Friday, February 14, 2014

Financial Technology: New Opportunities?

Axial is but one example of a new financial-technology firm
Not everybody with the buzz of an idea is seeking to start a company that will disrupt the world via social media.  Many are running new businesses by exploiting new technology---using technology to do old tricks, so to speak.  New businesses are using technology, for example, to assemble, analyze and interpret data or to deliver product to consumers in novel ways.

In finance for over a decade, some companies have sprouted from scratch and used technology in clever ways to provide new services, new analytics, or new ways of doing financial transactions or providing financial analysis, advice, or processing.  And we aren't necessarily talking about technology being used to ignite explosive high-frequency, black-box trading in equity markets.

Some of these financial-technology start-ups have come and gone or been acquired by large established institutions. Some have thrived.  And others were launched in the last few years and have just begun to take off with a critical mass of clients or customer activity.

In New York last month, a few new companies made presentations at a business-school networking function to explain to investors, bankers, and industry participants what hole they wish to plug in the industry and how technology does it.  Their ideas are off and running, the business model in place, and revenues trickling in and growing steadily.

Axial  is one example.  Years after getting his MBA from Stanford and working in private equity, Peter Lehrman started the company a few years ago because he thought there was a better way to help middle-market companies and entrepreneurs seek financing from banks and investors or seek M&A advice from investment banks and advisory firms.  The firm established an electronic network to connect companies with investors, advisers, banks, investment banks, and other financial institutions.

Lehrman calls his Axial network a "Linkedin" for mid-size companies and for the banks that seek to do business with them.  Members of the growing network purchase subscriptions (which explains its revenue model), get access companies in the network and exchange relevant data and information.  Companies can find the right match with a bank or private-equity investor.  Financial institutions can find the right match in seeking a company client.  They all get to become better acquainted with each other.

Today, there are about 15,000 members of the Axial network, including over 200 small companies and entrepreneurs. Axial, founded in 2010, is based in New York.

Is there a quicker, better way of taking voluminous amounts of financial data and prepare reports for investors and clients?  Is there a faster way for financial institutions to comb through hundreds (or thousands?) of pages of transactions and business data and prepare summary reports for regulators, investors or board members?

Narrative Science, a four-year-old company based in Chicago, says it has a solution. It has a patented artificial-intelligence platform (called "Quill") that digests and analyzes data and presents a summary in the form of written reports.  The platform provides many services, depending on a client's need.  Equity research analysts or financial consultants use it to prepare investment-portfolio reports or market updates. The company claims the platform doesn't just spit out verbiage, but provides insight, analysis, and trend forecasts. 

Reports can be formatted in the way clients prefer. They can also be as long, short, detailed or simple as desirable.  The company now has about 50 clients, most of whom are financial institutions.

Leigh Drogen decided to start his company, Estimize, when he saw an opportunity to aggregate vast amounts of information from equity research analysts who provide earnings forecasts for thousands of companies.  From quarter to quarter, equity analysts provide earnings estimates based on their own research.  They often update their forecasts during the quarter, right up until the company makes a formal earnings announcement.

Investors who rely on earnings forecasts and updates have had to aggregate by themselves the views, opinions and forecasts from dozens of analysts.  For example, investors with a stake in Microsoft stock will want to know how analysts assess the company and project its earnings and stock price. They might attempt to compile the numbers of many analysts. 

Estimize uses technology to do it faster and more easily.  It aggregates the projections and earnings estimates for about 900 companies, compiling information from over 3,500 analysts who send information to the firm. The firm presents a summary of the analysts' forecasts. In describing his firm, founder Drogen says it has an "orthogonal" (independent) approach to providing earnings estimates for companies and explained that the firm is "Wikipedia"-like in providing information to clients. 

Estimize also provides estimates or projections of macroeconomic factors (e.g., interest rates, economic growth), based also on aggregates from research analysts.

Hedge funds and fund investors comprise most of its client base now.  The company, three years old, has 10 employees and is based in New York and San Diego.

David Klein was once an MBA student at Wharton who borrowed money to fund his business-school education.  At some point after graduation, he decided there was a more efficient way for students to borrow.  He started his company, CommonBond, to transform the student-loan market especially after dysfunctions in this marketplace in recent years. Klein says the company is trying to "fix the broker student-loan market."

CommonBond created an electronic network to match students directly with lenders.  Klein claims this direct match-up helps lower interest costs to students.  Like an electronic stock market, the network allows market participants to link online.  The company also has a social mission by encouraging a "community" of lenders and borrowers:  Lenders follow the progress of students, and students form community networks among themselves and keep lenders informed about their school experiences. Lenders become more engaged in their investments.

In its first phase, CommonBond is only providing loans (from a current fund of about $100 million) to MBA students.  It will expand in its next phases to law and medical students.  Until now, most loans it has arranged via the network have been refinancings of other students' loans at competitive rates.

The company employs 13, but plans to expand to 22 by this summer.

Chaith Kondragunta's company AnalytixInsight is four years old.  He has an MBA from Carnegie Melon and is now CEO of the company he helped found four years ago.  The company uses technology to prepare research-analysis reports on 40,000 equity stocks around the world.  It labels its service Capital Cube and produces written analyses, based on data, statistics, and macro-trends.

For example, its technology gathers significant amount of data and financial information (including data available from company annual reports, 10-K's, etc.), assembles and analyzes the data for trends, computes relevant financial ratios, and then prepares a written financial analysis with useful conclusions and recommendations with minimal input from a human analyst.

Individual investors, brokerage firms, and some media firms have subscribed to the service. The company has offices in New York, Toronto and India. 

This group of five is just a few, a coast-to-coast sample. Many other financial-technology firms exist, covering special niches in the industry. And more will continue to be founded, as someone somewhere will determine that with technology advances there's a better, quicker, more efficient way to trade securities, research stock, raise equity, issue debt, share market information, prepare investment reports or provide strategic advice to companies.

Tracy Williams

See also:

CFN:  Knocking Down Doors in Venture Capital, 2012
CFN:  Venture Capital: Diversity Update, 2011
CFN:  High-frequency trading: What's next? 2012
CFN:  Dark days at Knight Capital, 2012
CFN:  Bitcoins:  Embrace or Beware? 2014

Friday, February 7, 2014

Finance: Still a Popular Destination?

Almost a third of Tuck's grads went into finance

Take a peek at the latest statistics.  At many business schools, they're out and available. MBA graduates from the Class of 2013 have launched their post-business-school careers, and they haven’t avoided financial services as much as the popular impression suggests. 

True, countless thousands who've entered and finished graduate business school since the worst days of the crisis opted not to pursue banking, trading and investment management or other financial-services paths.  The industry has endured transformation of all kinds (regulation, business restrictions, non-stop restructuring, and souring popular sentiment).  And it’s true, too, the industry had become a turn-off to some smart students who in years past would have pursued investment banking without a thought.

In current times, the rewards, comforts and predictable career paths in finance are still uncertain. Don't forget, too, the knocks on jobs and roles that had once been perceived as  prestigious and awe-inspiring on the cocktail circuit.  Many MBA students at top schools, so goes popular sentiment, will likely prefer more humane, more constructive routes in a long business career.

But the statistics are out for recent business-school classes, and they suggest MBA students continue to flock to certain areas in financial services.  Finance will still attract those who are inherently interested in finance, those who have finance in their bones, so to speak. 

Perhaps the numbers are not surging as much as they were pre-2007, but they aren't insignificant.  Or  perhaps banks, investment managers, and trading firms are doubling down to make special efforts to present themselves more fashionably to students, describing career opportunities better, and promising easier lives on the work-life-balance front.   

However, perhaps the industry is more defined, better understood after all the years of restructuring and gearing up for an environment ensconced in new regulation.  Of course, some hard-core students, fascinated by markets, deals, transactions, and cash flows, will head toward finance despite what they hear, see or are told.

Compensation helps, too.  It continues to be one attraction.  Data and anecdotal evidence suggest financial institutions still pay well, even if the industry pulled back and rationalized (and reduced) compensation after the mid-2000’s splurge.

Let’s take a look at Dartmouth-Tuck, a Consortium school. Its career-advisory unit recently shared data for the most recent graduating class after it received a sufficient number of responses from departing students. Tuck is a good example, because it has an outstanding history preparing graduates for Wall Street, has attracted large numbers interested in finance since its early days, and has a reputable finance division.  

The Tuck data indicate consulting is the hot spot these days.  MBA graduates are flocking to what is referred in campus jargon as "MBB"--McKinsey, Bain and Booz. In Tuck's Class of 2013, consulting firms hired 27% of the class (and offered the highest amounts in compensation).  In all, 33% are working in consulting roles, including those working at non-consulting firms or working in the consulting arms of the big accounting firms (Ernst and Deloitte, e.g.)

For some MBA students, consulting offers an experience, similar to what they might have received at an investment bank. They get to do extensive research and analysis.  They get to study corporate strategy and make recommendations regarding growth, expansion, and acquisition. They participate in “live transactions” and prepare exhaustive presentations for clients. They travel around the country. 

They also get to have meaningful contact with clients and sit in meetings with clients' senior managers.  Some become experts in the industries of their clients. Hence, while consulting has always been a favorite first job for MBA students, consulting might be swiping a handful of those who a decade ago would have marched right into Goldman Sachs or Morgan Stanley (or Lehman Brothers, back then) at the first whiff of interest on the banks' part.

Yet the numbers going into finance haven’t dwindled that much. MBA graduates at top finance business schools like Tuck (and arguably NYU-Stern, Michigan-Ross, Virginia-Darden, all Consortium schools) are finding their ways back to Wall Street, but perhaps in a variety of roles.  About 30% of the Tuck Class of ’13 headed to financial institutions, and about 35% are working in finance functions. In investment banking, 14% of the class went to work there; 11% are working in classic investment-banking functions (equity or debt underwriting, M&A, client advisory, etc.)—numbers that don’t suggest a lack of interest in  this generation of students.

Tuck’s statistics, nonetheless, show a dearth of classmates headed into private equity and venture capital (only 2%).  The small percentage stands out because many go to business school with expressed interests (and great enthusiasm) about private equity and venture capital. The numbers might reflect the scarcity of opportunity in such a fiercely competitive segment and the unorthodox ways some of these firms recruit.  (Blackstone and Carlyle may recruit at top business schools across the country, but Silicon Valley venture-capital firms may recruit informally or prefer to recruit only from across the street at Stanford).

The latest statistics may also reflect the lack of opportunities on trading desks at big banks, which have had to scale back because of new regulation.  MBA graduates interested sales and trading nowadays don’t have the chance to work in structured career pathways at a Credit Suisse or JPMorgan and will likely look for opportunities, if they exist, at hedge funds, many of which struggled last year and may not be swarming business schools this year. Some students interested in sales and trading can seek similar opportunities at investment managers (Blackrock, e.g.).

Tuck’s statistics show first-year compensation in finance hasn’t fallen into a sinkhole. But the range is as wide as ever, partly because the impressive, mind-shaking salaries and bonuses have been paid out primarily at the bulge-bracket and boutique banks in financial centers (New York, Chicago, San Francisco), and not always at the smaller, regional institutions. 

Still, in a post-crisis era, compensation doesn’t seem to always drive MBA graduates’ career decisions. Indeed these are different times. MBA graduates know the time they spend at Bank of America, Aetna, or UBS right out of school won't last decades. Furthermore, they seek flexibility and a life on weekends or seek some comfort that when the next crisis occurs, they won’t appear on a bank’s long reduction-in-force list.

Tracy Williams

See also:

CFN:  Who's headed into finance, 2013? June-2013

CFN:  MBA's: Eye on summer '14, Nov-2013

CFN:  Where do you want to work? Feb-2013

CFN:  Today's bulge brackets, Jan-2013

CFN:  Goldman tweaks the banking ladder, Sept-2012