Analysis | How a UK Unicorn Was Spawned by a Mundane Idea

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When Paul Taylor was preparing to quit Google in 2013, he was seeking ideas for his next startup: something fundamental that could scale, but that seemed mundane and had been overlooked. He landed on a perfectly dull-sounding 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 funding round led by Temasek Holdings Pte., a Singaporean sovereign wealth fund. Its success belies the view that Britain is falling behind on innovation and startups.

That criticism isn’t justified: In the past decade, the UK has taken almost one-third of all the venture capital invested across Europe, become home to one-third of Europe’s technology listings and produced nearly half of the region’s fintech companies by value, according to data from Pitchbook, a California-based research firm.

Total VC investment in Britain is only about one-tenth of that in the US (which has a population five-times larger), but there is no market like America: It outstrips even all of Asia on these numbers. In Europe, the UK punches above its weight.

Thought Machine has found a niche that looks likely to benefit from a long spell of investment from banks, insulating it from the rising interest rates that are undermining high-tech growth stocks. Its software to manage bank accounts, lending and payments runs in real time as cloud-based infrastructure. While that sounds so basic it must already exist, banking technology hasn’t changed much in decades, and most lenders still rely on hulking, old-fashioned mainframes. But moving to the cloud has become a priority for banks in just the past few years to make systems cheaper to run, more adaptable to new products and fitter for a world where people increasingly run their finances on their phones.

Taylor, a software engineer, is on his third startup firm. He sold his second, a speech-software provider called Phonetic Arts, to Google in 2010. He got lucky, he told me in an interview last month, because Phonetic Arts started to gain traction just when Google was fretting about Apple Inc. introducing Siri and Amazon.com Inc. developing Alexa.

He spent a few years earning out his equity at Google, studying what made the company successful and how the cloud computing it relied upon could be used in other fields. A key advantage of the cloud versus mainframes is that its processing power can be increased or cut swiftly — and you only pay for what you need. That cost flexibility can make smaller businesses viable more quickly.

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

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

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

Many of these backers are also clients. JPMorgan is using 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 launchpad 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 serviced: a full JPMorgan US rollout would be highly lucrative.

The company’s $2.7 billion valuation is from a just-closed $160 million fundraising 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 backers participated too. 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 to itself. Traditional banking software groups such Switzerland-listed Temenos AG are trying to sell their own cloud-based systems. There are other startups too, including Dutch rival Mambu, which works with a long list of fintechs and smaller banks and was valued at about $5 billion in its most recent funding round late last year, according to Pitchbook.

Meanwhile, some large banks are doing the work themselves. Spain’s 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, could in future be licensed to other banks as another competitor to Thought Machine.

Taylor says independence will help his firm retain a wide roster of different banks as clients, hence his preference for going public at some point rather than getting bought by a large financial firm. If he does manage to list in London, Britain could get to really show its true mettle in tech.

More From Bloomberg Opinion:

• SoftBank’s Arm Is Best Off Returning to London: Chris Hughes

• Jamie Dimon’s UK Startup Is Really a Global Story: Paul J. Davies

• Elon Musk Misses the Big Picture on Lithium Mining: Anjani Trivedi

This column does not necessarily reflect the opinion of the editorial board or 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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