The tech company making hedge fund investing available to everyone
The fintech space is doing extremely well right now, whether it’s banking, payment processing, tracking tools, or investing, says Andrew Pignanelli, CEO and founder of Decheque, a fintech startup that helps people find professionals to invest for them. “I’d even go as far as saying it’s one of the hottest markets in startups at the moment.”
According to Pignanelli, this has been brewing for a few years now and your average person (at least in the US) is directly impacted by the growth of fintech, most of which comes from business innovation combined with technology rather than purely technology itself―and he believes that’s a theme in fintech.
The biggest and most prominent example, he says, is Robinhood. They made stock trading free and easy for millions, but they could only do so by shifting the revenue toward data sales―as opposed to charging investors $1 per trade like TD Ameritrade or Charles Schwab. “Robinhood didn’t have much of a technology advantage,” Pignanelli says. “But they had a huge business model advantage: customers didn’t get charged. This forced all of the other brokerage companies to remove their fees and now it’s basically free to buy a stock.”
Not only have tech companies changed the way consumers are charged for investing, they’ve also made it easier for them to invest in the first place. “Whenever somebody makes an investment (on any type of finance platform), there are probably six or seven processes that the investment provider has to go through to make sure they are regulatory compliant,” Pignanelli says.
The fintech world has steadily made those processes easier on the end-user. And as a result, they’ve also been able to access financial data on their own. A few years ago it was impossible to get access to large portions of financial data that are now available through platforms like TradingView, YCharts, and Yahoo Finance.
All of this innovation paved the way for Decheque, which aims to make it easier for individuals to invest in hedge funds―formerly the domain of private, high-paying, high-risk investors.
Giving individual investors access to a private club
Pignanelli was not your average high school student. He traded stock in high school, and mentions a few times when his phone was taken away by his teachers because he was trading during class. “Somehow, the teachers didn’t like my response that markets didn’t close because I arrived at school… I ended up in a lot of trouble because of that,” he says.
Eventually, Pignanelli’s trading landed him in online communities where he had the chance to meet several investors. They told him they were trading other people’s money, and that captured Pignanelli’s attention. What better way than to get rich, he thought, than using other people’s money to trade? After all, Bill Ackman does it, Jim Simmons does it.
His peers warned him that raising money is hard, and even harder when you don’t work at an investment bank. Due to SEC regulations, private funds cannot be promoted to the general public, which means they have to resort to networking if they want to find investors. However, they can promote themselves to a group of “accredited investors”―people with more than $1 million in assets or an income higher than $200,000.
But that gave Pignanelli an idea: What if there was a marketplace with accredited investors on one side and private funds on another? That way, the funds could promote themselves freely and actually have a shot at raising money.
According to Pignanelli, there are thousands of private investment funds in the US. The idea is that an investor gives their money to a fund, the fund invests it, and then takes a portion of the profits. This can be extremely lucrative, but can also be quite risky. For one, investors have virtually no access to data. All of that data is locked behind a huge paywall, and it costs $10,000 a year to access data on each category of private funds.
“It’s garbage data too. You can’t even see the performance of most of them, which is essential for evaluating an investment. It’s a black box and inefficient. I’d even go as far to say private investment is one of the least transparent industries in the country.”
Then there’s the fact that everything is done by knowing a guy who knows a guy. Pignanelli calls this “golf games.” “If you want to get into a good one, you’ve gotta go golfing with the richest person you know,” an approach Pignanelli describes as an old, disjointed process that leaves the legacy players at the top and keeps any newcomers out.
“In an industry where things are supposed to be objective, personal networking to find investments is something that stands still in time,” he says.
If you do happen to network your way into a private fund, tracking is less than ideal. “You get a letter every three months telling you how things are going. It’s like you’re being written back from the war, not tracking an investment or hedge fund. We aim to bring this practice past 1945 to modern-day.”
As a result, Decheque is making all of the data on listed funds free, available to everyone online, and ensuring updates that are instant and automatic. “Decheque allows private funds to create listings, manage their cap table, and build a fundraising pipeline through a CRM. It allows investors to browse, evaluate, and invest in private funds faster than anyone else. We make money by charging the funds 3.5 percent of the money they raise on Decheque,” says Pignanelli.
Giving fintechs the opportunity to succeed
As it turns out, Decheque is one of many fintech companies in the state making waves when it comes to innovation and democratization in the financial services industry. There are dozens of fintechs in Utah, according to Erin Farr, senior business development manager at the Economic Development Corporation of Utah (EDCUtah), and many of the ones out-of-state have announced expansions to Utah in the last three years. Altogether, they plan on adding more than 6,000 jobs to the area in the next five years.
According to “Financial Services in Utah for FY 20-21,” Utah is one of the leading states in the nation for employment in the financial services industry, employing over 84,000 people. Two key examples are the Utah Association of Financial Services, which promotes the financial services industry, and the University Venture Fund, which helps provide college students with opportunities to be involved in real-world venture capital projects; these organizations are credited with aligning education and fintech.
Some notable fintechs in Utah include Deserve, Silicon Valley Bank, BlueVine, Brex, Plaid, Guardian Analytics, Lending Club, Zennify, Earnest, Carta, SoFi, Divvy, 1-800 Accountant, and AvidXchange. All of them in one way or another are bringing products and services to small businesses and the general public through efficient, innovative, online delivery methods.
Farr describes Utah as having a “very favorable environment” for fintechs beginning with a significant financial services industry. Close to 90,000 Utahns are employed in the sector so our talent base is deep. In addition, Utah’s IT industry is equally strong and can provide the technical and entrepreneurial talent fintechs need. And, as Utah has the most industrial banks in the country, these institutions are adept at providing back office compliance and lending services to support fintechs.
“Our state Department of Financial Institutions works closely with industrial banks and is open to supporting innovative approaches that fintechs bring to the market,” Farr says. But that doesn’t mean there aren’t challenges. Like any company, fintechs have to compete for talent, particularly in technology and compliance positions. And, the recent experience of Square opening its own industrial bank caught the attention of the fintech marketplace nationally.
“It’s an alluring possibility, but it’s also a process that takes considerable resources and planning. Fintechs may find more success in working with an established industrial bank to learn the ropes. After some experience with the nuances of the regulatory market, they may be in a better position to determine their long-term strategy.
When I asked Farr if she had any data to point readers to, she recommended the article, “Square to Open a Utah Industrial Bank: Five Questions for Frank Pignanelli.” Interestingly, Frank happens to be Andrew’s father.
“The fintech market exploded in part because small businesses wanted access to capital and big banks were not always responsive, and the FDIC was making it hard for state-chartered banks to be reactive too,” Frank Pignanelli, executive director of the National Association of Industrial Bankers (NAIB) told EDCUtah.
“Fintechs stepped in to loan money to individuals and companies, but did so outside of the traditional banking system. They have neither the capitalization requirements of banks, nor consumer lending protections. So anything that makes it easier for fintechs to participate in the traditional banking system is a good thing.”