Why Some Bankers Are Leaving Finance for Fintech Startups
bloomberg.com
bloomberg.com
A certain portion of the population, including most of the type-As, consistently pursue whatever opportunities promise the most money and prestige in the shortest time for the least work. Until the financial crisis, the best path to that end was getting rich as a trader. Now, startups offer greater risk but even faster and more tantalizing rewards. The exodus of finance towards tech will continue exactly until the next investment winter, at which point it will likely turn into a flight from SV-style tech into yet another sector - my best guess is health and bioinformatics.
Software exits were still certainly the highest (470 in 2014), but those most commonly occurred through acquisition and far less through IPO. Health/bio saw over 200 exits in '14, with about half of them going public.
You focus on regulation around returns, and there's certainly some regulation around costs as well (mandatory reporting, etc).
However, at seven-figure salaries you don't have to automation much person-work to show up on the final balance sheet.
1.) Regulation, HIPAA is a massive pain to deal with, the rules nebulous and require significant process that is expensive and time consuming.
2.) Violations of HIPAA lead to fines and even lawsuits from the office of civil rights. It used to be that Business Associates could hide behind the medical institutions to avoid this but with the Omnibus rules you'll face massive fines that will easily bankrupt any startup.
3.) The entire healthcare sector is extremely risk averse, slow moving and you cannot work around them you have to work with them which means you're going to move slowly too.
4.) You will HAVE to integrate with dozens of other ancient applications that medical institutions use, some of which have no documentation or publicly available source code. I hope you like searching through hundreds of pages of outdated HL7 and X12 documentation to figure out how a specific vendor screwed up their implementation.
5.) Large medtech companies regularly snuff out competition through lobbying and leveraging existing relationships in the medical community. So you've got a killer new medical app that will change the world? Big deal, your competition has three doctors who are leaders in their field(and conveniently board members). They will tell all of their buddies at the next American Cardiology Conference that your app is garbage. I hope you've got some big names associated with your startup and you can pay them handsomely.
6.) The medical field is a data hell. Some of it unstructured and non-sensical, much of it is structured but has no validation. That field you are getting from a third party API for albumin levels which was documented as g/dL, was actually entered in mg/L from the years 06/2004-12/2008, mg/dL from 09/2003-05/2004 and the proper documented g/dL for all other dates. Why was it that way? No one knows. You have to keep track of things like that for one field in one database for a single department in a medical institution with a few dozen departments that don't cooperate. Worst of all, it WILL change on you without you knowing.
however, from another perspective, it's exactly the type of "schlep" that mints millionaires.
> 2.) Violations of HIPAA lead to fines and even lawsuits from the office of civil rights. It used to be that Business Associates could hide behind the medical institutions to avoid this but with the Omnibus rules you'll face massive fines that will easily bankrupt any startup.
I agree with the last two-thirds of your post, but this doesn't match my experience. HIPAA is basically a bunch of "best effort" stuff and you can do shockingly little in terms of security and be fine by any audit I've ever seen. Unencrypted data at rest, encrypted data with keys on disk on the same machine, no SSL anywhere including external endpoints...and the auditors never asked or looked.
http://www4.ncsu.edu/~aianton/
HIPAA is seriously complex piece of legislation.
I think you're pretty wrong on this. There was tons of money to be made as a trader post 2008 as the bonds pummeled by the crisis clawed their way bay to real/inflated levels with the help of the Fed buying everything site.
For the most part, HF's grabbed a good portion of these dollars. So the "most money and prestige in the shortest time for the least work" job post crisis has been to be a trader/PM at a hedge fund.
Having worked a a start-up in fintech, I can say the prestige is lowish, and the rewards are uncertain at best. There have just not been any insane price exits in fintech at all lately. Forget about a whatsapp style exit, I can't even name a Tumblr style exit.
Can you?
But you do get to do much more interesting and rewarding work. You get to work in a collaborative and supportive environment You can wear whatever you want and enjoy the SF weather. And the hours are way better.
It doesn't seem like he really left finance at all - in fact, it looks like he probably hired some coders and had them build a product that he oversaw, then sold it utilizing his experience and connections inside the financial industry.
Are you really leaving finance for a tech job if all of your clients are in finance?
Also, did he really risk his life savings on this? Seven figures for even just a few years would set you up to launch a company and still retain some life savings, it seems like.
I'd be concerned if these people left finance to create another photo sharing app. If their contacts, network, and expertise are in finance, and they are solving a problem this industry has, why not maximise their expertise?
Plenty of good startups are started by insiders (be it networking, energy, healthcare, biotech, publishing, etc)
> Also, did he really risk his life savings on this?
Probably not, why should he? Wouldn't it be sensible to be frugal? Embrace the lean startup approach? I'd rather take the Eric Rice approach to startups, than that of Color Labs. Be lean, focus on solving a problem, great product, and focus on sales.
Makes more sense than him developing a healthcare app.
We've attempted to make the title more accurate. If anyone has a better suggestion we can change it again.
1. From the headline, I was expecting this story to be about investment bankers walking away from ~$300K total comp jobs to join early stage startups that pay $85K salary plus equity. In fact, it's basically about finance people doing what finance people have done for years -- realize that they could make a bunch more money if they start their own firm. I am not sure that the fact that the new firms they are starting are using technology in order to disrupt longstanding paradigms is especially new or newsworthy.
2. I do think that the development of AI has some interesting implications for the business of investment banking. Specifically, I think that we are at or close to a point where software solutions that do the blocking-and-tackling tasks performed by a young analyst -- spreading comps, making profile pages for all the dominant players in an industry, etc -- will make analysts unnecessary. If I had to guess I'd say that in 10 years, the only reason there will be analyst programs on Wall Street will be to teach bankers the theory behind what is done in an instant by AI -- in the same way that student pilots learn to navigate manually even though there's GPS.
All in all it felt like another 'someone who makes more than you took a risk' being written because the risk can be turned into a marketing campaign for their start up.
In the end it felt very light.
Bond Trader: "So who would be the last expensive workers to be replaced?"
Consumer Banking Executive: "Well, the ones writing the programs, obviously. If they replaced themselves, their programs would finish replacing everyone else practically overnight!"
Options Trader: "I move that we all become software professionals!"
Chorus: "SECOND!!"
B.A.: "Those in favor?"
Chorus: "AYE!!"
Quant (whispering into phone): "I want to short the entire global economy, RIGHT NOW."
Although the salaries are still high, I don't think most people working in finance really believe they will become millionaires staying in the conventional banking route. The idea held by many is that tech start-ups offer more upside.
Yes that worked out well in the past. How some people believe that shuffling money about will make more wealth is beyond me. (Queue all the apologist remarks confusing the speed of things happening with actual wealth being generated).
These financial products aren't about shuffling money around but shuffling risk around. For instance, one mortgage may be risky but you if you pool a thousand mortgages together, divide the cashflows so that one investor is willing to take on the first losses (for a higher return), and so on, this would attract many new buyers with different risk profiles. This would also reduce the cost of that mortgage to the buyer.
This is the theory at least.
So quickly we forget that it wasn't long ago what were essentially "shitty photo-sharing apps", and the hype behind them, crashed the financial system.
For that, IMHO you have to look at more fundamental things, like the US and other countries governments running massive deficits (not to mention private debt). Or the PRC looking at the consequences of the 1997 Indonesian financial crisis (https://en.wikipedia.org/wiki/1997_Asian_financial_crisis#In...) and deciding they were intolerable, and engaging in https://en.wikipedia.org/wiki/Financial_repression + no government social safety net + the demographic problems of their "one-child policy" (https://en.wikipedia.org/wiki/One-child_policy) resulting in not enough children to take care of retired parents and grandparents resulting in a big mess.
One consequence being people investing in real estate, plus other policies, like local governments selling land for real estate development, and the prior central government encouraging economic activity and "growth" through the construction industry ... well, as the PRC's new government "takes away the punch bowl", messy things are happening, but none of them have financial products as their root cause.
Or look at the Euro/EU, is the problem particular financial products, or a monetary structure that allowed "Mediterranean" countries like the PIIGS to borrow money like Northern European countries (for a while)?
In some cases fundamentally unsound financial products might be the cause, e.g. allowing Eastern Europeans to borrow in hard currency denominated financial instruments, when the currencies they earned money in had every chance of falling.
But the really big problems seem to me to be structural. Heck, look at extremely conservative Japan, which without to my knowledge any "financial innovation" has managed to thoroughly wreck their economy for decades and the foreseeable future.
Actually, if you look beyond the recent crisis, oftentimes it did. Examples: the invention of money (make O(nm) pricing problem into O(n+m) pricing problem), invention of debt (temporarily transfer savings from a person with excess money and no business idea to a person with no money and a good business idea), etc.
> How some people believe that shuffling money about will make more wealth is beyond me.
Money can help produce new wealth, depending on how it is invested. If you move it from a place where it is stashed and unused to a place where it buys land, buildings and machines and creates jobs then the latter will create wealth once the former will not. So yes, it is not inconceivable that shuffling money around may create wealth (when it actually does is a different question).
During dotcom crisis I once heard a complaint about software engineers: "you just sit there and move bits around". Well, it turns out some sequences of bits actually create value.
We have proposed a system for electronic transactions without relying on trust.
Financial innovation played a major role in creating the wealthiest global society in world history. And you are lucky enough to be living in it.
>Queue all the apologist remarks confusing the speed of things happening with actual wealth being generated
If "financal innovation", to you, is encompassed by HFT, you are probably the one confused.
These aren't new products or new wealth, but changing how people manage and interact with their finances.
The state of the art in the first half of the '60s was good enough to design such a bridge correctly, but the gusset plates that connect girders together were undersized.
Then there's the famous example of Boston's Hancock Tower, which was designed and built per the current state of the art and code, but it turned out that did not consider some important things that could have caused it to collapse along its long, narrow side: http://www.pulitzer.org/archives/5826
Yes with roughly 20% of the economy locked up in "finance" we appear to get INCREASED economic instability.
So... did I get downvoted because that wasn't clear, or because it hit too close to home for the financial experts on here?