ValueStream Labs | July 28, 2014
To the ValueStream community:
ValueStream Labs launched 16 months ago with the mission to discover and grow the entrepreneurial community in FinTech. At that time, we felt strongly that the Financial Services industry required a different approach from the traditional startup accelerator, and since then we’ve been continually encouraged by the positive reception we receive throughout the FinServ and startup communities.
We launched ValueStream based on a number of hypotheses about how we could best help both startups and investors in FinTech to prosper. We continually reexamine these hypotheses internally, as any good startup should, but today we want to also involve our community in this discussion. We hope this will give you a better view into how we uniquely add value to both the startups and financial institutions that we work with.
Our Initial Hypotheses
The most important of our hypotheses when we launched were:
- We can facilitate numerous and valuable customer introductions for our companies, not by acting as sales reps, but by building a community of FinServ professionals who benefit from win-win interactions with early-stage companies. CONFIRMED
- Funding isn’t the most important component of an accelerator program for FinTech startups. CONFIRMED
- Strategic angel investors from the FinServ industry can add substantial value to FinTech startups. CONFIRMED
- We can provide FinTech investors with access to exclusive investment opportunities. CONFIRMED
- We can accept new companies into the Development Lab Program at any time, not only on a set admissions schedule. CONFIRMED
- There are a significant number of exciting FinTech startups to work with. CONFIRMED
I’ll briefly discuss each.
Hypothesis #1: We can facilitate numerous and valuable customer introductions for our companies, not by acting as sales reps, but by building a community of FinServ professionals who benefit from win-win interactions with early-stage companies.
We have confirmed this hypothesis many times over by facilitating hundreds of high-quality conversations between our portfolio companies and influential FinServ professionals in our community. The benefits have accumulated across all aspects of their businesses, as they have landed key customers, advisors, investors, employees, and media coverage. The following three examples are just a small representation of the types of successes that have resulted from introductions made through ValueStream’s community:
- Estimize formed a deep relationship with a multi-billion dollar financial institution that now uses Estimize across multiple teams, spanning both quantitative and fundamental research. And subsequently, a Director of Research at this institution became a sizable personal investor in Estimize’s latest round.
- Within one week of joining ValueStream’s Program, Exitround had a positive meeting with a top 5 private equity firm to discuss multiple opportunities to work together. Both parties were immediately interested in continuing these conversations.
- The co-founder of a top hedge fund has become an informal advisor to ChartIQ, helping the company to approach his own extensive network of hedge funds and prop trading firms.
And as our community continues to grow rapidly, both past and present companies in our Development Lab program will increasingly benefit from our unique access.
The reason this has worked so well is that we create a win-win interaction for both sides of the conversation, and an important element of this is building trust between ValueStream and the institutional finance community. FinServ professionals are extremely busy, and so it’s no surprise that they can’t always keep up with all of the latest innovations. To fill this gap, we act as a trusted advisor not just to our companies but also to the professionals and institutions that can become their customers. And since our compensation is in the form of equity rather than cash commissions, we avoid the conflict of interest inherent in typical sales pitches. We only work with the best companies with the highest chances of success, not just whomever can pay us.
Hypothesis #2: Funding isn’t the most important component of an accelerator program for FinTech startups.
Traditional accelerators are focused on funding. Most make small investments into each and every company at the start of their programs. And during the programs, they put significant energy into preparing their companies for the all-important demo day that is the culmination of their programs, where companies present to a room full of VCs and media. This has been a highly effective approach for many types of startups.
But we don’t think this approach works for early-stage FinTech that targets an institutional customer base. First, the VC appetite for investing in this segment of FinTech just isn’t that high (yet) so the demo day should be focused on customer sourcing, not funding. And second, we don’t find that money is the major concern for FinTech startups, at least not at the seed stage. Many founders have had successful finance careers and have access to sufficient capital personally or from colleagues and that allows them to defer raising capital for longer than other startups can.
What these companies need most is strategic support with customer and product development, and that is where we place the bulk of our focus. Rarely have we heard a startup say that it wouldn’t work with us because we don’t provide guaranteed capital as part of our Program.
But this doesn’t mean that we ignore funding. Instead, we help funding to occur organically. As a company meets hundreds of FinServ professionals over the course of our Program, any of these customers or advisors could become an investor as well. We call this the Triple Threat Investor: an investor, advisor, and customer in one.
Hypothesis #3: Strategic angel investors from the FinServ industry add substantial value to FinTech startups.
The Tripe Threat Investor is somewhat unique to the FinServ industry, largely because it is one of the few industries where the average professional has both the income to be an accredited investor and the appetite for making investments of above-average risk.
It is also a great advantage for the companies we work with over startups from other industries. Here’s an example of how it works:
ValueStream raised capital to invest in Estimize from a syndicate of strategic angel investors at Goldman Sachs, JP Morgan, KKR, PNC Bank, CME, NASDAQ, Microsoft, large financial technology vendors, buyside institutions and market making firms. These influential individuals now facilitate access to their own networks throughout the Financial Services industry. .
Hypothesis #4: We can provide FinTech investors with access to exclusive investment opportunities.
The unique value that our Development Lab Program and our network of FinTech angel investors adds to our portfolio companies allows us to gain equity exposure to exclusive cap tables. We receive both equity grants and investment rights in companies that already have an oversubscription of investment for their next rounds, and even in companies that may never need to raise capital again. We believe this unique exclusivity allows our investors (both ValueStream LLC’s unitholders and investors in one of our venture syndicates) to access higher quality deal flow than ever before.
Estimize’s latest round discussed in the previous section is a great example of this. Even though Estimize had numerous offers from VCs to fully fund this round, ValueStream was asked to participate, and so we invested with a $300,000 syndicate sourced from our community of strategic angel investors.
Hypothesis #5: We can accept new companies into the Development Lab Program at any time, not only on a set admissions schedule.
One other way that we differ greatly from traditional accelerator programs is that we do not structure our time and activities around classes of companies. Companies are free to apply when they are ready to work with us, and we will begin to work with them as soon as we feel we can give them the right amount of attention.
This methodology has produced several advantages for us:
- We don’t have to wait to work with the best companies.
- We never feel pressure to fill a class with subpar companies or companies that just might not be ready.
- We have been able to work with later-stage companies that need very specific types of support rather than a standardized program curriculum.
For an outside observer, it may seem like an inefficient way to operate since we can’t as easily leverage our activities across multiple companies simultaneously. Although this is true (though not as often as you might think), we believe the higher amount of one-on-one attention is going to build far greater value in our portfolio in the long run.
Hypothesis #6: There are a significant number of exciting FinTech startups to work with.
FinTech disruption is in its early innings, particularly on the institutional side, and the number of exciting startups is growing. Between introductions from our community and applications on our website and AngelList, we’ve heard from well over 600 companies in the past 16 months across all walks of FinTech. We’ve met with over 200 of these companies, and we are actively tracking several dozen that we find to be highly compelling.
But to date we’ve only accepted 5 companies into our Program. Now you may be thinking: why is ValueStream more exclusive than an Ivy League university?
There are two primary reasons for this:
First, our Program was initially focused only on working with companies that had finished building a product but that had not yet gained customer traction. This has been (and continues to be) our sweet spot, but we also keep meeting exciting companies that are past the stage of needing a structured accelerator curriculum, but that we know we can add tremendous value for nonetheless.
In order to increase our reach into the later-stage, we launched our Industry Access Program. This Program targets later-stage companies that need a minimal amount of handholding as they access our community. It is a win-win for everyone involved: our community will see even higher quality companies that have more polished products that can be adopted immediately, the participants in this Program can meaningfully change the trajectory of their sales efforts, and ValueStream can receive equity exposure and investment opportunities in a broader range of companies. The reaction to our Industry Access Program offering has been very positive and we will announce several new participants in the near future.
The second reason is that we simply choose not to work with companies that we don’t think are or can be the best in their respective niches. This keeps us focused on maximizing the value of the companies that have the greatest chances of success, and it also helps us avoid diluting the trust we have built with our community. Unlike traditional accelerators that spread their bets widely to see what “sticks”, we prefer to make larger, concentrated bets.
Feedback Is Always Welcomed
As a valuable member of our community, we would like to hear from you often. This community is what makes ValueStream’s process work so well. Your insights and analysis about the startups we introduce to you helps them succeed, so please don’t be shy about also giving us the same type of feedback on how we can better serve our companies and your niche of the FinServ industry. Feel free to post suggestions in the comments section below, on Twitter at @FinTechNY, or by email at firstname.lastname@example.org.
And if you’re new to the ValueStream community and would like to learn more, please don’t hesitate to reach out. Whether you are a startup founder, a current or aspiring angel investor, or a Financial Services professional working at a firm of any size, we are here to help you understand what’s most worthy of your attention in the early-stage FinTech universe.
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