Jack Kokko is a serial entrepreneur who came up with the idea for AlphaSense after laboring away in Morgan Stanley’s research department for several years. The problem he identified (i.e., information overload confronting financial analysts) wasn’t easy to crack. But thanks to Kokko’s efforts, those of his co-founder Raj Neervannan and a deep team, AlphaSense now counts several hundred of the world’s most demanding institutions and corporations as clients. The FR’s Gregg Schoenberg recently sat down with Kokko for a far-reaching conversation. Everything from the rise of passive investment strategies, declining buy- and sell-side budgets to his move from San Francisco to New York was fair game. We came away believing that Kokko and his team are well positioned to seize the opportunities and face the considerable challenges associated with helping today’s financial professionals in their quest for alpha.
The Financial Revolutionist: Jack. It’s great to see you. Can you describe how you found your way from Helsinki to Morgan Stanley’s Menlo Park office?
Jack Kokko: Sure. After I studied in Finland, I went into telecom banking in London. From there, I convinced Morgan Stanley to send me to Silicon Valley because it seemed like the place to be. It was a crazy time but too tantalizing to miss. While there, I worked as a tech analyst and spent many nights and weekends poring over a massive load of information. However, the tools my colleagues and I were given to process all of the information were sorely lacking, so the work was very manual.
FR: So you had dog-eared stacks of paper around you?
JK: Exactly. We had these big piles of paper all over our desks. We flipped pages and used highlighters a lot and had sticky notes all over the place trying to keep track of things. But despite the hard work, there was still this constant nagging fear that I was missing something critical because there was no way to electronically search through all the content.
FR: So what led you to actually do something about that problem?
JK: My ultimate aspiration was to become an entrepreneur, but the first company I built was in a totally different tech field. I then went to Wharton (San Francisco) where I met my current co-founder, Raj, on a project. That project jogged my memory of my Morgan Stanley years, which I discussed extensively with Raj, who had a deep software background. Specifically, he had experience both in natural language processing and machine learning. He also understood the context of how to actually address the challenges I was describing.
FR: And what exactly are the problems that AlphaSense is addressing?
JK: We address information overload — the vast quantity of fragmented information that knowledge professionals must sift through in order to get to the piece of information they need to do their work. We find the information for them so they can focus on connecting the dots rather than manually digging for the data. Before AlphaSense, there wasn’t any professional tool for optimizing and indexing this data.
FR: So prior to AlphaSense, all of the search engines used by financial professionals indexed for consumers?
JK: Yes. There was no search technology out there focused on the needs of knowledge professionals. So we decided to fix that by creating a semantic search engine that's been built for professionals, which helps them find critical information rather than focusing on the grunt work of manually looking for those data points. We present those data points and let users connect the dots.
FR: Enabling the analyst to focus on adding value to the information?
JK: Yes, we amplify their intelligence.
FR: There’s a blog entry on your site that equates AlphaSense to “the Google for competitive intelligence.” But if you are going to be Google for anything, you’ve got to be very comprehensive...
JK: If Google is boiling the ocean, we try to be the targeted Google that goes to thousands of databases, thousands of places on the web, and just collects pre-curated information from high quality sources. Then, once the information is aggregated, it’s cleaned and processed in the same way to make all the information searchable through one interface.
FR: How long was the product under development before it was ready for beta testing?
JK: It took two or three years of tech development before we released the beta. And then, even with that beta, we worked with a few hedge funds for close to a year before we felt that the product was good enough to actually charge money for it.
FR: Once you had a product that was ready for prime time, how hard was it to get that first true sale?
JK: Getting that first client was terrifying because I had to make the call. I'm not a salesperson and I'm not a cold caller, but it had to be done.
FR: And who was the client?
JK: I can’t name the fund, but I will tell you that I'm happy to have made that first sale, which was the first step in our journey to having more than 500 clients today.
FR: So no more cold calls for you?
JK: (Laughs). Yes, I'm very happy to not have to do anymore cold calls.
FR: Can you provide a sense of the cost per seat?
JK: The seat cost really depends on a number of things. A firm that's buying hundreds of seats will negotiate a different price than a firm that's starting out with a few. But the pricing is in the thousands of dollars per user per year.
FR: Can you give a breakdown of your buy-side clients?
JK: We are about three quarters hedge funds and one quarter long-only funds.
FR: And how about the sell-side?
JK: Sell-side clients comprise less than ten percent of our total clients, but as a percentage of our user base, they are at least double the size as many of these clients have a large number of analysts using AlphaSense.
FR: Is it safe to say that you started with equity hedge fund clients first?
JK: Yes, because they were much easier to target initially as they can move faster when they see something they like. Essentially, we viewed hedge funds like small businesses, which can make purchasing decisions quickly when they need something. But later on as we became more established and credible, we started making more progress with the long-only funds as well.
FR: Let’s talk about use cases beyond equities. Do you have any global macro clients?
JK: Yes, we do. An analyst can input a particular exposure — say an election, exchange rates or a country like Venezuela — and quickly get a list of the companies most impacted by a particular theme.
FR: How about corporate use cases?
JK: Yes, this is a growing market for us and it started organically with investor relations professionals approaching us to use the product. From our perspective, it started as a way for corporations to level the playing field with the buy-side.
FR: Could you elaborate on that?
JK: Sure. IR folks saw the buy-side using the product and then calling them out on things that had been said in prior conference calls. PMs and analysts would walk into a meeting armed with an iPad saying, "Hey, two quarters ago you said this and this. How come you're saying that now?" Finally, the corporate folks realized that they needed to be on equal footing. But now, it’s gone way beyond that. Today, professionals in corporate intelligence roles, whether working at companies or consulting firms, are using our product.
FR: Given that the line between public company investors and private company investors is getting blurrier, do you see opportunity in the private markets?
JK: Absolutely. In fact, we already have clients that are private equity and venture capital funds, but it hasn’t been a big focus yet given that our current product is more geared towards a public company investor. However, we're actively working on expanding to help investors that focus on private companies.
FR: Let’s turn to the gorilla in the room. The name of your company has the word “alpha” in it. But you are undoubtedly aware that passive strategies have been gaining on active management via ETF inflows and, more recently, the rise of roboadvisors. Is this a trend keeping you up at night?
JK: Well, that's certainly a long-term secular trend that's undeniable and it’s affecting everybody in this industry. What I do know is that there are still hundreds of thousands of very smart people on Wall Street doing hard work digging for information and trying to differentiate between good companies and not so good companies. Passive management doesn't do any of that as it essentially treats all companies like they are the same. Maybe that’s the case while the Fed is pumping money into the system and all the boats are floating nicely. But when there’s a downturn, suddenly those bad companies might be doing much worse than the good ones.
FR: Creating opportunities for active managers...
JK: Yes, you’ll start to see distressed markets becoming a much bigger part of the whole. But taking a step back, I think you will see ebbs and flows, and while I don’t have a crystal ball to see exactly how things will go, I believe that active management is absolutely here to stay. It’s essential for the markets to function properly.
FR: What about the rise of quant funds? Do you think they represent a long-term threat to professional stock pickers as some have suggested?
JK: If you look at quantitative or systematic investors, they try to use algorithms to process a massive flow of information that humans can't process. I don’t see them as a threat to stock pickers. It’s just a different approach to investing and there is plenty of room for both to co-exist.
FR: Let’s assume you are right about the long-term future of active management. You still have the challenge of shrinking research budgets on the sell-side and fee compression on the buy-side, don’t you?
JK: We’re certainly aware of the budget pressures out there. However, AlphaSense is an efficiency and alpha tool, so we've got countering forces that ultimately even out.
FR: Do they really even out?
JK: Yes. In fact, one person today using our product to the fullest extent is able to take care of the grunt work that would have required several people to handle ten years ago. Plus, with the greater efficiency now achievable, an analyst at a small hedge fund who used to cover a dozen stocks can now perhaps cover two dozen stocks. So if the goal of any analyst is to turn over as many stones as possible, we can help that analyst uncover a lot more stones.
FR: Fair enough. But do you look at actively managed ETFs, the legions of financial advisors using indexed products and believe there’s a need for more efficient processing of information?
JK: What I can share with you is that, yes, we do spend time thinking about other use cases, and we are working on plans to address some of the trends you’ve referenced.
FR: And is the company still based in San Francisco?
JK: Yes, it’s still our headquarters, although I've moved here and I think about a quarter of our headcount is now here.
FR: To be closer to the clients?
JK: Exactly. We have clients all over the place, but New York has the greatest concentration of them. For me, being next to the bulk of the sales team, to attend a client meeting or just hop onto a call is very valuable.
FR: People like to compare Silicon Valley fintech versus New York fintech. We talk about it all the time in The FR. Was there a healthy internal debate about whether or not to move the center of gravity to New York?
JK: To be able to build a sophisticated platform for professionals, you have to have been one of those professionals. It's really hard for a 20-year old to just say, "Hey, I'm going to build a research platform." You have to have been in the shoes of the user and really understand how they need to consume information. Obviously, New York has more of those types of professionals.
FR: What does your ideal salesperson look like? Do you want people who have technology fluency, financial services relationships, or both?
JK: Actually, raw intelligence is probably the number one indicator because our prospects don’t want to talk to a traditional salesperson. They want to be talking to somebody who can show them how AlphaSense can help. So our people need to be able to find out the key things and then adapt the story to fit the individual. A certain level of tech savvy helps, but it's really more about just being able to have an intelligent conversation and thinking quickly on your feet.
FR: Is it hard to find the type of person you’ve described?
JK: Actually, it's not easy to find those people.
FR: In terms of the company's revenue growth, can you share anything?
JK: We have been growing well in excess of 100% a year, and we certainly expect to be growing as fast going forward. We also took in our big expansion funding to put some rocket fuel into the system, so we expect the growth to continue.
FR: Speaking of the capital raise, you raised $33 million earlier this year with a very solid group of backers. When people congratulate you because you've raised a lot of money, do you say to yourself, “Now the work begins. Don’t congratulate me.”?
JK: (Laughs). People tend to glorify fundraising. I think funding is a tool for growth and we wanted to wait until we were really ready to attach the big tank of rocket fuel to accelerate our potential. I think it's exactly as you said. Once you take that money, you’ve raised the expectations to a different level.
FR: I'm sure you speak to loads of experienced financial services executives thinking about their next act. If you had to make the jump from Morgan Stanley to entrepreneur all over again, is there anything that you wish you had known in advance?
JK: As an analyst, you need to understand risk. As an entrepreneur, you live risk each and every day. Given that, make sure you have passion.
FR: Despite all of the risk and pressure, are you having fun?
JK: Absolutely. Being able to go after a pain point that you lived through for years and feeling like you can solve it for everyone is very rewarding.
FR: Well, we’ve become addicted to the product.
JK: Hey, that's great to hear.
FR: Best of luck for your continued success.
JK: Thank you.
This interview has been edited for content, length and clarity
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