Brooke’s EXTRA: When I first wrote this article, I couldn’t reach the venture capitalist behind ByAllAccounts’s latest round of financing because he was at meetings in NYC. But this afternoon [Sept. 9], we were able to connect as he drove from the Amtrak station in Boston to his home outside the city. What he had to say was insightful enough to make it worth revisiting the story and adding some quotes. Here is the reworked version of the article with changes in bold.
On a hyper-growth track for the third year in a row, ByAllAccounts has attracted a second round of venture capital from a second venture capital firm.
Castile Ventures and Commonwealth Capital invested $5 million in the Woburn, Mass.-based account aggregation software maker, with Castile making the majority of the investment. Commonwealth Capital Ventures, which supplied a first $5 million round in 2008, contributed a minority portion to this round. ByAllAccounts revenue is growing at a rate of about 40% a year.
ByAllAccounts received its first round as a way to launch as an independent firm after spinning off from State Street in 2008.
VCs traditionally look for hyper-growth opportunities that are unlikely to be usurped by a competitor. The two firms saw that kind of opportunity in ByAllAccounts — but needed some convincing, according to Skip Besthoff, general partner, Castile Ventures.
Added after initial publication: “I’ll be honest. When I first heard the pitch, I was skeptical. Other industries have solved this data aggregation challenge. As I dug into it I realized it’s a hard problem to solve [in the financial advisory industry and it hasn’t really been solved from the wirehouses on down.] It really takes some special sauce and tech know-how and it really looks like they have market leadership. You can’t just get a bunch of engineers and throw them at the problem. You need to have been around the block and seen a number of types of transaction types. That gave me confidence as an investor.”
Many advisors see account aggregation software as a linchpin in managing a client’s entire wealth rather than just a portfolio — and getting paid for the wider responsibility. See: Nearly half of advisors now charge clients to manage held-away assets
Boxing out competitors
One way that the account aggregator is looking to box out competitors is by using an inside-outside strategy of winning all the advisors it can directly, but also signing on additional ones through partnerships with major technology players in the industry, such as Advent Software, Fortigent, Black Diamond Performance Reporting and Envestnet.
It is bringing aboard 40 to 50 new firms per quarter and about 20 of them come indirectly through these collaborations. ByAllAccounts serves about 600 firms. See: After more than a decade of trying, ByAllAccounts is gaining momentum with advisors — by taking a new tack
ByAllAccounts’ data services are currently integrated with more than three dozen wealth management companies including ones that specialize in producing portfolio management systems, CRM, reconciliation, personal trading surveillance, trust accounting and managed accounts.
“That’s how we get to breakaway brokers,” says James Carney, president of ByAllAccounts. “The majority of our clients are existing RIAs. Breakaway brokers go to outsource solutions.”
Added subsequent to publication: There’s a good reason why ByAllAccounts is winning partnerships with outsourcing companies, according to Besthoff.
“It comes down to data quality and they have a quality of data that the market expects and their market penetration speaks to that.”
Partnership deals rising
The revenues derived from the advisors brought on through these partnership deals now account for about 33% of total revenues, up significantly from prior years – though Carney didn’t disclose how much.
With all the success, ByAllAccounts accepted venture capital largely in the interest of pursuing a new line of business – institutional investors. Much of the new investment will go toward supporting its collaboration with SmartStream technologies, a company that reconciles data for big companies like BNY Mellon and State Street that serve institutional investors. In fact, more than 1,000 clients, including 75 of the world’s top 100 banks, eight of the top 10 asset managers, and eight of the top 10 custodians use SmartStream Transaction Lifecycle Management for greater efficiency in their trading operations.
Without this express need for cash for developing technology and support staff [ByAllAccounts currently has 37 employees], Carney would have been reluctant to involve more outside investors.
“Obviously raising money dilutes [your equity position]”, he says. “It was worth taking the dilution” because the expected uptick in growth offsets the diminished equity stake.
In selecting a venture capitalist, ByAllAccounts sought a second institution, Carney says.
Diversified VC firms
“We didn’t want to be dependent on one VC from a pure financial standpoint. We also wanted to bring more experience to our board [of directors].”
Founded in 1998, Castile has proven experience growing technology companies and then guiding them to mergers with larger firms. Its investments in Ahura Scientific, Brix Networks, ChosenSecurity, GeoTrust and Network Intelligence resulted in their acquisitions by Thermo Fisher, EXFO, PGP/Symantec, VeriSign and EMC respectively.