Closing the equity gap for underrepresented entrepreneurs: How Bank of America is driving diversity and inclusion in venture capital

Is the future of fintech founders diverse?  Bank of America says, yes.

Too often entrepreneurship involves undetermined risks and struggles. These roadblocks are further magnified when founders of color or diverse backgrounds are involved – damping their hopes of starting new businesses. 

The most marked impediment facing underrepresented entrepreneurs is the lack of access to capital and funding opportunities when it comes to highly regulated financial services. A majority of traditional funding providers — banks, credit unions, venture capitalists, and others consider credit scores, for example, among other criteria when evaluating potential investments. As a result, the potential profitability of businesses takes a backseat. This throws a spanner in the works and weakens the argument for underrepresented entrepreneurs seeking to secure funding, who may not have inherited generational wealth or face gender or racial disparity.

Bank of America, however, is en route to creating a new narrative.

To address these stumbling blocks and shine a light on fintech founders identifying as female, Black, or Hispanic-Latino, the Wall Street bank is devising an accelerator program called ‘Bank of America Breakthrough Lab’.

What does the program offer?

The bank is accepting applications for the six-month accelerator program commencing in September 2023 before the enrollment deadline in June. The program applies to pre-seed stage startups founded on or revolving around fintech or tech-enabled designs like HealthTech, WealthTech, EdTech, and housing at no cost.

The program centers on enabling inclusion and increasing funding opportunities for underrepresented groups but all other eligible entrepreneurs can apply as well.

“The Lab is managed by the Global Transaction Services team, the group that manages wholesale payments – an area that is rich in innovation. The Lab offers an opportunity for us to get to know a much broader group of entrepreneurs working in payments and other areas of finance,” Rina Arline, Breakthrough Lab Program director in global transaction services at Bank of America told Tearsheet.

The program will offer briefings and guidelines pertaining to a wide range of business management topics, in addition to how to partner with or sell to large enterprises. Counseling and tips will be provided by mentors at the managing director or executive level from Bank of America. Among other things, they will also provide technical support extending to branding packages including website and logo design. Finally and most importantly, toward the end, startup entrepreneurs will have a window of opportunity to establish connections with industry investors and capital providers – coupled with a pitch day where participants can put their business ideas on the map.

This is the third time Bank of America will be running the accelerator program in the latter half of the year. The bank initiated the pilot project with five New York-based startups in 2021. After experiencing a favorable outcome of the opening program, the bank scaled up its endeavors by enabling 17 companies from the US, Mexico, the UK, and France to partake in the second installment of the program in 2022.

Tearsheet Take: The need to build a fairer and more diverse venture capital

Many small businesses are phasing out every year in the US.

A column chart showing why businesses belonging to different categories fail in the US
Source: Data by BLS, image by LendingTree

The latest data from the US Bureau of Labor Statistics (BLS) found that 1 in 5 or nearly 22% of US small businesses fail within their first year of operation. 45% of these businesses fall flat after 5 years, and 63% come to nothing after a period of 10 years. These numbers haven’t faltered with time, in fact, they have grown ever since 1994

Although it can be argued that there are many reasons that may contribute to the failure of these businesses but inaccessibility to funding appears to be one of the root causes.

A graph chart showing the percentage of venture capital received each year by companies founded solely by women
Source: PitchBook

Venture capital (VC) is a fairly male-dominated space, as is evident from the fact that only 8% of VC-funded startups have female founders. Women are underrepresented among both venture-backed entrepreneurs and VC investors, with companies founded solely by women receiving less than 3% –  2.1% to be precise – of all venture capital investments in 2022. The situation for Black and Latinx founders is no different, garnering only 3% of venture funding.

These statistics haven’t improved over time, but lately, they have attracted attention from industry leaders, challenging the status quo. Advocates are pulling the plug on disparity arguing that when women have a seat at the table, more female founders should likely be able to get the funding they need. 

Driving inclusion means more opportunities for underrepresented founders, and more financial well-being for everyone involved – because a majority of new employment opportunities in the US are created by small and new businesses. Over the span of the last 25 years, small businesses have added nearly 13 million or two-thirds of jobs to the economy.

Some investor groups including Kapor Capital, which has led funding rounds for women-led companies like TomoCredit, and firms like Bank of America are trying to move the needle on a more inclusive VC industry. While the current landscape of venture funding may be far from providing equal footing for entrepreneurs belonging to underrepresented communities, the odds may change — given a growing range of accelerator programs, networking groups, and mentoring communities are organized regularly to tackle this inequity. 

Research also shows that women-led startups outperform those led by men in almost all areas, which translates to the idea that women-owned startups can be a better bet for investors. This might make the case for why more male-owned investor groups and prominent financial institutions likely need to adjust their sails and start thinking about investing in minority-led businesses.

Edison Partners’ Chris Sugden: ‘With growth equity, dogs are already eating the dog food’

As part of an ongoing series, we talk to professional investors in the fintech space to get a feel for what’s on their radar screen.

This week’s guest on the Tearsheet podcast is Chris Sugden, managing partner at Edison Partners, a Princeton NJ growth equity firm that invests in companies generating revenues of $5 to $20 million. After 31 years in the business, Edison is on its eighth fund. Chris leads the firm’s activity in fintech and was previously an entrepreneur in the billing and payment space.

Sugden joins us today on the Tearsheet podcast to discuss the role growth equity plays in the fintech ecosystem. We get the lowdown on his firm’s portfolio which includes investments like early forex leader Gain Capital, vertical payments player PHX, and personal finance manager MoneyLion. Lastly, we talk about where Sugden and Edison are looking to make fintech investments in the future.

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Finding a unique fintech proposition
At the growth equity stage, we’re thinking about the dogs eating the dog food. There’s a live product and we don’t need to make a lot of guesses about adoption. We do need to make guesses about execution and market size and whether this is a product or a company.

We think we’ve carved out something that’s unique in fintech. Growth equity is finally a thing, as it’s become an asset class over the past three or four years. Back in 2006, we called what we do “expansion capital”, but that was a bit confusing. All capital is for expansion. As we define it, growth equity is really a revenue filter — we look to invest in companies with revenue run rates between $5 million and $20 million. We also look for companies that haven’t raised a whole lot of money before we come in.

How does growth equity play out in fintech?
We find ourselves searching for areas where you can gain traction without a tremendous amounts of money. In many cases, that means avoiding spaces that get hyped up, like mobile payments. We’ve looked at a lot of mobile payment deals, but because of their platform nature and the fact that dual-sided marketplaces need liquidity to transact, they require a fair amount of capital. So, these deals tend to be trickier for us to find entrepreneurs who don’t need a lot of outside capital to get their revenue run rates going and growing.

So, in fintech, you’ll see us doing more enterprise-like deals targeting banks, brokerage, and wealth management, as opposed to consumer-type applications.

What startups need to understand about funding
The biggest lesson I’ve learned as an entrepreneur is that money can solve scale but doesn’t solve hard problems or create innovation. The pitch where an entrepreneur claims that if he had a little money, he could make a lot more revenue — well, that’s not really true at the smaller end. One of the biggest tests is what the money is going to be used for. Does the entrepreneur really understand the business model and the revenue levers? When I sit with an entrepreneur, if I don’t understand from them customer acquisition costs, lifetime value and gross margin and contribution margin, it tells you a lot about how the CEO will think about using capital.


How socially responsible investing is moving beyond the wealthy

To Scott Johnson, a biologist based in Amherst, Massachusetts, socially responsible investing is part of the way he lives his life. He said his motivations for doing so are the same as those that underlie his decisions to buy organic food at the farmers market and participate in a farm share.

“It’s one thing to simply buy Organic Valley products at Whole Foods, and it’s another to actually invest in the company,” said Johnson, 58, who with his wife invests in companies including Organic Valley as part of a larger portfolio that promotes social and environmental good. “For us, we see that as a seamless transition — we don’t see us getting a return on our retirement as separate from the way we live our lives.”

Among investors, interest in environmental, social and corporate governance areas is growing. According to the Forum for Sustainable and Responsible Investment, total U.S.-domiciled assets under management focused on these areas were valued at $8.72 trillion at the start of 2016, up 33 percent since 2014. And despite recent research from Morgan Stanley that suggests millennials are the generation most open to sustainable investing, according to a financial adviser who specializes in socially responsible investments, it’s older clients they’re appealing mostly to. Experts say income level, rather than generational affinity, is what determines whether someone will pursue sustainable investments.

“There’s a lot of industry press about the preferences of millennials because they’re an up-and-coming demographic, but due to the nature of our business model, we’re targeting people who have accumulated some wealth, and they tend to be in their fifties,” said Andrew Bellak, CEO of Stakeholders Capital, the financial advisory firm that Johnson and his wife use.

The lack of a one-size-fits-all definition
Socially responsible investments are often called ESG investments — the acronym referring to environmental, social and governance factors. ESG covers a range of issues, a recent BlackRock paper noted, including carbon emissions and other environmental practices, labor and human rights policies and governance structures with a company. But no single definition can account for the range of interpretations.

“It’s subjective,” said Bellak. “Broadly speaking, it means you are considering things other than financial criteria and making an effort to do better than what’s legislated. When you look at the environmental footprint, it could mean treatment of employees and all stakeholders, not just shareholders. We exclude a number of areas like gambling, weapons and extraction, like oil, gas or mining.”

Another type of socially responsible investing is impact investing, which blends measurable ESG criteria with financial performance. One firm that solely does impact investing is Swell, an investment platform that just launched as a subsidiary of Pacific Life.

A principle-driven mission, but a bias toward wealthier investors
For one baby boomer, in addition to a financial return on investment, a legacy of contributions to the planet is important.

“I spent time thinking about how I wanted to invest my retirement money and decided that it needed to reflect what I valued as an individual and align with my moral compass of who I want to be in the world,” said Elizabeth Ackerman, 53, Johnson’s wife. “I also wanted for my children to see me again walk my talk with this particular choice.”

Still, Ackerman and Johnson hardly count as your average investors, given that Bellak’s firm requires its clients have at least $500,000 in assets.

Passionate millennial investors
Millennials with money are getting into the game, hoping their investments will bring positive changes to the world.

“What we’re seeing now is somebody who made a bit of money at a hedge fund spin off on their own with an idealistic viewpoint,” said Sean Trager, svp at Wedbush Securities, a brokerage firm that works with hedge fund managers. “They are the freedom fighters; they’re using the world to effect change.” Trager works on socially responsible investments at Wedbush, including investments in clean technology.

Trager said it’s often wealthier investors that get involved with socially responsible investing because they can afford to ride out investments that can have erratic returns.

Among those getting into socially responsible investments are hedge fund managers like Sean Stiefel, 29, a portfolio manager at Navy Capital. Stiefel, who used to work at larger funds like Millennium Partners and Northwoods Capital, started Navy Capital three years ago to do more ESG investing.

“With the larger funds, you’re forced to go with a select group of stocks, which makes it harder to find smaller, more nuanced stories,” said Stiefel.

Stiefel’s forays into ESG investing include marijuana investments, particularly research into medical treatments.

“We came across an entire industry that has mind-boggling growth, with the ability to disrupt and make the world a better place,” he said. “With all the problems with opioids, there could be medical treatments, and that will improve the economic situation, too. You have a tremendous opportunity to improve people’s lives via marijuana.”

When cynics say Wall Street actors just want to make money, Stiefel replies that it’s the role of investors to provide the capital for positive change.

“These companies need capital to further their drug trials, and these products are actually going to help people, and without capital, these products may never make it to the shelf,” he said. “I think that the cannabis space in particular is going to change the world for the better.”

Ethical quandaries
Despite the appeal of ethical investments, some financial advisers say clients turn away if they can’t be assured of a good return, according to John Burke, a financial adviser at Burke Financial Strategies, which works with clients with at least $1 million of assets under management.

Most people haven’t given [socially responsible investing] much thought,” said Burke. “We try to get them to define it, and they realize that it’s not so easy. A lot of them give up on the thought of it.”

There’s also no clear agreement on what’s socially responsible. Emmanuel Lemelson, a portfolio manager at Lemelson Capital, is an ordained Greek Orthodox priest who employs what he considers a Christian philosophy of investment. Lemelson argues that the extractive industries still benefit the world, and he sees no conflict in investing in this area.

“The world needs energy, and energy is what’s going to help a lot of people living in poverty,” said Lemelson. “They’re not the best option, but it’s going to take time for society to change that. The problem is not hydrocarbons but emissions.”

The move to democratize socially responsible investing
Newer platforms are lowering the barrier for entry to make it easier for people to invest in socially responsible causes. To use Swell, for example, investors only need to invest $500 or more. Aspiration, an investment platform launched two years ago, requires users to invest a minimum of $100 to join its socially responsible fund, the Redwood Fund.

“Historically, almost all investing has come a relatively small number of very wealthy individuals and large institutions,” said Andrei Cherny, CEO of Aspiration.

Lisa Fernandez, 30, invested $500 into the Redwood Fund last October. Aspiration offered her a route to ethical investing even though she didn’t have access to a large amount of capital.

“This is the first socially responsible fund I’ve invested in, and to be honest, I didn’t think funds like this one existed with minimum investment amounts that I could afford,” she said.

The move toward sustainable investing is also gaining ground among other app-based platforms, including Acorns, which rounds up purchases so the change can be put toward investments. The company launched a sustainable investment fund for its Australian customers last week, a move it says challenges the thinking that do-good investments don’t yield returns.

“This is an old adage and no longer true,” said Acorns Australia CEO George Lucas. “The universe of companies that are becoming more socially responsible is increasing, and therefore, so is the universe of stocks and assets for constructing well-diversified portfolios which are still in line with investors’ values.”

Work with a purpose: Why millennials leave big finance

When Chrissy Celaya finished her degree in personal financial planning at Texas Tech six years ago, she said ethics drew her to a career in the field.

“I wanted to to help people,” she said. “Finance plays such a big role in everybody’s life, so if you can ensure people can be financially secure for the future, it’s helpful in so many different ways.”

After two years working at USAA and a year-long stint working at a language institute in Spain, Celaya moved to New York to work at Merrill Lynch. But after a year at the industry giant, Celaya, who is now 27, said she didn’t think the culture was a fit.

“I had to sell certain products because they generated money for the organization, and that was a huge turn off for me, so when I started to learn about automated investing, it was a no brainer for me to go back to an organization that had the client’s interests at the forefront,” she said.

Celaya said she switched to Betterment, a startup that offers automated investing tools and employs human advisers. Her move to a smaller firm that aligns with her values is not atypical of millennials, who, according to recent research, pay close attention to a company’s mission.

“Millennials want their work to have a purpose, they want to feel they contribute something to the world and they want to be proud of their employer,” read PricewaterhouseCoopers’ 2016 Global CEO Survey.

The values focus, combined with millennials’ lack of loyalty to a single employer — a recent Deloitte survey found that 38 percent intend to leave their current position within two years — is rattling the financial advisory industry, a field where the average age of an adviser is 50 and continues to climb.

The talent problem in the financial advisory industry
Experts note that legacy firms are having trouble holding onto talent.

“The concern with legacy firms is less of a talent war and it’s much more about talent replenishment,” said Michael Spellacy, senior partner of asset management and leader of global wealth management at PricewaterhouseCoopers. “Attached to that, the innovators in the landscape have upended the financial adviser value proposition — there’s been a shift from active management to passive management with the proliferation of artificial intelligence to help guide the financial advisers.”

Younger, technologically-savvy advisers are less likely to trust the big firms that they perceive don’t have the customer’s interest at heart. For at least one veteran who mentors up-and-comers, it’s an often-cited complaint from younger advisers.

Every single week they contact me,” said Paul Pagnato, who worked 19 years at Merrill Lynch before opening his own firm a year ago. “Having a sense of focus and having a sense of mission meaning in their work environment is absolutely critical.” Merrill Lynch declined to comment for this story.

The culture question
The attraction to startups is driven by more than just open co-working spaces and ping pong tables. Startups can be perceived as more open to the development of new ideas, notes one young industry watcher who has worked in the field for six years.

There are three core issues major players have: one would just be the slow decision cycle of the corporate environment where it’s hard to do innovative or disruptive things, on top of that there’s regulation, and the demographics of these companies can sometimes be off-putting to young talent,” said Grant Easterbrook, 27, founder of Dream Forward Financial, a 401(k) startup.

Previously, Easterbrook said, people working in finance would pivot to other industries if they weren’t satisfied, but with the growth of financial technology companies, they can use their skills while pursuing other goals within the startup sphere.

“Millennials care about impact and social good — a lot of the traditional players make money with hidden fee structures, and even with startups that aren’t doing impact investing in the traditional sense [investing for social causes over returns or profits], there’s more of a feel-good, social-good kind of vibe,” he said.

For Celaya, not having to upsell customers products and services was a big motivator to move to a startup.

“I didn’t like the idea of having to cold call and sell products [the customer didn’t need] and wanted the flexibility to do the planning the way I wanted to do it,” she said.

Incumbents respond
At least one major industry player said it’s changing the way it’s organized to help attract and keep millennials. Newark, New Jersey-based Prudential Financial, which has a large investment management practice, has developed an in-house customer office that’s designed to be an innovation lab for young talent.

“We have garage doors, ping-pong tables and a very open workspace that allows for more collaboration and that has a very different feel to it,” said Chrissy Toskos, vice president of human resources at Prudential who is charge of campus recruiting. “The [young] talent is very tech-savvy with more agile ways of working, and we’re inviting them to be involved and advance in our culture.”

The company said it’s also offering perks like student loan repayment assistance, subsidized healthy food, on-site fitness facilities and volunteer opportunities. When asked if the moves are in response to a flight of millennials, Toskos said they are a natural evolution of the company’s organizational strategy.

“It’s something born out of where we want to go and how we want to be perceived in the market,” she said.

In the startup sphere, at least one founder feels the skill set and mindset required to work in a startup is more aligned with where the industry is going.

“We look for people that are problem-solvers and people that can execute,” said Herbert Moore, 34, co-founder of WiseBanyan, a platform that offers largely automated investing tools, with the support of financial advisers. “In asset management, a lot of the skill sets people are learning in larger firms aren’t quite as relevant to what we’re doing right now because we’ve sought to automate those functions.”

What motivates the best employees, said Moore, is a commitment to a longer-term mission.

“No one’s going to choose a job just for a free lunch — what you see in the best people is a desire to do something meaningful.”

Investopedia now wants to ‘match’ financial advisers with readers

Far from just a how-to guide to financial and investing terms, Investopedia has evolved into a media brand in its own right. With coverage ranging from bigger economic stories, advice on investments and budgeting, and entertainment with a finance lens (“Investopedia’s Guide to Watching Billions“), its reach is growing.

Now, the publisher is looking to drum up more interest with a new service that will match some of its contributing writers, mostly financial advisers, with readers.

“After talking to a lot of advisers, clearly building the brand is important, but what they really care most about is driving leads and new client acquisition — their goal is to grow their practices,” said David Siegel, Investopedia’s CEO, in an interview with Tearsheet.

The move could help solidify the publisher’s Advisor Insights platform’s reach among a specialized community of advisers and investors, making it even more valuable to advertisers and ultimately generating additional revenue.

“Our aspiration is to have every one of the 300,000 advisers [nationally] work with Investopedia as part of their daily workflow,” he said. “If we have hundreds of thousands of advisers who are using Investopedia, and if we have tens of millions of users who are asking questions of advisers, there is significant monetization in being the intermediary,” he said.

Siegel, who took over as Investopedia’s CEO two years ago, has been working to build a more socially-inclined, specialist audience for the site. It’s an approach that draws 27 million unique monthly visitors and a ranking of 6th among the world’s top investing sites globally, according to SimilarWeb. The site has also beefed up original news content, including video.

IAC-owned Investopedia launched the Advisor Insights section of the site a year ago as a platform to allow accredited financial advisers to answer questions from users, for no fee. While Investopedia doesn’t pay the advisers for answering questions, it said it offers perks and exposure to help them grow their reach — after 25 answers or articles, Investopedia staff will shoot a marketing video about the adviser, and after 50, Investopedia gives them additional visibility by letting be the sponsor of the term of the day.

“They’re not paid and they don’t pay us, but by publishing content, they get tremendous digital exposure and traffic,” Siegel said. “But what they really care the most about is driving leads, driving new client acquisition.”

The new matching service (called Priority Leads) is available to advisers who have contributed at least 200 articles or answers. In response to requests from clients to connect with advisers, Investopedia staff will tap into its pool of top contributors to find a suitable match. Only 50 to 100 of the 25,000 advisers using the platform today have access to this service, but Siegel said he expects it to grow quickly.

Investopedia has quadrupled its staff over the past two years and now has 115 employees — 12 of whom focus on Advisor Insights. Siegel said he intends to keep the online advisory service free, as the site generates revenue from advertisers. The move to offer free curated advice from accredited advisers is one way for Investopedia to distinguish itself among a family of sites dedicated to personal finance and investing, including NerdWallet, Kiplinger, and others. It’s just one step of a larger strategy to drive audience engagement, he said, and future plans include the launch of Adviser Insights as brand on its own; continuing education content for financial advisers; and the creation of a online community for advisers who could discuss industry issues such as succession planning.

“Our focus is how we can create content in a differentiated way, and engage with users such that users are coming back on a more frequent basis and are engaging much more deeply with our content — Advisor Insights has proven the answer to that for us.”


With acquisition of SparkFin, StockTwits grows platform for younger active investors

Not everyone wants a roboadvisor.

StockTwits announced today that it is acquiring investment research and discovery platform, SparkFin. Active investors use SparkFin’s website and app to build, follow, and share all kinds of curated lists of stocks. The new acquisition gives StockTwits users more opportunities to engage with markets and investing, and new ways to think about their portfolios – or even figure out how to create one.

“We have seen tremendous growth since our launch,” said Jason Pang, CEO of SparkFin, which launched in 2015. “Would-be investors who use SparkFin lists to get a jumpstart on selecting a portfolio will have a wider community to interact with at StockTwits, and sophisticated investors can generate new ideas based on the data we create.”

Details of the transaction weren’t disclosed.

Passive investment products attract a big chunk of new assets. In 2016, passive investing accounted for approximately 40 percent of all institutional money in the U.S. stock market, according to Morningstar. That’s double the share passive products, like ETFs and index funds, had in 2005. The rising popularity of incumbent-owned roboadvisors, like Schwab and Vanguard offer, speak to passive investing’s growth.

But, there’s a growing number of investors who want to get more hands-on with their finances and investment activities. They’re joining communities like StockTwits to learn and interact with peers. StockTwits’ growth attests to this trend: its community shares over 200 messages and investment ideas every minute and 6000 charts each day. The company claims its userbase grew over 50 percent last year.

“Both experienced and novice investors alike are looking for ways to use technology and their peers to make the process easier or more effective, and to come up with new ideas or validate ideas they have,” said Ian Rosen, StockTwits’ CEO. He joined StockTwits in 2016 after co-founding EVEN Financial and senior roles at MarketWatch and Dow Jones.

Even if performance data isn’t on their side, today’s investors want more say in directing where their money is invested. One such investor is valuation guru, NYU professor of finance, Aswath Damodaran. He sees more disruption coming in the active money management space, as passive strategies trump more active ones and squeeze profits out of the industry. Damodaran is still an unabashed stock picker, though.

“I have often described investing as an act of faith, faith in my capacity to value companies and faith that market prices will adjust to that value,” he wrote in a recent blog post. “I would like to believe that I have that faith, though it is constantly tested by adverse market movements.”

millennial stock list from SparkFin
Most popular monthly list from SparkFin

SparkFin offers a variety of different watchlists for its users. Some are built by editors around a particular investment theme while others are driven by quantitative criteria. The most popular investing list this month is “Where Millennials Spend their Money,” catering to younger investors and giving new investors investment ideas based on consumer habits.

Like other verticals, the investment industry is becoming more social and crowd-aware, which plays right to StockTwits’ sweet spot. A new generation of investors is looking for more information about investing and they’re using digital tools to help them discover ideas and organize what they find.

“StockTwits is lucky enough to manage the largest standalone, curated community of investors and traders so we are well positioned to add specific tools and experiences to make that community more productive,” said Rosen. “SparkFin is one of those tools.”

The Tradestreaming guide to investing in fintech

investing in fintech

Most articles about fintech begin with something like the following formula: (Insert sloppy, over-excited adjective) fintech in (insert any of the past 3 years) raised (insert number <20, KPMG pegged 2015 at $19.1) billions of dollars.

That’s great and it’s certainly one way to measure the impact innovative technologies and entrepreneurs are having on the business of money. But, as an investor, you have to wonder: if fintech is such a lucrative investment, how do I get in on the game? We’ve done some of the work for you, interviewing the most successful fintech investors on the planet o our podcast (yep, hyperbole works in these parts). We also track quarterly fintech investment trends.

Here are various ways both individuals and professional investors can invest in fintech.

Investing in public fintech companies

New fintech ETF
Keefe Bruyette and Woods launched the KBW Nasdaq Financial Technology Index this week, listed under the ticker $KFTX. The 49 fintech companies listed in the index include publicly-traded payments firms, niche research, data, and analytics providers, portfolio management technologies, and stock exchanges.

It’s not the first time around the fintech block for KBW, which is owned by midwestern brokerage and asset manager, Stifel. The firm has a family of indices that track the financial industry, including a global bank index ($GBKX), capital markets index ($KSX), and a P&C insurance index ($KPX).

According to KBW, the constituents of the fintech index represent 18% of the investable domestic financial universe and nearly 4% of the investable domestic equity universe, which accounts for approximately $785 billion in total market cap. “The KFTX provides a relevant benchmark within the fintech space, which will be valuable to the increasing number of investors closely watching this area,” said Fred Cannon, Global Director of Research at KBW.

Invest directly
Investors who want more direct exposure than an index can provide can merely peel open the KFTX to get a better view of the 49 companies included in the index. Once they do, they’ll be able to drill-down on names like ACI Worldwide ($ACIW), Cardtronics ($CATM), Envestnet ($ENV), Green Dot ($GDOT), IHS Markit (INFO), Nasdaq ($NDAQ), PayPal (PYPL), and Square ($SQ). Using an index gives an investor broader exposure to the fintech theme in general, while investing in a single name or a handful of names is more of a bet on these specific companies outperforming.

Investing in private fintech companies

Venture capital
Large check writers (say, $5 million) may want to consider putting their monies in the stewardship of large venture capital funds that are active in fintech. Most funds that are active in fintech aren’t dedicated to the space, so if you were to invest in Sequoia Capital, per se, you would be get exposure to portfolio companies like Prosper and Nubank, but you’d also get exposure to the rest of the fund’s holdings. Spark Capital, Bessemer Venture Partners, Kleiner Perkins, and Norwest Venture Partners are also active in other fields.

There are a handful of funds which are highly-exposed to fintech. Firms like Anthemis and Route 66 that are comprised of specialists in financial services and focus their investing entirely on the sector. For investors who like to get into private companies early, 500 Startups recently announced it was launching a $25m fund. Over the past 6 years, the microfund/accelerator group founded by PayPal mafioso, Dave McClure, has made 80 investments in fintech, including in firms like CreditKarma and Simple. FinTech Collective is another early stage venture fund completely focused on fintech and has made investments in payments and banking, as well as across capital markets, wealth and asset management, lending, and insurance.

Of course, there are a lot of corporate venture capital (CVC) funds, like Google Ventures and BBVA-affiliate, Propel Ventures, but they don’t typically take outside money. Fintech specialists like QED Investors and SennaHill Partners also only manage their GPs’ money.

Angel investing
If you like to handpick your own private investments or don’t appreciate the 2-20 model of fund management, you’re probably be most comfortable being an angel investor in fintech. Angel investing in fintech is interesting — some of the same technology angels are investing in has made angel investing even more accessible to most investor. My list of 40 epic resources for angel investors is a great place to start learning the ropes or continuing to hone your craft.

Equity crowdfunding gives investors the ability to invest in fintech startups from the comfort of their own living rooms. In increments as small as $1000, fintech enthusiasts can identify top startups in fundraising mode, research their investability, see who else is also investing in a current round, and pull the trigger and invest alongside other investors. Companies raising via equity crowdfunding then aggregate all these small investors from around the world. Typically, these investments are made through a funding vehicle, so that fintech startups don’t have hundreds of surly angel investors on their cap tables.

AngelList is a DIY investor’s dream. There are over 12,000 companies listed in the financial vertical — not all of them are currently raising money, but it’s worth checking out. AngelList also has syndicates where an investor can piggyback on another investor leading a round to get access to a particular deal.

There are other equity crowdfunding firms, like OurCrowd (disclosure: I was its previous CMO and am a general partner there), which take some of the investment selection burden off the investor by doing their own due diligence. So, unlike AngelList, which is an open marketplace, these types of equity crowdfunding platforms are selective, typically only listing a small percentage of companies that apply for funding. Investors can read platform-supplied research, attend pitch events, and interact lightly with the founders.

Investing in fintech may be a rising tide that floats all boats, but it’s also been an opportunity for more sources of capital and more investors to access the space.

[podcast] Ely Razin wants to inject big data into real estate investing

corporate real estate financing big data

Credifi's Ely Razin
Credifi’s Ely Razin

We’ve spoken a lot on the podcast about tools for institutional investors. Technology and data have changed the way they go about their business. But that’s not really true for real estate investors. It’s funny — in an industry where hundred million dollar transactions are the norm, there’s surprisingly little data-enabled decision making. Corporate real estate finance is still predicated on relationships — between buyers, sellers, financiers, and brokers.

Ely Razin wants to change that —his firm, Credifi, is developing big data solutions to provide transparency for the corporate real estate ecosystem. He’s built and sold a previous startup to Thomson Reuters and joins us on the podcast this week to talk about how big data will change the way real estate investing is done, the opportunities and challenges of building a fintech startup in the CRE space, and how building a startup finance company has changed since his last go-around.

Below are lightly edited and condensed highlights from the conversation.

What role does data currently play in commercial real estate finance?

It’s really interesting — real estate has been perceived as a laggard industry that didn’t readily adopt data at the core of its decision making processes. And that’s despite the fact that any real estate transaction is fairly large in size. These aren’t hundred dollar stock purchases. Building purchases can be worth hundreds of millions of dollars. That’s beginning to change and we’re part of that change.

How real estate investing changes once data and analytics become commonplace

We have coverage of 2m properties and 2.5 loans that finance them. We have coverage of the real estate markets in the top 100 cities in the US — from New York City to Spokane, WA. With a full view, an investor can decide where he’d like to invest, when he’d like to do it, and when you think a borrower is ready to move. By contrast, in today’s real estate market, a buyer is completely dependent on brokers. One thing having information enables you to do is simply spot the right opportunities and go after them.

It sounds like you’re trying to create the Bloomberg of commercial real estate finance

We often draw the parallel to Bloomberg. Aspirationally, Bloomberg is a fabulous model. We do take a few pages out of their playbook. First, we start by putting all the data available in one place. That’s critical — this is a market that was highly fragmented. We weave all the data together, so that our users can click through from a property to its owner to its lender. The second thing we take from Bloomberg is an understanding that it’s not just about the data — it’s about moving the transaction forward. Bloomberg’s messaging platform is a backbone for trading. We have the mindset that we want to help get deals done.



Marketplace lending meets retirement investing with Income&

retirement investing with Income&

Open any news site and you’ll read how the Marketplace Lending sector is ramping. US companies like Lending Club and Prosper are underwriting billions of dollars of loans every month now. But when you read stories about the industry, the media frequently focuses on borrowers. Typically, on online lending platforms like these, these are relatively high quality borrowers drawing money to consolidate their credit card debt, pay for weddings, college for their kids, and to make home improvements.

Brad Walker, Income&
Brad Walker, Income&

But, because these are marketplaces, for everyone who borrows, there’s a lender. An investor on the other side. Who are the investors on these platforms? A big percentage of the money coming in is from professionals — hedge funds looking for an investment with an appropriate risk-return profile.

But what about the individual investors — why do they come to these platforms? Why are they investing on marketplace lending platforms vs. other options for their investment dollars?

I think that’s a similar question our next guest grappled with and why he co-founded a new lending platform, Income&. Brad Walker’s professional experience was in hard-asset lending and few years back, he saw an opportunity to provide a different type of investment to investors — a marketplace loan backed by a mortgage. He believes investors, primarily in and entering retirement, require the regularity of a fixed income investment but also the security of the asset backing it and so, he and his partner set out to build a new marketplace lending platform to provide these types of investments.

Income& has even productized these investments, mortgage-backed marketplace loans — they call them PRIMOs and they’re fractional promissory notes like you’d find on the other marketplace lending platforms, except these are backed by prime-rated mortgages.

Join us as we talk about how as a country, a rising number of retirees require different solutions at a time when saving your money in the bank just doesn’t get you where you need to go. Will we see more flavors of online lending and new products like Income&?

Listen to the FULL episode

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OTAS Technologies’ Tom Doris is creating machines to do (part of) a trader’s job

interview with fintech investor, Dan Ciporin

Tom Doris is CEO of OTAS Technologies

What’s OTAS all about?

Tom Doris, OTAS Technologies
Tom Doris, OTAS Technologies

At OTAS we use big data analytics, machine learning and artificial intelligence to extract meaning from market data and provide traders and portfolio managers with insights that would otherwise lay hidden. Our decision support tools help traders to focus on what’s important and interesting, you could say that we use machines to identify the areas that humans should be paying attention to.

I did my Ph.D. in artificial intelligence, and around 2009, it was clear to me that several of the more sophisticated hedge funds were converging on a set of approaches to market data analysis that could be unified and made more efficient and general by applying algorithms from machine learning and artificial intelligence.

Better yet, it quickly became clear that the resulting analysis could be delivered to human traders and portfolio managers using natural language and infographics that made it easy to absorb and action. At the same time, the role of the trader was becoming increasingly important to the investment process, while the problem of executing orders was becoming more difficult due to venue fragmentation, dark pools, and HFT, so it was clear to me that there would be demand for a system that helped the trader overcome these problems.

How does leveraging artificial intelligence for trading help traders and portfolio managers make better decisions and manage risk?

Experienced traders and PMs really do have skill and insight. With all human skills, it is not easy to apply the skill systematically. We can leverage AI to help humans scale their investment process to a larger universe of securities, and also to ensure they apply their best practices on every single trade.

In many professions, everyday tasks are too complex for a human to execute reliably, for instance, pilots and surgeons both rely on extensive checklists. Checklists aren’t sufficient in financial markets because hundreds of factors can potentially influence a trader’s decision, so the problem is to first find the factors that are unusual and interesting to the current situation. This is the task that AI is exceedingly good at, and it’s what OTAS does. Once we’ve identified the important factors for a given situation, machine learning and statistics help to quantify their potential impact to the human, and we use AI to generate a natural language description in plain English.

What is compelling the increased use of artificial intelligence and big data analysis in financial services?

A basic driver is that the volume of data that the markets generate is simply too much for a human to analyze, but the more compelling reason is that AI and machine learning are effective and get the results that people want. Intelligent use of these techniques gives you a real edge in the market, and that goes to the firm’s bottom line.

How do you see artificial intelligence and big data analysis playing a role in trade execution in the future? Any predictions for 2016?

AI is going to provide increased automation on the trading desk. Execution algorithms have already automated the task of executing an order once the strategy has been selected by a trader. Now we’re seeing a big push to automate the strategy selection and routing decision process. The next milestone will be to see these systems in wide deployment, and with it will come a shift in the trader’s role; traders will have more time to focus on the exceptional orders that really benefit from human input. Also, the trader will be able to drive the order book in aggregate according to changes in risk and volatility. Instead of manually modifying each order, you will simply tell the system to be more aggressive, or risk averse, and it will automatically adapt the strategies of the individual orders.

What’s the biggest challenge in acquiring new customers in your space?

Traders have largely been neglected in recent years as regards technology that helps them to make better decisions. Even when the benefits of a new tool are clearly established, it can be difficult for the trading desks to get it through their firm’s budget. Despite the recent hype around HFT and scrutiny of trading, there’s still a lag when it comes to empowering traders with the best information and tools to support them.

Photo credit: via / CC BY-SA