Venture capital (VC) and corporate venture capital (CVC) have played a significant role in accelerating the growth of startups in recent years. With their investment and support, startups have been able to scale and develop innovative solutions for various industries.
In this article, we sit down with Matteo Moscarelli, Venture Associate at Plug & Play Italy, a leading global innovation platform and accelerator, to discuss the role of VC and CVC in startup acceleration. Through this interview, we aim to provide you with a comprehensive understanding of the pivotal role played by VC and CVC in the dynamic world of startup acceleration.
Since its launch in 2020, CRIF InnovEcoS has co-managed I-Tech Innovation, CRIF's acceleration program, in partnership with Fondazione Golinelli. We invest directly in promising seed and early-stage FinTech and AgriTech startups, aiming to cultivate valuable partnerships and increase their success in subsequent financing rounds. We also oversee CRIF's expanding portfolio of investments, leveraging new technologies and offering training opportunities to startups. We prioritize their mutual development, investing with a minor stake and selectively choosing startups that complement our business.
Additionally, we adopt a local approach through BOOM, CRIF's new Knowledge and Innovation Hub based near Bologna. BOOM includes a startup membership program and open innovation services, facilitating connections between startups and corporates. InnovEcoS manages this entire ecosystem.
We invite you to join us for an insightful conversation with Matteo Moscarelli, to gain valuable insights into Plug & Play’s investment strategy, which has propelled numerous startups to unprecedented heights of success.
How has the current high interest rate environment affected investment in FinTech startups, and what strategies does Plug and Play use to navigate this landscape?
Interest rates should stay high in the foreseeable future; Fitch expects the Fed Funds rate to remain at about 5.0% through the rest of 2023, while the MRO rate is expected to remain at 3% during 2023 (let’s see).
This means that FinTech startups which don’t “own” their balance sheet will likely continue to suffer. To manage this risk, we at Plug and Play carefully scrutinize our investment prospects and stress test their business model to make sure that they are still viable under current market conditions. We also prefer to invest in solutions that drive tangible value as opposed to "nice-to-haves", and in business models that don't require very significant leverage to thrive. As for existing portfolio companies, we advise them to manage spending frugally to extend the runway as much as possible, and when feasible to avoid fundraising in a bear market.
Can you discuss any notable trends or developments you have seen in the FinTech industry, and how do you stay on top of these changes in your investments?
Thanks to Plug and Play’s international perspective, some of the global FinTech trends we have observed include embedded finance, green finance, innovation in payments (e.g., B2B payments) & SMB tech, cybersecurity, blockchain (e.g., identity verification, supply chain and asset tokenization), RegTech and quantum computing applications in the FinTech industry.
Of course, trends may vary from country to country depending on national economies. To keep it short, I’ll just focus on three global trends which we are really excited about:
- SMB Tech: The European Commission has recently found that 200 thousand SMEs fail every year in the EU, resulting in a loss of 1.7M jobs. Bad cash flow management plays a crucial part in the problem, with 80% of failed companies stating that cash flow problems are the main driver of their failure, exposing SMEs to late payments and overdraft interest. Italy accounts for 3.6M of the 23.1M SMEs in Europe, and our economy is strongly reliant on those companies. We are proud to be backing Sibill, an Italian startup offering a cash flow management solution for SMEs with the vision of satisfying all their financial needs on an end-to-end platform.
- Climate FinTech: As everyone knows, Europe’s goal is to be carbon neutral by 2050. FinTech can play its part and, according to a recent CommerzVentures report, investors poured $2.9B into Climate Fintech in 2022 with carbon accounting and carbon offsetting as the best-funded sectors. In March 2021, Plug and Play invested in Sylvera, a leading UK-based carbon credit rating company which now has around 150 employees.
- Quantum Computing: According to IBM, quantum computing is a rapidly emerging technology that harnesses the laws of quantum mechanics (superposition, entanglement and quantum inference) to solve problems too complex for traditional computers. Financial institutions often have to compute operations that involve a very high number of variables; therefore, quantum computing can be a good solution. The three main applications of this technology in finance are portfolio optimization, derivative pricing and cybersecurity. Tier1 Banks such as Goldman Sachs and Citi are already at the forefront of this trend through open innovation (QC Ware) and investments in startups (1Qbit and QCWare), respectively. We are currently taking an in-depth look at this field.
How do you approach diversity and inclusivity in your investment portfolio, particularly in the FinTech space where innovation often comes from unconventional backgrounds and perspectives?
We really care about diversity and inclusion when assessing an investment opportunity in all industries. Plug and Play is keen to partner with founders who have a diverse, inclusive and complementary background. Therefore, we generally don’t invest in solo founder startups.
Moreover, we have a program for women founders called FoundHer, a 5-month equity-free and fee-free program offered by Plug and Play Italy, dedicated to Italian startups with at least 51% of female founders to boost their potential through our network and programs. We recently held a FoundHer event at our Milan office, which was a huge success, and we will be launching the call for applications for the 2023 program soon.
Can you share any notable investments you have made in the FinTech industry and the key factors that led to your decision to invest? Is there a “killer factor” that drives your investment decision (e.g., the team, business model)?
Plug and Play was a first-check investor in N26 – one of the first challenger banks who reached unicorn status. As our CEO & Founder Saeed Amidi often says, we decided to invest in N26 for two main reasons. The first was the exceptional founding team and the second was customer demand for a fully digitalized bank without physical branches.
This was exactly what Valentin Stalf (CEO & Co-Founder) and Maximilian Tayenthal (Co-CEO & Co-Founder) wanted to achieve.
Web3 was a buzzword in 2022 but looking to our past we predicted this trend through some of our investments. One of our notable portfolio companies in the space is Blockdaemon, the leading independent blockchain node infrastructure to stake, scale and deploy nodes with institutional-grade security and monitoring. Our partner George Damouny led the investment and told us that the main reasons behind our investment in the pre-seed were Konstantin Ritcher (CEO & Founder) and the value added that we could bring. The business was completely different from what Blockdaemon is now and this teaches us that in pre-seed deals, the team and market are the most important factors to consider.
How do you view the role of corporate venture capital in the FinTech industry and what do you think the advantages and disadvantages of this approach are compared to traditional venture capital investments?
As Plug and Play we are the largest corporate innovation platform in the world, and we really love seeing some of our forward-looking corporate partners investing directly or indirectly in startups. According to Pitchbook, CVCs were involved in 21.7% of all European VC rounds in 2022 — an all-time high. In all industries, we prefer to see CVC investment from Series A/B and not before. We believe that a CVC leading a pre-seed or seed round could be a red flag for international investors, which will assess later financing rounds of the startup. This is because CVCs are generally more interested in synergies with the corporates’ core business than financial return.
In FinTech, the reasoning is the same for round participation. We prefer it from Series A/B onwards.
- Advantages: We think startups backed by financial institutions can benefit a lot from distribution agreements, lower interest rates for lending business models, network and bank employee expertise.
- Disadvantages: Some financial institutions tend to ask for exclusivity; this will limit startup growth and we strongly discourage founders from accepting it.
What is your advice to corporates entering the corporate venture capital business?
My personal advice would be to start slowly to build confidence with the startup world. I think the first steps to break into the corporate venture capital business are:
- Investing in startups through the balance sheet: This will allow the innovation team to start building some success stories that will facilitate the creation of a dedicated fund later on. My personal advice would again be to invest from Series A/B onwards and as a follower investor and not as a lead.
- Investing through the balance sheet as a Fund of Funds (FoF): In this way, corporates can start building diversified exposure to a portfolio of startups in many industries. Moreover, the corporate can ask the VC to commit its money just to some target industries. Let’s assume you are a bank; you can ask to invest 80% of your money just in FinTech/InsurTech and 20% in all the other industries. On this subject, we are currently raising an EMEA Plug and Play fund. Please reach out to me if interested.
- Leverage a third-party VC to start your CVC: Investing in the technology business is a very risky game and that's the reason why I think it is better to start leveraging the expertise of experienced fund managers. In Italy, this is exactly what A2A did with 360 Capital or what TIM did with United Ventures.
Once the corporate builds confidence through one of these options, it may be worth defining its goal and building a strong internal team. It will then be important to align the incentives between your corporate and CVC arm, establish clear processes and leverage your network to bring value to your portfolio companies. In conclusion, it is worth remembering that corporate venture capital is a long-term play, and you will need to be patient to see results in terms of financial return.
What is your advice to startups looking to start a partnership with a corporate?
I think startups should:
- Understand the point of contact with the corporate: This is of pivotal importance to understand who will work on the implementation of the partnership. Of course, it is strongly advised to build a good and trusting relationship with the contact.
• Communicate effectively: Often startups have difficulty in interacting with legal departments and in the procurement of corporates. It is extremely important to define a communication strategy and never get tired of following up without being rude.
• Be clear that decision-making takes time: Corporates, especially banks, have a long decision-making process before choosing a supplier. Startups often get disappointed because they perceive that this could be used as an excuse to deliberately prolong negotiations. Be patient.
• Understand the corporate culture: This allows the startup to understand what kind of sales style they can use to start a partnership.
ABOUT INNOVECOS
InnovEcos is CRIF's Global Open Innovation Hub. Our mission is to guide the discovery of future business models and technological trends to innovate services, products and processes through research, experimentation and collaboration with startups. In the last two years, we have scouted +550 startups and run +18 PoCs and +7 pilots through our Venture Client Lab.
If you're a startup looking to make a difference or a company interested in open innovation experimentation, reach out to us.
This article is part of a series that aims to help startup founders and corporates to navigate and understand the value of open innovation and partnerships.
