Chicago Venture Capital Firms Are Funding Fintech

Sarah Rudolph

Sarah Rudolph

Managing Editor & Head of Editorial Operations

Chicago may not be doing as well as some other cities in certain areas, but it is leading the charge in technological innovation in the financial world and in the crypto world. Several Chicago-based venture capital companies took part in a panel on financial innovation moderated by Chuck Mackie, consultant at Maven Wave Partners and contributing editor to John Lothian News, at The Trading Show Chicago on Thursday.

DRW works with companies on development in the later stages. Its Digital Asset Holdings venture, headed by Blythe Masters, is building a database to speed up trading, clearing and settlement using blockchain technology. But the company’s projects are diverse, including work on digitizing legacy portfolios and streamlining swaps dealing with Asian counterparties, said DRW Venture Capital director Kimberly Trautmann.

Peter Johnson’s company, Jump Capital, is getting into the alternative data space, which includes things like credit card data, location data, etc. in order to help people make better investment decisions. Jump Trading is one of the largest cryptocurrency trading firms, and Jump Capital, which is independent from the trading firm, invests in venture capital.

Being a venture capitalist in the crypto space is tricky, however. Trautmann said there are “a ton of terrible projects out there” and that most data in the crypto space is terrible.

There are, of course, worthwhile companies whose crypto projects match up with their core competencies. However, “Some companies are trying to fit a square peg in a round hole just to get the money” that is associated with crypto funding these days, she said.

Johnson said Jump also has a very high bar for investing in token ICOs. It turns out that contrary to many people’s expectations, there is not a lot of liquidity in token ICOs.

Will ICOs replace venture capital?  Probably not, said Peter Johnson. Venture capital is selling equity in companies, whereas ICOs are selling private keys that control an entry in a private ledger.  Venture Capital also generally comes with expertise and advice that is absent from an ICO.

Crypto has captured the imaginations of many in a relatively short period of time; however, in a recent survey, 35 percent of companies in the Fortune 500 had absolutely nothing to do with blockchain or cryptocurrency, Mackie said.

“We are still in the early stages, especially relating to large institutions,” Trautmann said.

Johnson said all new technology goes through three stages: First, skepticism and derision; second, the realization of the technology’s potential and a big wave of capital investment – which can sometimes lead to a bubble; and third, changing the world. For that to happen with crypto, we need regulatory clarity, the right infrastructure, and real deployment of the technology for individuals and institutions (not just speculation).

Crypto technology has far greater possibilities than just for banks, said venture capital and international business entrepreneur Rumi Morales – including for supply chains, identity and the inter-relationship with other technologies such as IoT.

The panelists all agreed that the most essential ingredient for successful innovation was the team.  However, governments can do a lot – Delaware and Wyoming, for example, stepped in early on in becoming crypto-friendly states. But the complexity of crypto and other fintech makes it difficult for regulators and policymakers to understand, which is why it’s important for financial companies and individuals to be vocal at both the state and federal level, Morales said.

Morales also said that the comedian John Oliver’s widely watched segment on cryptocurrencies was “not wrong at all.”

“This is a once in a generation evolution – to be able to transfer assets without a trusted third party,” said Johnson.

And firms like these are smart enough to be involved in it.

 

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