Financial technology startups seize moment
The big players in financial services have long struggled to keep pace with technology. They’ve been slow to deploy the latest in computers and software to analyze data, pick investments, and engage customers.
That has created big opportunities for a slew of local entrepreneurs.
“The industry is just crying out for new ways of doing things,” said Adam Broun, chief operating officer of Kensho Technologies Inc., a Cambridge software company launched two years ago to speed the process of modeling the effect of world events on the prices of stocks, bonds, and other assets.
Kensho is one of a growing number of Boston-area companies seizing a moment when the needs of the financial industry and capabilities of technology are coming together, aiming to take advantage of modern computing speeds, troves of data, and the ubiquity of mobile devices. At least 100 financial technology startups have emerged in Greater Boston in recent years, according to FinTech Sandbox, a Boston nonprofit started in March to help these enterprises test ideas.
From investment software to payment systems to hedge funds that use crowdsourcing to make bets, these young companies hope to shake up one of the city’s oldest and most tradition-bound industries. Some of these firms are seeking to profit by helping banks, funds, and investors, while others are more disruptive.
“Historically, Boston hasn’t been known for startups in the financial technology space — now we’re seeing more and more companies,” said Jean Donnelly, executive director of the FinTech Sandbox.
Greater Boston seems to be the ideal place for a financial technology, or “fintech,” sector. It has long been home to one of the world’s leading tech sectors — and one that specializes in business-focused applications — as well as a robust and diverse financial industry that includes some of the nation’s biggest mutual funds, venture capital firms, and private equity companies.
So why now? Industry officials cite three main factors: data, timing, and better technology.
First, more things are getting measured. From social media to traffic patterns to health statistics to electric grid usage, massive amounts of data have become available for an unprecedented range of behaviors and events. By analyzing and understanding this data, financial firms can gain deeper insights into what moves markets, helping them make wiser investment choices.
“The most important trend behind our business is the explosion of data available from the real economy,” said John Fawcett, chief executive and founder of Quantopian Inc. of Boston, an investing platform that lets users write programs that evaluate investments.
Following the 2008 financial crisis, many of the biggest companies slashed budgets for technology development, Fawcett said. In the meantime, computers grew more powerful and people started expecting more from mobile devices. The result: opportunities for tech entrepreneurs.
Kensho and its 35 employees offer software that allows users to quickly answer questions about the effect of world events on asset prices: How do markets react when the Conservatives win in the United Kingdom? Such information can help inform their decisions on future investments.
Such analysis is done today through a combination of computing and human brain power. But Kensho’s software, in conjunction with today’s vastly improved computing power, accelerates the process and lowers the cost, said Broun, the chief operating officer.
Kensho’s clients include big investment banks, hedge funds, and asset managers. Financial news network CNBC uses the software to present statistics tied to news, such as a recent segment that looked at the connection between hot summers and the prices of utility stocks.
“Computing power is becoming more accessible and cheaper to use,” Broun said. “It makes this a wonderful time to be doing projects like this.”
Investors in Kensho include investment bank Goldman Sachs Group Inc. and Google Ventures, venture capital arm of the tech giant Google Inc. In November, Kensho closed a $15 million round of funding.
Quantopian, founded in 2011, throws its digital doors open to anyone who wants to try writing computer code that analyzes potential investments. The company’s online community shares, tweaks, and collaborates on code intended to find the best investments. Each month, Quantopian chooses one promising strategy and backs it with $10,000; the member who wrote the code keeps the returns.
Quantopian, which has grown from a handful of employees to more than 30, has raised close to $24 million so far, including a $15 million funding round that closed in October. Quantopian plans to make money by launching a hedge fund that will use the best of these crowd-sourced algorithms to make and manage investments for pension funds, family foundations, university endowments, and other institutional investors, Fawcett said.
Another fintech newcomer, Elsen Inc., is concentrating on computing power, offering a high-performance computing platform that lets hedge funds, banks, and other institutions quickly process enormous amounts of data. The Boston company, founded in 2013, received its first outside investments — $400,000 from angel investors — in January.
“We’re more of a technology company than a financial company,” founder Zac Sheffer said. “We’re using the cutting edge of things that are out there.”
Bison Inc. (the name stands for Boston Illiquid Securities Offering Network), also of Boston, has created a system to let subscribers analyze and compare investment returns of private equity and venture capital funds. While public companies must file details of their financial performance with the US Securities and Exchange Commission, no such requirements apply to private companies. Most private equity and venture capital funds are privately held, making it harder to assess potential investments in these funds, Bison cofounder Michael Nugent explained.
Bison’s goal is to build a repository of data for privately held companies and the tools for subscribers to analyze the information. Data is collected from sources including federal and state regulatory filings, Freedom of Information Act requests, and news stories from more than 25,000 publications. The company’s clients are largely institutional investors, Nugent said, including foundations, university endowments, and pension funds.
Other startups aim to serve consumers rather than institutional investors. Circle Internet Financial Inc. of Boston, for example, has created an app that allows users to send and receive money in the form of US dollars or the digital currency bitcoin. Founded in 2013, the company has received $76 million in backing from investors.
Boston is an ideal spot for ambitious fintech entrepreneurs because of its supply of both clients and talent — technical and financial — industry officials said. Major financial companies, such as Fidelity Investments and State Street Corp., along with many smaller hedge funds, private equity firms, and university endowments make the city fertile ground for finance-oriented innovation. The hope, these fintech entrepreneurs said, is that Boston will embrace new approaches to financial services.
“Changes in the space are really overdue,” Donnelly of the FinTech Sandbox said.