How to grow a fintech company without taking outside capital

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During 2015, there was so much venture capital money sloshing around the finance industry. Some of the top startups in the space raised +$100 million rounds (debt and equity). Sometimes, surrounded by the splashy big fundraising news, companies trying to bootstrap their paths to profits get lost in the noise.

Justin Carbonneau, Validea
Justin Carbonneau, Validea

But there are companies out there in the finance world that are doing a good job building businesses for the long term. Validea is one of those firms founded by three professionals that chose to go the self-funded route. Founded in 2003, the company provides investment data and portfolios built and managed using algorithms that mimic the investment strategies of some of the greatest investors in history, like Graham, Buffett, Lynch, and Neff. The company was founded during the dot com era when money was loose and profits didn’t seem to matter.

Instead, when Justin Carbonneau and Jack Forehand teamed up with founder John Reese, the team decided that they would grow Validea with a goal to profitably run their fledgling fintech business. The idea would be to expand the business by using cash flow to build the business, not outside capital.

Control was also an important issue — the firm decided early on that it had a clear goal in mind and it wanted to own its own destiny. “We also didn’t want to give up control of our concept to outside investors who may not have understood the vision we have for the company and may have tried to force us to go in a direction that isn’t consistent with our goals for the business,” Justin Carbonneau, who heads up sales and distribution, remarked. “We think that level of control has been important to both its success and the personal enjoyment we get out of running it.”

Indeed, the firm credits going the self-funded route with helping it navigate the 2008 downturn, a period of time that proved very challenging for companies exposed to the stock market. Bootstrapping a company ensured the team kept costs in check. It also meant there was a high level of resourcefulness on the marketing and sales side. Carbonneau described his early marketing successes, “Early on, we benefited from highlights in major media outlets, such as articles in The Washington Post and on very popular investing sites like MSN Money.” Popular writers and columnists would highlight Validea’s investing system and this type of earned media generated a lot of interest in the firm’s products early on.

Peter Lynch and Validea stock picks

Those big, unexpected wins have changed as the company has grown. The company is much more focused on optimizing its own sales funnel now and that means working to get Validea’s premium products in front of traffic that comes to the site from search engines. Content partnerships can help bring a steady stream of prospects to the site, as well. Carbonneau has inked a partnership with NASDAQ which involves out-licensing part of Validea’s research product to the stock market’s flagship website, which drives more traffic to the firm’s premium products. The firm’s founder, John Reese, is also a contributor to Forbes and Canada’s Globe and Mail, which brings in more readers. “I think this content marketing approach is much more sustainable for the long run versus the former PR-centric growth strategy,” he posited.

While the Validea team recommends their self-funded approach to growing a financial business, it has had its drawbacks, too. Sometimes the focus on short-term profits has steered the team away from focusing on longer-term projects.

Validea Capital Management_-_Invest_Using_the_Proven_Strategies_of_Wall_Street_Legends

For example the founding team runs a separate firm, Validea Capital Management. It took 18 months to launch that asset management business after releasing Validea.com. “We probably could have expanded that much faster if we launched it out of the gate, but we wanted to be cautious both from the perspective of profitability and the perspective of making sure our models were ready to run actual money,” said Carbonneau. It wasn’t until 2014 that the firm launched its first exchange traded fund (ETF), the Validea Market Legends ETF, which was certainly later than some other firms in the space. “So in hindsight, we could have employed a more fast moving, aggressive expansion strategy, but in the end, we are risk averse people and we are willing to give up the upside of a potentially much larger company to ensure that we have a company that is sustainable over the long-term.”

Advice to others contemplating taking VC vs. self funding?

Carbonneau offers the following words of advice for other entrepreneurs considering taking outside capital to fund their fintech firms:

  • It really comes down to each person’s own vision and risk tolerance. Business owners need to ask themselves if control and profitability is more important or if that are willing to give that up in pursuit of a bigger long-term vision.
  • Having a focus on profitability early on gives you flexibility and more leverage if you do decide to raise outside capital.
  • Many times, founders know more about their businesses than outsiders do, so you need to strike a balance between staying focused on what you believe in and future expansion.
  • Sometimes a product can be too early, so it can pay to try to wait for the marketplace to accept your product and self-funding can give you that flexibility.
  • Changing the business model can be key to long term survival – Validea started as a free research product, we pivoted to a subscription based product, then launched the asset management business. The core of what we do was all centered around the fundamental guru-based strategies we run but the various business model evolved over time.
  • Sometimes companies feel compelled to hire, invest, develop, market and more. All of these things cost money, and while they can help grow a business and add-value, they can also hurt a business if the execution is off or if the revenue does not keep up with the cost structure. They increase reward, but also increase risk.

Bringing to life history’s best investing strategies via technology (Future of Investing)

This post was originally included as part of an ebook that I published alongside the launch of my book, Tradestream, entitled “Tradestreaming and the Future of Investing”. The content was so good I wanted everyone to have access to it. :-)

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At Validea, our belief is that investors can produce market outperformance by following the quantitative strategies of Wall Street greats, like Warren Buffett, Peter Lynch, John Neff, Joel Greenblatt, Ben Graham and others.  Rather than creating new strategies, Validea takes the publicly disclosed stock selection methods outlined by these successful long term investors in their writings and lectures and captures their methodologies in a systematic investment approach that allows for bottom-up stock analysis, stock screening and model portfolio creation. While advancements in technology and fundamental stock data availability have been crucial in the development of the next generation of stock screening tools, Validea’s algorithms are proprietary and incorporate aspects of artificial intelligence so that certain criteria are measured in the same way a human would measure them.

Simple screens, like screening on the Price-to-Earnings ratio or Relative Strength, are useful as a starting point for building a portfolio, but the sophistication and uniqueness of guru-models like Validea’s allow for the selection of top rated stocks according to each proven fundamentally-based investment strategy. By vetting over 6,000 securities for over 7 years through these models, which have anywhere from five to fifteen distinct criteria, we have demonstrated the value of these approaches through our model portfolio tool. By holding baskets of stocks that pass through a guru filter, investors are able to statistically put the odds in their favor and over time, this results in 55-60% of portfolio positions winning. Applying these strategies through a disciplined framework allows for excellent potential for long term market beating returns.

*—> Like what you see? Hey! Don’t forget to subscribe to the free Tradestreaming newsletter for updates, tips, and special offers

Justin Carbonneau is a partner at Validea Capital and manages the firm’s Private Client Group. He also acts as the principal business development officer for the company and is responsible for managing growth efforts and strategic initiatives. Prior to joining Validea Capital, Justin was a controller for a Fortune 500 healthcare company where he was a member of the firm’s leadership development program.

What is Tradestreaming: Screening 2.0

Top investment gurus like Benjamin Graham, Warren Buffett, Peter Lynch, and Joel Greenblatt didn’t only help investors enjoy huge market-beating returns in their funds.  They also left behind the keys to the (investing) castle: the methodologies they applied in their market-trouncing performance.  They’ve written books, complete with formulas and strategies, that propelled them to the top of their games and gains.  Tradestreaming aims to recreate these strategies as we pave our own way to outperformance.

Because a small number of expert investors wrote extensively about their investing techniques, we can now create complicated computer programs to reenact their strategies and apply them to today’s stock markets.  Screening 2.0 is all about using smart technology to bring history’s best investors back to life.

Technology-driven investing

Stock screens have been around for decades.  Using screens, we can filter through thousands of investment candidates on the prowl for the ideal investment.  Old screens merely searched databases of stocks using specific criteria (i.e. all large cap stocks with a p/e less than 20 and a growth rate over 7%). Unfortunately, for most investors, these screens fail — searching for specific stocks tells us nothing about the success of such a strategy.

Screening 2.0, lead by analysis and money management firm, Validea, allows us to recreate history’s best investment strategies, computerize them, and then look for stocks that guru investors like Ken Fisher and Marty Zweig would have purchased themselves.  Screening 2.0 is the marriage of search technologies and artificial intelligence with quantitative investing.

More Resources

Make sure you check out the Tradestreaming for the Internet’s best stock screening resources.

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Buffett, Algorithms, and Technical Analysis: The Evolution of the Investment Newsletter

The evolution of investment newsletters

Investment newsletters have been around as long as investments have. Never mind that they used to be delivered snail mail. Then fax. Then email. Given the lag time between publishing and delivery, these old-school newsletters, like the Motley Fool’s Hidden Gems or Al Frank’s Prudent Speculator, mostly gave paid subscribers a pick or two or provided them with a list of stocks — typically, the output of a stock screen.

From static to real-time

But that’s the old model. Given the real-time nature of the web, investment newsletters are morphing into full-blown investment systems. The difference between the old model and new comes in both shape and form:

  • Amount of information: With short-form Twitter content and the 24/7 model of financial news, subscription services have to stay relevant. So, instead of delivering a static recommendation, new subscription services have to continue delivering a lot of commentary and analysis to help their subs decipher the news that envelops them and their portfolios.
  • Frequency of publication: Publishing 1x/month no longer suffices. Newsletters have become quasi-trading desks of info, providing ongoing analysis of markets and their stock picks.
  • Quality of analysis: With high quality analyst-bloggers producing real-time content, I believe we’ve seen the bar raised in terms of the quality of content being produced. There is certainly more of it — I believe it’s getting better as well.
  • Diversity of content products: We’re no longer looking at a two dimensional financial content market made up of the bloods (fundamental analysis) and crips (technical analysis) — new subscription products are becoming really valuable, like the portfolio cloning tools at AlphaClone and the ability to bring history’s best investors back to life via algorithms like Validea has done. Come to think of it — expert networks like Covestor and kaChing are also investing systems as investors subscribe to track and mimic newly-found gurus.

Couple o’ examples

Given their strategies, technical traders and day traders have had systems at their disposal. But it’s only recent that fundamental investors have. We know what investment newsletters look like but what about investing systems? Here are a couple that stand out as interesting examples:

  • StockTwits premium blog network is a good showcase of the types of services available to subscribers. They’re expensive but in return, subscribers get ongoing, daily commentary from the publisher as well as a variety of different types of media (I’m thinking about TV here) to consume.
  • Validea: I’ve written about John Reese’s firm before but I like the way their proprietary stock screener that recreates the investment strategies of history’s top investors is evolving. The Validea Pro product pings subscribers when a certain trigger has fired. Combined with graded reports on numerous stocks, Validea has become a trading system by combining the real-time aspects of trading alerts (buy and sell) as well as the fundamental rigor exemplified by its screening algorithm.
  • Davian Letter: Emerged from seemingly nowhere to provide a variety of real-time trading services — from black box type algorithms to more detailed analysis on tech stocks to earnings recaps.

Of course, some newsletters get it. Others are still playing by yesterday’s rules. What are you using? Let me know if the comments.

**Also, if you manage/contribute/publish an investment newsletter, make sure to download my free ebook, How to Build a Profitable Investment Newsletter.