Transparency, Markets, and the Internet

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One of the benefits of looking at the Internet from an office in Manhattan versus Sand Hill Road, Route 128, Beijing, or somewhere else is that the Wall Street mentality is pervasive in Manhattan. And so my lens is colored by the ways of Wall Street. I am not suggesting that is good or bad, just that it is.

And so one of the things that I have been fascinated by is the power of the Internet to create transparency and facilitate the creation of more efficient markets.

When I first met Jim Cramer blogging like a mad man from his trading desk, putting short bursts of wall street rumors and facts (not much a difference between the two) out into the ether, I was stunned. Jim was basically saying that he was going to share all that he knew, all that he was hearing, and all that he was doing with the world at large. We invested in Jim's vision but I believe we made a big mistake charging a subscription for that blog which was and still is called TheStreet.com. What we should have done was make it free and encourage every other person crazy enough to do the same thing to join Jim and blog the hell out of Wall Street. Create a Weblogs Inc for Wall Street. In 1997.  would a could a should a

In 1999, I came across Gian Fulgoni and Magid Abraham who wanted to create a panel of Internet users large enough to devine what the entire Internet user base was doing. Not just where they were going, but what they were doing, what they were spending, etc. That was the genesis of Comscore which is now the leading Internet measurement firm. A year or two after they started Comscore, they were able to predict the quarterly revenues of Amazon within a tiny margin of error. Again I was stunned. Talk about transparency.

Around the same time that Comscore pulled the Amazon numbers out of their hat, I sat down and had lunch with Seth Goldstein who had been an entrepreneur in residence and then a principal at Flatiron Partners and was looking to start a new company. He wanted to do something in the area of hedge funds which he saw were becoming a huge force on Wall Street.

I suggested he think about taking data from companies like Comscore and others and use them to create transparency for wall street investors. He liked the idea and took it and ran with it. He and his partner Tony Berkman created Majestic Research which uses data culled directly from the Internet and provided by third party firms like Comscore and others to deliver primary actionable data to Wall Street. Majestic took off and is now a major provider of third party research to the hedge fund community.

Also in 1999, I invested in and joined the board of Alacra. They have built a huge data warehouse on the web and filled it with pretty much every premium database of interest to wall street. And just last month, they released company specific RSS feeds that alerts you when much of this premium information is updated.

In 2003, as Brad and I were getting ready to start Union Square Ventures, I got a call from Isaak Karaev who had founded and built Multex into one of the leading information providers on Wall Street. Isaak had sold Multex to Reuters and was starting a new firm. He was looking at blogging, RSS, web services, tagging, and a host of other “web 2.0” developments (this was 2003, Isaak always was ahead of the curve) and saw that they could be combined into a web service that would allow wall street professionals to see more, understand more, and share those insights quickly with their co-workers and trading partners. And that was the genesis of Instant Information which is now marketing their service to the buy side and sell side on Wall Street.

Early last year, I met Roger Ehrenberg who was leaving the world of proprietary trading after almost 20 years on wall street and looking to do something in the startup/venture world. Roger teamed up with Jeff Stewart to form Monitor 110, which is crawling the deep web to surface actionable trading ideas before they surface through traditional channels. And Roger has recently started a blog called Information Arbitrage which I have just added to my blogroll.

So that’s a quick trip through my journey toward the land of transparency in financial markets. The days of schmoozing the CFO so you can get the call before the other analysts is over. Put to its grave by the cleanup of wall street in the aftermath of the last bubble. So you have to get the facts some other way. It’s good that we have this thing called the Internet that is ideally suited to out every secret, fast forward every rumor, and route it to the very people who need that information to trade on it.

Schmoozing is out. Crawling is in. MBAs with a spreadsheet are a dime a dozen. But the kid who knows how to mashup 1000 rss feeds, tag them on the fly, and cross index them with the crawler he hacked the other night at three in the morning is in high demand.

And if that kid wants to give up his fat hedge fund paycheck and build a company around those skills, I am all ears.

We are currently going through the planning stages for our next Union Square Sessions event. Transparency, Markets, and the Internet is one of the topics under consideration. If you have an interest in this area or know of people who are leading thinkers in this arena, please let me know in the comments or via email.

Comments

[roger]

thanks for the mention, fred. i completely agree with the thesis of your post, and think the evolution you've outlined is spot on. we are in the second inning of a 9-inning game (which may go into extra innings), and are just scratching the surface of harnessing the "long tail" characteristics of internet information for investment. no question we are in a different world than the one i grew up in as a banker during the late 1980s/early 1990s, requiring massive re-tooling of skill sets and mind sets in order to stay ahead. looking forward to the next sessions and think you have hit on a topic and investment theme that will have legs for a long, time time.

[dave mcclure]

hey fred -

you've struck on one of my personal passions. would love to hear more about the event, and if i could snag an invite i'd love to attend.

a few of my posts on related topics are here:
http://500hats.typepad.com/500blogs/2005/01/securitization_.html http://500hats.blogspot.com/2002/06/random-rant-on-sustainable-economic.html
http://500hats.typepad.com/500blogs/finance_economics_capital_ideas/index.html

- dave mcclure

[Rick]

I would just love if there was a blogging network around public companies.

If there was a site for all the companies I owned, I would check them 2-3 times per day for new info (and I'm not even a day trader).

Rumors, speculation, links, real news... it would be all good.

[JIm Larrison]

Great post.

It is amazing to see how the web has moved to the real value of transparency and control, but there is still a lot of work to do. The individuals and companies that provide tools and services that are transparent will be successful.

I would love to attend your next USV event.

[sean]

sermo.com

[Michael Tung]

"One of the BENEFITS of ... I am not suggesting that is good or bad ..."

[Vijay Veerachandran]

Fred. I am highly interested in attending any USV session on these lines. The skills you mentioned yes urely people lack that. Log me in. Vijay Chandran

[howard lindzon]

I have a headache from how deep some of these ideas are going.

Wow-

I still think simple is better for 95 percent of the public investing market and nobody is doing that. STILL

But a well thought through thought piece and a huge institutional market indeed.

[Niki Scevak]

Fred, the same transparent and accountable drivers were the reason I founded Homethinking, which monitors real estate activity to try and figure out whether real estate agents are good or bad and who as a home owner you should give 6% of your home value too (and entrust the final sales price with).

The original inspiration was actually the book Moneyball, which through transparent data eliminated old-school scout bias and found cheap and productive players for the A's.

Either way, would love to attend the USV event, if possible.

[howard lindzon]

By the way - would love to attend and contribute

[David Sieh]

I wrote some software back in 2001 that crawled some financial websites, aggregated the information using some "growth"-type analysis, and sold it to a company that at the time was called ZiaSun (when I wrote and sold the software, I had never heard the term "mashup"; this seemed like a very natural thing to do with info on the web). They were later acquired by Telescan which changed the name of the company to Investools. They used that software for several years, and to the best of my knowledge, they're still using it. The point being: with the transparency, tagging, free info available on the web, etc., some very valuable applications can be developed.

[Rohan Freeman]

The man who first gave me a sense that liquidity might be an end unto itself was David Landes, author of 'The Wealth & Poverty of Nations.'

Don't know whether you'd get him to speak, but I can't think of anyone better to put Web 2.0 into a wide economic context.

[Aram Fuchs]

I am constantly thinking of new ways to use software to get a research edge on our competition.

Please let me know if I can attend your forum.

Aram Fuchs
General Partner
Fertilemind Capital

[Steve]

Great post Fred. Before Monitor 110 there was Codexa, put together but a quant named David Leinweber. Great idea, just too early. Idea generation in both investment banking and investment management are big themes right now and your post is right on the screws.

[Nic Brisbourne]

Great post Fred. This type of deep web research can also play a role in risk management. Confused of Calcutta has posted on this.

In my experience though it is tough to build big companies around research tools.

[sr]

There web is the idiot box for this
generation. There is just too much noise --
and for the most part browsing blogs/news
is a passive mental activity. The point is
that access to more information (thru the
web) does not necessarily enable original insights in investing/trading or in other
fields. There is probably a reason why
Warren Buffet lives in Omaha and not
Manhattan

[P-Air]

I think Kevin O'Brien (CEO) at Revere Data LLC (www.reveredata.com) could add value to these discussions. They're in the thick of it and are focused on serving hedge fund clients w/their proprietary data which is already being mashed up w/publicly available data.

[Toufique]

Insightful post, Fred. I'm always on the lookout for ways better ways to connect and route information to generate value. Would love to attend your event.

Toufique Harun
Founder & CEO
TaskCue Technologies

[Alex]

Transparent markets are closer than we think.

A few years ago I built a market model for a large CPG marketing company. Using 10 years worth of internal tracking data it was able to demonstrate present day market share, consumer loyalty etc and it too was accurate to within a few points.

With RSS the danger lies in separating measuring buzz indices and actual impact on market share.

Information is waiting to be transformed into insight - provided someone has the money and patience to build the lense.

In my humble opinion, RSS is only one proxy, at least in the world of mega-corps with multiple brands. Creating the equivalent of a Bloomberg systems for company's and their umbrella brands is achievable but subject to mashing-up huge amounts of data from companies like Comscore and IRI.

[Rod Ebrahimi]

Enjoyed this read, thanks Fred.

I'll remove my non-existent VC hat for a second to say... isn't it possible to use this type of transparency, be it financial or otherwise to make a positive social impact as well? Perhaps to encourage companies to do the right thing?

Best wishes in 2007