Strategy Insight: Technology-Enabled Businesses and Financial
Services Investing
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About Michael BrownAreas of Interest:Michael is interested in investing in financial services, enterprise software and technology-enabled business services. Investments and Boards Include:Michael has been actively involved with Battery’s investments in ChemConnect, OutlookSoft (acquired by SAP), and LIFFE (acquired by Euronext). He currently serves on the board of Fingerhut Direct Marketing, MRU Holdings (NASDAQ: UNCL) and TradeKing. |
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EmailOne of the more interesting areas of focus at Battery during the last several years has been a category of deals we affectionately refer to as “technology-enabled businesses.” We have made several investments in this sector, including: A Place for Mom, Fingerhut, Fintura, LIFFE, MRU Holdings, PrimeRevenue, and TradeKing and continue to allocate significant resources to finding great opportunities across the stage spectrum from early and expansion stage venture capital to private equity.
I’m sure you are asking yourself, “What is a technology-enabled business?”, so let’s begin with a quick definition. Unlike the other sectors of our investment strategy — internet and digital media, enterprise software, infrastructure technologies, semiconductors and components, clean tech and advanced materials — tech-enabled businesses are not vendors or suppliers of technology. Companies in this category do not market or sell a specific technology product to a third-party customer. Rather, these businesses have invested in and built a proprietary technology, such as a software application, algorithm or business process, which enables them to differentiate their product or service and build sustainable competitive advantage. As a result of their unique technology assets, tech-enabled businesses function as either change agents that transform traditional industries or innovators that create entirely new markets.
We have evaluated thousands of tech-enabled businesses in a variety of sectors such as retail/e-commerce, data services, Business Process Outsourcing and consumer services. But the area in which we consistently see the most investor opportunity is financial services.
20 Years of Experience and a Willingness to Think Differently
Our interest in the financial services sector is steeped in more than 20 years of investment experience with approximately $250 million of committed capital invested in 17 companies. Through our portfolio, we have investments in most of the vertical markets that comprise the broader financial services industry, including brokerage/asset management, commercial/retail banking, securities/capital markets, payments and specialty finance.
Consistent with Battery’s overall investment strategy, we are very proactive in defining investment themes and identifying those companies that we believe will define and lead large categories. However, most importantly, we attempt to constantly challenge the status quo and think outside the proverbial box. Our willingness to think this way resulted in our investment in LIFFE (London International Financial Futures and Options Exchange), which was the first investment by a VC or private equity firm in a regulated exchange. Most recently, this “think different” approach led us to a company in the retail space that was going underappreciated. We invested in Fingerhut Direct Marketing, a unique company that combines traditional retail direct marketing and consumer finance.
Extending into New Markets in Measured Way
Over the years, our strategy in financial services and tech-enabled businesses has evolved through various phases of development whereby we embraced the lessons learned and extended that knowledge to new and different markets and business models. The first phase of our development was an opportunistic outgrowth of one of our traditional areas of expertise and success — enterprise software. As a result of our investment in HNC Software in 1987 and subsequent investments in financial services software companies such as Corillian and eCredit, we learned to appreciate the critical importance of technology to financial institutions. This insight was important as we began to think more strategically in the late 1990s about the impact of technology on this sector and how best to exploit it.
Phase two of our development marked our first series of investments in pure tech-enabled businesses. During this time frame, we expanded our strategy to include companies that served as market intermediaries, which facilitated trading between buyers and sellers via technology. LIFFE is a prime example of this phase. This new focus was important for two reasons: (1) it allowed us to participate in the transaction flow of the markets without assuming any underlying risk and (2) it exposed us to a new business model, which was much more attractive than the traditional software license model.
The third and most recent phase of our development represents the culmination of a variety of lessons learned over the years. Most importantly, we now appreciate what it means to be a market maker or risk taker and the potential economic returns that accrue to these businesses. Put simply, we believe when you combine proprietary technology with an appetite for measured principal risk you can generate outsized returns. Consequently, we have invested in several pure financial services companies that underwrite business or consumer credit risk on a daily basis. A good example is MRU Holdings, which is a specialty finance company focused on the student loan market. Through its brand, MyRichUncle, MRU leverages a proprietary credit scoring algorithm and direct-to-consumer marketing strategy to provide innovative and competitive priced loans to both undergraduate and graduate students throughout the U.S.
Maintaining a Broad Investment Strategy in Financial Services
Although our strategy has evolved over the years, it’s important to note that we continue to invest in enterprise software companies selling into the financial services markets as well as regulated and unregulated market intermediaries and their associated ecosystems. In fact, we are actively evaluating opportunities both domestically and, more interestingly, in emerging markets such as India, which are in the process of building out their financial services infrastructure.
Looking forward, we are strategically positioned at the convergence of financial services and technology and are focused on opportunities where technology is a critical enabler for success. We are particularly interested in a variety of technologies, services and business models as they apply to key sectors, such as capital markets, asset management, specialty finance and payments. And we continue to evaluate investments across the stage spectrum from early and expansion stage venture capital to private equity.
If you would like to discuss this area of our investment strategy in more detail or have a specific investment opportunity, please feel free to email me at michael@battery.com.
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