There has been a significant rise in vertical investment, triggered by a substantial decline in target companies’ valuation and the ongoing decline in funding opportunities.
Financial institutions have traditionally developed operational capabilities internally, from their IT to human resources, in addition to using external experts as needed. However, in recent years banks and institutional investors have become strategic investors in startups and businesses that expose them to new technologies while diversifying their risks and gaining better returns on investment.
Among the recent notable transactions is a $300 million investment made by global Spanish bank BBVA in Brazilian digital bank Neon. In comparison, Citibank has invested $175 million in Synk as part of the cybersecurity firm’s Series E fundraising round.
There has been a significant rise in vertical investment, triggered by a substantial decline in target companies’ valuation and the ongoing decline in funding opportunities. In addition, overfunding in the cyber, fintech and AI sectors and the bearish the financial markets have provided banks and pension firms with meaningful investment and acquisition opportunities.
ABN AMRO took a stake in ThetaRay, a big data analytics provider that combats financial cybercrime and operational failures. Initially, the bank used ThetaRay technology to detect money laundering, human trafficking and terrorist financing. It then realized that taking a significant strategic stake in the company positions the bank well for the future of the financial sector and tech investing.
Financial institutions, in that respect, follow management consulting and other advisory firms that are using the attractive tech acquisition environment in 2022 and 2023 to expand their tech capabilities and have a market edge against competitors.
Although investing in or acquiring tech companies can provide global financial institutions with a unique entry point to new opportunities, it also poses some serious challenges for banking executives. For example, it can be difficult to integrate new tech into existing IT platforms or the bank more generally. Also, some among banks’ leadership ranks worry that greater tech exposure brings new financial risks, especially during the credit crunches and financial downturns.