Twenty-one financial institutions have committed $200 million to a venture capital fund created to invest in up-and-coming financial technology companies.
Participants in the Financial Technology Ventures fund, which include half of the top 20 banks in the United States and three foreign banks, say they are not ponying up purely for profits. Part of the payback on their multimillion-dollar investments is expected to be early access to cutting- edge technology.
Indeed, staying ahead in technology is crucial to the banks, given the fast pace of Internet and electronic commerce development and the burdens on bank technology from mergers, acquisitions, and year-2000 initiatives.
"It helps each institution to have as many ears to the ground as possible," said Scott W. Wu, a former vice president of Montgomery Securities and one of the fund's three general partners.
In an unusual symbiosis, fund participants can choose to use the technology of the companies they invest in. In this way, the banks would help ensure the financial health of companies they have deemed important to achieving their strategic technology goals.
"We're the first venture capital firm we know of in which major players are collaborating to invest in companies of interest to them," Mr. Wu said.
The banks with the largest stakes in the fund-and the most opportunity to steer its direction-are Bank of America Corp., National City Corp. in Cleveland, U.S. Bancorp, Wells Fargo & Co., Banque Nationale de Paris, Credit Suisse Group, and Deutsche Bank.
Smaller stakes are held by Bank One Corp., Canadian Imperial Bank of Commerce, Fifth Third Bancorp, Fleet Financial Group, KeyCorp, PNC Bank Corp., Republic New York Corp., Royal Bank of Canada, and Wachovia Corp.
Nonbank second-tier investors are Charles Schwab & Co., Chicago Title Corp., American International Group Inc., Sallie Mae, and Washington Mutual Inc. Members were unavailable or unwilling to discuss their participation.
Mr. Wu and his partners-James C. Hale 3d, a former managing director of Montgomery Securities, and Robert Huret, who worked as a senior consultant to that firm for 14 years-will make the actual investments in the individual companies, $3 million to $7 million in each.
From San Francisco the three plan to scout midsize to large companies that have not yet made public offerings. Companies in digital payments, on- line banking, electronic commerce, and financial software will be targeted.
"It's a very rational approach for banks to make good investments at an appropriate stage," said Alex W. Hart, a venture partner of Internet Capital Group, Radnor, Pa., and the former chief executive of Advanta Corp. and MasterCard International. "It's a good way for them to stay on top of emerging technology."
The fund, which plans to have its first board meeting in June, has already invested in Financial Engines, a Palo Alto, Calif., company that provides on-line investment advice. It plans to close another investment soon.
The partners plan to use proprietary software to pass along to member institutions information about promising companies, including ones they don't invest in.
The fund's formation adds to a rising tide of venture capital investment geared toward information technology. In 1998, $7.77 billion in venture capital was put to work in the sector, up from $6.64 billion the previous year, according to VentureOne, a venture capital market research firm in San Francisco.
Banks including Chase Manhattan and Citigroup have made strategic investments in technology companies they believe are important to their futures. And Visa International, the card association, recently announced plans to establish the Visa Technology Fund, a venture capital fund open to member banks.
The developments highlight the desire of financial services companies, faced with numerous information technology pressures, to keep up.
Preparation for the year-2000 computer problem and shortages of expert staff can stretch resources to a limit, said James Moore, vice president of financial services at Gartner Group.
The Stamford, Conn.-based research firm forecasts a 40% shortfall in qualified information technology personnel by 2002.
"The pressure of change has been cannibalizing professional staff within financial institutions," Mr. Moore said. With "technical wizards" so difficult to bring in as employees, "it might be good to have them as partners," he said.
Mr. Hale said the fund does not view itself as a replacement for a bank's own professionals.
"We tried to position ourselves as another porthole on technology," he said, in addition to the bank employees who have that role.
The fund's partners are no strangers to financial technology. While at Montgomery, Mr. Hale and Mr. Wu helped technology companies raise money through initial public offerings and private placements of securities.
Though the fund's focus is to help its members keep abreast of technology, their investments in technology are expected to produce strong returns. Royal Bank of Canada, for example, said a small equity interest it took in Security First Technologies returned a $60 million to $70 million gain after seven months.
The prospect of financial success with a strategically focused fund like Financial Technology Ventures is as strong as it is with a fund that has a pure financial interest, said Josh Lerner, an assistant professor of business administration at Harvard Business School who studies corporate venture investing.
"Programs that are just set up financially are often terminated before the companies mature," he said.
But he also said investors have to weigh the advantages of banding together against the risks of losing the competitive edge they would gain by seeking out technology partners on their own.