Why I sold my hedge fund to take on the banks
After Ken Staut graduated with his MBA from Columbia University, he co-founded an event-driven long/short hedge fund. He wore many hats, working on everything from data analytics, risk management and marketing to portfolio management and trading. When Staut and his partners sold Tiburon Capital Management, he was already planning to launch a crowdfunding startup, which would later be called GrowthFountain.
However, it was a bit too early. While the JOBS Act had been proposed, it had not yet been officially passed by Congress. In the meantime, Staut took a job as a portfolio manager at hedge fund USDR Investment Management.
“As we started to build GrowthFountain, it felt like building a ship and setting sail without a compass,” Staut said. “The SEC hadn’t finalized the rules, and as I was building the startup with co-founder Leon Steele of AM Investment Partners, I was contacted by people at USDR, who were looking for a portfolio manager.”
Staut worked there for two and half years, then gave his notice last year as the final rules for equity crowdfunding rolled out as part of the JOBS Act and GrowthFountain became his full-time job. He is the CEO.
During the 2008-2009 recession, lending seized up, and Congress realized that they needed to update the laws, hence the JOBS Act was passed. It is a groundbreaking law, but the SEC took four years to come up with the final rules, which went into effect last year.
Companies can raise up to $1m via the lowest exemption, or $50m if they do a Regulation A exemption.
“We’re registered with the SEC – we’re allowed to offered shares in small businesses, and we no longer have to certify that people meet certain minimum wealth or income levels to invest,” Staut said. “As we start to educate the American public about what this means, the flood gates are now open for everyone in the world to invest in America’s small businesses.
“We can issue common equity or a revenue-share agreement, so we’re like Kickstarter meets Goldman Sachs,” he said. “Companies can issue securities through a crowdfunding mechanism, and investors can get a stake in a company they believe in rather than making a donation or pre-purchasing a product."
How hedge fund experience applies to a fintech startup
When Staut first started working at a convertible arbitrage hedge fund firm as an analyst fresh out of college, he was still learning the learning the ropes. It was sink or swim.
“It was a small shop, and they didn’t have the resources to train people properly, so it was on me to get up to speed,” Staut said. “I took the CFA exams and then went to business school, with the idea of getting an educational base then going to a bigger hedge fund post-business school.
“Honestly, it took me eight years to become really good at my job,” he said.
Certainly the experience of co-founding a hedge fund was directly relevant to the experience of co-founding GrowthFountain, Staut said. As the cracks in the traditional financial services industry became all too apparent after 2008, becoming an entrepreneur seemed all the more attractive.
“I find that the finance industry is in real trouble, with the regulatory crackdown on the banks, the low-interest-rate environment, too much competition among asset managers making it very difficult to outperform on a consistent basis and the shift from actively managed portfolios to robots and indices,” Staut said. “Those factors make it very difficult for college kids who always planned to go to Wall Street, and for those looking to generate outsized returns at a hedge fund, it’s getting tougher in that space.
“People have to constantly reinvent themselves in today’s economy, because the pace of technology evolution is fast, and launching a startup was an attractive option,” he said. “I would not have been able to do that without hedge fund experience, plus business school education – fintech is applicable to what I was doing, but I took it in a different direction.
“You don’t necessarily need the heavy-handed technical investment experience you would need at a hedge fund to do this – a lot of people coming out of business school would have the firepower to join a fintech startup right away.”
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