October 25, 2005
Within the $72-billion enterprise software market, one niche is growing at a rate that’s caught the attention of venture capitalists. That would be the financial services segment, as banks, insurance companies, and credit card outfits all look to specialized software to help them better manage their clients’ money.
One VC firm that’s been particularly bullish on the area is Jerusalem Venture Partners, a $700-million fund based in Jerusalem, Israel. JVP’s Laurel Bowden focuses on investing in enterprise software companies for the firm and is particularly keen on the potential for returns in the financial software market.
Of course, she’s not the only one. Large enterprise software companies like Oracle and SAP have shown an immense interest in this vertical because of its size and interest in adopting software. Redwood Shores, California-based Oracle bought a 41 percent stake in i-flex solutions, an India-based provider of banking software, for $593 million in August (see Oracle Buys i-flex solutions).
Even rival SAP has talked about plans to expand in the $9-billion worldwide market for banking software.
But Ms. Bowden, who heads up JVP’s European operations, has also been keeping busy. In September, she led a $7-million round of funding for Earnix, an Israeli company that provides pricing optimization software for insurance companies.
Not all of her investments have been in the financial software segment. In the past, she co-led the investment in networking equipment maker Native Networks, which was later acquired by Alcatel.
Among some of the other financial software firms receiving JVP investment were Zoomix, which does data cleansing across different databases and geographies, Oblicore, which monitors different outsourcing implementations for banks, and Cyber-Ark, a security provider mostly for financial institutions.
Although JVP started in Israel, it also invests in the United States and Europe. And 10 out of JVP’s 30 portfolio companies have financial services companies as a major customer base.
Ms. Bowden talked with Red Herring from her offices in London about the potential for financial software and future trends in this segment. Edited excerpts follow:
Q: How big a part of enterprise software is financial software?
A: When I talk about financial software, I am talking about software that targets financial services institutions such as banks, insurance companies, or credit cards companies. I think financial services companies are an enormous buyer of software. Forty to 50 percent of the deals within enterprise software we look at are in financial services.
Q: Why is the financial software market so lucrative?
A: I think financial services companies have traditionally been at the forefront of buying software and at the forefront of having their systems online. The minute three of the top banks in the U.S. are doing it, others have to follow, and the same happens in the United Kingdom, Germany, and Japan.
And the banks have always been more open than large manufacturing companies to buying software products from quite early-stage software companies. Financial services are tough to crack but they are probably the most likely buyer, long before some manufacturing company or a hotel chain.
Q: Which specific areas in financial software are you interested in investing in?
A: I find all things around consumer Internet marketing very interesting. Today, you go into the bank and you have various pamphlets and people who can offer you help. The same things can be required on the Internet when you buy additional products through banks or an insurance company. We constantly look at that type of software, whether it’s real-time targeting, web analytics, marketing automation, or price optimization.
Another area we have looked at a lot is fraud detection and compliance. Clearly, we look at security quite a bit. We looked at a number of different types of software that enable consolidation and integration of both systems and data.
And finally, we think an area that is very significant is outsourcing. We might not be investing in the latest outsourcing company in India but we would invest in companies that enable Fortune 500 or 1000 companies to outsource various parts of the enterprise. There again, financial services is an enormous market.
A Goldman Sachs survey says CIOs of all financial services have substantial parts of their business in India, the Philippines, or in some outsourced place. And they expect outsourcing budgets to rise from 5 to 7 percent to up to 50 percent over the next five to ten years.
Q: Is there a number you can predict for the size of the market?
A: No, but it obviously is in the billions.
Q: You mentioned price optimization. At what stage of the lifecycle is price optimization in financial services?
A: Pricing optimization is probably one of the areas we think that happened in reverse. We normally look at software and you see financial services adopt it very fast and then later on, other industries adopt it.
In pricing optimization, it almost seems like the exact opposite. The airline industry and the car rental industry have adopted pricing optimization for years now. But today I can phone up an insurance company and get quotes that vary from a very low level to a high level.
We have invested recently in a company called Earnix that focuses primarily on financial services limited to insurance. The company uses existing software that has different models for different industries. We hope to now take it beyond car insurance and personal insurance into credit cards and personal loans. In financial services, pricing optimization is relatively in the early stage.
Q: Geographically, which countries are developing software for financial services?
A: You’re always going to get great software coming out of the U.S., various parts of Europe, and Israel. So we definitely as a fund have a big Israeli focus. Sometimes the technology might come out of Israel, in the case of financial software, but all the business development is being done in London, Europe, the U.S., or Asia.
Personally, I see quite a lot of things in the U.K., in Scandinavia, and Ireland and my colleagues see things on the East Coast [of the U.S.]. But realistically, the bulk of our investments will be Israel-related. We’ll then help the companies expand and grow in different markets.
