FinTech Startups Benefit from Buy-Side Investment Trends

An Aite Group survey of 25 financial technology vendors found the buy-side is more willing to invest in startup vendors products, especially around risk management and compliance.

The report suggests the banks, hedge funds and other buy-side firms are ready to move away from years of stagnant IT spending dedicated to maintenance and regulation, and look forward to growth and additional new revenue generation. Fortunately, a lot of financial technology companies are trying to help potential clients achieve that through cutting-edge innovation.

"Given the type of IT spending environment, it makes sense for innovation to take place outside of traditional financial institutions, and to have the startups lead the next generation," says Sang Lee, managing partner in Institutional Securities & Investments at Aite Group and author of the report.

[To hear about how financial firms are managing their complex data architectures, attend the Future of the Financial Services Data Center panel at Interop 2014 in Las Vegas, March 31-April 4. You can also REGISTER FOR INTEROP HERE.]

Products peaking the interest of buy-side include non-traditional data sets and social media. Those surveyed also report increased focus on visualization and user interface.

The report also found most new technologies leverage cloud delivery, something the buy-side has been skeptical of due to security and reliability concerns. But the past year saw increased comfort with cloud and the potential rewards (scalability and cost control) have encouraged the buy-side to become more risk tolerant and open minded.

Opening the Door

"Many people come up with interesting products, but they still need to get in front of buy-side clients." says Karl Antle, managing partner at ValueStream Labs, a business development program working to accelerate adoption of new technologies in the financial services industry. "Historically technology companies have aimed to sell to the sell-side, because they were easier to find and had large budgets for IT, but they can have difficult and long sales cycles."

"In order to reach the buy-side, startups found it was easier to through distributors, such as market data or terminal vendors, rather than directly selling to the end customer," but Antle says startups are seeing a shift. Yes, the buy-side is still working with the large vendors, but startups are experiencing better results using the web to reach the buy-side directly.

"It's the time to be selling directly to the buy-side because they are looking to new business models and open to new technology than they were before. This is the time to be targeting them, and vendors will have more luck getting in than they had even two years ago."

Key to success: How it is versus how it should be

Perhaps the most important element of success for firms targeting the buy-side is a dose of reality.

“While many of the providers offer innovative products, services, or delivery models, not all have a viable long-term business model that will take them beyond being short-term curiosities,” says Lee in the report. “Finding the right business or revenue model within the context of market reality will be the key to their success.”

Financial services is an old market that's worked in a specific way for a long time, and there are a lot of nuances that aren't obvious, explains Antle. "One of the mistakes we see fairly often is products being designed for how the market should work, without taking into account how it operates today."

Similarly, the sell-side is not searching for products that will disrupt their market, they're targeting products complimentary to the existing ecosystem. An example would be a data feed similar to what the firm already has, delivered an hour faster and at a lower price. A purchaser of technology understands how to use and implement that versus a new concept altogether.

"A lot of these new guys are more disruptive, so you are relying on [buy-side] to rethink how they go about their daily workflow, that's a challenging thing to overcome. We see a new wave of companies being launched that recognize it's not easy to get off one track and onto another track."

Although the report acknowledges some of the vendors profiled may not exist even 24 months from now, Aite finds their developments impressive, and an important contribution to the next generation of market growth. Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio