By putting some distance between itself and its venture capitalists, BBVA is hoping to get closer to fintech.
The Spanish bank announced Thursday it would take the $100 million backing its internal Ventures effort, add an extra $150 million and create Propel Venture Partners, an independent firm that will invest in fintech startups in various stages of development.
At the heart of this effort is the autonomy granted to Propel. Bank venture arms, despite the clout they carry by having the brand of a major global bank in their name, are often hamstrung by the complexities of being part of such an institution.
-
Small business investment companies offer bigger returns than traditional loans, along with the opportunity for new business relationships and even CRA credit. Now banks are rediscovering this SBA program as a way to make equity investments in startups, while avoiding the Volcker Rule vortex.
April 28 -
The latest in BBVA Compass' ventures with fintech companies will bring it a simpler way to offer investment advice to the millions of households that typically don't qualify for it.
January 12 -
Eastern Bank's 18-month-old innovation unit, run by startup veterans, is preparing to release its first product as the industry continues to allocate resources to internal tech labs while wondering when and how such efforts will pay off.
October 28 -
Digital-only Atom Bank in the U.K. recently won a banking license a feat U.S. fintech entrepreneurs have either failed to accomplish or not bothered trying, instead partnering with established institutions.
July 7 -
Mobile and online banking, security and analytics are expected to dominate IT spending as banks shift resources to growth initiatives and the figurative cost of keeping the lights on drops.
December 8 -
Unless banks devote the same amount of investment as standalone incubators, the innovation labs launched by financial institutions will be a short-term fad.
January 28
Those complexities include the bureaucracy of any large organization, the limits put in place by regulation and the trepidation entrepreneurs may have about pairing with an incumbent they are looking to displace.
"This makes us a much more attractive investor," said Jay Reinemann, a managing partner of Propel, who also co-managed BBVA Ventures. "The hard-to-get deals are the ones we want. It's easy to make investments, but it's hard to make good investments."
BBVA Ventures had made some major fintech plays since its 2013 launch, including: acquiring neobank Simple in 2014; taking a 29.5% stake in Atom, the U.K.'s first mobile bank; and investing in marketplace lender Prosper.
Still, investments in young companies were difficult. Under the regulatory framework of the Bank Holding Company Act, controlling more than 5% of an outside company is difficult. But early-stage companies are often looking for smaller amounts of money, so given the investment constraints, the amount of money banks are allowed to invest may make a deal too small for them to bother.
"The Propel fund can reach a greater amount and wider range of companies," Reinemann said.
The Propel Venture Partners team, from left: Jay Reinemann (managing partner), Tom Whiteaker (managing partner), Ceci Alvarez (analyst), Ryan Gilbert (managing partner) and David Mort (senior associate)
Banks' ability to invest their money has also been severely limited by the Volcker Rule in the Dodd-Frank Act. Essentially, moving the investment arm out of the bank and into a small business investment company with autonomy opens up a world of possibility.
Even if the money is still coming from a bank, the control part is what matters, said Lawrence Kaplan, a partner at Paul Hastings.
"By spinning it out, it is no longer under the limitations and restrictions of what kind of equity investments a bank can make," Kaplan said.
Of course, various banks have structured their investment arms differently as they look to evaluate ways to partner with the tech sector that is looking to disrupt them. While BBVA believes an arms-length approach might be best, others say that a mix of autonomy and interconnectivity is the way to go.
For instance, Santander's InnoVentures unit is a fully owned but independent arm of the bank. While InnoVentures, under the direction of a board of advisors, picks its investments, it needs to get a business line to "sponsor" the venture, said Mariano Belinky, managing partner of Santander InnoVentures.
"By doing so, we make sure that every investment is highly strategic," Belinky said.
Nonetheless, by maintaining its independence, InnoVentures can act primarily in the interest of its portfolio companies, not the desires of the bank. For example, it can argue against a business line wanting exclusivity in a partnership with a fintech company because that would limit the firm's ability to generate revenue elsewhere.
"We are not part of a specific business unit. We are not the corporate development team," Belinky said. "Even though we are fully owned, we are a standalone entity."
He downplayed the limitations of the ownership rules. Those rules largely apply to the scope of control, not the size of the stake, so there are ways to address those concerns.
"There are contractual ways to solve for that issue…in all of the discussions we've had, it has never proven to be a real constraint," Belinky said, adding that the bank often limits its investments to less than 15% of the equity in the startup.
Of course, the legal framework is likely only one reason why BBVA has decided to spin out its venture unit. Other observers say that it is about appealing to companies that are not comfortable with the idea of pairing with a bank.
"Clearly, they found some of the investments were a little put off by notion of having a partner be a big incumbent bank, even one as progressive as BBVA," said Dan Latimore, senior vice president in the banking division at the research firm Celent. "This is a tribute to its willingness to experiment and course correct."
Indeed, some startups are worried about becoming intertwined with a bank, said Oliwia Berdak, a senior analyst at Forrester Research.
Some startups see having big banks invest in them as limiting other investments in future. They worry "no one will touch them" if they are seen as associated with a bank, said Berdak.
"Most startups are really worried about independence," Berdak said.
Mary Wisniewski and Bryan Yurcan contributed to this article.