Why there’s not much “capital markets” in fintech


The folks at FinTech Collective posted an interesting comment about the lack of “invest tech” within the fintech landscape. By “invest tech” they mean technology that serves investment managers. Having spent quite a few hours mapping the fintech landscape, I’d go further by saying there are not many new “capital markets” startup companies out there serving financial institutions generally, at least relative to the large numbers of payment, wealth management, bitcoin, P2P marketplaces, etc that seem to be attracting the bulk of venture funding.

A few observations about why the institutional space is different:

  • Sales cycles to banks and buyside firms are often long, involve larger budgets and multiple decision makers (IT and business). The POC process alone could take a startup months or years.
  • Banks have been cutting costs, and consolidating systems, not looking for taking a risk with new vendors (in NY at least this has benefited the startup community in that many founders and tech teams have spun out of these institutions). Buyside firms have fared better, though last year was one of the worst for hedge fund launches.
  • Many markets are quite “mature” from a technology perspective — e.g. equity exchanges had their renaissance in response to regulatory changes (Reg NMS) around 2005. There was a flurry of innovation — new electronic market places, connectivity providers, low latency providers (hardware, software, service) — that is now history. Similarly, trading platforms have generally been moving cross-asset and consolidating (OMS with EMS, front-office to back-office, etc).

It’s not all doom and gloom. Read any of the institutional-focused research and you’ll hear of a number of trends that could drive startup opportunities: regulatory change and new compliance requirements, changes in market structure (e.g SEF ecosystem), outsourcing of bank functions (e.g. KYC).

It may take some time to see more startups take root — the “core banking” and payments landscape was pretty slow for a period of time too. Given the proximity to so many financial institutions, NY-based startups have an incredible opportunity as some of these trends start to take hold.

And hopefully capital will start to move more broadly.

Disclaimer: The views expressed on this blog are mine alone.

M&A marketplaces: what it takes to be successful

DealmakingI’ve recently been looking at companies that are building marketplaces to help match buyers and sellers of private companies (e.g. IntraLinks DealNexus, Axial Market, ExitRound, Mergerdeals, Dealgate, BizBuySell). I’ve spent most of my professional career doing M&A, and I find it fascinating to consider what will separate the winners from the losers and how they could change the deal process for practitioners.

There is no doubt the M&A market is inefficient. There is a large number of private companies (5 million in the US alone with fewer than 1,000 employees according to the Census Bureau). There is no easy way for business owners to identify which companies might be looking to acquire (or more importantly, looking for someone like them). And it is extremely difficult for strategic buyers and private equity firms to actively monitor more than a few hundred firms effectively.

So why shouldn’t there be a Match.com that makes it easier to transact?

There should. But there are important differences between private company M&A transactions and other types of transactions that have moved online.

Heterogeneous market. Unlike other financial transactions involving standardized products, there is a massive range in the characteristics of targets – industry focus, size, business model, geography. So there is not really “one” market, but multiple markets. And the opportunity for an online marketplace will vary – markets with large numbers of targets, “discovery” challenges (e.g. targets with limited online presence) or diverse buyer profiles, should be more attractive.

Implications for success 

Trying to be a marketplace for everyone would be challenging – significant acquisition cost to bring on members, long time to scale to the point of seeing transactions.

As a result, success (or at least early success) becomes a problem of where to build first. BizBuySell has succeeded by focusing on the really small end of the market – sole proprietorships, franchises. ExitRound is focused more on the technology sector. So I believe it will be possible for multiple “micro” platforms to coexit and not overlap, at least in the medium term.

Role of intermediaries. In contrast to many “broker” relationships, the role of the advisor in M&A is quite complex. Making buyer introductions may be “high value”, but that is a small part of the job. Ask any analyst, associate or junior VP what they do, and you’ll probably here about tasks such as preparing and distributing marketing materials, handling buyer NDAs, managing the exchange of due diligence information, maintaining process logs or preparing client updates.

Implications for success:

There appear to be three ways for online marketplaces to “play” with advisors:

  • Replace them by providing with technology what they do themselves.
  • Open the marketplace up to them, treating them much like business owners who can create listings on behalf of clients.
  • Build additional workflow tools for them as a platform within the platform (with additional subscription revenue).

These are by no means mutually exclusive. A marketplace could both disrupt the advisor model, replacing part of their role, while enabling them to focus on other aspects on a deal. This is already the way many marketplaces work today – they are a compliment rather than a replacement for an advisor.

And I do believe it will be challenging to disintermediate advisors entirely without significant investment in workflow tools, or integrating existing workflow tools into the platform. Otherwise, when a business owner faces a decision whether to “self-serve” on a platform or hire an advisor route, the platform will not deliver a sufficient solution.

Building workflow may be challenging. IntraLinks is perhaps the best positioned to combine workflow with a marketplace, since they already have the largest online dataroom product and also acquired DealNexus. However, they appear focused on selling their Via product to corporates (staying ahead of Box.com et al), as opposed to building an M&A desktop application. Many workflow components (e.g. CRM, diligence logging, client reporting) will require expertise and resources to build, and time to adopt. While some components already exist, such as CRM tools, adapting them to the M&A use case is tricky (have a look at Navatar).

Noise. My inbox is overloaded. I’m sure yours is too. Having worked in corp dev, I can tell you what M&A practitioners don’t need are more poorly targeted opportunities being lobbed at them. Very few deals are actually consummated, and one of the biggest determinants is in the initial filter of what companies to look at. This is important for two reasons – first, I believe many marketplace business models will depend upon a success fee (at least in part) so you need transactions to take place to earn revenue; second, I think practitioners will be slow to adopt (or quick to dismiss) a marketplace that does not deliver relevant recommendations. Continue reading “M&A marketplaces: what it takes to be successful”