Financial services companies with a keen eye for innovation are making venture capital investments.
They're funding and incubating early-stage, high-risk technology companies. They're seeding their investments in Silicon Valley, Silicon Alley in New York City,
Banco Bilbao Vizcaya Argentaria recently said it would invest $100 million through its newly created BBVA Ventures arm.
The division of the Spanish banking group will invest between $500,000 and $5 million to entrepreneurs to fund their businesses, pick their brains and potentially use the technology they create.
Though BBVA is new to corporate venture capital, the concept has picked up steam in the past several years, says Matthew Harris, managing director at Bain Capital Ventures.
"The trend of corporate venture outside of financial services is just generally up," Harris says.
"The reason that people speculate it has increased is the amount of R&D spend went down pretty dramatically as a function of the credit crisis," he says. "So there is this sense" that banks and other financial services companies "have to invest in and ultimately purchase innovation from outside."
Banks, especially, have useful insight because of the amount of data they curate, Harris says.
"They are huge customers of technology," he says. "They get a first look at the newest, latest greatest shifts from new venture."
Citigroup, Harris says, was the first bank to throw its hat in the venture capital arena.
Citigroup started Citi Ventures several years ago. The division has paid dividends, says Deborah Hopkins, the banking company's chief innovation officer and chairman of its venture capital division.
In 2011, Citi invested in Silver Tail Systems, a startup that uses predictive analytics to detect and prevent fraud.
"We were able to take it into a pilot and very quickly we were able to identify threats quicker, and in a way that could prevent fraud issues in a much more accelerated fashion," Hopkins says.
Because Citi took an interest, Silver Tail's profile was raised, Hopkins says. Silver Tail was sold to the storage-technology giant EMC Corp. (EMC) last year, she notes.
BBVA completed its first investment in Silicon Valley early last year.
Already the ventures division has put money into SaveUp, a startup that plans to gamify aspects financial services, and Ribbit Capital, a Silicon Valley-based venture firm led by Meyer Malka, the founder and former chief executive of the now-defunct Bling Nation.
BBVA operates a number of
BBVA's "executive leadership have realized that we need to supplement our internal efforts to keep up with the pace of external innovation," says Thomas Whiteaker, an executive director at BBVA, who previously worked on corporate venture capital projects at Hartford Financial Services Group and Visa.
American Express (AXP) has made similar investments. American Express launched its digital commerce investment initiative in the fall of 2011. The company, like BBVA and Citigroup, has an office in Palo Alto, Calif. (Citi Ventures also has employees in Shanghai, Hopkins says.)
American Express'' investment team has invested in Radius, which provides data to small and midsize companies, and Ness Computing, a search technology provider. Ness has created a Likeness Engine that creates personalized recommendations based on people's tastes and preferences.
Venture investing is "highly strategic" for the bank and the startup alike, says Philip J. Philliou, a payments consultant who evaluates startup companies for banks.
"Oftentimes investment is the only way for a bank to realize the enormous value that they provide to a startup by becoming a first or pilot customer," Philliou says. "Investment can also help a bank secure exclusivity or first right of refusal, as well as accelerate speed to market for the startups product or service."
Still, Hopkins is adamant that Citigroup's investments aren't a replacement for actual innovation within the bank. This, she says, is "new-age R&D."
"It's not a substitute," Hopkins says. "It's an extension."
