Innovation doesn’t always come naturally to capital markets firms.
The ability to harness energy and ideas from outside the finance world has to be fought for, and nowhere is this better illustrated than with technology startups. David Dawkins scratches under the surface of a number of the firms to have emerged from this space, and looks at how the innovation emerged from this space, and looks at how the innovation landscape has changed in recent years.
Over the last few years, a number of new terms have entered the financial services innovation lexicon: Accelerators, hubs, labs, bootcamps, and hackathons are just a few of the new ideas appearing across the industry. All are subtly different in form, but the common purpose of these programs is to remove the distance between large financial institutions, often burdened by processes and compliance issues, and nimble, fresh-
faced startups with their disruptive technologies, requiring the capital, expertise and mentoring associated with large banks and funds.
But despite all the hype and promise, how many of these programs actually produce solutions or services that go on to see the light of day in a production environment?
“What I wanted to do with StockViews was to create a two-sided platform, which would connect on one side the fund managers who want access to research, and on the other side, a network of independent analysts, creating research and recommendations to fund managers.” Tom Beevers, StockViews
Markus Gnirck is co-founder and global COO of Startupbootcamp, an accelerator program that connects startups to a global network of the most relevant partners, investors and mentors in their sector. Gnirck summarizes Startupbootcamp’s role as a bridge between two very different, but co-dependent worlds: “The goal is to close this big education/knowledge gap between the financial world and the technology world. Both sides have problems accessing one another. For the most part, the banks have no idea how to reach out and bring in talent that can bring forward their technology, and no idea what’s going on outside the industry,” says Gnirck, “At the same time you have these startups that are driven by great concepts, with new business models that can really innovate the space, but have issues reaching the banks to work with them and accelerate their own growth.”
So it’s not a question of banks and financial service firms pawing through the offerings for immediate solutions to problems, but rather a long-term cultural investment of time spent closest to those on the bleeding edge, bringing in the most relevant innovation from the wider technology world.
Metamako and The Hub
The idea of importing this knowledge gap is undoubtedly important, but how do these new ideas create opportunities for young firms, and conversely, how do financial services firms get the most from this innovation going on right under their nose? Waters spoke to Australian low-latency switch vendor Metamako, a firm well-placed to offer insight into this conundrum, having been born of the traditional model, then crossing the floor into the fintech community during its adolescence.
Back in May 2013, Scott Newham, Dave Snowdon and Charles Thomas used their backgrounds in ultra-low-latency hardware, software and algorithmic trading to develop a new offering in the high-frequency trading (HFT) market. The firm that would become Metamako arranged a small, serviced office, they enticed a strategic vendor that believed in their potential, and in December of 2013, they released MetaConnect, an ultra-low latency switch, proposing to offer significant speed advantages to traders, brokers and exchanges. Metamako was up and running.
However, with the business developing nicely, and despite opening sales offices in London and New York, six months ago, Metamako started talking to a not-for-profit fintech hub, Stone & Chalk, about becoming a resident in its new fintech center in Sydney. For some, this might appear to be a regression down the evolutionary ladder, but Metamako was aware of the changing landscape and the myriad opportunities this change might bring.
The firm took up Stone & Chalk’s offer and jumped into a specially equipped area of the floor of the center. Stone & Chalk got an “anchor tenant,” while Metamako received exposure to the wider startup and fintech communities in Australia’s financial capital. So, despite following the traditional path for the first number of hurdles in its development and becoming a genuine vendor with a marketable offering, Metamako identified the benefit of connecting with other firms facing similar challenges and attempting to gain greater traction in the capital markets.
“We’ve been able to connect to a large number of companies quite quickly—not just the larger startup community but also the capital-raising community,” Snowdon explains.
The connections to which Snowden refers have led to further development of Metamako’s offering. According to Snowdon, the product has now matured and moved on from marketing purely to HFT firms, toward bigger latency-sensitive trading companies, those invested in harnessing the new technology to help improve their trading platforms. “We’ve taken the products, polished them and moved them across— we now sell to banks, exchanges, brokers and clearers—the types of organization not happy with rough-around-the-edges products,” says Snowden.
Another offering to step out from the fintech community into the capital markets is StockViews, a crowdsourced platform for equity research. StockViews is a perfect example of a lean startup challenging an established way of doing things in the capital markets, and attempting to do so with increased reliability, transparency and accuracy.
Tom Beevers, CEO of StockViews, and formerly a wealth manager at Newton Investment Management, explains what the firm does differently, and why it’s changing sell-side research for the better. “I found conflicts of interest from the big banks providing the research—they had corporate clients to keep happy, they had proprietary trading divisions, and that often meant that their research was conflicted,” Beevers says. “What I wanted to do with StockViews was to create a two-sided platform that would connect on one side the fund managers who want access to research, and on the other side, a network of independent analysts, creating research and recommendations to fund managers.”
Analysts are vetted and ranked in the same way, according to Beevers, as modern, online markets such as Uber, eBay, and Airbnb. The analysts who consistently receive four- or five-star ratings move to the top of the platform, while those receiving lower ratings move to the bottom and are eventually ejected.
StockViews’ story is interesting, as it is tightly knitted into the fabric of London’s fintech community, yet it has managed to graduate from the noise and hype to offer a genuine proposition to wealth managers looking for a better way to judge the credibility of sell- side research.
In the Beginning
The StockViews story starts at Level39, a well-known community and co-working space for London’s fintech community based at One Canada Square in Canary Wharf. Beevers left his job in 2014 and decided that Level39 seemed like the obvious starting point to develop his ideas. Shortly thereafter Beevers met Sandeep Bathina, an ex- Google engineer, who was working with another company on a contract basis at the time, but was keen to try his hand at something new. Beevers explains how Level39 facilitates the connections that led to the establishment of StockViews. “One of the big benefits of Level39 is the huge community. As a fund manager, there’s no reason why I would have had any contact with someone with technical skills, with coding ability, and a background in artificial intelligence,” he says. “We got talking and bounced around a lot of ideas—how to structure the community, how to build the platform, and after a few months we agreed to formalize that relationship as co-founders.”
The next stage in the journey took StockViews back to the accelerator space, in this instance to Startupbootcamp. Beevers presents further insight as to how this new landscape of innovation is starting to take shape: “The great thing about accelerators is that they’re well connected to financial institutions and other interested parties— investors and potential users within fintech,” he says.
But what do small firms actually do on these programs? “Startupbootbamp was an intensive program, three months long, and it did an incredible job of connecting us with the right people at institutions that might have been interested in our offering. It allowed us to create a pilot trial, which was very successful, and we came out with a number of pilot customers that have now gone on to become paying clients.”
StockViews has now returned to Level39 to benefit from what Beevers describes as “a critical mass of companies concentrated on the fintech vertical.”
The picture painted of this London-based startup community takes the form of an ecosystem with the accelerator (Startupbootcamp) offering an intensive, immersive program, while the fintech hub (Level39) offers the benefits of a community in a shared space. It’s a very different proposition to traditional innovation ladders that need to be negotiated by small technology offerings currently active in the capital markets.
Climbing the Mountain
Clearly, this startup ecosystem isn’t just all noise and hype. Solutions for capital market firms have and will continue to emerge from this community, although it’s important to note that like most other industries, the failure rate of startups trying to break into the capital markets is still alarmingly high. However, for those firms that do make it out of the incubators to adolescence, the future appears bright, not only for them from a commercial perspective, but also for their paying capital markets clients that, by virtue of the financial support, clearly derive value from the technologies and services on offer.
Steve Grob, director of group strategy at Fidessa, claims that the true value of innovation for capital markets firms comes with an ecosystem, where “each party puts in what they’re best at and gets from the others what they most need.” For Grob, success relies on separating the ideas from the factors most likely to help startups succeed—distribution, support, brand identity, and what he calls “a blueprint of how to climb the mountain.”
Waters spoke to Nicole Anderson, CEO of FinTech Circle Innovate, who has seen first-hand, this culture of innovation develop from the ashes of the 2008 financial crisis, to what it is today. Although Anderson is hugely positive about the culture of innovation in the capital markets, she says she is dubious about the sheer number of accelerators and the sustainability of that number in the years to come.
“Accelerators have quite a difficult business model to sustain,” Anderson argues. “The life-blood of an accelerator is finding investable, early-stage businesses. The risk is fairly high and the returns are low. So by its very nature this massive expansion of accelerators is likely to contract quite radically. The sustainable accelerators will be those dedicated to certain sub-segments of the industry and those who continue to sustain quality—both in the companies coming through the cohorts and the programs they put them through.”
Speaking at the 2015 European Trading Architecture Summit, Usama Fayyad, chief data officer at Barclays and formerly an employee of NASA and Microsoft before going on to become Yahoo!’s chief data officer, said that “a lot of what’s missing in the financial services industry is a technology company’s way of thinking about technology.”
Accelerators like Startupbootcamp and co-working hubs like Stone & Chalk and Level39 represent the industry’s way of knitting into itself this way of thinking, but cynicism remains. According to Anderson, there are over 50 accelerators now in London alone and a number of banks are moving into the accelerator space, lowering the bar to entry and using accelerators as a marketing tool rather than genuinely striving to turn startups into solutions, although, as Grob states, getting involved is a lot more effective than sneering from the sidelines. “While it’s easy to sit and criticize how other people approach this, it’s a lot better than doing nothing,” he says.
Potential Still Apparent
Although these programs remain a predominantly young and noisy part of the technology and innovation industry, capital market firms should be well under way in working toward bringing as much of this innovation, talent and energy in-house.
Some might argue that the startup hype era might be coming to an end, but as StockViews’ Beevers says, the potential is still apparent. “Across many different sectors, we’re seeing a fundamental paradigm change in the pace of innovation. It has been called various things—the fourth industrial revolution, or the second machine age,” he says. “The pace of innovation has accelerated so much over the last few years and so much of that innovation is now coming from small companies. These so-called ‘lean startups’ are able to execute on a business model so much faster than they ever could have in the past. Innovation is now coming from the bottom and not from the top and accelerators are one way to harness this potential.”
- Accelerator programs can bridge the gap between capital markets firms looking for innovative solutions and startups looking for expertise and investment.
- Today, startups tend to operate as part of a like-minded community, often populating co-working spaces and innovation hubs while they fine-tune their proposition. Hubs provide an ecosystem of support in the form of mentoring, community relations, and good facilities.
- Startups require help in developing the business side of their proposition, and despite all their energy, are unlikely to present genuine disruption to long-standing technology and pre-existing workflows in the first few years of their lives.
- Capital markets firms can help startups polish their products of services via distribution, support and brand identity.
By David Dawkins