Financial tech cluster could be great – If the big banks and law firms play too

MaRS fintech cluster
A cluster is born.

The recent announcement that MaRS is forming a cluster of financial technology startups is great news. In my experience tech startups must fight through enormous inertia; to win you need all the concentration of force you can muster. Thus, the need for clusters.

Will the FinTech cluster be effective? Key pieces are missing.

For B2B startups the biggest challenge is go-to-market. Tech risk gets all the attention; it’s easier to quantify. Go-to-market challenges are qualitative, easy to overlook. But it is an unnatural act for Fortune 50 companies to entrust their core value creation processes to companies with no track record and negligible capital. If the tech doesn’t work who do they sue? To overcome this fear, B2B startups have to win the support of the supplier ecosystem as well as the end customer.

An effective cluster in action

Digital drafting board R&D.

Here’s an example from my experience. Our goal as founders of Input Technologies (ITI) was to commercialize research into computer supported collaborative work that grew out of the Ontario Centres of Excellence. Our launch customers were car stylists and our MVP was a digital drafting board.

The MVP.

Our rocket would never have launched without the support of Alias|Wavefront and its parent company, Silicon Graphics. They opened doors into the supplier club and the OEMs. Their endorsement was a critical support when we needed to raise capital. Their support enabled our sales team – me and one application engineer – to sell millions of dollars of ITI product with a tiny marketing budget.

Two iterations later, an MVP for engineers and stylists.

Proximity played a huge part. Instead of crisscrossing the continent to build relationships many Alias and ITI folks already knew each other through the Centres of Excellence R&D project. After SGI bought Alias, its HQ stayed in downtown Toronto, a 7-minute drive from ITI’s offices. Alias connected ITI to the key SGI folks in Mountainview, Detroit, Japan, and Europe.

In summary, the ingredients and mechanics were:

  1. Enterprise-scale companies actively sharing their brand and distribution with startups
  2. Long-term public funded research
  3. Enterprises, startups and researchers collaborating at the earliest stages

Another cluster example, chosen not at random

In the cleantech energy industry the low-risk, large-scale solutions that utilities crave are very expensive to bring to market. If you screw up, people will die. In the race to global scale startups without powerful allies have almost no hope of winning.

In wind power many of the most promising sites are offshore. Besides generation and distribution know-how you need shipbuilding capacity, and the engineering know-how to put it all together.

Germany has multiple enterprise-scale companies on top of the power generation and shipbuilding supply chains. These companies have the global brand and distribution that startups need. The entire ecosystem lives within Germany, aided and abetted by various government programs and agencies. This helps startups stay at home as they grow. Talent sticks around too. And the big companies get a steady stream of innovation. It’s win-win-win.

What about FinTech?

Like cleantech energy and automotive engineering, the deployment risk of B2B  FinTech is high. Unlike bad wires and cars, which might kill you, FinTech failures could vaporize your savings. Actuaries will tell you, this is worse than death.

So go-to-market risks in FinTech are high. Toronto boasts a number of global-scale banks and law firms. How active are they in the FinTech cluster?

Banking: As of this writing, only one of the big 5 banks supports FinTech. UGO, a FinTech supporter, is a joint venture of PC Financial and TD.

The other corporate partner is PayPal. PayPal is a huge plus, and a big question mark.

The plus: PayPal was a startup. When Levchin, Thiel and Nosek founded PayPal in 1998 their modest goal was to replace the U.S. dollar as the international currency.  PayPal attracted a lot of negative attention among bankers. But seventeen years later PayPal has increased the global market for credit card transactions and everybody gets along. PayPall now employs 13,000.

The question mark: PayPal’s roots. Both PayPal and its parent eBay have deep roots in Silicon Valley. There is more pressure today than there was during ITI’s time to relocate promising startups close to the capital.

Law. The blockchain will have a profound impact on IP and contracts, and once again, as of this writing none of the big law firms are directly involved in the FinTech cluster.

Unlike power generation and distribution, where the risks and benefits apex predators face from startups are pretty clear, the FinTech picture is confused. Just look at these FinTech startups and the markets they are pursuing:

  • Borrowell – consumer loans
  • Wealthsimple – wealth management
  • Digital Retail Apps – credit card services
  • Bitcoin and blockchain – online contracts with digital currency

For the big banks and law firms the risks are obvious and the benefits are hard to define.

Fight or flight, or something else

Accenture graphic shows FinTech taking flight.

Faced with mortal danger the natural reaction is to run, or to attack. If the big players stay on the sidelines even the most heroic efforts by MaRS will fall short of success. If the big players attack,  New York and London will be very happy.

But there is a third way: accept and embrace. Look at PayPal. It looked like a big threat but has turned out to be an ally.

Change is already happening. The unicorn club, startups valued at $1 billion and up, now includes multiple companies in FinTech.

If the banking and law giants go all in to support the FinTech cluster, its outlook will become much better – and the giants will be in better shape too.

Geoff Foulds
Geoff Foulds
What fascinates me are the edges. And nowhere are the edges edgier… the stakes higher… than startups. There are plenty of sources of friction, compression and tension among founders and financiers, engineers and marketeers. How do you mesh all the edges so they transmit power even when loads are heavy? That’s what I write about.

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