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03 September 2014

3 Ways Traditional Financial Services Pros Can Profit From FinTech Startups

Financial technology startups are transforming financial services. But whether they are complementary or competitive businesses, financial service professionals must get involved with FinTech startups ASAP.

FinTech disruption is in its early innings, particularly on the institutional side. But the number of exciting startups is growing.

You’ve likely heard of companies such as Lending Club in the lending sector, Wealthfront for wealth management, and Square for payments. Companies such as these are reinventing very old processes in their respective sectors, and there are many more examples of technology firms like these that are gaining mainstream recognition. But there are thousands of startups reimagining much more niche functions in financial services, and many of them could be complementary or competitive to your own business.

So … How can you profit from these startups?

Working with fledgling companies is a foreign concept to many FinServ professionals, particularly outside of the CTO’s office. But here are 3 reasons you should personally and professionally get involved with FinTech startups right away.

Reason 1: You will adopt the best technologies first, long before your competitors.

The benefits of being first are numerous. The early users of disruptive technologies will have the first opportunities to reap the benefits—especially profits. For those of you on the buy side, this is particularly true when a product can uncover new sources of alpha before your peers catch on to them.   

[Related: “Market Data’s 'Cambrian Age' Offers Limitless, Untapped Potential”]

Even if you are more risk adverse with technology adoption, discovering new products early can still have a meaningful benefit by making you a faster “fast follower.” Don’t start your due diligence on a product at the time it becomes mainstream, when the excess benefits are already being arbitraged away. If you start by putting small amounts of time into reviewing early stage products a year or two in advance, for example, you’ll be ready to immediately jump in once the early adopters have sufficiently validated it for you. And even more important, you’ll have the opportunity to help shape the product features as they are built, ensuring it will have maximum utility to you once you do start using it.

Many entrepreneurs are at the forefront of thought leadership, and since they are shaping the future of this industry, it follows that they are also a great source for understanding that future as early as possible. Don’t solely rely on industry publications or consulting firms to highlight key trends. You’ll gain a much deeper understanding by also interacting directly with the trendsetters themselves.   

An additional benefit of being “in the know” is that you’ll brand yourself as a forward-thinker. You’ll impress your boss, land new clients, or maybe land a new job at a more innovative company or startup (if you’re so inclined to pursue that course).

As a partner at ValueStream Labs, which runs an accelerator program specifically for FinTech startups, we’ve introduced numerous startups and FinServ professionals at institutions of all sizes. For example, a team at a large hedge fund described to us their inefficiencies in searching for certain types of information in very large collections of text-based documents. This is a common problem across many hedge funds, and yet the existing tools this particular fund uses still can’t do exactly what the firm needs. So ValueStream introduced this hedge fund to a company called Sensai, which has developed an innovative and simple interface that allows analysts of almost any skill level to more effectively use cutting-edge, machine learning-based search algorithms. Although Sensai is a young company and has only entered into contracts with firms outside of the financial services industry to date, the potential benefits to this hedge fund were immediately clear.

The key to making this an effective process for you is to avoid wasting your time listening to the startup pitches that will never add value for your firm. You need to be selective, and the best way to do this is to utilize a filter to help you wade through the crap that exists in the startup ecosystem. That’s one of the biggest opportunities we saw when we started ValueStream: providing a level of transparency and due diligence that helps professionals focus on the startups that can truly add value to their businesses.

Reason 2: You will uncover excellent investment opportunities

Investing in early stage companies can provide excellent upside potential, but it’s a daunting endeavor when you’re unfamiliar with the market the startup is attempting to tackle, on top of the many other unknown risks of investing in startups. What’s your edge in identifying the next Instagram that will sell to Facebook for circa $1B when there are already dozens of potential competitors in the space? Therefore, what better place is there to invest than in a FinTech segment where you already have unique expertise (and where most other investors likely do not)?

FinServ professionals are unique in that they have both the income to be an accredited investor and the appetite for making investments of above-average risk, and because of this, it is one of the few industries that produce numerous Triple Threat Investors. A Triple Threat Investor is an individual or firm that can be an investor, and advisor and a customer, all in one. When this type of investor gets involved in a startup, numerous ‘win-win’ interactions can occur, benefiting both the investor and the startup. Most notably, the industry expertise and relationships you have can rapidly add value for a startup, helping to increase the probability of you making an excellent return on your investment.  

[Related: “Crowdfunding Is Going Viral”]

Reason 3: You will hedge your career against technological change

Finally, if you don’t think the potential returns in early stage FinTech are compelling enough for you, perhaps you should consider investing in FinTech startups as a hedge on your current business. If technology reinvents your business over the next decade, and that perhaps leaves you a bit short of the compensation level you would have otherwise expected by then, wouldn’t you like to have benefited along the way by owning a piece of the companies that caused that disruption?

ValueStream Labs’ mission is to discover and grow the entrepreneurial community in FinTech. ValueStream runs a startup accelerator program, venture-stage investments, and hosts numerous events in NYC focused on early stage financial technology. 

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2 Comments to "3 Ways Traditional Financial Services Pros Can Profit From FinTech Startups":
  • Comment_gene_headshot_smallest
    Gene Massey

    04 September 2014

    Excellent article Josh. Everything that has already happened because of the Internet: no more paper maps or yellow pages or door-to-door vacuum cleaner salesmen, etc. - has barely touched FInTech. A true revolution in online funding of early stage companies is just around the corner, and when this wave breaks, there will be a mad rush to follow your advice here and invest in early-stage companies.

  • Missing
    groenfeldt

    04 September 2014

    Good points on how to get involved, and why. I have been writing about fintech innovation labs for a couple of years at Forbes but this is the first "how-to profit" piece I have seen. If you want to see where to look for more, search for my fintech lab stories on Forbes.com

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