G+D Ventures: investing in the TrustTech ecosystem

In its most common form, a venture capital (VC) fund provides high-risk financing to startups at different stages of their development, in return for equity. This class of investments exists largely because banks typically do not finance non-profitable early-stage startups. Although a significant percentage of the startups that are financed will not survive, the attraction of well-managed funds is undeniable: backers stand to see a major return on investment (ROI) as portfolio startups prosper, go public, or are acquired.

It’s a model that has given rise to countless startups, from Google and PayPal to Coinbase and Uber. Typically, VCs are backed by multiple investors (including sovereign wealth funds, pension funds, and family offices) who look to the VC/private equity asset classes to achieve higher levels of ROI for their clients.

Venture capital: enabling an innovation ecosystem

Venture funds are differentiated by criteria such as:

Investment strategy: Some specialize in investing in early-stage startups that have yet to release a product; others invest in growth-stage companies that might have as much as $100 million in revenues and many hundreds of employees. Others take a regional focus, targeting a specific set of countries or a region, such as Europe or North America.

Investment theme: Generalist funds invest across multiple product areas and industries. Those contrast with specialized funds where the investment strategy is focused on a single tech area such as AI or security. 

Those approaches date back to the establishment of venture capital as an asset class in the 1960s, when pioneering Silicon Valley–based funds such as Mayfield, Sutter Hill, and Venrock Associates took root before going on to back some of today’s largest companies, including Apple, Genentech, and Electronic Arts. Encouraged by such success stories, the US startup ecosystem grew to 290 active VCs by 1985; today there are over 12,700 VC funds.²

Corporates and the VC wave

Back in the 1970s, a few corporations – notably 3M and Xerox – were experimenting with the financing of startup companies, and over the following two decades corporate venture capital (CVC) became established as an additional source of funding for startups and a channel for either R&D or simply for investment for established companies.

Interest in CVC has grown ever since. Appreciating that in-house efforts alone can’t fuel all innovation, numerous companies have turned to corporate venturing initiatives, with the pursuit of disruptive innovation and a startup mindset now a priority in many board rooms. 

In contrast to classic VC funds, the finance for a CVC typically comes directly from the corporate itself. CVCs also usually make investments in innovators within a specific domain that is strategically relevant to their business. The strategy and objective of CVC initiatives vary, from a “strategic-only” focus to a more financially driven purpose. The corporate venturing model has become indispensable for many large companies: indeed, for several years now, corporate-backed deals have accounted around 20% of all global VC funding activities and half of all deal value.³

G+D Ventures aims to offer the best of both the VC and corporate venturing worlds. Launched in 2018, its activities are financially driven, with investments aligned to the core product themes of G+D. In 2022, G+D Ventures established a fund together with the European Investment Bank (EIB) and G+D with a thematic focus on TrustTech.

TrustTech expands the traditional definition of cybersecurity to include technologies that promote trust across all layers of the digital ecosystem: infrastructure, identity, regulation, and ethics. The goal of the €50 million fund is to provide financial return for the two backers but also to maximize the potential benefits of the partnership.

The fund aims to bring together the mindset of a financially driven VC with the close ties to two cornerstone investors – G+D and the EIB. It not only leverages G+D’s unique, global trust network to open doors for its portfolio companies, but also helps by establishing close mutual collaboration. In short, the G+D Ventures model accelerates value creation for the startup and the corporate by allowing them to draw on each other’s strength.

Partnership advantages for startups

Hands-on TrustTech team
The team behind G+D Ventures has extensive know-how in the TrustTech domain – mainly as a result of past involvement in the boards of various TrustTech companies. However, it is not only about experience and know-how; it also takes the right connections.

By networking and collaborating closely with G+D, the G+D Ventures team is able to provide access to experts, customers, partners, specialists, and executives (including CISOs).

G+D Ventures is an active investor – not only making the right connections in the TrustTech space, but also serving as a sounding board for startup founders and management when they are building and scaling their companies. In this context, having a team that has worked in both VC and corporate venture setups is advantageous.

Credibility and reputation through G+D
Backing from a reputable corporate is likely to add significant credibility to any startup and its product offerings. That is especially true in close-knit communities such as cybersecurity or TrustTech. As a security tech leader with a global footprint in Digital Security, Financial Platforms, and Currency Technology, G+D can showcase its close relationship with a startup to boost the confidence of potential customers and future investors for the startup.

Startups often have a hard time selling to large customers that are potential buyers of TrustTech technologies, such as banks and others in highly regulated sectors. Such customers are concerned about buying from a small, little-known company whose product is just breaking through. But if those enterprises see a global corporate partner backing the startup, it adds real credibility to the young company and builds trust in the commercial relationship.

Scaling internationally
By their nature, startups need to show success in a single geography before they can scale up internationally. One of the key advantages of having a global corporate investor is the ability to use their existing international network. In the case of G+D, the Munich-headquartered company is represented by 123 subsidiaries and joint ventures in 40 countries around the globe, making it the ideal partner for international expansion.

Accessing expertise, process know-how, and resources 
Tech startups typically follow a “fail fast” product development approach, in many cases entering the market with an MVP (minimum viable product), which is far from perfect but demonstrates the potential of the innovation. However, at some point in its evolution, certain key product requirements are inevitably raised, especially when the customers are large, risk-averse organizations such as banks or telcos.

These requirements might involve obtaining product certifications (for example, ISO accreditation) or passing security audits, which can be costly and time-consuming, especially when undertaken for the first time. Startups are not necessarily familiar with these processes and often need more time than a corporate to address them.

G+D has deep expertise in areas such as certification, vulnerability testing, and regulatory compliance. This can be highly beneficial for a startup and the decisive factor in securing a contract with a large client. Furthermore, G+D operates its own security lab for software and hardware testing, presenting a startup partner with the opportunity to leverage what it has learned and avoid any disruptive security issues.

Partnership advantages for corporates

The startup-corporate relationship is not one-sided. There are also numerous benefits for corporates that can flow from an investment-inspired partnership with a startup – besides the purely monetary ROI. Here are just some of the key ones:

Deepening market intelligence
The success of most mature enterprises rests on maximizing the value of their core offerings and markets – sometimes at the expense of venturing into potential new areas. Obtaining exposure to startups that are taking tangential, novel approaches often broadens a corporate’s thinking on innovation and its go-to-market approaches. As an active partner in numerous startups, G+D Ventures gains direct insights into customer needs, market demands, and competitive landscapes, ensuring a deep understanding of the key elements that drive business success.

That kind of exposure allows a corporation to step outside of its existing ecosystem, see the scope for new products and, critically, assess potential disruptions to its incumbent market position.

As part of its startup search and qualification process, G+D Ventures creates “search fields” that map out the complete ecosystem in which a potential investment lies – profiling the market segment, the key technologies, the competitive landscape, and more. The aim: to see where the “sweet spot” would be for a G+D Ventures investment and identify the most exciting startups in that segment.

But the team also shares that in-depth intelligence with the appropriate business units at G+D, enhancing their product and marketing strategies. Examples of search fields conducted over 2023 include “privacy-enhancing technologies” and “responsible AI” – both highly relevant fields for G+D.

Tapping into an entrepreneurial mindset
Startups have operational models and different ways of working that larger corporates can learn a lot from. Besides agile development, lean decision-making processes, and new models for remote working, startups apply techniques such as “growth hacking” that corporates seldom use. While not all of these can be applied one-to-one by a corporate, some can be adopted and greatly influence its success. 

Partnership opportunities
Finally, product and solution partnerships have great commercial potential for corporates as well as startups. A corporation refining or supplementing its established offerings with fresh, adjacent, and sometimes disruptive solutions from a startup can add value for the customers of both parties.

Two examples of G+D Ventures investments that demonstrate the high strategic potential of such partnerships are  Salv and Yields.io.

Salv, established by former Skype and Wise employees, specializes in financial crime solutions. Its current focus is on addressing the ever-growing need for anti-money-laundering (AML) solutions. A significant challenge for banks is not only identifying AML transactions, but also sharing the resulting intelligence throughout the financial services ecosystem, effectively creating a network of financial crime fighters, while always respecting GDPR regulations. This presents a highly relevant opportunity for G+D, with the potential to combine Salv’s solution with G+D’s existing anti-fraud and authentication capabilities for the benefit of customers.

Yields operates in the field of model risk management, a top priority for banks under increased regulatory pressure. Its solution manages the entire inventory of models, tracking the data and creators of these models. Additionally, it enables the models to be tested and facilitates straightforward reporting of results to regulators. These models can encompass both AI-related and non-AI-related models, such as credit risk models. Yields and G+D both recognize the opportunity to offer this solution to G+D customers, potentially aiding Yields’s international market expansion. G+D is also exploring advanced applications of different AI models and could integrate Yields solutions into its own AI-related projects.

One of the reasons this technology is particularly interesting is because of the new European Union AI Act. As it comes into force, there will be a major requirement for robust model management and model testing.

The role of G+D Ventures

As these examples illustrate, G+D Ventures acts as the link between the startup and corporate worlds. For startups, G+D Ventures can be seen as the “business development” vehicle for the G+D Group and its ecosystem of partners and customers. And from the corporate perspective, G+D Ventures identifies innovative technology and business model developments in the TrustTech startup space, striving to find the best potential partners and generate return on investment when that is executed successfully.

TrustTech: enabling a trust backbone for the digital age

TrustTech expands the traditional definition of cybersecurity to include technologies that promote trust across all layers of our digital ecosystem: infrastructure, identity, regulation, and ethics.

Digital Infrastructure: Enables the exchange of data between parties. Examples of technologies present on this layer are cybersecurity, secure data collaboration, and privacy-preserving techniques.

Identity: Ensures only authorized parties participate in the data exchange. Examples include know-your-customer, authentication, and identification.

Regulatory: Enforces laws and regulations to protect the rights of transacting parties and defends society from fraudulent and criminal activity. Examples are anti-money-laundering and anti-fraud solutions.

Ethical: Observes and maintains societal values not explicitly protected by laws and regulations. Examples are deepfake detection and fake news detection technologies.

The ultimate aim: enabling a trust backbone that engenders high societal trust in digital technology – in all its forms

Published: 04/06/2024