e-finance – JP Morgan hatches its own future

JP Morgan will this year plough $1 billion into its new incubator for e-finance businesses - LabMorgan. Euromoney's Peter Lee reports.

With some pride JP Morgan managing director Thorkild Juncker hands over his new business card on the second Friday in March. Apparently Euromoney is the first recipient from outside the bank. And it's certainly a change from the very traditional cream-coloured JP Morgan card which carries the bank's and the officer's name running across in heavy black type.

One side of the new card is entirely indigo. On closer inspection there is a faint background pattern of a honeycomb and near the bottom the name of JP Morgan in a lighter shade of lilac. The reverse is plain white with contact details reading down like a menu to, at the bottom, the name of the new division, LabMorgan, of which Juncker is the European head.

Isn't it all very new economy, jokes Juncker: tweed-jacketed and sprightly after an over-night flight from New York and a hectic morning of presentations.

Juncker is one of the key men behind Morgan's drive to create LabMorgan, an in-house incubator for e-commerce ideas that he is now unveiling around the bank.

He later lets slip that he spent the previous evening discussing with one of the bank's equities executives what he described as potentially “a miracle idea” that had been suggested by a big client.

Juncker worked on it during the flight to London, while staff in New York were refining the business concept and e-mailing ideas ahead to him. Juncker hopes to test out and validate the basic idea within two weeks. If it still stands up, LabMorgan will then accelerate development, build prototypes, demos and a basic company infrastructure around the business idea. That might take two months. Then comes the key decision whether to invest or not. If it still looks viable, JP Morgan might commit $10 million to $20 million into what began two and half months earlier as a chance conversation between Juncker and the equities man. In the internet arena, speed is of the essence.

A hive of creativity

JP Morgan is preparing to devote $1 billion of investments to new e-finance businesses in 2000, many based on ideas brought forward from employees of the bank and then screened, validated, built and launched by the 200-strong staff of the new LabMorgan, an in-house venture capital unit dedicated solely to business-to-business (B2B) internet-based finance ventures.

The aim is to fill the cells of the honeycomb speedily by combining Morgan's established client contacts, market presence and solid brand with the new ideas and entrepreneurial flair of its own employees. These should be the first to spot ways the internet might allow the bank access to more clients, or to cut costs, or to do both at once.

If it works, LabMorgan will do much more than earn the bank income from its stake in thriving new e-finance businesses and capital gains from realizations. It will re-invent JP Morgan from within.

“This is much broader than stand-alone venture capital. This is a transformation of the firm and its markets through innovation. There has to be a significant partnering with and impact on all our existing businesses, or we will have failed,” declares Juncker.

What are its advantages?

Most obviously, focus on a single area. While other internet incubators and venture capitalists might seek to fund all manner of internet ideas including business to consumer (B2C) and business-to-business, LabMorgan concentrates solely on ideas relating to wholesale finance.

If an entrepreneur brings a new idea, LabMorgan can quickly test out the concept with the bank's own clients. Does it give customers something they badly need? Would they use it? How would they refine the business idea to suit them even better?

Related to this, Morgan brings two components that are vital for many internet start-ups: content and brand. A portal for corporate bond research and trade execution remains no more than a good idea without actual research content and live prices. JP Morgan brings both.

It also brings an established name. This might not be attached to a new company's name directly, but a flag on a website saying a new financial business is empowered by, or partnered with, JP Morgan lends it some serious credibility.

And, of course, Morgan provides capital.

LabMorgan does many of the basic things that all incubators do for budding internet entrepreneurs.

In the initial two- to four-week validation phase, it brings technology experts, business people and at least one professional doubting Thomas to work with the entrepreneur. It tests the basic idea out with clients. In the acceleration and building phase, it brings in website designers, provides premises, helps recruit key staff such as a chief technology officer and a chief financial officer. It helps build the company.

“We do all the things a typical incubator does during the time-to-market phase and we probably do them at least as well as any incubator,” says Juncker.

He goes on: “Where we are unique is in the time-to-value phase, that is in taking the new venture from launch to critical mass, to making it a real player. We excel here because of our client reach and knowledge of the underlying financial markets.”

He mentions a couple of internet-based bond trading vehicles which were launched earlier than MarketAxess but which since then have been treading water while they tried to bring in leading dealers as partners. JP Morgan can provide that content immediately.

Finally, and as important in an age when speed to market is crucial for new e-businesses, the bank already knows very well the main sources of its new ideas: its own employees. Unlike outside venture capitalists, it doesn't have to spend time on background checks and due diligence on these people.

The old and new can meet

To the extent that a new venture from LabMorgan depends on content from an existing Morgan business unit – say something in the bond markets area that relies on bond indices or prices from the banks' researchers and traders – then the Morgan business unit supplying that content will be allocated a portion of the bank's equity in the new venture.

This distinguishes Morgan's approach from the internet development efforts at many other large banks.

On a blackboard Juncker draws two roads angling towards a meeting point. The top road is the established JP Morgan with all its brand, content, market presence and client contacts. The bottom road is LabMorgan, which emphasizes new ideas, speed, focus, technology and the ability to partner quickly with entrepreneurs and even traditional competitors to Morgan.

“Many firms keep those roads running in parallel and separate because they think the old and the new cannot meet. But to me the most interesting point is the intersection.”

With a flourish he draws a third wider, larger road leading away from the intersection and writes the word “value”. He says: “That value could be simple efficiency, EVA, or market value-added to JP Morgan.”

If JP Morgan can indeed negotiate the traffic snarling around that particular junction, it will have pulled off quite a trick.

Just a few simple questions

A large venture capitalist might see 10,000 business ideas in a year. LabMorgan, concentrating solely on e-finance, will see fewer, but still expects to measure them in thousands. It expects to launch from 20 to 40 new businesses in a year.

What lessons has Juncker absorbed in the previous months that will serve the new LabMorgan through this process?

First is that there are two types of internet ideas: the small and the big. LabMorgan is interested in the second kind.

And Juncker does not lack ambition for the ventures LabMorgan launches.

“In Europe the entrepreneur behind the typical start-up is probably happy to launch his company and grow it to being a national player. What we offer is the ability to take the next step and access the regional or global markets quickly.”

Although junior employees may come up with some interesting technology-intensive ideas, it is the top producers and business leaders who are the best sources of business ideas.

Juncker has a few simple tests for these budding entrepreneurs. “We expect when people come to us with their ideas that they can answer a few basic questions. What is the unmet client need your business meets? Why is your idea unique? What is the size of the potential market? What technology is needed? Why are you best placed to make this work?”

Rewards

And what are the rewards for people that can answer those questions?

By the time LabMorgan provides the first round of financing, the founder who brought the idea might expect to still own from 15% to 30% of a business that is now worth in the region of $20 million.

As the size of the business rises, so his or her ownership will be diluted, not least to accommodate outside business partners as investors. The group makes it clear that by the time the business gets to the IPO stage, the founder will likely own roughly 5%. But if things go well 5% of something now worth closer to $200 million than $50 million.

This is an edited extract from an article that originally appeared in the April issue of Euromoney magazine.

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