There is a new kind of entrepreneur targeting rundown businesses. He has revolutionised financial services in the 21st century. Wall Street has to develop greater transparency and accountability. It has to create more opportunities and enhance social utility to recover some of its lost glory. Young companies are on a mission. There is a range of new companies run by visionaries with the zeal required to effect the changes expressed by Michael Lewis in his book, Flash Boys. The areas they focus on are addressed below.
Investment research is full of conflict of interest. It’s difficult to retain the independence of a firm which is compromised to issue IPOs and give advice on mergers as well as engage in prop trading. Most Companies still outperform market expectations against all odds defying any short or long term analysts’ forecasts. Esitimize, a company run by Leigh Drogen, an accidental entrepreneur and former hedge fund manager, is seeking to remove these biases and increase accuracy in forecasting. Esitimize provides free and anonymous estimates to anybody while allowing everyone to air his or her opinion.
Among the main problems faced when analyzing companies is the fact that most companies still rely heavily on paper documents. Even large financial firms such as Capital IQ, Thomas Reuters, and Bloomerg still use paper documents to set up their data bases for crucial financial information. This has pushed the cost of data up and created a big barrier to new entrants in the business.
The XBRL reporting language is an XML based standard that has taken more than a decade to develop. US companies are now obliged to publish results on this machine readable format leading to innovation in this area. TagniFi, which is a company operated by entrepreneurs, Dave Bettin and Chad Sandstedt, is now consistently generating a timely and transparent database for US stocks.
Following closely behind TagniFi and Esitimize, is SpreadCloud. SpreadCloud has developed an Excel based tool that enables one to make financial models utilising a wide range of data available on the cloud. The idea is exciting because it’s free in contrast with the thousands of dollars one has to part with for FactSet, Bloomberg, or CaplQ licenses. The cost of premium data has always been a stumbling block for access to Wall Street.
The data contributors to SpreadCloud have their own clients to whom they grant access according to their licence rights. SpreadCloud is only paid to run the intergration by contributors but is not responsible to the end user. This has helped to open up the market to new contributors thus developing better content unlike getting data into a platform such as FactSet, which used to involve a long and complicated process.
Investment banking enriches the bankers who connect sellers to buyers of businesses. This business is a cash cow and is carefully controlled. In the Hamptons, restaurant owners and yacht builders are busy during every summer taking advantage of the increased cash flow. Peter Lehrman, CEO of Axial, has created an alternative marketplace to address this imbalance. Now, one does not need to go to New York City to get into the business. Axial is like the eBay of Capital Markets for those targeting midmarket companies.
These companies all have one thing in common. They have focused on the single area of a differentiated business model. They have management teams with expert knowledge of domains. These teams all developed outside Wall Street and they are tackling the big players but not head-on. There are smarter than that.