FinTech disruption is in its early innings, particularly on the institutional side, but the number of exciting startups is growing. You’ve likely heard of companies like Lending Club in the lending sector, Wealthfront for wealth management, and Square for payments. Companies like these are reinventing very old processes in their respective sectors, and I could list many more examples of technology firms like these who are gaining mainstream recognition. But there are thousands of startups reimagining much more niche functions in the Financial Services industries, and many of them could be complementary or competitive to your own business.
So…how can you profit from these startups?
Working with fledgling companies is a foreign concept to many FinServ professionals, particularly outside of the CTO’s office, but here are 3 reasons you should personally and professionally get involved with FinTech startups right away.
Reason 1: You will adopt the best technologies first, long before your competitors
The benefits of being first are numerous.
The early users of disruptive technologies will have the first opportunities to reap the benefits—especially profits. For those of you on the buyside, this is particularly true when a product can uncover new sources of alpha before your peers catch on to them.
But even if you are more risk averse with technology adoption, discovering new products early can still have a meaningful benefit by making you a faster “fast follower.” Don’t start your due diligence on a product at the time it becomes mainstream, when the excess benefits are already being arbitraged away. If you start by putting small amounts of time into reviewing early-stage products a year or two in advance, for example, you’ll be ready to immediately jump in once the early adopters have sufficiently validated it for you. And even more importantly, you’ll have the opportunity to help shape the product features as they are built, ensuring it will have maximum utility to you once you do start using it.
Many entrepreneurs are at the forefront of thought leadership, and since they are shaping the future of this industry, it follows that they are also a great source for understanding that future as early as possible. Don’t solely rely on industry publications or consulting firms to highlight key trends. You’ll gain a much deeper understanding by also interacting directly with the trendsetters themselves.
An additional benefit of being ”in the know” is that you’ll brand yourself as a forward-thinker. You’ll impress your boss, land new clients, or maybe land a new job at a more innovative company or even a startup (if you’re so inclined to pursue that course.)
I’m a Partner at ValueStream Labs, a firm that runs an accelerator program specifically for FinTech startups, and we’ve organized numerous interactions between startups and FinServ professionals at institutions of all sizes.
For example, a team at a large hedge fund described to us their inefficiencies in searching for certain types of information in very large collections of text-based documents. This is a common problem across many hedge funds, and yet the existing tools this particular fund uses still can’t do exactly what they need. So ValueStream introduced this hedge fund to a company called Sensai, which has developed an innovative and simple interface that allows analysts of almost any skill level to more effectively use cutting-edge, machine learning-based search algorithms. Although Sensai is a young company and has only entered into contracts with firms outside of the Financial Services industry to date, the potential benefits to this hedge fund were immediately clear.
The key to making this an effective process for you is to avoid wasting your time listening to the startup pitches that will never add value for you. You need to be selective, and the best way to do this is to utilize a filter to help you wade through the crap that exists in the startup ecosystem. That’s one of the biggest opportunities we saw when we started ValueStream: providing a level of transparency and due diligence that helps professionals focus on the startups that can truly add value to their businesses.
Reason 2: You will uncover excellent investment opportunities
Investing in early-stage companies can provide excellent upside potential, but it’s a daunting endeavor when you’re unfamiliar with the market the startup is attempting to tackle, on top of the many other unknown risks of investing in startups. What’s your edge on identifying the next Instagram that will sell to Facebook for circa $1B when there are already dozens of potential competitors in the space? Therefore, what better place is there to invest than in a FinTech segment where you already have unique expertise (and where most other investors likely do not)?
FinServ professionals are unique in that they have both the income to be an accredited investor and the appetite for making investments of above-average risk, and because of this, it is one of the few industries that produce numerous Triple Threat Investors. A Triple Threat Investor is an individual or firm that can be an investor, and advisor, and a customer, all in one. When this type of investor gets involved in a startup, numerous ‘win-win’ interactions can occur, benefiting both the investor and the startup. Most notably, the industry expertise and relationships you have can rapidly add value for a startup, helping to increase the probability of you making an excellent return on your investment.
The story of ValueStream investing in Estimize is a great example of how this process works. We organized a group of Tripe Threat Investors from firms like Goldman Sachs, JP Morgan, Susquehanna, KKR, PNC Bank, CME, and NASDAQ, who participated alongside Estimize’s venture capital investors. Not only do these individuals benefit from being customers, but they also provide Estimize with valuable guidance and introductions to more potential customers. After all, investment professionals love to “talk their books”.
Reason 3: You will hedge your career against technological change
Finally, if you don’t think the potential returns in early-stage FinTech are compelling enough for you, perhaps you should consider investing in FinTech startups as a hedge on your current business. If technology reinvents your business over the next decade, and that maybe leaves you a bit short of the compensation level you would have otherwise expected by then, wouldn’t you like to have benefited along the way by owning a piece of the companies that caused that disruption?
Image credit: Brian Glanz
