Strateer Blog

There are many reasons why New York should be the center of the universe (it has been to me since I moved here in 2002) but in terms of tech startups, New York seems to struggle compared to the usual suspects on the West Coast or even Boston.

One reason that is always thrown into the discussion amongst NY based startups is the tech brain drain by Wall Street. For many engineers the job security and lofty salaries paid by banks and hedge funds made joining a startup seem a dumb idea. Furthermore the lock-in effect of end-of-year bonuses created a timing-problem. When looking for that great engineering candidate, a startup does not have 6 months time to wait.

This problem might have gone away – at least for some time.

Risk of joining a startup
Amidst the financial meltdown we now see major Wall Street firms cut headcount in IT. In earlier downturns we saw headcounts in administration and on trading floors shrink but IT always seemed to be excluded. Not this time. I have friends at Merrill Lynch that got all projects stopped right now and that have been told to wait for the announcements what will happen after the merger with Bank of America. Whose platform will the bank consolidate on (I heard Merrill’s might make the race)? What about the teams that work on the discontinued platforms?

Janco Associates, a management consulting firm, earlier this fall declared that the financial firms’ woes will glut the IT job market. According to them and based on interviews with sources within Lehman Brothers and Merrill Lynch it has been confirmed that a large number of IT professionals in both organizations will lose their jobs by the end of the year. More than 230 IT professionals at Lehman Brothers who make $250,000 or more a year will be out of a job by year-end. At Merrill Lynch, more than 180 IT professionals making more than $250,000 a year will be without work as well. And let’s not forget all those hedge funds that will blow up over the next couple of months. A friend of mine just left his position as Head of Software Development at a midsized Quant Hedge Fund ($400M in assets) to start his own tech startup. According to him, most funds below $1B in managed assets will not survive the next 6 months.

So the relative risk of joining a startup, right now, has been reduced significantly.

Salary
For those engineers that do not loose their jobs as part of the downsizing, there is still the salary aspect. It is true that most startups probably will not be able to match the salary levels enjoyed on Wall Street. But next years bonuses are quite uncertain right now. This removes already one lock-in reason to join a startup right now.

But there is another reason that might make the salary question become less important. In the last weeks I spoke to quite some engineers from investment banks and hedge funds - we are hiring financial service engineers right now. None of them liked their job in financial services too much from a technology perspective. Some guys from Lehman Brothers were fed up having a very narrow scope in terms of technologies and relevance of their projects. The  same I heard at Merrill Lynch. They are looking for the satisfying experience of being part of designing and implementing and application end-to-end across all layers. Something a tech startup  is all about.

Eventually great engineers want to use interesting technologies to solve challenging problems. Wall Street’s huge IT departments with headcounts of a couple of thousands in each major firm did not do a good job to provide an environment that is interesting to work in. In the end great things are achieved by a small team of great engineers. As an example a major investment bank used to have a problem with their equities execution platform, which had become a piecework of many different platforms acquired over the years. When it came to build a new global equities execution platform they set up a team of only 10 engineers to build it. That leaves many engineers with boring maintenance and life support for legacy systems.

The financial crisis removes a major obstacle for the development of the NY tech startup scene. Engineers from Wall Street are joining startups – Josh Koppelman created a website for them (www.leavewallstreetjoinastartup.com) - or founding their own startups. Strateer is one of them, somebody else is working on build a discount consumer platform to trade government bonds and another company was founded to compete with rating agencies for better credit ratings, using mathematical models and natural language processing. There are many more.

Unfortunately though, this is only one (positive) effect of the financial crisis for NY tech startups. At the same time when hiring tech talent becomes easier, it be comes extremely challenging to raise money. VCs, in anticipation of a nuclear winter, are keeping much more cash in their funds (I heard a number of 40%) to help provide liquidity to their existing investments during the next year if needed, and Angels are preserving cash for what ever comes next year. But that topic has been covered already extensively during the last weeks.

Today the stock picking site Kaching announced that they have become an SEC registered investment adviser. I believe other stock picking sites like CoVeststor have done or will do the same. Becoming a registered investment adviser points into the direction social investment communities are heading: Taking on the Mutual Fund industry. We will provide as well alternatives to the Mutual Fund industry who is bloated, too expensive and performs mostly worse than the market does. However I do not believe stock picking is the right way to do that. I repost a comment to stock picking I left on Techcrunch:

“‘Of the 350,000 portfolios on kaChing, 1,500 have actually generated positive returns…’ The problem with ranking is, that it does not contain positive information value. When you rank, you always get winners - question is whether this is luck or skill. Not the performance but the risk adjusted performance of a portfolio is relevant. All these ‘winner portfolios’ have huge Beta’s. Another problem with ranking fantasy portfolios: What if a user generates two portfolios, one bullish another bearish. One of the strategies will win but this does not mean that the owner of the portfolio is a good stock picker. Having said that, I believe social investments and taking on Mutual Funds is very interesting. But there are problems attached on how to identify long term winning strategies.”

I believe following arbitrary stock picks is not providing real value to individual investors. It the strategy, the systematic investment that creates long term winning investors. That is what we are focusing on with Strateer.

Alerts4all, our first product that brings Wall Street technology to Main Street, is up to a good start. We released the site on November 18th (see here for our blog post). Even though we have not performed any search engine optimization or started our search campaigns we see a steady stream of accounts created every day.

We are proud that within 2 weeks of our launch we got an article in Barron’s (print and online), probably the most important publication in our space (we are still working on Investor’s Business Daily). The article generated quite some attention from potential customers, strategic partners and other journalists. Furthermore as these days a movement of 5% up or down in the S&P500 is no front page news anymore, we get a lot of interest for what we do: Bringing Wall Street tools to Main Street and democratizing institutional technology for the individual investor.

Alerts4all got great coverage online from blogs such as Silicon Alley Insider, MarketWatch, the Amazon Webservices Blog and other publications. On MarketWatch, Alerts4all was described as an “easy-to-use stock market alert tool that brings institution grade investment technology to individual investors.” And Financial Content asked “How cool is that?!”

Now you can help us to spread the word:

Sign-up for Alerts4ll, if you haven’t done it yet. Then, let me know in case you know:

• a distribution partner for Alerts4all (Online Broker, Stock market news site etc.)
• a journalist / blogger that writes about financial markets and technology
• a customer that would be able to provide feedback (every customer counts)

Alerts4all is the first product that we have launched and the market response has been great. This gives us confidence that we are working on something big. We cannot wait to show you what our next product will look like - but you will have to wait until next year.