Deal Radar 2010: Firm58, Chicago, Illinois

Firm58 provides financial management software to capital markets firms. The company’s SaaS-based platform is designed to help clients better manage post-trade processes such as billing, profitability reporting, client commission agreements, and soft dollar programs, thus increasing revenue and operational efficiency and lowering costs.

The Chicago-based company was founded by Sam Mele and Jim Mullen in 2005. Mele learned the inner workings of the middle and back office from his father, who managed a boutique clearing firm. He later pursued a career in enterprise software, where he was VP of sales and services at Ariba. He also spent 10 years with Oracle. Mullen was the founder and president of Intercap Systems, a software company that designed and built financial services back-office systems. Prior to Intercap, Jim held senior technical and sales management positions at Siebel, Softwire/Kabira, Rich/Reuters and Oracle.

Both Mele and Mullen recognized that the growth of electronic communications networks (ECNs) had significantly increased trade volume and made trading more complex, posing a challenge for middle and back-office systems. Yet, the founders felt that for all the focus on streamlining front-office systems in order to execute trades, there was little attention paid to critical operations after a trade was made. This problem, Mele and Mullen believed, would only get more complex and messy over time. They say that over the past five years in particular, financial services firms have been challenged to manage new demands resulting from the proliferation of electronic trading, industry globalization, and new government regulations. These issues have fractured the financial supply chain, making it more difficult for organizations to contain costs while maintaining their current customers and attracting new ones.

The company believes that unlike point solutions that address specific challenges such as billing, its products take a broader view of simplifying post-trade activities, thus protecting revenue. This vision is based on the use of SaaS technology to build a scalable and networked infrastructure that would be geared to manage high volumes of complex cross-asset and cross-market transactions. Customers can scale up without investment and lower their operating costs by automating critical middle- and back-office post-trade processes. Firm58’s technology consolidates all of a firm’s transactions into one database, thereby eliminating duplicate, time-consuming, and, perhaps most important, error-prone manual business processes.

Increasingly complex transactions are costly for firms that lack automation. To illustrate, in a 2009 survey conducted by Tabb Group and Microsoft, 83% of participating organizations said that they use spreadsheets to model, analyze, and price financial instruments. Almost half (48%) use spreadsheets to handle trade data, 42% use them to keep track of positions, 42% to manage risk and 40% to handle compliance.

For now, Firm58’s target is the $700 million market comprised of the thousands of brokerages and hundreds of trading firms and marketplaces in North America. More specifically, Firm58 targets broker-dealers (agency, principal, futures commission merchants, introducing brokers); all manner of execution venues (global exchanges, electronic marketplaces, alternative trading systems (ATS), and dark pools, which are crossing networks that display liquidity that is not on order books); and trading firms (day trading, proprietary firms). The company offers a subscription-based pricing model based on transaction volume with one- to three-year contracts.

Through a combination of direct and indirect sales, the company plans to target the multi-billion dollar market comprised of nearly 20,000 hedge funds, investment advisors, asset managers and clearing firms, as well as equally large international markets in Europe and Asia.

At this point, Firm58 processes 20 million trades and more than 27 billion shares a month. The platform currently supports thousands of middle and back-office personnel and a growing number of end users who access the solutions via the Web. The customer base includes execution venues such CBOE Stock Exchange (CBSX), Liquidnet, Boston Options Exchange (BOX), ELX Futures, as well as broker-dealers and trading firms such as Pulse Trading, Hamilton Executions, and Equitec Group, LLC.

Early traction came through Firm58’s billing solution and rating engine. Early adopters were very focused on lowering trading costs for their customers and found that Firm58’s solution to automate bill generation, presentment, and collection helped them to do this. Hamilton Executions said that it used to spend 20 hours a month generating bills and now spends 30 minutes. These initial successes paved the way for more customers and growth.

The principal competitors are financial services firms’ and clearing houses’ internally developed post-trade management systems. SunGuard has a portfolio of transaction management products that includes post-trade processing. In Europe, Eurex Clearing, owned by Eurex Frankfurt AG and jointly operated by Deutsche Börse AG and SIX Swiss Exchange, offers services for derivatives, equities, repo, energy, and fixed-income transactions. It processed more than 2.3 billion transactions in 2008. In April of last year, financial services technology provider Cinnober released a real-time risk management solution that included a post-trade component. Other solutions focus on a single asset class.

Firm58 has raised almost $15 million thus far: $2.5 million in seed funding in 2005; a $3.7 million Series A led by New World Ventures in February 2007; and an $8.5 million Series B led North Bridge Venture Partners in 2008. The company will seek a Series C in the spring. Its ideal investor has experience in the field of financial software.

Firm58’s revenues have more than doubled year-over-year for 2008 and 2009. While revenues are still under $10 million, Firm58’s annualized contract values (ACV) are rapidly approaching this threshold based on strong demand for its solutions. The company expects to be profitable by the middle of 2011.

Related Readings
Forbes Column 2009: Capitalism’s Fundamental Flaw
Value Creation Vs. Value Destruction
Deal Radar 2009: MAIA Intelligence

This segment is a part in the series : Deal Radar 2010