Vincenzo La Ruffa, Susquehanna Growth Equity, Tabb Forum,2013 TOP STORIES: The Demise of the Trading Technology Company, here. This is originally from Apr 2013.
Where have all the trading technology companies gone? Actually, if you look hard enough, they are in the same place they have been for the past few years – stalled out, unable to grow and often unable to make real profits.
For those companies stalled (i.e., sub $5 million or $10 million, not making money and not growing), a play for more fertile hunting grounds has meant retargeting existing solutions for new asset classes. Spend in areas most effected by Dodd-Frank has remained more resilient than cash equities, for example. However, transitioning from a focus on one asset class to another can be very challenging to execute and usually requires a significant financial investment with uncertain success. In most cases the owners of these companies should try to roll them into another business – not only in exchange for a job, but perhaps the hope of preserving upside through equity in the new business. Even if there is not the direct opportunity of equity consideration, the teams will be compensated with options.
Other companies have found some life by morphing into more of a service business and playing for cash flow. With the right relationship and good project management (often overlooked), this can be a very attractive alternative in this environment, as many CIOs and desk heads find it easier to sign up outside resources for tactical projects then add head count. However, it usually comes at a cost of lost equity value, as services companies in the sector have little acquisition value without significant scale.