Capital markets are constantly evolving and changing. Instrumental to this transformation are financial technology (fintech) companies who are playing a unique role in creating innovative solutions, services, and products that are reshaping the industry. For Nasdaq, its ventures arm, Nasdaq Ventures, is poised to invest in these firms as part of its mission as a technology company and exchange operator to improve global markets everywhere.
There are a number of drivers fueling this rapid growth in the fintech space. Among them: advanced technologies such as artificial intelligence and machine learning, shifting regulatory changes, and a heightened competitive landscape. “We have a catbird seat to all that is taking place,” explains Gary Offner, head of Nasdaq Ventures. “The companies we’re investing in help us grow new products lines, open new market segments, and basically give us a competitive edge."
The Ventures business unit was officially formed in 2017 as a way to formalize the kind of periodic venture investing Nasdaq had been doing. Offner says investments range from $1 million to up to $10 million, and from Seed through Series C. Each investment drives at, and reinforces, Nasdaq’s key business areas: blockchain; artificial intelligence; data analytics; regulation technology (regtech); and what Offner calls “markets everywhere” or the ability to use Nasdaq’s technology and expertise to establish marketplaces where they don’t exist today.
The screening process for any of the companies that Offner and his team consider always begins with alignment. “We want to make sure the technology or product we’re looking at is a strategic priority for Nasdaq,” he says. “Does it help us build capability or knowledge, or accomplish a strategic objective? The strategic value and our ability to affect the outcome should drive the investment as well.” And while the financial return on investment is certainly an important metric, Offner adds, so too is the commercial or strategic alignment within any of Nasdaq’s business units.
In the three years since Ventures was formed, it has invested in over a dozen companies. Its latest stake is in Caspian, an industry leader in automated AML (anti-money laundering) investigation technology. The UK-based company’s platform—AML Investigator—helps financial institutions detect, mitigate, and manage fraudulent and criminal behavior. In addition to Nasdaq Ventures taking a minority stake, Nasdaq’s Market Technology business has also partnered with Caspian to fuel the growth of the business within the Financial Crime business verticals.
A growing niche
Unlike most venture capital firms that focus on consumer and retail facing segments, Nasdaq Ventures specializes in fintech. As a result, many of the entrepreneurs running firms in this space want an audience with Offner and his team not only for funding, but for the strategic value that Nasdaq can bring. “Our investment is important, but beyond that, often these companies are looking for technology and distribution,” he says. “We can be a partner, a customer, an investor, or all three.”
That’s certainly the case with Caspian, where Nasdaq is partnering with the firm on R&D as well as acting as a significant mechanism for expanding distribution. XM Cyber, a cybersecurity startup, is another such example. Nasdaq Ventures led the company’s Series A funding round in late 2018 after becoming a client of the firm. XM Cyber, co-founded in 2016 by former Israeli security experts, offers a cyber threat simulating platform that monitors software and IT systems to detect potential attack paths. Offner says Nasdaq’s internal technology team did its due diligence on the company’s offerings before becoming a client, and that this step informed the Ventures team’s decision to make the equity investment.
As symbiotic as these relationships can be, investing in a niche space comes with its challenges. Volume is one of them. “We are flooded with proposals,” says Ben Blueweiss, who joined Nasdaq Ventures in September after working in corporate strategy and development at Bloomberg for eight years. He and Offner, along with colleagues Yordanka Illieva and Randall Zuccalmaglio, make up the Ventures team, and he says as the capital markets fintech space has grown, so too has their workload. “We’re probably tracking about 3,000 companies in this area and are constantly talking to them to see if an investment makes sense,” Blueweiss adds.
Making their jobs just a bit easier is the fact that Offner and his team are familiar with the management at many of these capital markets fintech startups. “Most the management teams are well established folks who have been at large banks running desks who understand the asset class,” Offner says. “They’ve seen the problems and have a solution that reduces friction and inefficiency. And because it’s a close-knit community, it’s easier to check out the bona fides of the entrepreneur and where they’ve been.” Adds Blueweiss: “If it’s a first-time entrepreneur, that’s fine. We’ll just make sure they have deep industry experience or very seasoned advisors helping them to fill any voids.”
Once Nasdaq Ventures has done its own due diligence on a company and decides that it wants to make an investment, it needs the blessing of Nasdaq’s investment committee. It’s comprised of Nasdaq’s senior leadership, including CEO Adena Friedman. “By the time we get the deals to senior management they’ve been pretty well-vetted and we have a good sense of whether they’ll be approved,” Offner says. Ventures typically won’t go past a 20% ownership stake in any one company, and in return gets one or two nonvoting observer seats on the board. “We have to be comfortable with the entrepreneur and the team,” he adds. “We’re not looking to go in there and replace a management team. We don’t have the time.”
Of course, one of the ultimate goals is for Nasdaq to eventually take one of these companies public. “We’re investing mostly in Series A, so none of our companies are there yet,” says Offner. “But we’d be delighted if things got to a point where we could list their IPO.”