Venture Capital and Innovation in Banking

Innovation in banking can be had in various levels. In today’s innovation economy, new technology and its applications, as well as new business models, lead to innovation in the sector. While painful, allowing banks to fail leads to creative destruction and new, entrepreneurial banks that better serve their customer bases and are more efficient.  Bailing out the banks was wrong in the first place. We don’t see technology startups getting bailed out when they make mistakes, do we?  No they fail and fail miserably in the country and no one really cares. That is just part of the game in our sector and its accepted that failure rates are high. However, these organizations are more efficient and add more value to the economy and the society as well than big banks.

Scotland could rapidly increase its venture capital supply by insisting that the UK government give its fair share (10%) of publicly held shares to Scotland, under either an independent or further devolved scenario.  This money could then be invested into the innovation economy in Scotland through a venture capital fund-of-funds structure.  One of the investment categories of a new fund-of-funds could be a “banking innovation venture capital fund” focused on new bank start-ups. Also, a hedge fund-of-funds seed fund for attracting and growing new hedge funds in Scotland could accompany it.

Turning Non-Productive Assets into Productive Assets

The Royal Bank of Scotland Group PLC has a market cap of GBP 40.9 billion as of today. The UK government owns 64% of the company currently. That means Scotland’s share is approximately GBP 2.56 billion. Here is the math:

RBS Market Cap 40 billion * 64% (UK Government Ownership) * 10% (Scotland’s share) = GBP 2.56 billion in new venture capital fund-of-funds capitalization

While not a big figure in the grand scheme of things, this is about 2X what is available in institutional venture capital supply in Scotland today. After management fees (1% a year over a 10 year period) and cost of setting the fund-of-funds up, let’s say there was GBP 2 billion available for investment in venture capital funds. Over a 5 year period, this fund-of-funds could invest in 15 different venture capital funds of $100 million each on average. Other for-profit investments could include those in crowdfunding funds, incubators, accelerators, and similar vehicles.  At least a few of these new venture capital funds could be geared towards new banking startups; a private banking incubator or two;  a seed fund for hedge funds;, and maybe a couple more focused specifically on technological innovation in banking, especially information systems and platforms. A GBP 100 million cyrptocurrency venture capital fund could be developed as well.  In addition, a venture capital fund focused specifically on crowdfunding, also capitalized with GBP 100 million, could be sought and financed by the fund-of-funds. These financial services-oriented venture capital funds would lead to a step change in innovation and new venture formation. They will attract entrepreneurs from all over the world and help turn the banking system on its head. It’s about time, 6 years later, that this is done.

The government of the United Kingdom has already started selling its shares in Lloyds. So there are other holdings as well that could be sold and the funds contributed to the venture capital fund-of-funds in Scotland. GBP 2 billion is just the size of the funds from the RBS contribution.

Why is the public’s money being held in inefficient dinosaurs?  Sell the shares ASAP and put the money into the innovation economy. Turn non-productive assets into productive assets,  as taught in accounting 101.



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