Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Alexander Ross was recorded in July 2018.
Alexander Ross, Founder at Illuminate Financial, talks about his firm’s FinTech investment thesis.
Sramana Mitra: Tell us a little bit about your fund and your investing focus. Let’s get to know one another. Let’s introduce you to our audience.
Alexander Ross: Our fund is called Illuminate Financial. We are a financial market technology-focused venture capital fund. We saw a space in the market where fantastic businesses are coming out of banks and out of financial markets with very limited capital that really understood the nuances of this market. We went about raising capital from financial market participants along with a number of other institutions and senior capital market executives. The underlying aim is to maximize our leverage into the financial market ecosystem.
Sramana Mitra: How big is the fund?
Alexander Ross: That’s not currently public.
Sramana Mitra: Can you give us a ballpark? Is it a micro-VC? Is it a large VC? What are we talking about?
Alexander Ross: We’re a Series A and late seed-focused fund. We write checks of between $500,000 to $3 million as an entry point. We probably make about 11 to 15 investments out of this fund. We reserve about the same amount of capital for each of our companies roughly as the entry point check.
Sramana Mitra: Your focus is specifically FinTech?
Alexander Ross: Capital markets and fintech. It’s the B2B side of fintech. We don’t look at B2C. We will look at some B2B2C businesses. To give you an idea of some the businesses in our portfolio, one is a collateral management solution, which is a big focus of the industry at the moment as more and more derivative contracts have moved to being cleared post financial crisis. We have fixed income trading platform and connectivity platform as the fixed income markets move more to being digital.
Sramana Mitra: What about geography?
Alexander Ross: We’re a global fund. We’re based in London. We’re just opening an office in New York. The reality is we’re focused on the major capital market hubs. That’s New York, London, Frankfurt, Singapore, and Hong Kong.
Sramana Mitra: Tell us a bit about your portfolio companies. If you could illustrate all the things that you’ve said so far about what you’re looking to invest in with some examples of companies that you have already invested in, that would help us anchor this.
Alexander Ross: Absolutely. I would just talk more broadly first. We believe that we are still at the early stages of a once-in-a-generation shift in financial markets infrastructure through the shift to cloud, the application of new technology, machine learning, and Blockchain. In the case of applications of those technologies to the massive financial institutions, they have huge amounts of data and huge amounts of technology spend. We really believe there’s an underlying tectonic shift going on.
The key success criterion for the new technology providers is whether they are focused on reduction of costs. You’ve got an industry average of 80% cost income ratio. You’ve got large tier one banks with return on equity in the single digits. Cost is clearly important. We don’t see a slowing of the cadence of new regulation being rolled out. The ability to apply new solutions that enables these large and complex financial institutions to remain compliant in a cost effective way is a key criterion.
Control is a similar point to compliance. Improved efficiency of capital is clearly a big focus for these large institutions. Finally, the fifth is competitive advantage. Over, the last eight years, the focus has been more on the negative math. Growth is still key. Competitive advantage is still key. That’s another area that we focus on as a fund.