The alt-data industry faced serious growing pains after its sudden glow up - here's what players in the multi-billion-dollar space can expect for 2020
- Alternative data quickly went from a quirky subset used by only the most sophisticated hedge funds to a multi-billion-dollar behemoth that has investors and companies like Vista Equity Partners, Nasdaq, and Bloomberg diving in.
- Last year was an inflection point for the industry, which is adding new vendors every day and putting more and more pressure on long-time players. Once rock-solid business models have been upended, as hedge fund clients have grown more sophisticated and changed their preferences.
- As Business Insider has reported, the rapidly changing space has rocked veteran players like Thasos, 7Park Data, and Jefferies' MScience.
- Because clients want information that no one else has, promising startups have found it difficult to scale their businesses while also keeping the same quality of data.
- Hedge fund managers tell Business Insider they are no longer looking for prepackaged data from vendors, but want more raw data streams that they can manipulate.
- Business Insider spoke to a dozen alt-data experts about what the space can expect in 2020 and beyond.
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To understand the big-picture story of alternative data, one could look no further than Greg Munves.
Munves joined 1010data fresh out of college in 2004 at a time when the term "alternative data" had barely even been coined. Back then, as he put it, "Big Data was very new to the world."
Munves spent nearly 16 years there, which included two years as CEO, and went from dealing with an uneducated client base to a $500 million merger in 2015.
But on January 17th, the industry veteran announced his departure from the Advance Publications-owned data provider on LinkedIn, adding 1010data to the growing list of alt-data sellers that have had management shakeups over the last 12 months.
Munves' career arc mirrors the path of the alt-data industry, going from a time when, as he wrote, "it wasn't a household term," to its current iteration, with hundreds of companies trying to pry off a chunk of what some analysts predict will eventually be a $7 billion market.
The explosive growth of alternative data - unstructured, unique data sets that include everything from credit card transactions to satellite images - has led to attention from deep-pocketed investors eager to tap into the gold rush. But funding comes with high expectations for revenue and profits.
Meanwhile, big names have barged in with their own offerings and platforms that come attached to well-known brands.
All of this has created an overcrowded, hyper-competitive environment in which the consumers - typically quantitative hedge funds - hold the power.
1010data offers an example of a startup that is still operating and held in high esteem today after the sale, but there have been several cautionary tales after last year forced a reality check for many alternative data providers.
And this year may see more of the same.
"People are starting to question: Is every piece of alternative data worth it?" Mike Chen, director of portfolio management at $43 Panagora Asset Management, said. "People are starting to realize not everything is valuable. Not all that glitters is gold."
Business Insider spoke to a dozen insiders across the alt-data world to get a sense of the state of the market and what to expect in 2020.
2019 a year of reckoning?
After a year that concluded with back-to-back acquisitions of alt-data companies by larger players, it seemed as if the sky was the limit for the space in 2019. The truth was much closer to the ground.
At least three different alt-data companies face similar issues, even though they all had different ownership structures. The underlying theme: their data wasn't selling enough.
For Thasos, a geolocation data vendor, sales woes forced a major reduction in staff and a CEO change. Jefferies-owned MScience tried to pivot to a more data science-centric approach before making cuts to that team amid changes to its sales leadership. And 7Park Data amped up sales pressure after its $100 million sale to Vista Equity Partners.
For alt-data companies that were created when the space was still under the radar, a few hedge fund clients were more than enough to keep the lights on. The problem, though, was growth.
Hedge funds are hard enough to keep as clients, industry experts say, as they quickly change preferences and are not shy about cutting vendors. And managers tell Business Insider they are no longer looking for prepackaged data from vendors, but want more raw data streams that they can manipulate.
"I don't want anything that's rolled up," said Michael Recce, chief data scientist at Neuberger Berman, who once worked for Steve Cohen's Point72.
"I want rare data, I want slightly cooked," he added.
This change has forced vendors that once used to sell their research team's reports, like sell-side analysts at bulge-bracket banks, to transition to a more data science-heavy approach - all under the watchful eye of their hedge fund clients.
"The conversations we have with vendors are about the intricacies of data collection, consistency of delivery, and timeliness, because we often aren't getting the most packaged product," said Caron Boneck, the chief data officer at Balyasny.
Meanwhile, sellers of alt data must also cater more to less-sophisticated firms, such as fundamental hedge funds, that have shown an increasing interest in using alternative data but lack the expertise or resources to handle raw data sets.
Industry experts said pricing of alternative data has evolved into a barbell-style model. Firms either charge high fees to a limited number of customers in order to maintain the data's rarity, or drop prices in hopes of the data becoming so widely used it is table stakes.
A company's growth is limited with the former approach, but pushing data out to a wider audience comes with its own risks, Tammer Kamel, CEO at Nasdaq-owned Quandl, told Business Insider.
"I think any proprietor of data aspires to get to that point ... Your price goes down, but your customer base grows faster than the rate your price decreases, so you continue to make more money," Kamel said. "If you start charging for the other end and get stuck in the middle, you might have a big problem."
More money (and attention and competitors), more problems
Picky customers aren't the only thing sellers of alt data need to contend with. Often times the biggest critics might reside within the company itself.
Whether it was an outright acquisition by a traditional player (Nasdaq and Quandl) or private equity firm (Vista Equity Partners and 7Park), money poured into alternative data companies in recent years on the belief Wall Street's obsession with getting unique data sets would never end.
Investors weren't the only ones to recognize the opportunity, as seemingly any data scientist with some resources and the slightest bit of ingenuity launched their own offering.
Data giants also took notice, with FactSet and Bloomberg eventually rolling out their own marketplaces in 2018 and 2019, respectively, where alternative data could be bought.
And that's not counting firms like Goldman Sachs or London-based marketing and advertising consultant Ascential that are trying to go at it alone by finding unique data sets they already own but have yet to be used.
The resulting environment is one that is highly competitive - to the point of being overcrowded. Buyers of alternative data tell Business Insider they've forgone answering their phone or replying to email due to the deluge of pitches.
All of that comes as hedge funds have struggled to beat a surging stock market, leading to tough conversations with investors who question why they should pay high fees for a strategy that trails nearly-free index funds.
And when one considers how difficult it can be to find a useful data set - experts estimate the share of alternative data sets the average hedge fund actually subscribes to after testing could be as low as 10% -it's not a surprise why the market has been so tough for sellers.
"There is a huge cost into testing it for the firm. Couple that with a low hit rate. Couple that with it's the fifth person within the last two weeks that sells you on the same type of data sets or similar data sets, naturally it becomes a harder and harder game to play," Chen said.
Still, some companies refuse to bow to any fears of potential oversaturation.
Data veteran Dan Entrup, who is the CEO of startup Datavore, said the industry struggles with pricing because too many firms view their data as the be-all and end-all, restricting the number of potential buyers able to afford their product.
"There's a lot of firms out there that try to say everyone needs [their product], and only [their product]," he said.
Providers need to do a better job of pitching what "question can I answer with this data that I wasn't able to before," Entrup said.
Taking such an approach could require coordination between data providers with different, but possibly complementary, datasets that could be mixed to create a whole new product.
"It's really quite open at the moment at what you could do combining these datasets," said Naz Quadri, head of enterprise data science at Bloomberg.
The (10) million-dollar problem, and a possible savior
But not everyone sees the space as being in dire straits.
Lauren Stevens, the director of Open:FactSet data strategy at FactSet, has a more optimistic view. In addition to collecting and selling a bit of alternative data itself, FactSet partners with sellers, offering its wide-ranging distribution model in exchange for a cut of any sales.
Stevens told Business Insider that while there might be some overcrowding in the market, she still sees opportunity as a broader set of customers get comfortable with using the data.
"As of now, we definitely see it being the early-majority stage. There isn't really a single client on the buy side where we are not having some discussion about both alternative data and technology," Stevens said. "Not every single partner or data category has had the same adoption rate, but the interest is definitely there."
Stevens isn't alone in seeing a bright spot. While nearly everyone interviewed acknowledged consolidation in the space would continue, most still believe there is value in the use of unique data sets.
One potential customer segment, in particular, could prove to be space's saving grace. Big corporate clients are viewed by many as the holy grail due to the sheer size of addressable market.
Marta Lopata, chief growth officer at alt-data seller Thinknum, told Business Insider that 2020 could be the year sellers make the use case for large companies to incorporate alt-data in their analysis.
"I don't think the full validation will happen in 2020, but I think there will be some significant milestones and clarifications about what's possible and what's coming next," said Lopata about the opportunity of selling alt data to corporates.
This could be the shift that will finally push alternative-data companies over the $10 million revenue hurdle that many get stuck on. Balyasny's Boneck said it's hard for firms to break into the next tier of growth with their current client base.
But getting large companies to start ingesting complex data sets would be no easy task. Financial firms have a long history of figuring out ways to use data to help them generate higher returns. But the same cannot be said for every Fortune 500 company, many of which likely have a fraction of the number of data scientists on staff.
Even if an alt-data seller were to make inroads with corporates, the payoff isn't as high, according to Atit Amin, an associate at Pivot Investment Partners. The price point for a hedge fund or asset manager will always be higher than that of a corporate, which will have less-intense use cases for the data.
"Uncertain as to whether 2020 is when it materializes, largely because it is a much harder sell," said Amin of selling to large companies. "With corporates, it's a lot hard to navigate all the different layers and it's also harder to get sponsorship within corporates to use this data."
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