First State Super is rolling out a venture capital strategy to increase the likelihood that it will be an early investor in technological solutions which could disrupt businesses, including superannuation.
The $52 billion super fund has already invested $110 million in Blackbird Ventures (a venture capital firm established in 2012 to nurture the development of local internet start-ups with global market appeal) and is looking to invest in other fintechs, as well as bioscience companies, delegates at the Investment Management Consultants Association (IMCA) annual conference heard.
Caroline Saunders, senior manager of strategy and projects for investments at First State Super, said: “We may unearth something that will become a disruptor, and we will be an early investor in that, so our members will participate in one of those technological solutions or disruptors.”
She added that most large players in a market, such as retail super funds, innovate in what is called sustainable innovation at the higher end of the market, because, historically, this is where they can charge the highest prices to their most demanding and sophisticated client, and hence they achieve their greatest profitability. For example, super funds have started offering a simplified self-managed super fund solution.
Saunders said because of sustainable innovation most companies end up producing products or services that are too sophisticated, too expensive and too complicated for many of the customers in the market.
The result was to unwittingly open the door to disruptive innovation at the bottom of the market.
Disruptive innovation was a term coined by Clayton Christensen from Harvard and describes a process by which a client or service initially takes root in simple applications at the bottom of the market and then relentlessly moves up the market, eventually displacing the established competitors.
Saunders cautioned that the sustainable innovation strategy employed by super funds has so far failed to address the education or skill requirements around investments, allowing disruptors, like robo-advice, to come in.
“An innovation that is disruptive typically allows a whole new population of consumers access to a product or service that was previously only accessible to those with a lot of money or a lot of skill.
“For example, robo-advice empowers clients themselves to invest on some excellent administration platform with cutting edge technological tools.”
Characteristics of a disruptive business in its initial stages often include lower gross margins, smaller target markets and simpler products and services that may not appear as attractive as existing solutions.
Even if they do look vaguely attractive, the business environment of market leaders often doesn’t allow them to pursue disruption when it first arises because at first it is not profitable enough.
Another reason these are not often pursued is the development can take scarce resources away from sustaining innovations that incumbents need to compete against their current competition.
A disruptive innovation can take a long time to develop and the risk associated with it is much higher than sustainable innovation, but once a it is deployed in the market it achieves a much faster penetration rate.
By rolling out its venture capital strategy First State Super is planning to reap the benefits of disruption while maintaining its market-leading positon.