Federico Baradello founded Finalis, the investment banking-as-a-service platform for dealmakers, after working in a sector he knew was long overdue for an upgrade.
Baradello began his career at Kirkland and Ellis’s law firm, where he worked on deals involving middle-market tech companies. He soon saw the dichotomy involving cutting-edge tech firms using decades-old technology to structure deals.
“That made no sense, particularly because digital natives, including myself, are now driving forward the workflow of a given transaction,” Baradello said. “Those digital natives live their entire lives in the cloud, except for the deals they’re managing, the most important aspect of their careers.”
Where Finalis started: The first of several smart decisions
As Baradello considered a better way to deliver the deal-making experience, he could have started at many points.
A typical process involves thousands of emails, trackers, and checklists in Excel and Word and old virtual data rooms. The successful design had to account for a deal’s many players, from the two parties to their consultants, finance people, lawyers, and advisors.
“It just felt like an incredibly broken and antiquated process,” Baradello said. “There was an opportunity to upgrade how we execute private market deals in the cloud and to bring that digital transformation forward.”
His starting point was with the sell-side investment bank. The process begins there once an engagement letter is signed.
How to get reticent banks to adopt new technology
The next consideration was getting into the banks at velocity and scale. Banks aren’t known for quickly adopting the next big thing, so Baradello looked at companies’ go-to-market strategies that upset the brokerage models in other verticals like insurance and real estate.
Investment bankers get paid when the deal closes. They don’t want to risk that deal on unproven technology, Baradello reasoned.
His solution? Getting in through the back door is not a productivity suite but an infrastructure solution. It’s a different pitch when you’re speaking about reducing the cost of the back office by enabling cloud-based operations. Provide valuable turnkey infrastructure.
“What we saw is that there was a tremendous opportunity to bring that model into investment banking,” Baradello said. “We could deliver the first truly cloud-based infrastructure as a service offering for the long tail of the investment banking industry.”
That long tail is the fastest-growing segment of the investment banking industry, Baradello said. Boutique investment banks are responsible for more than 40% of investment banking revenues. That rate is growing.
There’s plenty of room to grow
Finalis makes a compelling offer to these boutique banks. Instead of leaving most of your commission with the megabank, provide a much smaller percentage to Finalis. As that tech offers more value, Finalis earns more commissions. So far, so good on that front. More than 160 investment banks have around 800 deals on Finalis.
“This is a classic story of come for the tool, stay for the exchange,” Baradello said. “You started as Compass, and you ended up like Zillow. We think there’s a tremendous opportunity to build the true marketplace for broker private market securities in this space.
“That’s something that has been tried before but failed because there was never a strategy to get quality supply. And we think that the way to get quality supply is by being the best-of-breed infrastructure provider that can scale to support the lion’s share of the longtail on one unified platform.”
A summary of wise decisions
Experience in the sector you wish to disrupt. Identify a clear and logical starting point. Follow that up by simply delivering clear value. The Finalis strategy was clearly articulated.
The intelligent decisions continued. Finalis also identified who their actual competitors were. Get that wrong, and product design can quickly go awry.
Baradello said Finalis’ competitors aren’t software companies. They’re broker-dealers from the United States that deliver some regulatory or compliance service. Their problems include poor brand equity, no brand equity, and little scale. Most see a value proposition limited to compliance.
“Our philosophy is that if we’re going to be taking basis points off the table, and we’re going to be earning a piece of success fees, we need to add a lot more value than simply checking compliance boxes,” Baradello said. “Goldman Sachs is far less efficient than Finalis, and we’re just getting started.”
There’s plenty of room to grow
The scaling potential is significant, Baradello reasoned. Begin with human-in-the-loop technology, then layer self-service technology on top. He likens the vision to the Cross River Bank of investment banking.
Succeed, and you democratize private capital markets, Baradello said. Liberate the longtail investment banker and build a rich ecosystem around their deal flow.
That’s only the beginning. If the bankers already leverage Finalis for their back-office tech, it’s a short leap to connect them with those looking for exits—one place for banks to pitch for their business.
“Those are the applications that will be in a position to roll out based on having coalesced the entire longtail of the investment banking space on our infrastructure solution,” Baradello said.
Three industry factors to watch
Baradello said he’s watching three factors that could shape his industry. The first is FINRA’s and SEC’s responses to pandemic-forced changes such as remote, cloud-based supervision. He sees signs that FINRA might be receptive to making some changes permanent.
The second is the market downturn. Investment banks are downsizing. The rise in boutique investment banks is usually negatively correlated with market conditions.
“The third thing is regulatory attitudes towards cryptocurrencies and blockchain-enabled applications,” Baradello concluded. “That’s a white-hot space, and we’re going to continue to track the evolving regulatory guidance in that space.”
Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.