Illuminate Rounds Out Baton Systems Funding with $4m Investment

Venture capital firm Illuminate Financial has made a $4 million investment in Baton Systems, rounding out the start-up’s $16 million funding total. Baton, a provider of distributed ledger-based clearing and settlement technology, will use the investment to expand into EMEA, and beyond.

Baton has already received investments from three Silicon Valley-based VC firms: Trinity Ventures, Alsop Louie, and Commerce Ventures. But the company also wanted a VC with expertise and existing networks in the capital markets technology industry, and found their match in Illuminate.

“We wanted an investor who understands capital markets and putting together very complex deals, because we are starting to see that banks want to invest in companies like Baton, and in the blockchain,” Arjun Jayaram, Baton Systems CEO and founder, tells WatersTechnology. “Now that we are past the blockchain hype cycle, the companies that are left standing are the ones that will last,” he says, adding that Baton’s product is not blockchain per se, but is blockchain inspired.

Luca Zorzino, an investment director at Illuminate, says his firm had been in contact with Baton since it was founded. “We had originally looked to do an investment in 2016, when they had nearly set up the firm. But part of the mandate and criteria we look for in the investments we make are meaningful commercial traction. At the time, though we found the proposition interesting, they were still finding their feet.”

Baton aims to automate the clearing and settlement process. Its tech is based on permissioned distributed ledgers that can integrate with clients’ legacy systems and existing payments rails to move real assets into accounts. Jayaram says Baton has been able to consistently reduce the time these processes take—12 to 16 hours—to three minutes.

Baton now has major global banks live in production, including JP Morgan, on its two DLT-based platforms, one for the settlement of margin collateral, and one for FX transactions that launched in April 2018 and for which the company won Best DLT Project in the WatersTechnology Sell-Side Technology Awards 2019.

Baton has opened a small London office and hired former Citi prime brokerage FX veteran Alex Knight to drive its expansion into EMEA. There are three people in the City office currently, which Jayaram says will increase to seven or eight sales and support staff by Q3.

Illuminate founding partner Mark Beeston, who was formerly the CEO of Icap’s risk and information business, says his firm made the investment in Baton because its product addresses the cost and inefficiencies of settlement processing, and gives “organizations significantly higher levels of control over the settlement journey than they had in the legacy, batch-processed, barely-visible world of settlement, which is historically backward-looking and reconciliation-driven.”

This is the first investment Illuminate has made in a company offering DLT-based tech.

“That might come as a surprise for a fund so focused on market infrastructure and technology, given the focus there has been on blockchain initiatives over the last three years. That is not to say we had not looked at a lot of propositions—we had. And we said no to every single one of them, till now,” Zorzino says.

The other propositions did not take into consideration clients’ existing infrastructure and workflows, whereas Baton emphasizes integration with existing operations and systems, he adds. 

Expansion

Baton will now be looking to branch out into more complex transactions, like securities lending and repo, Jayaram says. Baton initially went for clearing settlement of securities and FX transactions because these are relatively simple problems to solve. 

“The action of a pledge [promising securities as collateral] is a futures commission merchant pledging securities and getting the cash back. We said, ‘Let’s solve this particular problem…because you don’t need to build a network for this. It’s between the central counterparties and the FCMs, and you don’t have to build a network,’” he says. “But we believe that once we solved this problem, we can use the same solution for doing more complex transactions like repos and sec lending. …That is the next natural frontier for us.”

The company will also look to expand geographically, starting with the UK, as London is still very much the center of the FX world, and then to Asia.

“For our next expansion, the logical place is likely to be either Singapore or Hong Kong,” Jayaram says, adding that at the current rate of growth, Baton could open up operations in Asia by Q2 of 2021.

“We are finding at this point that there is a lot of demand for Asian currencies and non-CLS settled currencies, so Asia seems a natural progression. People are wanting delivery of those assets,” he says.

To fund these activities, the company will consider another funding round next year, and perhaps even a bank consortium.

“We believe that we can get close to profitability and then probably raise a large round [of investment], and that large round would be primarily to put together a large consortium of banks. When you are getting into securities lending, getting into repos, when you have to build market infrastructure, you need a lot of capital, a lot of regulatory oversight and governance around that,” Jayaram says. “So that’s going to be our next big thing that we are already planning for right now.”