Rapid prototyping, low development costs, and sticky network effects are all characteristics that attract investors to internet startups in any industry. At Value Stream Labs, we focus on web-enabled startups in Financial Services for all of these reasons, but we are most interested in the network effects.
Financial Services as a whole is a collection of some of the oldest networks known to exist; the entire industry is based around information and money being shared amongst trusted parties. All of this information and trust requires a combination of intellect and drive to make the network run: thus was born the concept of professional Financial Services.
The world of professional Financial Services is made up of analysts, bankers, investors, advisors, and researchers. While each of these professionals performs a highly specialized function, each function typically generates income for performing a service – and that service often relies on navigating through a vast network of people and information. We can argue the relative merits of these roles, but for the better part of 500 years, these services have played a large role in how institutional finance operates. The most successful services firms have managed to standardize processes to allow the business to scale (i.e. Investment Banking), and a combination of value-added content and information asymmetry about the networks resulted in a $100BN industry.
The vast opportunities to apply technology to the forefront of these services functions are why the potential of the internet for institutional finance is so exciting to us. By its very nature, technology reduces information advantages by supporting the discovery process. In standardizing processes to allow scale, many large financial institutions have opened themselves to having the business transition from a manual human-based workflow to digital web-based workflow. Don’t get me wrong – there is still value added by content, critical analysis, and experience, but the system will require far fewer resources to conduct these activities as the industry replaces analysts with applications.
We had an entrepreneur in the ValueStream offices last week who was demoing his latest product to support the investment allocation process, and for meeting new potential funds to place investment capital. It was neat to us in that it automated a highly manual process, but more importantly, it provided a centralized point for multiple stakeholders involved in the process to interact in a structured workflow…exactly what the internet was designed to do.
What I found most interesting was that the entrepreneur referred to his site as a SaaS (Software as a Service) application. The engineering nerd inside me looked at him quizzically – to me, SaaS refers to delivering a software package through a web interface as opposed to a locally run application. The benefits of SaaS are lower local resource requirements and a more fluidic upgrade cycle, which this application certainly achieved. However, the term seemed counterintuitive in this context, since this was not really an application you could ever reasonably run as a local install.
Then it hit me: the entrepreneur was using the term SaaS because his software performed a service…one that had traditionally been performed by people with crisp suits and nice ties.
So maybe in institutional finance there is a new SaaS model emerging: Service as a Software
How will Hermès stay in business?