Corporate Venture Capital in Unprecedented Times with Santander InnoVentures
Manuel Silva is the Head of Investments for Santander InnoVentures, Santander’s Corporate Venture Capital arm and a leading fintech investor.
InnoVentures' investment portfolio includes companies like Kabbage, Ripple, SigFig, Tradeshift, Curve, Payjoy, Roostify, Trulioo, Klar and Upgrade.
In this conversation, Manual and I discuss advice for founders in a recession, potential for COVID-driven consolidation in fintech, opportunities in LATAM and thoughts on the digital banking business model.
For all of our past episodes and to sign up for our newsletter, please visit www.rebank.cc.
Thank you very much for joining us today. Please welcome, Manuel Silva.
Full transcript:
Will Beeson:
Manuel Silva. Welcome to Rebank.
Manuel Silva:
Thanks. Thanks for having me.
Will Beeson:
It's great to connect with you. I'm glad we were able to put this together. You are, as I understand it, London-based, you're the head of investments for Santander InnoVentures. Can you introduce yourself real quick and talk a bit about the work you guys do?
Manuel Silva:
Yeah, of course. So, as you were saying, I'm Manuel Silva and I run the investment unit InnoVentures, which is, in a nutshell, the corporate VC for Santander. Our role within Santander is really to make equity investments in startups that we think are good investments, and we're very financially driven. But at the same time there can be a connection into the bank that can be mutually beneficial, both for the companies in our portfolio and for the bank. And that ranges all the way from commercial opportunities, co-creation opportunities, access to certain assets the bank may have, and pretty much anything that really can accelerate those companies.
Manuel Silva:
We also have a part of the portfolio that's a little bit less, I would say, embeddable in a way, into Santander, but we just think they are really great investments which we have, and they create ecosystem synergies within our portfolio, right? We, as you say, I'm London based. Most of the team is in London, although we have people in Silicon Valley and in Madrid. We are, though, global investors. US, Europe are probably 40/40, and then the rest is in LATAM, or in Israel, or elsewhere in North America. So we try to keep always a very global view of fintech and of the trends that are developing in the different regions of the world, and just strive to make smart bets with usually other smart people who are willing to bet alongside us.
Will Beeson:
Excellent. So to bring that concept to life, the investments that you believe are going to be financially impactful, but that also tie into the core business, can you highlight any investments you've made and explain what the thesis was?
Manuel Silva:
Yeah, of course. And I'm glad you mentioned thesis because I think we do consider ourselves as reasonably thesis-driven investors. At the end of the day, we have a core set of beliefs on where the industry is going, and we follow that. So just to give you a few examples of those, we're big believers, and no surprises here, but big believers in the digital transformation of the industry, and how the industry needs to boost its efforts, and COVID has just been an acceleration of that. And so along those lines, we've invested in a number of companies that allow us to do that better. Some examples could be Trulioo which is a KYC company based out of Vancouver, Socure, which is local to you in New York. We've invested in a US company called Autofi that improves the way you purchase a car online and you finance that. We've invested in a Silicon Valley based company called Roostify that does some of the same for the mortgage process. So we like companies in different infrastructure space that can help banks and other players be more digital.
Manuel Silva:
Similarly, another theme for us has been investing in digital first propositions, and a few examples there, so we're investors in Curve here in the UK. We're investors in Klar, which is a Mexican neobank that launched late last year. Our most recent investment is in a Brazilian company called A55, which does income secured lending, a little bit like Clear Bank in North America. And we think those are really interesting propositions that are trying to solve for a use case that maybe banks are not addressing as of now, and so there's a space for them.
Manuel Silva:
A couple of more things that we, that you will find on our portfolio, we have historically been very big promoters of blockchain, and DLT businesses, mostly from the perspective of how that type of technology can change the infrastructure of the industry and within banks. And so we have a good representation there in the likes of Ripple or Elliptic, or other kind of usual suspects there. And then we've done quite a few things also in the capital markets space, just because we think there's different ways of structuring that. We invested in a company called Crosslend that rethinks the debt marketplaces across Europe. We invested in Securitize, which ties digital asset issuance and custody in new, future financial capital markets. So again, very thesis driven. We try to stick to core themes that we know well and that we believe are going to be transformational, and try to place bets that are related to that.
Will Beeson:
Yep. And do you have a specific timeframe along which you seek to realize value? Or is it invest in amazing companies and enjoy the ride?
Manuel Silva:
No. I think our processes are tailored as any other VC would tailor their processes. And I think that's important, even if we're investors out of the bank's balance sheet and so we can be a little bit more patient.
Manuel Silva:
But I think there's a lot of good things to be said about being aligned with the rest of the cap table and understand fellow VCs who are also in the cap table think. And so we tried to tailor our processes to that. I think financial services is a slightly lengthier industry. And so somehow our expectation is that our holding periods are going to be longer than in other verticals. But again, I think we're very much aligned with the way a VC would think about exiting.
Will Beeson:
And just because I think it's relevant, I believe that prior to this role at Santander, you worked at BBVA, so another phenomenally tech forward global bank with Spanish slash LATAM roots. And maybe before getting involved in the CVC side for them, you were doing some internal business facing type work, which sounds like it would be highly relevant in the context of the approach that you described before, this kind of link between the corporate venture capital arm and the business.
Will Beeson:
Can you talk a bit about your experience on the business side of banking, and how that informs not only the way that you engage with the bank parent, but also the way that it informs your investment decisions?
Manuel Silva:
Yeah, no. That's a great question, and thanks for scrolling down my LinkedIn profile, all the way down! No, I think it's interesting. When we speak with a lot of investors in the market, we realize how important having industry expertise in such a regulated and such a complex industry is. And so as you say, just the fact that my career started more in a very classic corp dev function, buying banks, selling banks, rethinking about portfolios, rethinking about branch network, rethinking about processes, et cetera, et cetera, really gave me a very good understanding of the nitty gritty of banking, and the way banks work from a decision making process from the risk appetite perspective. And also from a lot of the regulatory things that pressure banks, that are hard to understand if you haven't been kind of deeply into that, right?
Manuel Silva:
And so interestingly enough, my career from that perspective has been a slow transition into the worlds of innovation. I started, as I was saying, classic corp dev, buy bank, sell bank, the way I described it. And then I became kind of the internal investment banker for the innovation group at BBVA. And so I had a chance to really work with a bunch of really good people coming from mostly the tech world, and just help them structure their view of how they wanted to transform the bank at the time through more of the corp dev toolkit, right? So creating JVs, structuring contracts, investing in companies, buying companies that type of thing.
Manuel Silva:
And so I think the combination of that business experience, and this kind of very broad toolkit of how to relate to that outside ecosystem has been key to what I do now. There's a lot of our transactions that are overly structured at times, from a contractual perspective, and that's probably a testament to my, to my corp dev past. But it just gives that extra tool kit that allows also to tailor things so that they make sense for the entrepreneurs we invest in. And it makes sense for us from both a strategic and a financial perspective.
Will Beeson:
And that's probably a nice tie into another piece I wanted to pick up with you, which was your expectations for how the COVID crisis is impacting digital in incumbent banks like Santander. Can you talk about what you're seeing early on, and what the implications are likely to be for fintech?
Manuel Silva:
Yeah. I think if I were to summarize in one word, I think I would say acceleration. And luckily enough Santander is a bank that has been investing heavily in digital processes and digital transformation for a number of years. So it's not, it doesn't catch anybody off guard. But I feel really what COVID has done is that it has invalidated to some extent, at least temporarily, certain ways of doing banking, certain ways of relating to customers, and has just created an extra pressure to drive things to a hundred percent digital, and a hundred percent remote processes, right?
Manuel Silva:
So at the end of the day, what that is doing for fintech, a little bit aligned with some of the beliefs I was mentioning before, is that the traction of companies that are supporting those transitions, whether it's KYC, or processes, or kind of post sales servicing, or any part of the value chain of those processes, are seeing tremendous acceleration and tremendous demand just because the world has become very, very binary and digital. If it wasn't the priority before, it is the absolute and pretty much the only priority at this point in time, right? At least from a business development perspective.
Manuel Silva:
So I think in that sense, I think it's good for fintech because it brings extra validation to those new models, but also it pressures banks to move more and more to the same space those newcomers in the digital space are occupying, which will also drive probably more competition from incumbents, and fintech players in the future.
Will Beeson:
I think my view is that this crisis is actually a great thing for the entire banking industry. Certainly for some types of fintechs, I guess the more enabler types perhaps, it may be some of the first companies that you mentioned, like the Trulioos and Socures in your portfolio, but it's also a great thing for incumbents. Not because it's easy, but because it forces them to really shift forward their digital agenda, and in doing so, increase their competitiveness against some digital banks, neobanks that were perhaps building something of a lead with a digital native customer base.
Manuel Silva:
I fully agree. There's another dimension to that that I'm starting, now that things are settling a little bit with COVID, and we're starting to maybe get a little bit more visibility on what may be coming, there's another aspect to that I think is really fascinating which is, as a result of all this, I can see how customer behaviors are going to change dramatically. And the same way the shift to digital in banking is accelerating, I feel the shift in digital in any other industry is accelerating, and probably new industries are going to be created just out of new demands, right? And so I'm thinking about things like new ways of working, new ways of consuming goods and services, new ways of even thinking about real estate, new ways are thinking about consumption. Pretty much every single customer behavior is going to be put under pressure and is going to be scrutinized this new lens.
Manuel Silva:
And so I think this crisis is not only an opportunity for the banks who have been investing in digital to accelerate their efforts, and make a statement on that. But I feel also there's an opportunity to be the banking partner or the transformation partner for all these new behaviors, and all of these new industries that may appear as a result of the change of mindset, and the change of economic infrastructure through COVID, right? And I think that is more, it's probably more of a long term matter, and it's probably slightly more philosophical, if you will. But I think those can be interesting alleys of growth where banks should be enablers, and should be helping build up those visions. So I think that's really exciting, and hopefully the industry is keeping an eye on those things.
Will Beeson:
All right. So I will be the first to admit that corporate venture capital is not an area in which I have any sort of expertise. I'd be interested from you given, where you said, given your experience, what we should expect to happen in the corporate venture space in an economic recession? Data suggests that we've already entered a recession. Forecasts suggests that that recession will last for some meaningful period of time. What happens to CVC in an economic recessions? Do banks continue to invest?
Manuel Silva:
We are investing, for sure. I can speak about ourselves. We definitely are investing. We're very active. You'll see a few things in the press over the next few days and weeks. I don't know what individual banks are going to do about their programs. I can tell you what we think makes us really valuable in these times and why I think banks should be not only keen on investing in CVC, but doubling down their efforts, right? And I think it has to do with this kind of change of paradigm, right?
Manuel Silva:
The way, and maybe just going one step back on how I try to define myself and I try to define my group within the innovation strategy of our own entity, right? And when we started started with Santander InnoVentures, a lot of what we were doing was sourcing technologies, and sourcing partners that could help the bank in more or less short term plans, deliver new businesses, or deliver new business solutions that were incremental, I would say, to the offering they had, right? I think that was really helpful at the time, and that has brought a very high level of maturity around a lot of people in the banks, and not only the executives who have traditionally been very versed in digital, but also more on the operational layers of the bank. And now there's a very strong recognition that fintech and startups are a good source of partnerships, and a good source of technologies. And everybody's looking at that, right?
Manuel Silva:
And I think now, more and more, because of the level of maturity, more and more we're shifting towards identifying those longer term trends, and identifying what's coming. And I think that's precisely the reason why banks should keep on investing and doubling down efforts on CVC, right? Because at the end of the day, I tend to think about me and my team as a little bit of a light house in the dark, if you will, where we ended up being kind of the first line of defense in innovation. We're 24/7 in the market trying to understand what entrepreneurs are thinking, trying to understand and assess the relevance of the business problems they're trying to solve. And I think that's a tremendous intelligence that should inform any bank strategy when it comes to driving the longterm plans, right? And I think that's really needed in addition to short term actions to have a very coherent strategy.
Manuel Silva:
So I think now it's precise, the CVC to some extent is a little bit counter cyclical in the sense that, in the times of, as you say, there may be recession, there may be a slow down, there may be a little bit of a back to fundamentals, but these are the moments where investing in innovation creates longterm winners and creates an edge that lasts in time. So that's why I definitely think, of course in a biased way, but I definitely think that banks should double down on their programs precisely for that reason.
Will Beeson:
So you talked about in a past role having done the buy bank, sell bank work, with your investment banker hat on now, what are your expectations for M and A and deal opportunities in the environment, whether it's a function of valuations deflating a little bit, or cashflow issues at otherwise attractive fintechs, do you have any sense or any expectations around M&A or consolidation in the market?
Manuel Silva:
No. I think it's still early days for that. So I wouldn't have said, I don't have a lot of, I'm not seeing a lot of anecdotal evidence to that happening in the short term. Having said that, it does make sense to think that some fintech players may be better off consolidating and merging and creating bigger companies, right? And I think maybe COVID is creating a little bit of a market moment for that. Probably those comments still hold for the rest.
Manuel Silva:
So if you look at Europe, for example, Europe is still a very fragmented financial services market, where at the end of the day, from a fintech perspective, each country has its category leader in every single vertical you can think of: lenders and roboadvisors and infrastructure, API, open banking. In every single category you have category leaders, but because each market is big, but maybe not big enough to create large unicorns, you create this kind of multi-cluster market structure that, it's good enough, and creates for good businesses. But to your point, putting my investment banker hat on, I can see how there's a lot of synergies that can be created from just consolidating some of those players, and in creating a bigger multi-country companies, right? Again, this is very theoretical to some extent. I think it does make sense, and I don't honestly have anecdotal evidence of it yet. But I could see that being the case at some point
Will Beeson:
In terms of that cashflow management piece, I don't know what you're seeing in your portfolio specifically, or just more broadly in the market, but do you have any kind of thoughts or advice for companies, many of which are entering their first ever economic recessions, as to what they should be thinking about and how they should be managing through this?
Manuel Silva:
Yeah, I think I would say very unsurprisingly, I think that the mantra of "cash is king" still holds, right? Because cash is kind in the sense that cash is optionality, and cash is the right resources you may need the right time to do what you need to do, whether it's organically or inorganically, right?
Manuel Silva:
So I think keeping cash is key. But usually, because everybody is giving the same advice, so it doesn't really, it's not really additive to most conversations I would say. There's a few of the things that I tend to discuss with a seasonal portfolio, and people I know in the market. One is really to focus on the opportunity and to take these times where maybe sales are slower, or revenues are not coming as fast as you would expect, or the market facing part of your company may be a little bit frozen, just to make sure that you are investing in product, and getting to the product that you want. And if your product roadmap has been slow in the past because resources were allocated for something else, just rethink all that, and focus on product, product, product. So that by the time the market reactivates and demand comes back, you're out in the market with your dream product, as opposed to something that's kind of have finished, or that you're not a hundred percent proud of. So that's one thing I typically say.
Manuel Silva:
The other thing that I think is really interesting is the cultural aspect of all the changes that a company needs to do these days to keep up with the market. And I think as much as this is the first economic recession for a lot of startups, it's also mostly for first time entrepreneurs, it's also the first time they need to manage teams in these type of environments. And so I also tell them to make sure that they focus on creating a positive culture where you highlight the survival and the strengths of, there's a lot of positive values I would say in going through this as a team. And I think highlighting that as a core strength of the company for the future is also something that entrepreneurs should be investing in. So I think the cultural aspect of this is really interesting and typically a lot of people are just not really spending that much time on that. But I think it can make it or break in many cases in the future.
Will Beeson:
So I think you mentioned at the top that you had invested in a digital bank in Mexico relatively recently. Can you talk a little bit about your view on digital banks in general? Obviously we've seen kind of a boom in Europe first and then the US, and that's spreading to an extent to Asia and Latin America. Do you have a thesis around challenger banks or digital banks?
Manuel Silva:
I would say yes. Yes and no, in a way. I think the thesis is a little bit bigger I would say than digital banks. And it has to do more with what building a digital first business means. And from that perspective, and that's something that we're very religious about in our portfolio is, we're very focused on unit economics, and we're very focused on investing in businesses that have strong, resilient revenue lines, or at least where we have the strong conviction that there's going to be a demand, and users and customers are going to be willing to pay for services, right? And because we are very focused on positive unit economics, we tend to be very selective when it comes to investing in neobanks, in a way.
Manuel Silva:
And I guess the point of that is, if you look at some of the early players in the space, they had a lot of very positive attributes. I think everybody was marveled by the user their experience. Everybody liked the quality of the customer service you would get from some of those players, whether in the US or in Europe. There was a lot of very positive attributes that, to be honest, banking has learned from. And I think probably today things are reasonably at particular. But that got a little bit everybody, none off guard, but that was refreshing. Let's put it that way.
Manuel Silva:
But I think really the ones we've mostly been interested in are the ones that have strong unit economics, and are building products that make intrinsic sense as a business. So for example, well our example in Mexico, so Klar. Klar is very much a credit first neobank. And for those of you listening who know Latin America, credit in Latin America can be a very profitable business in many ways, right? And so the fact that Klar is a credit first business makes us believe that, and we know for a fact now, that it's a good business, and that you can create those positive unit economics you're looking for. So I think probably know not all neobanks are equal to each other. And I think we tend to prioritize the ones that have strong unit economics, and Klar starting on the credit side, is a good example of that.
Will Beeson:
So speaking of Latin America, very recently we connected with QED and Broadhaven Ventures, both of which are active in Latin America. And we had an interesting conversation, and it may end up being part of more continuing content around that geography. Santander and your previous employer BBVA have had extensive operations in Latin America. I'd be fascinated in your view of the fintech opportunity in Latin America.
Manuel Silva:
Yeah, no, as you already mentioned, we spend a lot of time looking at what happens over there. We're very excited and we've been following this space for a long, long time now. I think the opportunity is massive. I think you have countries that are big enough to be good markets to innovate in. You have regulators who are bringing in legislation that is supporting the ecosystem. You have a population that is very young. They're eager to test new things. They, they love digital, they're digital first. There's very high connectivity. They're still in certain countries low, traditional, incumbent, or banking product penetration. So there's a demand there that is waiting to be tapped into. So the fundamentals are amazing.
Manuel Silva:
And so LATAM, even if we're a London based, and we have people in Silicon Valley, as I was saying, but LATAM is our third market where we keep an eye. And some of the people you mentioned, QED, Broadhaven are good friends. We have a number of co-investments with them. And I think we share a similar thesis on the supremacy of good user experiences, digital first products, the interest around credit as an enabler for good economics, and all of that. So I think we probably share a lot of the same views. And as I was saying, we announced our, it must be our fourth investment in Latin America recently in A55, which is a lender. We're investors in Creditas, which is a lender in Brazil. We're investors in Klar, which is a neobank with a lending component to it. So, big believers in lending LATAM as a driving force for fintech there.
Will Beeson:
Excellent. Manuel, I look forward to continuing to watch your portfolio evolve, and through that lens, keep a finger on the pulse of what's interesting in fintech, maybe specifically in Latin America.
Manuel Silva:
Yeah. For sure. Lots to come. So looking forward to sharing that with the world at the right time.
Will Beeson:
All right. Manuel Silva, thank you very much for joining us today.
Manuel Silva:
Yeah. Thanks for having me.
