February 17, 2014

Business Models: Turning a Profit?

While all of these ideas add value, Honore says the challenge is turning them into revenue model. Companies like Estimize are forming partnerships. Estimize struck an agreement with Bloomberg to provide its earnings estimates along side the Wall Street consensus estimate data.

"Creating something that's cool for a smart person isn't as hard as it used to be, says Honore. "But creating something that makes that cool idea into something that makes money is still proving to be hard," he says.

Thinknum's Zhen says he plans to offer hedge funds the opportunity to run their models on distributed computers. Zhen says the firm's cloud-based distributed computing network is of value to hedge funds. Quantitative analysts that develop a very complicated model on their computer can take hours to run, whereas with Thinknum's distributed computing model, one server is able to leverage thousands of services all hosted on the cloud within minutes.

Calling up a bunch of hedge funds and selling them on privatizing their model, won't be easy, maintains Honore. "If they call up Mr. Hedge fund and tell them this will cost them $500 a month," they will find that "if you have buy side attached to your name, you are cheap," says Honore. In addition, Honore contends there 's not an enormous market for analytics on a one-off basis. "The real value ultimately is in amalgamation of all of these platforms," he says. The real value is to get larger technology player that already caters to hedge funds to distribute a startup's analytics for a revenue share," he says. For instance, he notes that Estimize data is distributed through a Bloomberg terminal. "I don't think that precludes that."

But innovators like Drogen see their model as different and more efficient. Startups of the past like Bloomberg, FactSet, S&P Capital IQ and Thomson Reuters are terminal based companies "whose livelihood relies on selling terminals," says Drogen. "They not free models; they're pay to play models," he says. "I think you can build a bigger company by giving a core piece of it away for free and you get a bigger community and wider range of people that are willing to pay, "he says.

Also, these are enterprise software models that tend to have an expensive sales force to sell the big-ticket products. Rather than hire an expensive sales force, Estimize has a head of institutional relationships and marketing to call upon the hedge funds. The same person, who tells them they can go on the platform and contribute estimates for free, is also the person who tells hedge funds they can pay a fee to receive the data in their models.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...