How a British unicorn was spawned from a banal idea

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When Paul Taylor was about to leave Google in 2013, he was looking for ideas for his next startup: something fundamental that could scale, but that seemed mundane and had been overlooked. He landed on a perfectly boring answer: banking software.

Eight years later, the company he founded in London, Thought Machine Group Ltd., counts JPMorgan Chase & Co. among its global clients and has just been valued at $2.7 billion in a round of table led by Temasek Holdings Pte., a Singaporean sovereign wealth fund. funds. Its success contradicts the view that Britain is falling behind when it comes to innovation and startups.

This criticism is unjustified: over the past decade, the UK has captured almost a third of all venture capital invested in Europe, has become the home of a third of European technology listings and has produces almost half of the region’s fintech companies by value. , according to data from Pitchbook, a California-based research company.

Total venture capital investment in Britain is only about a tenth of that in the US (which has a population five times the size), but there is no such market as America: it even exceeds all of Asia on these figures. In Europe, the United Kingdom exceeds its weight.

Thought Machine has found a niche that looks likely to benefit from a long period of bank investment, insulating it from rising interest rates that are undermining high-tech growth stocks. Its bank account, loan and payment management software runs in real time on a cloud-based infrastructure. Although it sounds so basic that it must already exist, banking technology hasn’t changed much in decades, and most lenders still rely on outdated, outdated mainframes. But moving to the cloud has become a priority for banks in recent years alone to make systems cheaper to run, more adaptable to new products and better suited to a world where people increasingly manage their finances on their phones. .

Taylor, a software engineer, is on his third start-up. He sold his second, a voice recognition software provider called Phonetic Arts, to Google in 2010. He was lucky, he told me in an interview last month, because Phonetic Arts started to gain traction just as Google worried about the introduction of Siri by Apple Inc. and Inc. developing Alexa.

He spent a few years earning his capital at Google, studying what made the company successful and how the cloud computing it relied on could be used in other areas. One of the main advantages of the cloud over mainframes is that its processing power can be scaled up or down quickly, and you only pay for what you need. This cost flexibility can make small businesses viable faster.

In the UK, when the government demanded more competition among retail banks after the 2008 crisis, the regulator found it needed to get to grips with the cloud to give small lenders a chance. Today, Britain has a host of new banks and finance companies, including Starling Bank Ltd. and Monzo Bank Ltd.

“I didn’t want to open a bank because I don’t know anything about banking,” Taylor says. But he found the design of a basic banking system quite simple: At its core, it’s just a ledger that keeps track of money coming in and going out, he says.

Redesigning core banking IT from the ground up without having to integrate with legacy software or mainframes allowed Taylor to simplify its systems. The big banks were quickly impressed and have been among its main supporters since the early days, alongside venture capital funds. UK’s Lloyds Banking Group Plc has been an investor since 2018 and Sweden’s Skandinaviska Enskilda Banken AB joined in 2020, while Netherlands’ ING Groep NV, JPMorgan and Standard Chartered Plc invested in 2021. Its backers venture capital funds include Nyca Partners of New York and Eurazeo SE of France.

Many of these funders are also clients. JPMorgan uses Thought Machine for the cloud-based bank it is building in Britain, Chase UK. The project is a testing ground for new systems and products that JPMorgan plans to use as a launch pad for other markets and eventually for its giant US retail bank. Thought Machine charges subscription fees for its software based on the number of accounts it serves: a full JPMorgan rollout in the US would be very lucrative.

The company’s $2.7 billion valuation comes from a just-closed $160 million fundraising round led by Temasek, with Intesa Sanpaolo SpA and Morgan Stanley among new investors. Intesa will use the software to build its new digital platform, Isybank. Existing donors also participated. Thought Machine’s value has more than doubled since its previous funding round, which only closed in November.

Thought Machine doesn’t have the field on its own. Traditional banking software groups such as Switzerland-listed Temenos AG are trying to sell their own cloud-based systems. There are also other startups, including Dutch rival Mambu, which works with a long list of fintechs and smaller banks and was valued at around $5 billion in its last funding round late last year. , according to Pitchbook.

Meanwhile, some big banks are doing the work themselves. Spanish bank Banco Santander SA, which employs 16,500 software engineers, said last week it had moved most of its core systems to the cloud using its own software. Its system, called Gravity, may in the future be licensed to other banks as another competitor to Thought Machine.

Taylor says independence will help his company retain a large roster of different banks as customers, hence his preference to go public at some point rather than being bought out by a big financial firm. If he manages to register in London, Britain could really show his true courage when it comes to technology.

More from Bloomberg Opinion:

• SoftBank’s arm better go back to London: Chris Hughes

• Jamie Dimon’s UK startup is truly a global story: Paul J. Davies

• Elon Musk misses lithium mining overview: Anjani Trivedi

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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