The new Investment Banking paradigm
Posted by Pat Kitano at 1/28/2008 1:11 AM 
Categories: The Future, New Business Models, Disintermediation, Transparency
Categories: The Future, New Business Models, Disintermediation, Transparency
If one subscribes to the idea that a real estate transaction is basically matching capital with opportunity, and that the transactional process has become more transparent due to internet data, then it's logical to see that any intermediary based transaction is also fair game.
Investment banking and venture capital is a relationship based business that matches investor bases, often institutional investors, with opportunities - stocks, bonds, M&A, start ups, etc. Like any other lucrative business model, maintaining the mystique of "high finance" and managing deals behind the scenes keeps power contained within the select few who live on Park Avenue or in Woodside.
TheFunded.com, a website where entrepreneurs post data and feedback on the venture capital community, begins to level the playing field for entrepreneurs who pilgrimaged to so many VC meetings in order to figure out where their investment opportunities stood. Techcrunch notes TheFunded is now creating a database of VC term sheets uploaded by entrepreneurs. Exposure of data develops more efficient marketplaces.
"What's next for Banks?", a WSJ op-ed piece on January 25 by Andy Kessler is a must read explanation on why Wall Street, by sheer necessity to maintain their standard of living, embraced the collateralization of subprime debt ("CDOs"). In 2003, investment banks had been hit with electronic disintermediation - stock and bond trading margins collapsed, and the markets were still suffering the after effects of the tech crash and September 11, with few IPOs and M&A deals. Investors and hedge funds didn't trust stocks, but they also weren't pleased with low margin, low yield bonds... they clamored for bigger returns. And voila! Wall Street packaged the CDOs to meet the demand, and collected record bonuses, even in 2007 as the CDO market collapsed.
Now that the jig is up, investment banks need to prove another business model for 2008+, but like many of the transactional industries disintermediated by the internet - travel, real estate - the new reality will be lower fee structures distributed among more players who can provide services that were once the sole province of investment banks. For example, Kessler posits that new players will be consolidated financial powerhouses with the capital strength to provide a continuum of financial services - think Goldman Sachs merged with Citigroup.
On a smaller scale, I see a new class of investment matchmakers/consultants who provide financial and operational support to businesses, similar to the "business incubators" of the 2000 dot.com era. The difference between the new consulting paradigm and the Idealabs of the dot.com era is domain expertise not only with internet business models, but with the target industry. In real estate, you're seeing this movement with 1000 Watt, Dustin Luther and Domus.
Finally, matchmaking the investor with the opportunity is being democratized by various peer-to-peer lending players like Prosper.com. Although the matches are currently from consumer investors to consumer borrowers with immediate loan needs, the concept can be extended to other instruments and opportunities that may range from real estate to seed capital to structured finance, or even municipal financing.
[ Pat Kitano at Transparent Real Estate has an interesting post speculating on what the future of the real estate industry might look like, by taking a look-see at the finance world...]
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