Fin-Tech Start-Up Nexus

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In its earliest days, when it was based above London’s Smithfield meat-market and opposite the huge Fabric nightclub, UK cyber security start-up Digital Shadows had a hard time establishing credibility with banks, an important part of its target customer base. “When we were in Smithfields they were literally power-washing the blood off the streets in the morning,” says Peter Jaco, an angel investor, entrepreneur and now the company’s commercial director. “We used to get some [banking] people visiting us in those offices, and they didn’t look too comfortable there to be honest.”

The start-up’s relocation to Level39 — which bills itself as Europe’s largest accelerator for finance, retail and future cities technologies — not only transformed the way Digital Shadows is perceived; it helped the company land contracts with three Tier-One banks and raise new funding.

Opened in March of this year, Level39, a Canary Wharf-based fintech accelerator, has rapidly established itself as a fixture of London’s fast-growing tech scene. With 29,000 square feet of space, hosting 30 resident start-ups as of September, Level39’s purpose is to create a much-needed nexus between start-ups, investors and the big banks, in the heart of one of Europe’s key financial districts. According to TheCityUK (a membership body that promotes the financial sector), financial services (and related professional services) account for nearly 14% of UK GDP. Yet despite this, fintech companies in particular have not had a clear leader to champion them to the wider industry. Eric Van der Kleij, Level39’s head and a former CEO of Tech City — the government-backed organization charged with boosting East London’s growing cluster of tech start-ups — spied a glaring gap in the market and decided to fill it.

“We want to help the fintech sector stake its rightful claim on the world stage,” says Van der Kleij. “By making such a sizeable investment and creating the largest accelerator space of its kind in Europe, our goal is to give the fintech industry a clear sense of direction.”

Level39 was full just 15 weeks after opening. After receiving more than 280 enquiries, this summer the accelerator decided to open a ‘high-growth floor’ covering the entire 42nd floor of the building. When start-ups outgrow the early, hot-desk phase, they can move upstairs to scale up in the same building, he explains. “We weren’t sure, when we started, what the uptake would be but the sheer volume of enquiries that we’ve had has blown us away,” says Van der Kleij.”

One of the first companies to take up Level39’s offer to move upstairs is Digital Shadows, which was founded in 2011 and counts the UK Government among its clients. The company originally moved to One Canada Square because it had won a place in Accenture’s new accelerator program known as the FinTech Innovation Lab London, a collaboration between Accenture, 12 of the biggest banks, the Mayor of London, the City of London and the Technology Strategy Board. Accenture was Level39’s first corporate resident and Digital Shadows its first resident start-up. “Being the first occupants of Level39 was fantastic because we had subsidized space from January to March and we got to trial our technology with four of the Tier One banks,” says Digital Shadows CEO Alastair Paterson. “Three of them ended up in commercial relationships with us off the back of the program — and a big part of that was becoming part of Level39; we got on so well here that we’ve decided to stay.”

The move to Canary Wharf has also enabled the company to host events that would have been unthinkable at their previous premises, says Paterson. “There’s a group of the banks who share information on cyber threats. They had their second-ever chapter meeting in Europe recently, and we were able to host it at our offices. That’s a fantastic thing for a small company. It allows you to punch above your weight.”

The Digital Shadows experience additionally helped to formalize the relationship between Level39 and Innovation Warehouse, the Smithfield incubator. The two enterprises now have a friendship agreement in place that gives their respective start-ups reciprocal rights to each other’s lounges. More importantly, it provides Innovation Warehouse’s fintech start-ups with a path to move on to Level39 when they’re ready to grow.

For Tom Gatten, CEO of another Level39-based start-up called Growth Intelligence, which tracks the performance and activity of businesses in real time for salespeople, being based in the same building or across the street from Tier One banks ensures that bankers will often come to them.  “We had a meeting with two people from HSBC, who were one level below the global CEO, and we were able to have that in our boardroom, here at Level39, which was very impressive,” he says. “[Being based here] puts you on the same page as the people you are selling to.”

One of the great disadvantages of working in a small company is that the power differential is very stark, says Gatten. “If you want to do business with a big firm, you are physically handicapped, because you are a long way away, and you are handicapped in prestige, because your offices are so different. One way to get around that is to pretend [the differential] is not there, and a good way to do that is to have really good-looking offices. It sends a really clear signal about how you want to be perceived,” he says.

Van der Kleij knows all about that problem first hand. He founded Adeptra (formerly Realcall), a technology company that pioneered the automation of credit card fraud detection and alerting. The entrepreneur raised seed, angel, and venture capital finance and moved the business to the U.S. before the company was successfully sold to FICO for $115 million in August 2012. Getting to an exit took over 10 years, in part because it was so difficult to connect with big players in the financial services industry, he says.

Level39’s differentiator is that it is providing space for the two sides to work together on an on-going basis, says Van der Kleij. “London can become a global leader in fintech,” he says — that is one of the goals. “We want to help the sector transform, and in some cases reset, and help it find the right kind of innovation.”

Level39 hopes to attract big corporations which want to either connect with outside innovation or “supercharge” their own internal R&D outside the strictures of company headquarters.

Along with Accenture, SWIFT, the global organization that organizes Sibos and each day handles financial transactions such as wire transfers for more than 9,000 banks, has signed a partnership agreement with Level39. “Level39 is an important catalyst for innovation in the financial industry and is instrumental in positioning London as the hotbed of new and strategic initiatives,” says Matteo Rizzi, a co-founder of Innotribe, the innovation arm of SWIFT. Innotribe organizes financial services start-up competitions around the world in order to spur better collaboration with the banking community.

Pinstripes Meet Sandbox In The Sky

Over the summer Informilo was invited to an executive breakfast of fruit, croissants and coffee at Level39. Attended by a small gathering of bankers and other financial services executives, the event was entitled, “The 3D FinTech Challenge 2013” and sponsored by Dassault Systèmes, a French software company.

The purpose of the breakfast, which was held under Chatham House rules, was two-fold: first, executives from financial institutions could discuss industry-wide challenges in neutral territory to further thinking about the future of financial services regulation.

The other goal was to kick off a start-up challenge focusing on giving banks, which have a hodgepodge of 30 or 40 legacy systems, a single three-dimensional view of clients so that they can more proactively develop tailored financial services and improve risk assessment.

Dassault Systèmes, which specializes in developing such systems for various industries, has created a fully-regulated platform for the financial services industry. It is opening that platform to start-ups that can develop services on top while retaining their intellectual property. “The accelerator program will allow start-ups to stand on the shoulders of a big brother to help them get into the market,” says Van der Kleij.

Participating start-ups can either use Dassault’s technology platform or take an independent market entry approach. “The prize for the start-ups is traction and access to financial services customers,” says Van der Kleij.

One perennial challenge that start-ups face, and that Level39 (which does not take equity in the companies in its program) has already gone some distance towards solving, is the brick wall encountered by young companies trying to land meetings with decision-makers in large financial services institutions. Van der Kleij recalls that with his own fintech start-up, Adeptra, it would sometimes take six months to set up a meeting with a bank. “But, here, you find CEOs will pop in at lunch time to mentor a start-up and that’s happening almost every day now,” he says. Chance encounters are boosted by “huddle rooms” and sandboxes, spaces where hackathons and coding days are held. The Club39 Executive Lounge and boardroom for mentors and investors also helps keep corporate foot-traffic levels high.

Once visitors take an express elevator to the 39th floor their first stop can be the coffee bar; they can use an iPad to personalize their java orders or use one of the old phone booths that have been updated to allow privacy while Skyping. The space includes a ‘technology tunnel,’ capable of showing live data and incorporating interactive technology prepared by Level39 companies. The tunnel leads to a new 200-seat event space for hosting regular industry meetings and demonstration days.

“I’ve been in start-ups for 15 years and I’ve seen a lot of these innovation  programs come and go,” says Jaco, Digital Shadows’ commercial director. “Some of them think, ‘let’s create a cool space and put a pool table, dartboard and a funky coffee machine in.’ But the successful ones, like Level39, really add something else. [For them] it’s more about the network.”

Digital Shadows should know. The start-up, which was just closing a funding round at the time Informilo went to press, met two potential investors at Level39. One was introduced personally by Van Der Kleij. The other was rather more down to serendipity. Paterson spoke at the recent WIRED Money conference, hosted by Level39, and got talking to an investor at the networking event afterwards. “I can’t be specific about the amount or source, but I am prepared to say that we are lucky enough to have received term-sheets from several well-respected venture capital firms,” says Paterson, Digital Shadows’ CEO. “This round will enable us to make a number of key hires to accelerate our growth into 2014.”

The accelerator has also helped create encounters with potential clients, he says. “We keep bumping into people from banks here which really helps. They’re in our office, you see them getting a cup of tea, you go over and have a chat, you bump into them in the lift. I really believe in all those interactions,” says Paterson. “If we were shut away somewhere else, they just wouldn’t happen.”

 

Jennifer L. Schenker contributed reporting to this story.

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