CITI's outperforming venture capital arm: the success formula

While we often speak of venture capitalist companies, we rarely examine the VC branches of larger companies. Citi's VC has been very successful in the past 5 years, let's have a look!

Venture capitalist

For those of you who are not certain of what a venture capitalist is, I'll explain it shortly here. The others can jump forward to the following section.

A venture capitalist (or VC) is a private equity investor, meaning that he invests in companies that are not publicly listed. In general, they provide funds to start ups or small companies that exhibit a strong growth potential, in exchange for an important part of the shares.

The choice of start-ups is all that counts. The VC knows that most of their investments will fail, but they count on having placed on chip on the one company, that will grow to become a unicorn or a multibillion dollar company. The pareto rule applies: 80% of the results come from 20% of the startups. haha

In general, this is very helpful to start ups and smaller companies that do not yet have access to the equities market.

In the last 5 years, we have witnessed an uptick in VC activity, with a peak in 2019 according to Crunchbase. Between 2015 and 2019, US corporate venture firms have increased their investments 83% compared to the previous 5 years.

Big names of Venture Capitalists companies include Andreessen Horowitz, Index Venture, Sequoia Capital or Monica from Silicon Valley. We rarely hear about Citi's active venture arm. Big mistake, as they are a great example of a very successful VC, and in fact, one of the most successful and most active VC in the US in the recent years. Here is why.

 

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Citi's VC arm

The famous bank's VC arm has shown a tremendous success and activity. They have invested in no less than 9 unicorns (private companies valued over $1 billion). Out of these 9 companies, 6 went public for a valuation of over $1 billion.

The bank's portfolio has seen no less than 61 companies since 2015. If you do the math, that is a 14.75% success rate in their investment, an impressive number considering that reaching 10% is already considered good.

Adding to this, they have 5 more companies listed on the Crunchbase emerging unicorn list.

“Our goal is to invest in category-defining companies that are going to be the leaders in their area,” Matt Carbonara, the managing director at Citi Ventures, told Crunchbase News.

The company invested in many companies you may know, such as the API platform Plaid, the coupon company Honey, the cloud-based e-signature company DocuSign, the e-commerce platform Jet.com or the mobile payments company Square.

CITI has mainly been focusing on companies which offer services that the bank seeks to develop. They always had a strong interest in fintech, but have recently broadened their horizon to customer experience, regtech, automation, smart treasury and more.

To give you a little measure of success: Square was IPO'd at $9 a share in 2015. Today, the stock is worth over $200. Docusign was IPO'd at around $40 a share and is now worth over $220. Regarding Honey, they were bought by PayPal for the juicy sum of $4 billion.

 

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The strategy: what is the secret of such a success?

Funny that all these companies seem to have a certain link with banking and payments. And this is not by accident. The secret of Citi is that it invests in what it knows. This is very simply illustrated when we see that two thirds of CITI's portfolio companies have a commercial relationship with Citibank. As a simple example, DocuSign's services is proposed to Citi's clients for their free e-signatures.

“We spend a lot of time with our business and technology leaders in Citi, trying to understand the gaps that they have from a product, technology and business perspective,” said Matt Carbonara, Citi Ventures managing director.

If you know and use the products and services you are investing in, you get a whole new understanding of their true value and growth potential, and you're set to make better investment decisions.

In general, the fund invests between $1 million and $20 million in a deal, the average being $5 million. They rarely lead rounds and did so only 20% of the time.

The team is made up of 13 investors: seven in the Bay Area, three in New York, two in Tel Aviv and one in London. Citi also has an innovation lab in Israel where they lead projects mainly on cybersecurity.

 

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A switch of priority following the pandemic

As many other VCs the company took time to think and reflect on what will become the next big industry following the pandemic. By and large, technology focused on customer experience retained the most attention.

Citi will therefore invest in UJET, a mobile-first customer interaction platform that allows companies to see customer's problems in real time, Flybits, a finance company that found a way to make ultra-tailored services for the customers, and Trulioo, that verifies customers who sign on globally, a vital service to avoid money laundering.

The VC also focused on automation technology, as they are convinced that budget pressure will encourage companies to reduce costs and produce more with less.

Nylas is an automation API that links a company's calendar, email, and contacts for a global view to customer services (another fancy CRM, basically).

Anvil is a no code platform that will allow companies to create web forms workflow without knowing how to code, a useful service for companies with little digital budgets.

 

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Key Takeaway

The secret seems to be to invest in what you understand and keep a clear idea of your objectives and areas of interest, that's the rule that Citi seems to follow. Let us illustrate this. Say you want to buy a couch. You go on Jet.com to see what you like. You check Honey to get some discounts. Then, as you roommate will also use it, you split the bill in two with Square's Cash App. They you transfer this money to your bank account via Plaid, so you can invest it later via Betterment. And guess what: Citi invested in all those companies.

Another fun info: today, Square is almost as valuable a Citi bank.

 

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Citi stock (Source: Investing.com)

 

Sources:

The Top 100 Venture Capitalists, in CB Insights

Venture Capitalist (VC), in Investopedia

How Banking Giant Citi’s VC Arm Invests In Billion-dollar Exits, in Crunchbase News

Citi Ventures

Stripe To Offer Banking As A Service To Merchants On Its Platform, in PYMNTS

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