Why Santander spinning off Innoventures is interesting

Santander, the Spanish banking giant, announced that from now on, Innoventures would operate as a separate entity. It is the bank’s Corporate Venture Capital (CVC) unit, set up in 2014 and responsible for investing into promising startups. It will be called Mouro Capital and have $400 million under management. Not too bad to get started.

Innoventures has made a series of good bets since its inception, notably in Ripple and Izettle. It developed a cross-border payments app with Ripple, One Pay FX, after investing in its Series A in 2015. Corporate Venture Capital works pretty much in the same way as traditional Venture Capital. The goal is to inject funding into early stage startups. The twist is that corporates do not invest primarily for financial returns but rather to get early and possibly exclusive access to their technology or proposition for the benefit of their customers. And by the way, Venture Capitalists have invested a lot in Fintech over the past few years.

There are plenty of good reasons why a bank, or any large corporation for that matter, would have a Corporate Venture Capital division. It fosters innovation, because by investing into up-and-coming startups, you stay close to the market. There is always a risk that by running a business, you are in some kind of a bubble. CVC helps you broaden your horizon. You get better at understanding new trends and threats, and can thus adapt your business model and your products.

So why spinning off the unit if everything is going so well? Santander gave a few reasons for the move. It said that it is apparently mainly down to gaining a bit of independence, even though Santander will remain the sole investor or Limited Liability Partner (LLP). It is true that you could consider that a CVC is slower to deploy capital than a traditional fund, because it needs to follow some protocol within the bank. Usually, Venture Capital firms have usually several investors and it does not mean that Mouro Capital will not welcome new ones later down the line. The fund will have more freedom around the way it invests in startups and it will help portfolio companies sell more easily to other banks and financial institutions.

Why is it so interesting then?

Corporate Venture Capital has been booming as of late. Corporates used to have a reputation as some kind of tourists in Venture Capital. But not anymore. It’s not just Santander, a number of them from Microsoft’s M12 to Salesforce Ventures have been really active over the past few years. They have been making bets, backing many promising startups with quite some success. Santander, alongside others, has validated the model. Strategic investors make sense and startups understand that. Particularly within Fintech in which many startups are transitioning from business-to-customer (B2C) models to business-to-business (B2B) or business-to-business-to-customer (B2B2C). Your investor becomes your main client.

If Corporate Venture Capital is such a successful model, why changing it then? Why spinning off Innoventures?

Well, it probably has nothing to do with the unit itself and its track record. A wave of consolidation is coming to European banking.

Caixabank is merging with Bankia to create the largest Spanish banking group. There have been talks of other deals in the making across Europe from Italy to the UK. It’s logical, the combined pressures of new fintech entrants and low interest rates are not particularly good for banks. And a big economics crisis that will hurt the bottom line of all the banks with higher impairments and credit losses. Despite its sheer size, Santander is not immune to that and is already being hit by the Covid-19 crisis. There have been rumours of a potential merger with Sabadell. Other European banks could be potential suitors.

What has that to do with Innoventures then? Santander might want to “clean” its business to facilitate a merger with a competitor. Therefore, spinning off the division makes sense.

Or it might simply be that Santander does not believe that its core to its business and it is a distraction in terms of costs and capital. Time will tell…

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