Financial firms are facing competition from legacy players and disruptive fintech startups as technology continues to reshape the heavily regulated industry.
Two financial firms are betting on a nonprofit incubator program in San Diego in hopes of identifying top talent and potential targets for investment or acquisition.
The incubator, EvoNexus, said this week that Royal Bank of Canada, Canada’s largest bank, and Franklin Templeton (NYSE: [[ticker:BEN]]), a U.S.-based asset manager with more than $700 billion under management as of the end of February, have agreed to be founding sponsors of its new fintech incubator.
Financial terms of the agreement weren’t disclosed.
According to a December report by consultancy McKinsey, global investment in fintech has grown dramatically in recent years, rising an average of 50 percent annually since 2011 to more than $30 billion. EvoNexus, which has incubated some fintech startups in the past, wants to help more of these companies through its incubator program.
EvoNexus, based in La Jolla, is vetting applications from fintech startups to find about 15 teams to move into a 6,000-square-foot space, a new addition to its 20,000-square-foot main office in La Jolla, where the majority of its current group of about 20 early-stage companies work today. EvoNexus also has an office about 70 miles north, in Irvine, CA, where a handful of its entrepreneurs work on their companies. Rory Moore (pictured at left), co-founder and CEO of EvoNexus, said he anticipates having nearly 50 companies in the incubator offices by year’s end, including the new fintech companies.
The organization is also accepting applications for two other cohorts sponsored by corporate partners: one for San Diego area-based defense contractors Viasat (NASDAQ: [[ticker:VSAT]]) and Cubic (NYSE: [[ticker:CUB]]), and another for EMD Performance Materials, a U.S.-based business of Germany’s Merck.
The Irvine Co., a real estate investment company and large private landowner that has long backed EvoNexus, provides the office space its companies use.
RBC’s Eddy Ortiz, who leads its innovation and solution acceleration team in Orlando, FL, joined the EvoNexus board of directors about a year ago. He said the bank was especially interested in becoming involved with the incubator because of its proximity to Qualcomm (NASDAQ: [[ticker:QCOM]]), which is a leader in the development of 5G cellular networks.
“We believe that with the experience of EvoNexus, and us, and Franklin Templeton, we’ll be able to attract a lot of talent, and we’ll be able to bring some great spinoffs of fantastic companies coming out of it,” Ortiz said in an interview with Xconomy. “We’ll be able to have a line of sight to what companies we want to invest in, what companies we’ll want to nurture and possibly bring into the RBC family, and … to learn from these companies.”
Keeping tabs on what fintech entrepreneurs are working is also among the reasons Franklin Templeton signed on, according to its chief technology officer, Joe Boerio.
“Such relationships enable us to expand our learnings in this evolving space and position us to further leverage these capabilities to gain an information advantage to drive investment performance,” he said in a statement. Franklin Templeton is based in San Mateo, CA.
The incubator intends to focus on a wide range of areas. They include aspects of data science, including artificial intelligence/machine learning and predictive behavior analytics; payment and lending technologies; digital cash and blockchain; and enablers of advanced telecoms, such as 5G, IoT, and edge computing.
The new corporate sponsors are, in turn, playing a role in the EvoNexus roadmap to self-sufficiency, according to Moore.
For years the organization operated on a pro bono basis, not asking any startup for equity in exchange for a place in the program. Last year that changed. Since midyear, companies that are invited to the program are asked to give a 4 percent to 5 percent equity stake as a condition of acceptance. The idea is that when a company that has incubated at EvoNexus finds financial success, the organization will also benefit. Since 2013, 26 companies that have spent time at EvoNexus have been acquired, according to the organization.
In 2016, according to its latest publicly available financial documents, EvoNexus’s expenses surpassed its revenues of about $1.7 million by about $41,000. In the previous year, it lost about double that amount on roughly the same total revenue. In recent years the organization has spent about $1 million annually on salaries and other compensation.
EvoNexus is known primarily for its incubation of startups focusing outside of the software realm, especially hardware, semiconductors, wireless technologies, and robotics. But the fintech field is primarily software. Moore, however, said EvoNexus has had some experience with fintech along the way, noting that it had incubated Approved, a mortgage startup, and LoanHero, a point-of-sale lender, which were acquired last year by CreditKarma and LendingPoint, respectively.
Deals and funding for fintech companies set records in 2018, with just shy of $40 billion invested across about 1,700 deals, according to research firm CB Insights. However, early-stage companies weren’t as hot as their more established counterparts: as a percentage, seed and Series A round deals fell to a five-year low as investors focused on later-stage companies.
