Business of Fintech
Inside Swell, Pacific Life’s in-house impact investing startup
- Swell, an impact investing startup, was built inside Pacific Life to offer different types of products for a new clientele
- Swell's autonomy lets Pacific Life test new product approaches and build a culture of agile development throughout the company
For Dave Fanger, building an in-house startup was labor of love.
“It was a nights-and-weekends passion of mine,” said Fanger, CEO of Swell, the impact investing platform owned by Newport Beach, California-based insurer Pacific Life. “We were looking for asset managers to acquire, but I didn’t see anything out there that was addressing the values I was looking for.”
For Fanger, finding partners who were committed to sustainability was important. So six years ago, he teamed up with a colleague and decided to launch Swell -- but instead of creating a startup from scratch, he decided to do so from within Pacific Life. It was early in the robo-adviser space. Fanger made a business case to management based on data on how young people were interested in investing in companies that had some kind of social impact, and why it would be a good business move for Pacific Life.
“I presented the data on socially responsible investing versus socially responsible consumerism -- how folks want to do investing online and do it responsibly,” he said.
Fanger’s pitch resonated with Pacific Life management, and through several iterations of the product and collaborations with a design firm, it launched to the public last year. Pacific Life has so far invested $30 million in Swell. Investments in the in-house startup serve three key purposes: to build up a new type of product; reach a different type of audience (Pacific Life’s clients are companies and Swell serves consumers); and build a culture of innovation throughout the parent company.
“When [Fanger] came to us with the idea for Swell, we recognized an opportunity to support a new kind of asset management option that filled a gap in the investing universe,” said Adrian Griggs, chief operating officer at Pacific Life. “Younger investors haven’t traditionally had access to true impact investing options, and that’s exactly what Swell set out to deliver.”
Dave Fanger, CEO of Swell
Swell offers its clients the choice of six impact portfolios under such themes as Green Tech, Clean Water, Zero Waste, Renewable Energy, Disease Eradication and Healthy Living. It currently has 20 million in assets under management, and clients pay a 0.75 percent assets under management fee.
Swell spun off as an LLC of its own in February and has 30 employees. It's a wholly owned subsidiary of Pacific Life. Swell is part of a bigger trend among large financial companies that incubate their own startup-type entities, with recent examples including iShares from Barclays, which was acquired by Blackrock in 2009, and Marcus by Goldman Sachs. Analysts say this type of arrangement is likely to become more common since they let established companies innovate more quickly, and the new brands can reach different types of clients.
"It lets traditional firms pivot to different business models, without changing everything at once -- and very often, you see them create different brands for different audiences -- take, for example, Marcus by Goldman Sachs which has a very different business line," said Aite research director Alois Pirker.
As venture capital funding in certain segments of fintech becomes harder to come by, corporate-incubated startups may become more common, he added. For Swell, maintaining the "separateness" of the startup entity is a critical driver of success, and the choice of location in Santa Monica -- away from the mother ship -- is no accident.
"You need the company to have its own office when you're building something so different, and you've got to bring in people who are passionate -- you can't just bring them over from the parent company," said Fanger. "The risk if you don't provide that independence and autonomy is that a clawback could occur [from the parent company.]"
Maintaining the distinct identity for Swell was important, but legacy brands bring investment capital, historical knowledge and consumer trust. Pacific Life said it meets with Swell several times a quarter to stay informed, and the teams connect regularly through Slack. The Swell experience and agile development philosophy has also encouraged change within the parent company, too.
"Pacific Life has started to implement design thinking approaches to innovating within its core product offerings," Griggs said. "We have leveraged the expertise that they have developed in all things digital, from marketing to cloud technology."
Corporate-funded startups offer both strategic and financial returns, said Erica Young, venture partnerships director at Anthemis Group.
"It's really hard in pure startup land to identify a business that's aligned with your future trajectory or strategic path," she said.
Should the in-house startup succeed, incumbents that create startups eventually face a tough choice of whether to fold it inside the parent company, sell it or sell equity stakes to other investors. A challenge with incumbents that incubate startups is that they often have trouble ceding control to other entities, Young added.
As for Swell, Pacific Life said it's open to letting other investors in if it advances Swell's mission.
"Swell’s structure provides agility for them to potentially work with new partners that could offer additional support and guidance," said Griggs. "Pacific Life and Swell’s shared goal is to make impact investing available to as many people as possible. If strategic partners open access to new markets and avenues for expansion, we’re all for it."
Photos courtesy of Adolfo Garcia Photography
Dave Fanger, CEO of Swell
Swell offers its clients the choice of six impact portfolios under such themes as Green Tech, Clean Water, Zero Waste, Renewable Energy, Disease Eradication and Healthy Living. It currently has 20 million in assets under management, and clients pay a 0.75 percent assets under management fee.
Swell spun off as an LLC of its own in February and has 30 employees. It's a wholly owned subsidiary of Pacific Life. Swell is part of a bigger trend among large financial companies that incubate their own startup-type entities, with recent examples including iShares from Barclays, which was acquired by Blackrock in 2009, and Marcus by Goldman Sachs. Analysts say this type of arrangement is likely to become more common since they let established companies innovate more quickly, and the new brands can reach different types of clients.
"It lets traditional firms pivot to different business models, without changing everything at once -- and very often, you see them create different brands for different audiences -- take, for example, Marcus by Goldman Sachs which has a very different business line," said Aite research director Alois Pirker.
As venture capital funding in certain segments of fintech becomes harder to come by, corporate-incubated startups may become more common, he added. For Swell, maintaining the "separateness" of the startup entity is a critical driver of success, and the choice of location in Santa Monica -- away from the mother ship -- is no accident.
"You need the company to have its own office when you're building something so different, and you've got to bring in people who are passionate -- you can't just bring them over from the parent company," said Fanger. "The risk if you don't provide that independence and autonomy is that a clawback could occur [from the parent company.]"
Maintaining the distinct identity for Swell was important, but legacy brands bring investment capital, historical knowledge and consumer trust. Pacific Life said it meets with Swell several times a quarter to stay informed, and the teams connect regularly through Slack. The Swell experience and agile development philosophy has also encouraged change within the parent company, too.
"Pacific Life has started to implement design thinking approaches to innovating within its core product offerings," Griggs said. "We have leveraged the expertise that they have developed in all things digital, from marketing to cloud technology."
Corporate-funded startups offer both strategic and financial returns, said Erica Young, venture partnerships director at Anthemis Group.
"It's really hard in pure startup land to identify a business that's aligned with your future trajectory or strategic path," she said.
Should the in-house startup succeed, incumbents that create startups eventually face a tough choice of whether to fold it inside the parent company, sell it or sell equity stakes to other investors. A challenge with incumbents that incubate startups is that they often have trouble ceding control to other entities, Young added.
As for Swell, Pacific Life said it's open to letting other investors in if it advances Swell's mission.
"Swell’s structure provides agility for them to potentially work with new partners that could offer additional support and guidance," said Griggs. "Pacific Life and Swell’s shared goal is to make impact investing available to as many people as possible. If strategic partners open access to new markets and avenues for expansion, we’re all for it."
Photos courtesy of Adolfo Garcia Photography