This interview is a Labor Day Special.
We talk to Victor Hugo Gomez (https://www.linkedin.com/in/victor-hugo-gomez-2b65a719/) who is the founder of Frankfurt-based fintech BITA (https://www.bitadata.com/). Victor is originally from Venezuela, but his education and jobs brought him to Frankfurt. He is also an MBA alumnus of WHU (https://www.whu.edu/) and Northwestern Kellogg (https://www.kellogg.northwestern.edu/). Big *high five* to the guys from Tech.eu, where we found the publication of BITAs 1.25 mn VC round (https://tech.eu/brief/german-fintech-startup-bita-raises-e1-25-million-to-bolster-its-indexation-software/).
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BITA is a “deep fintech” so to speak, it allows the calculation of tailored indices. Any investor, asset manager, bank, wealth manager, pension fund or insurance company can pay BITA to calculate indices, which they are putting together (given the data is available). You can learn more about him, the company and ideas in our interview.
We are sorry for the sometimes-blurry video, but we are sure you can get the important information anyways.
During the interview Victor and Joe are talking about:
Asset allocation / Asset selection (https://www.investopedia.com/terms/a/assetallocation.asp)
Pension fund (https://www.investopedia.com/terms/p/pensionplan.asp)
Financial Index (https://www.investopedia.com/terms/i/index.asp)
DAX – Germany’s leading stock market index (https://www.investopedia.com/terms/d/dax.asp)
“Dow Jones” – Dow Jones Industrial Average (https://www.investopedia.com/terms/d/djia.asp)
MSCI Emerging Markets (https://www.investopedia.com/terms/e/emergingmarketsindex.asp)
Lehman Aggregated Bond Indices / Now Bloomberg Barclays Aggregate Bond Index (https://en.wikipedia.org/wiki/Bloomberg_Barclays_US_Aggregate_Bond_Index)
Commodity Index (https://en.wikipedia.org/wiki/Commodity_price_index)
Weather Derivatives (https://en.wikipedia.org/wiki/Weather_derivative)
Narrator: Welcome to startuprad.io. Your podcast and YouTube blog covering the German startup scene with news interviews and live events.
Joe: Hello and welcome everybody. This is Joe from startuprad.io. Your startup podcast and YouTube blog from German. Today I have Victor Hugo Gomez with me who, as you can tell, is not originally from Germany, but nonetheless he built up a successful startup here in lovely Frankfurt. Hola. Que Tal?
Victor: Hola. Que Tal? A pleasure. Thank you for inviting me.
Joe: You’re very welcome. And you are here because of your startup BITA data
Joe: BITA? Just simply BITA?
Victor: Just BITA.
Joe: Just BITA. And everybody who’d like to find this BITA, because I also had trouble, go down here in the show notes. You’ll have a link to the company website and of course, to Victor’s LinkedIn profile that
I already put it here. That’s why I’m always looking at it. But before we get into what BITA does can we talk a little bit about you. Because at first, I was thinking “okay it has something to do with data and financial indexes, but it’s not something that people would think straight out of their mind “oh let’s do index company.” They’d rather think “let’s do e-commerce. Let’s do something very simple.” So how did you get this idea?
Victor: Definitely, so let me start by maybe giving you a little bit of background on myself. As you probably can tell by my accent, I’m originally from Venezuela. My background is in economics and finance. I started my career first in management consulting and then I worked for several years in investment consulting working for Mercer advising pension funds. I used to advise pension funds on topics like asset allocation, portfolio structuring etc. So already during that time I got a very close relationship with let’s say the world of indexation and passive investments.
After that, I had a first startup that didn’t scale as I would have wished and we sold to a competitor and then from there, I took the decision of going to Germany and living in Germany. I did my MBA between Germany in the US and then right after that I started working for the Deutsche Börse, or the German Stock Exchange being responsible for innovation in the data business, which included both the data part as well as the index side of the business. I did that for some years and then during my last couple of years in exchange I was a VC, so I had the task together with a colleague to set up the corporate venture capital structure for the German Stock Exchange.
So, I was one of the first members of the team of the CVC of the German exchange and I came to a point after spending quite some time working with the startups and talking to startups around the world. I always had that entrepreneurial inclination and I felt that my time to go back into entrepreneurship had come. The idea behind BITA was something that I had already for some time. And I think that’s something that for me, is always critical. It’s always good when you have the luxury of setting up and a start-up where you can specialize in a problem that you had before.
And in this case, both from the time that I was a consumer of indexes to the time where I work at Mercer consulting all the way to the time where I was basically the provider of indexes and I was involved with the stock which is the index company of the German Stock Exchange, I have realized several things; Number one is the indexes space is highly attractive, so the companies are operating in that space tend to be very profitable. All of them tend to have operating margins of over 60% and those are businesses that are growing very rapidly. They are going rapidly because passive investments are growing massively.
Joe: May we tell the people out there, because not everybody has a background in financial services what the indexes are that we are talking about. Most people may know Dox or Dow Jones Industrial Average, S&P 500. So basically that’s an aggregation of data they start at one point and then through different math methods, all those constituents as they are called, they’re the members of an index get aggregated and calculated into an index in real-time or very fast or daily. So, there are hundreds and thousands of indices out there.
Most people just know, for example, the famous equity ones but there are also the formally Lehman aggregated bond indices, now Barclay’s. There’s MSCI, Stanley Capital International. They have a huge emerging market in the indices with several thousand constituents. So it can be a big business just for the simple reason that if you have a mutual fund or if you have a derivative which wants to orient itself or have the benchmark with this index or for derivatives as reference value, as underlying, basically they need to pay you fees and that’s how those companies make profit.
Victor: Exactly. So, there are two main uses, as I would like to say, there are two main uses of indices. The first use is you are an active fund in most of the cases, and you need an index to surface a reference as you say. So, you evaluate your performance against that index and in that case, you would pay the index provider a license fee to use that index as a reference rate. That’s one use case and that was the original use case for indexes.
Under that box, you will have the S&P 500, the Russell 1000 etc. Now since certain years ago
because a lot of investors have tried to, on one hand, reduce their costs but on the other hand, get more effective ways to access a particular asset class, a new use case for investors has been developed which is basically, the passive investment side, where the index is the underlying investment strategy. Or you could even say it’s even the underlying asset manager of your investment product. And that’s a typical case of an ETF.
Joe: So basically, you can have an ETF. It’s like a mutual fund but basically, there’s no active management. There’s passive management and they’re just doing the same stuff as the index meaning; either they have like the same amount of equity of shares in their index or they replicate it meaning; they are replicating this via derivatives?
Victor: Exactly. And in that second use case is especially what brought us to start BITA because
as more and more specific exposures are being migrated from active management into passive management, clients of index providers are requesting more and more specific implementation of indices. So, what is happening is that today more than ever, clients of index providers are going to the index provider and saying “hey I want you to build me an index that gives me exposure to, let say Japanese equities, but I want you to have a restriction on liquidity and I want to have an ESP angle on it so I only want to invest in companies that have a good EG score and buy what I want to leave [inaudible 00:08:43]
So, they come with a very specific request to the index provider and the index provider then normally takes some weeks to develop a strategy, to back-test it and to deliver it to the client. And that’s exactly… so you wanted to say something or?…
Joe: No. That’s usually something that is done by institutional investors. The retail investor has the opportunity to create an index but basically, they’re also for precious materials, for commodities. So, there are even climate indices for weather derivatives. So, everybody who would like to learn more about this, of course, go down here in the show notes. We’ll have some links on that as well. So, there’s a huge universe of indices out there.
Victor: Exactly. And the problem is the following; so, you have a scenario where clients go to the index providers and they come with very specific requests. So how it normally works is, the client sends a request, the index provider takes as I said, three to five weeks to develop something. They present it to the client. The client might want to retry something or perform a change. Then that index goes back
to the index provider.
They recalibrate and it goes back to the client. If after several iterations the client is happy, with the result and they say “okay I want to license that index” then normally the index provider will charge the client a significant licensing fee. In most cases, it will have a variable component which means, that if the client turns that into a fund, for every asset that that fund has under management, the index provider will get a small percentage. And the problem is that the whole process sometimes takes too long and in other cases, the asset manager has issues with the fees.
Because they say “hey so when I [inaudible 00:10:46] my fund and I grow my fund on assets, I keep it proportionally the same to the index provider, so my margins are not improving. And that’s a ubiquitous issue in the industry today.
Joe: So basically, that is why there are so many indices out there and that’s the way you’re making money because you help the people to compose, to put together indices, right?
Victor: Well that’s exactly where we are different. What we’re trying to do at BITA… that infrastructure that an index provider normally draws in-house to provide services to their clients, which means back-testing systems, data management systems calculation systems, all the technology. What we are doing is that we are developing it in a very efficient way and we are licensing it to plant which means that clients can go to BITA and instead of licensing an index from us they can license the technology and they can develop it in house.
It helps shorten the product development time significantly by being way more flexible when it comes to developing new products and services and then just paying a software license instead of paying an index license.
Joe: I see. So basically, you are cutting into the business of those usual index providers and the people aggregate those indices for others. You cut out the middleman.
Victor: We will not necessarily expect to cut them out in all cases. I think they are complementary. So, what we can expect to happen quite often is that clients would license, for example, our back-testing software, they [inaudible 00:12:47] backtesting software, saving costs on their side. But then the client in a lot of cases might decide “hey, what I want is Standard and Poor’s to calculate my index.” Which for us, it’s also fun. So, in that case, we license the software, the client creates the idea of the software and then goes to Standard and Poors with a very concrete idea of what they want completely parametrized. And then Standard and Poor’s can perform their calculations. So, I normally refrain from saying that we are directly competing with them. I think in a lot of cases we can be a complementary offering.
Joe: I see. And that is the business. So, you’re a very deep capital market, b2b service offering financial services and I think you’re at the right place here in Frankfurt with that. And how did you raise venture capital? Because you’ve been on the investor side before so it would be interesting for our audience to hear what your thoughts were going into this venture.
Victor: So, the first thing I must say is that the fact that we had not necessarily been a VC made the fundraising exercise less complicated. So, at the end of the day, the basics are the same. You need to ensure that you have a very strong value proposition. You need to have a very strong team. You need to be very clear on how you are going to make your business scale and where do you see yourself in a certain number of years.
And then you just go out there. You need to target right the type of investors for your business. So, I think the great advantage that we had at BITA is that the team had a lot of experience from the very particular niche that we’re trying to cover. And we have the luxury of operating in an industry which on one hand is a niche, but on the other hand, is huge. So, the potential is massive or for the company and I think that’s something that is very well received by investors.
In this case, our first-round right at the beginning just to have enough capital to prove the concept and to have our first system out. That we did, raising from Angel investors. And then for the second step, we raised a seed round from two large institutional investors.
Joe: And that’s basically where we found you on the Internet going through English-speaking blogs on the other hand. But basically, we connected. We’re very happy about that. Talking about your clientele, since the index is not per se, restricted in any form, basically you can have clients from all over the world. You’re not limited in terms of financial regulation, right?
Victor: No, we’re not. As an index provider, the only thing that we need to make sure is that whenever we start offering administration services, we need to be regulated and that’s a regulation that only exists in Europe which is called the European benchmark regulation. And that’s something that we’re already applying to receive the certification for. But that’s only for the administration case. Aside from that, to calculate indexes, that’s a global business. You can have clients all around the world.
Joe: That sounds good. What are your plans for the future? You talked about proving that it’s scalable, so how long will this take you?
Victor: So, the first thing that we did is developed our calculation system. That system we launched around September or October of last year. That is already on a full version. We have more than ten clients. All of them are large b2b companies using us for index calculation. So, it has been a very big success story for us. And now in the short term, our second objective for this year is to finish the development of our second system which is our index backtesting software which is called BITA Core.
That second system, it’s not so much targeted at trading firms which we are doing business with right now. That second system is going to be more targeted at asset managers and institutional investors like pension funds.
Joe: We may add for our viewers and listeners that basically back-testing means you have an ideal with an index and basically, you go back in time and you collect the data for several years, as far as you can go back in some cases, and then test how it has been fearing in the past. You show this to potential investors.
Victor: Exactly. So today, most of our clients are on the calculation side and they came to BITA because we have a very powerful system and we’re able to provide real-time calculation where we pick a price in less than a second. So, we’re able to calculate and process massive amounts of data and come up with an index price and everything.
Joe: That is cool. So basically, everybody who’d like to learn more about you guys can go down here in the show notes and there is a link to your company website and of course to your personal LinkedIn profile so people can reach out to you directly and learn more. And hopefully, you’ll keep us up to date.
Victor: Of course. I’d be happy to answer any questions or have a call with anybody interested in what we’re doing.
Joe: Great. I greatly appreciate it. Thank you very much.
Victor: No, you’re welcome. Thank you very much for the invitation.
Narrator: That’s all folks. Find more news, streams, events and interviews at www.startuprad.io. Remember, sharing is caring.