Over the past decade, the investment banking industry in America has witnessed the rise of many new startups and challenger firms. Unlike the large, established investment banks that have dominated the industry historically like Goldman Sachs, JP Morgan and Morgan Stanley, these investment banking startups leverage new technology and business models to disrupt the status quo. They are taking advantage of inefficiencies in the traditional investment banking model and unmet needs from clients to carve out a space for themselves. The success of investment banking startups like Lazard, Evercore and Moelis & Company demonstrates there is room for innovation and specialization in the industry. However, the landscape is evolving rapidly, as new investment banking startups enter the fray each year. Armed with venture capital funding, these fintech-powered startups are leveraging artificial intelligence, big data analytics, blockchain and other emerging technologies to develop new capabilities and differentiate themselves. The rise of investment banking startups promises to reshape the competitive dynamics in America’s financial services industry.
Lower costs and automated services allow investment banking startups to compete
Many investment banking startups are able to operate at lower costs than incumbent players by automating key processes through technology. For example, startups like Nummo and T-Rex Group provide AI-powered services that automate parts of the due diligence, financial modeling and valuation processes for mergers and acquisitions. This improves efficiency and lowers the costs for clients. Startups focused on specific niches also avoid costs associated with being a full-service, integrated investment bank. Their focused business models allow them to operate lean. Startups have also tapped into the gig economy, hiring freelance expert bankers as needed instead of large teams of full-time employees. The scalability and cost structure of investment banking startups put pressure on established players to lower fees and find efficiency gains.
Specialization allows investment banking startups to gain expertise in niche sectors
Many investment banking startups focus on specific industries or niches rather than providing a full spectrum of investment banking services. For example, Boxwood Partners and Feenix Partners are startups focused on providing M&A advisory services for middle-market clients. Other startups focus on technology, healthcare, financial services or other sectors. This sector expertise allows them to provide specialized knowledge and cultivate strong relationships with clients in those niches. Many clients today are seeking industry-specialized advice rather than generalist investment banking services. The specialization of investment banking startups has enabled them to compete with the large investment banks that have tended to focus more on large-cap clients and blue-chip deals.
startups utilize technology to improve customer experience and access new markets
Investment banking startups are also leveraging technology in innovative ways to improve the client experience and reach new segments of the market. For example, startups like Origin and Hokk Finance provide online investment banking services and solutions that open up M&A and capital raising services to middle-market, early-stage and startup clients that may not have had access before. The user-friendly interfaces and streamlined processes developed by these startups cater well to the needs of founders and entrepreneurs who are used to transacting online. At the same time, incumbents have been slower to digitize their advisory services and clouded by legacy processes. The technology capabilities of startups have allowed them to provide specialized services and tailor solutions to clients that incumbent banks have struggled to replicate.
Lower fee structures and flexibility on compensation attract top talent
Investment banking startups have also been successful in attracting top-tier banking talent, often from the large investment banks. The combination of lower fee structures, flexibility on compensation, specialized focus areas and entrepreneurial cultures have drawn many experienced bankers. Startups have compensated with performance-driven pay, shared equity and upside. The exodus of bankers from large banks to join startups brings established expertise and connections to these new entrants. High-profile examples include Michael Klein founding Churchill Asset Management after leaving Citigroup, and Jimmy Hallac leaving Deutsche Bank to start NextPoint Partners. This influx of talent in leadership roles has been instrumental to the rise of investment banking startups.
The rise of investment banking startups leveraging financial technology and unbundling services marks a pivotal shift for the investment banking industry in America. As these startups chip away at the market share of incumbent investment banks, their lower-cost tech-enabled models and specialized offerings are reshaping the competitive landscape. Incumbents will need to accelerate modernization efforts and develop targeted services or risk losing more ground. With strong growth momentum and financial backing, investment banking startups seem poised to continue disrupting investment banking as we know it.