The FIA convention is in town. Each year, the futures industry descends on Chicago from all over the world. I went to one function. For the past couple of years, the FIA has been doing an “innovators pavilion”. They have selected companies that compete for a small prize. I met a couple of the entrepreneurs the other night. They are working on things that are very atypical when it comes to startups. But, they are startups.
Finance has very different problems than other industries. Sure, payments are a problem. But, OTC and swaps have different problems than consumer point of sale payment systems. For many VC firms, it’s hard to invest in the companies that are solving problems in big finance.
The reasons are pretty simple:
- Check sizes to get going are too small. By the time a firm can take a larger check size, the valuation/exit metrics don’t work
- Lack of expertise to diligence
- Lack of ability to add value besides capital
- Market size
Corporate VCs also don’t invest early in this space. The reasons they pass are different. Sometimes they pass because they refuse to invest in technology that would threaten their existing business model. Sometimes it’s because of stage. However, corporate VC is getting a lot more active in the space because they see the threat. Many banks have started incubators in the last three to four years.
In Chicago, we have the guts and glue of the financial industry. The major exchanges are here. They have a culture of doing things differently. All the major high frequency trading firms are here. They have recruited the best and the brightest from all over the world to come here.
The trading world has gotten significantly more competitive in the last five years. 0% interest rate policies are having knock on effects for many firms. It’s gotten a lot tougher to make money. I was talking to one trader who said, “We knew computers were going to make it more competitive, but we never counted on order flow drying up.” No one needs to hedge 0% interest rates. Firms that chose not to invest in the arms race of speed are having to pivot. It’s lead to consolidation. It also means that highly talented technology people are starting to sniff around for new opportunities.
There is a lot of opportunity in this space. I think the entire backbone of finance will look different within the next five to ten years.