Weekly Briefing No. 149 | Voting isn’t Enough if You’re in Fintech

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Welcome to The FR. Here is what’s on our ballot this week:

Note: We’ll be taking a publishing break next week. We’ll be back with a new edition on November 17th.

  • Voting is “just” table stakes

  • The new face of Berkshire Hathaway

  • A data-driven Doogie Howser

  • IBM looks to the future

  • Fintech financings stay strong

  • Rebooting commercial real estate finance

REFLECTIONS

If you’re a US fintech entrepreneur, voting isn’t enough.

Recently, we casually chatted with a well-funded fintech CEO who admitted that he hadn’t been keeping up on politics or the markets because “they’re too crazy.” But here’s the thing: That CEO’s considered apathy was made possible by the stability of our post-World War II democratic system, norms that have kept political differences from turning personal, generally low levels of domestic violence and a free press — all of which have been hugely accretive to American innovation. That entrepreneur’s company has also been given a big-but-unsung boost from its ability to generate revenue in the world’s reserve currency, raise capital in the world’s deepest markets and rest assured knowing that US regulators and courts, while a pain, preserve the credibility of our financial system.  So, yes, there’s no law that says you must be informed on the issues or markets, and perhaps this CEO will cast his ballot on Tuesday. But those are just table stakes. Because while younger people like entrepreneurship, they have issues with our current market economy. And leaders of dynamic financial start-ups are uniquely positioned to improve that system. That is, if they know what’s going on.

Big fintechs and insurtechs should swing by Omaha.

Of course, Warren Buffet is still the public face of Berkshire Hathaway, but when it comes to fintech and insurtech, Todd Combs is the man to watch from the conglomerate. As The Wall Street Journal (subscription) reported on Monday, Nebraska-based Combs has been the driving force behind Berkshire’s decision to drop a total of about $900 million on newly public Stone and Paytm in recent months. $900 million sounds like a lot, but when your company has over $110 billion sitting around, it speaks to how much more money Combs could dole out if suitable investments appear. Moreover, Combs, who has been on JP Morgan’s board since 2016, led his firm’s role in the still-unnamed healthcare partnership it has with Amazon and JP Morgan. Our guess is that this partnership, which continues to generate high expectations as a transformative force in healthcare, will look for numerous external partners in navigating that journey.

Morgan Stanley hires a data-driven Doogie Howser.

Speaking of healthcare, Morgan Stanley has announced that it hired David Stark as the firm’s chief medical officer. While over 21, Stark shares the genius trait with the fictional Howser, as he has degrees from Stanford and Harvard’s medical schools and Yale covering Biomedical Informatics, Medicine and Biology, respectively. In recent years, he’s served as the director of Lab100 at Mt. Sinai’s Icahn School of Medicine, which provides a deep data dive into a person’s health. In his new role, Stark will look to use HR and health data to foster innovation in wellness and cut costs. So while the Morgan Stanley approach differs in rollout and structure from the Berkshire-Amazon-JP Morgan initiative, we think it’s driving toward the same end. Plus, we suspect that if it’s successful, it could also serve as a basis for a new AWS-esque, financial-healthcare services business for Morgan Stanley down the road. Because a) there’s no shortage of companies that would probably love to have their resident Doogie, and b) not all of them can afford or want to hire their own.

NEWS ANALYSIS

IBM tries to keep up.

There used to be an old saying, “Nobody ever got fired for choosing IBM.” For organizations implementing new technology systems, IBM was safe and dependable. Old Reliable. But over the past decade or so, Big Blue has been fired or at least not hired as it’s lost ground to companies offering cutting-edge enterprise cloud services, such as Amazon, Google and Microsoft.

That was surely a driving force behind IBM’s $34-billion acquisition of Red Hat, an open-source software company. This is especially important for IBM to remain competitive in the financial services industry; where “cloud” was a bugaboo early this decade in financial services, it’s being embraced regularly now. Just recently, Capital One said it will migrate all its computing to the cloud by 2019. Only time will tell if IBM will still be the standard in enterprise technology in 2060 as they were in 1960. They’re certainly hoping acquisitions such as this one will help them do so.

Good times continue for fintech financings.

The stock market roller coaster may be on everyone’s minds in the US as we head into the midterm elections, but for fintechs, it’s still smooth sailing when it comes to raising money. In the past week alone, fintech firms have raised hundreds of millions of dollars from VCs and institutional investors. Among the highlights include DataRobot, a developer of a machine learning automation software for enterprises, raising $100 million in Series D funding. Algorand, a Boston-based developer of blockchain and cryptocurrency products for business, raised $62 million from firms including Union Square Ventures, Slow Ventures and Pillar Venture Capital. And Wahed Invest, a New York-based halal roboadvisor, raised $8 million at a $100-million valuation from Cue Ball Capital and BECO Capital (See below). It seems perpetual talk of a fintech bubble is always a bit premature.

IN CASE YOU MISSED IT

If you didn’t catch them the first time around, check out these popular pieces from the last few months.

Rebooting commercial real estate finance.

“Today, we still look fairly institutional, but we’re increasingly moving to high-net-worth family offices and accredited investors, and then retail eventually. But we’re sequencing it, because we want our infrastructure to scale properly.” That’s a quote from Cadre’s dynamic leader, Ryan Williams, on the long-term aspiration of his high-profile investment platform focused on institutional-quality commercial real estate assets. Recently, The FR’s Gregg Schoenberg sat down with Williams to determine how much progress the company is making towards achieving its bold vision. Williams, who has been a successful entrepreneur since his teenage years, provided us with some interesting insights into that topic. He also addressed Cadre’s business model, its efforts to build a secondary marketplace and how his personal philosophy guides his vision for the company.

A Conversation with Domeyard’s Christina Qi.

Whatever you think of Michael Lewis’s book Flash Boys, there’s no denying its significant impact on the overall perception of the high-frequency trading sector. Before the book, even many markets professionals understood little about the strategies and techniques employed by the arcane fund fortresses of rocket scientists who execute a huge number of trades in nanoseconds. Prior to the book’s release, the HFT world has needed a fresh face, an ambassador that can show that high-frequency strategies are not incompatible with fairness and basic transparency.

Show me the alpha, then I’ll show you the money.

“A lot of the talent we’re finding is coming from hedge funds that have been attracting talent away from the fixed fee space for years.” That’s what Peter Kraus told The FR’s Gregg Schoenberg after Thursday’s launch of his new asset management start-up, Aperture Investors, in partnership with Italian financial giant Generali. Specific offerings haven’t been rolled out, but our read of the initial press release and website indicates that Kraus is infusing a welcomed dose of accountability into the world of AUM-driven asset management. How? By aiming to fix the wounded alliance between investors and their fund managers. Specifically, Aperture plans to link fund fees to performance and incorporate deferral and clawback provisions. The result: If a manager matches or lags behind their benchmark, the Aperture fund will charge a skinny fee that’s comparable to passive ETFs for that strategy. But if a manager beats their benchmark over the longer term, they are able to earn a performance-linked fee on the alpha (up to a cap). As such, it looks like Aperture will provide an innovative hedge for investors of all stripes. That sounds like a square deal to us, as we believe that there are still many investors who believe in and yearn for alpha. However, they don’t want to fork over fat fees for it on the come. And really, in 2018, why on earth should they?

QUOTE OF THE WEEK

Of that colossal wreck, boundless and bare.

The lone and level sands stretch far away.

-Percy Bysshe Shelley, “Ozymandias”