"I left banking to start a fintech firm that failed. This is what I've learned"
Four years ago, Paul Reynolds left 26-year investment banking career to start his own fintech firm, Bondcube. By the time the hype around fintech built up to fever pitch last year, Bondcube had 35 employees across five offices in the UK and U.S. Then, in July last year, it collapsed.
Pitched as the ‘eBay’ of the corporate bond market and a service to match any buyer and seller of fixed income inventory, Bondcube failed because its buy-side clients couldn’t reach an agreement on price once a match was found. They were too used to taking prices from dealers.
Reynolds hasn’t returned to the trading floor. He now runs another fintech firm, Bondchain, which sells software allowing banks to allow them access private networks of buy-side clients. It’s not purely focused on fixed income markets.
Thanks to Bondcube, Reynolds has learned lessons that can be applied to any budding entrepreneur.
What, ultimately, led to your decision to leave banking?
After the 2008 crisis, the break down in bond trading revenues led me to think that opportunities for traders in investment banking were unlikely to return to previous highs. I had the idea that bond trading should be open to all buyers and sellers back in 2009. I had made various attempts to pursue this within a large investment bank, but by 2012 I realised that in order to really make it work, I would have to leave and develop it myself.
What were the main challenges getting the business off the ground?
I had no experience or knowledge about running a business, so the learning curve was very steep. Regulation, accounting, international law, employment law - this was just what I needed to get up and running. But, ultimately, employing good people and creating a functional team is the key to success.
You built your team significantly over the three years at Bondcube. What happened after its closure?
I made the point of addressing the whole team the day we closed the business. Some of them were never paid out, but they have remained incredibly loyal and even offered to join the new team.
What led you to close the business?
We were overwhelmed by problems of our own creation and could not create a convincing recovery plan. The irony is that the level of liquidity, customers and price matches were at a peak at that point.
What lessons did you learn?
1. A successful business needs to generate revenues from the get-go. After Bondcube, I would never propose a business idea that did not have immediate revenues. Start-ups often require a huge upfront investment and forecast revenues based on a fixed launch date in the future. This is very risky, but not uncommon in the bond trading fintech sector.
2. Technology management is critical to success. Adhering to the concept of a minimum viable product is difficult to achieve and requires a lot of discipline.
3. The cost of regulation cannot be underestimated. Regulation means acquiring buy-side clients is costly - perhaps too costly for a start-up that's dependent on reaching a certain critical mass and generating trading volumes for revenues.
You launched Bondchain almost immediately after closing Bondcube. What's different?
Bondchain is a trading productivity software designer and builder.
Our products apply to any trading market where there are buyers, sellers, a product and intermediaries. - Not just bonds, also commodities. Our customers are brokers, dealers and order management systems, not the buy-side.
Bondchain is unregulated. All revenues come from software sales, support and development. Almost all of our staff are developers.
How does the current company structure differ from the previous company?
There are two shareholders - the CTO Richard Smith and me. We also have three exceptionally talented developers and a very accomplished administrator. There are no external shareholders. - This doesn't mean that we are averse to them, but I would hope that if and when we have them, our shareholders will be familiar with the fixed income market and will help us build clients.
How can you remain profitable?
Bondchain is not dependent on bonds alone - our first project is in commodities in fact. As I mentioned above, we do not have external financial shareholders and are not beholden to their financial targets or milestones.
What advice would you give to someone contemplating leaving banking to start out in fintech now?
1. Test your idea on existing customers before you give up the salary and benefits of a large financial institution. Unless you have overwhelming proof of client demand and fully understand their price point, you have more work to do.
2. Take all the advice you can from proven and failed entrepreneurs and find a business mentor to keep you on the right track.
3. There is an abundance of free advice available from accountants, lawyers and government. Use it.
4. If you are working with a partner, make sure you understand how intense this relationship will be. Any doubts you have about yourself or your partner will be cruelly exposed later on.
5. Try to avoid the need for investors until you have proven, sustainable and growing revenues. If you have this, the stock you sell them will be better priced and they will focus on your growth rather than your initial mis-steps.
6. Importantly - and this is hard for some to get over - remember that just because you were in banking there's no guarantee you will succeed.