Wall Street courts startups it once may have ignored
On the first day of a hackathon at the Manhattan headquarters of Goldman Sachs, participants from the Wall Street bank showed up in suits. The programmers from Kensho, a startup that had recently received money from Goldman, were there in jeans and ripped shirts.
The next day, many of the Goldman employees took off their jackets and ties. And the day after that, many of the Goldman employees were wearing the gray hoodies and Beats headphones that had been made especially for the event. (This being Goldman Sachs, the headphones were custom engraved — “GS Kensho Hackathon 2015” — to commemorate the occasion.)
The evolution of the dress code during the hackathon was one indication of the changing relationship between Wall Street banks like Goldman and startups like Kensho, a data analytics company, which received a $15 million investment late last year in a financing round led by Goldman.
No longer shrugged off
In the past, Goldman and its big competitors kept their distance from startups like Kensho that were trying to disrupt the Wall Street business model — especially startups as young as Kensho, which was founded in 2013. Goldman and many other Wall Street banks have historically done most of their significant technological developments in-house, viewing their business as the product of decades of experience.
Now, though, there is a growing recognition across Wall Street that the old habit of ignoring the upstarts may be foolhardy in an era when many of the best young talents are going to Silicon Valley and not New York City.
“There’s a certain cultural moment now that is quite palpable,” Daniel Nadler, the 32-year-old Kensho CEO, said about the hackathon and the broader engagement with startups like his.
Wall Street’s recent cooperation with financially minded startups has taken many forms.
Citi, like several other banks, has established its own venture capital fund, which it has used to invest in wealth management startup Betterment and payment company Square — both of which are developing entirely outside Citi’s walls.
Goldman has been particularly active, putting money into Kensho and machine-learning company Context Relevant, alongside Bank of America and Bloomberg. Goldman has also teamed up with other banks to invest in other compa- nies, including Perzo, a messaging startup that has been acquired by a broader venture, known as Symphony, in cooperation with the banks. Symphony will provide instant messaging and access to research. It is designed in part, to challenge Bloomberg’s dominant role in providing financial technology to banks.
New trading platforms
These investments in outside technology companies are not entirely new. At the beginning of the last decade, banks jointly financed new stock trading platforms like Direct Edge.
But in the past, banks tended to wait until technology companies were well developed before making an investment or trying out the services. When possible, banks tried to build technology themselves.
“Historically, banks have looked at the ‘build versus buy’ decision and have focused on ‘build,’ ” said Stu Taylor, a former banker who co-founded startup Algomi, which provides trading tools for banks.
Now, Taylor said, “Not only are there lots of different new entrants in the tech space, the banks are very, very open. You will generally get meetings if you ask for them.”
Bankers and startups give several reasons for the changing attitudes. Perhaps the most important is that there are simply more startups working on financial problems — and banks do not want to miss out.
The pace of venture capital investing in financial technology, or fintech, has grown three times as fast as the overall growth rate of startup investing over the last three years, according to a study released by Accenture last year.
At the same time, the banks need to spend most of their technology budget on improving the enormous compliance systems that have become necessary since the financial crisis.
Not grads’ 1st choice
“You are seeing less budget for innovation,” said David Easthope, a financial technology analyst at Celent. “That’s why it’s much easier to co-opt it or invest in it or bring it in.”
Banks are also recognizing that they are no longer the first choice of recent college graduates, because of the recent successes of Silicon Valley. Wall Street is looking less attractive after the financial crisis, especially as the big salaries available in finance have shrunk somewhat.
“There is a recognition that the world has changed and some of the best engineering talent doesn’t automatically go to Wall Street,” Easthope said. “It’s important to harness that talent.”