Countering West Coast pull, by helping finance start-ups sell in New York

Nine of the 15 United States financial technology "unicorns are in the San Francisco area

When Jeff Bezos, then a New York hedge fund employee, decided to start Amazon in 1994, he quickly moved to the West Coast. So did Mark Zuckerberg, who moved from Harvard to California in 2004 to find the technology talent and financing needed to build up Facebook.
 
Today, the West Coast exerts a similar tidal pull for start-up companies in finance. Nine of the 15 United States financial technology “unicorns” — companies worth $1 billion or more, as tracked by CB Insights — are in the San Francisco area. These Bay Area companies, which are not public, include the online payments processor Stripe, the online lender Social Finance and the finance website Credit Karma.

 
For the last seven years, a New York business-backed program — the FinTech Innovation Lab — has been working to stem that West Coast tide by helping financial services start-ups sell their services in New York in an industry where the city clearly dominates: big banks and other finance companies.
 

The program’s backers include Henry Kravis, a co-chief executive of the private equity firm Kohlberg Kravis Roberts; Fred Wilson, a co-founder of the venture capital firm Union Square Ventures; and James D. Robinson III, a former chief executive of American Express.
 
“There’s no reason New York should not be the fintech capital of the world,” said another program backer, the internet entrepreneur Kevin Ryan. He is a former chief executive of the online advertising pioneer DoubleClick and a founder of the flash-sale platform Gilt Groupe and the business news website Business Insider.

 
The term “fintech” covers a group of start-ups, often funded by venture capital investors, that aim to apply new technology in areas like online lending, investing and payments. These start-ups have surged in popularity among investors as banks have had to focus on complying with regulations and rebuilding capital.
 
The FinTech Innovation Lab is a so-called accelerator that annually gives a half-dozen start-ups the chance to interact with top financial firms, hone their products and learn how they can fit into what Accenture, a management consultant, estimated was a $270 billion technology budget for banks worldwide. Tim Estes, the president of Digital Reasoning in Nashville, which uses artificial intelligence to spot compliance and reputational risks for banks in routine employee emails, said that going through the lab program in 2012 was “transformative for the company, opening up doors across Wall Street as advertised.”

 
As Digital Reasoning won business from Wall Street, it opened a New York office near Union Square, which now has about 30 employees and is the firm’s second-largest office. Goldman Sachs and Credit Suisse Group have become investors.
 
Estes said Goldman was an early customer, two years after the investment bank’s chief executive was attacked in televised congressional hearings over a subprime debt sale that one Goldman staff member had described in an email as a bad deal. As firms like Goldman realised other such “time bombs” might be in their email files, “everyone wanted a better bomb detector,” Estes said.

 
Another start-up that won business through the lab, in 2012, was True Office, which turns compliance training into a game experience for employees. Adam Sodowick, the chief executive of True Office, had first met Maria Gotsch, a lab co-founder, at a dinner event at a Flatiron district loft. Morgan Stanley signed as a client and invested in True Office, which eventually moved its headquarters from Boston to New York and was acquired in 2014 by the New York Stock Exchange. The exchange resold it this year.
 
The best-known firm to go through the program, in 2015, was the blockchain start-up Digital Asset, shortly after it recruited Blythe Masters, a former JPMorgan Chase derivatives pioneer, as its chief executive. Accenture soon invested in the company, which aims to improve Wall Street trade processing.

 
The New York lab is one of hundreds of incubators and accelerators that have sprung up throughout the country to help start-ups, such as Y Combinator in Mountain View, California; Techstars in Boulder, Colorado; and Plug and Play Tech Centre in Sunnyvale, California. Though many programs require start-ups to give them an equity stake of five per cent or more, the New York lab gets only 0.5 per cent. The lab began in 2010 as a way to bolster the New York City economy after the 2008 financial crisis. It is co-sponsored by Accenture and the Partnership Fund for New York City, an arm of the nonprofit Partnership for New York City — a business-backed civic group formed in 1979 by David Rockefeller.

 
The lab is designed for companies that want to become partners with big financial institutions, rather than compete with them. One goal, said Robinson, an investor at RRE Ventures since 1994, is to “expose the big banks and insurers to early-stage companies doing interesting things in this area.”