available. 

With five or six primary banks, there’s also a deep understanding of the business – that’s very different to the US, where there are ~9000 independent financial institutions, 50 state regulators plus the federal government. That’s why we still write cheques – I moved to London with my chequebook and I write one cheque a year, to the federal government! In the UK and Canada, where there are a few larger banks, the regulator makes a decision and it doesn’t take so long for the banks to get on board and for the industry to move.

A place which enables that level of innovation and creativity also attracts capital from a VC perspective, and it’s becoming increasingly easy to raise US capital here, too. Covid-19 will undoubtedly have an effect, because when there is a market correction, capital usually retreats to its back yard: there is a flight to quality not just in the portfolio but also geographically. We can expect a bumpy ride for the next 18 to 24 months, but I expect the UK to continue to be the primary spot for solid fintech companies.