2016年2月26日金曜日

2016-02-26- Leigh Drogen, Founder and CEO of Estimize, a New York firm that crowdsources stock data estimates



Leigh Drogen Interview

Before founding Estimize, Leigh ran Surfview Capital, a New York-based quantitative investment 
management firm. His hobbies include ice hockey and surfing. 



1. How did you conceive the idea for Estimize? Who were the first three people you told and why? How did they react?

The background begins with a personal story. I left school to work for a hedge fund here in New York, where we ran an interesting model that looked at earnings acceleration and analyst estimate revisions. We were basically searching for the confluence between those factors related to the inefficiency of the sell-side data set and all of the skew and bias wrapped up in it and momentum. We were looking for stocks that were growing quickly, companies that were flourishing, exceeding their estimates quarter after quarter. We did a good job of removing inefficiency from of that data set.
That hedge fund is where I learned why the data set was so inefficient and about all of the incentive-structure issues on the sell side. The idea for Estimize was born there in 2007 basically a year after I had begun my career. I am a member of the Millenial Generation. We believe strongly in web philosophies including openness, sharing and pseudonymity; in avoiding pay walls and crowdsourcing. These beliefs had not been brought to finance at large, definitely not to the data set that we are now developing.

Fast forwarding a couple of years, I left the hedge-fund world to work for a financial start up named Stock Twits. It was there where we built this community of people who were willing to contribute their ideas to an  open community without any direct incentive structure. This development set the stage for Estimize. Walking into a meeting one day at a large, financial-data company with a colleague is where idea struck me. Walking out of that meeting, I turned to my colleague and said, “We have to build this! This is the perfect thing for us to build.” Agreeing, he responded, “Yes, but our founder will not go for the idea.” I spent the next couple months validating the idea by talking to people in the industry. I then went to our founder at Stock Twits and told him I should build this data set. He replied, “Yes, I think it’s a really great idea, but it’s not for us.” I ended up leaving the company in 2011 to build Estimize. That’s the genesis of how I started the company.




2.   What is Estimize's business model? What are your products? Who are your customers / your revenue source?

We are economic terrorists. Thomson Reuters, FactSet, Bloomberg, and Capital IQ all own a sell-side data set, which they guard behind a pay wall. They charge at least $1500 a month just to let you browse it. If you want to actually touch the data, you have to pay them even more. We said, “Screw all that! We’re going to make the data completely free at the front-end of the site. We are going to amass this orthogonal data set that no one else has, and we are going to own it! We are going to own all of the eyeballs.”

Then, we are going to sell the data through the back end by launching an API (Application Programming Interface) in a few weeks and using an Excel plug in. We will sell the API to large, quantitative hedge funds that do statistical arbitrage trading and other types of quantitative trading, and the Excel plug in is used by discretionary traders, analysts, PMs (Project Managers), IR (Investor Relations) professionals and anyone else who wants to incorporate our data in their Excel models. Then, we intend to build some premium, front-end analytic features available via subscription. These features will not be openly available on the front end of the website. We are also building connectivity between the buy and sell sides in regards to research. I believe that will develop into an interesting business as well.  
Our customers, the people who pay us, are large, quantitative hedge funds, asset-management firms and hedge funds on the discretionary side, investor relations representatives, and banks.


Follow-Up Question: What are you current revenues and how do you intend to grow over the next couple years?

We do not release our revenues for a good reason:  we have a few serious competitors in our space. Our current goal is focused on growing the data asset as large as possible. We aim to become the quote consensus, the distribution of estimates that everyone must use because we have a set of more accurate, more representative estimates. Eventually, our focus will shift to generating as much revenue as we possibly can, but currently the data set is the most important focus. About a year from now, we plan to really focus on revenue.  




3.   What are the top three countries contributing to your open-source platform? Do you plan to add languages other than English to broaden the field of potential contributors?

The top three countries are the U.S., obviously, followed by Canada, then Japan. Because the third largest group of contributors is in Japan, and they are working in English, we actually plan to begin building a Japanese equity-estimate data set before we even build one for Europe or Canada. After Japan, we will do China, South Korea, and Taiwan. Our next four equity data sets will be for those countries. However, before building these data sets we are going to expand our macroeconomic estimate data set from just the U.S. to international, which will include Japan.


Follow-Up Question: How do you attract analysts and others who contribute to your open-data platform? How do you manage them?

Concept marketing is our primary method of user acquisition. We have a content director who writes a lot of great research with our data, which we publish to our blog. This blog is then republished to Yahoo! Finance, Business Insider, Forbes and many other sites. These blogs quite effectively attract people who want to use the data to our site. Many eventually end up registering to contribute to the content.

We have a completely open philosophy allowing anyone and everyone to contribute to the data set. We want more and more people contributing, because we know that when we have more estimates, the accuracy of the consensus increases. We have to be careful, of course, to protect the data from those might want to damage it and safeguard it from less sophisticated people.

We employ two protection algorithms. The first is a reliability algorithm. It tests whether the information you have entered is reliable or if you are trying to game the system or otherwise contribute data that does not belong in the system. If the algorithm detects a problem, the data are not uploaded to the system. Furthermore, by the end of the day, we manually review all of these suspect estimates. We are launching our predictive analytics platform, the second algorithm, next week. This algorithm predicts which estimates are going to be more accurate for a particular earnings release, then weights them in the consensus based on their confidence level. We will be posting confidence scores ranging from 0 to 100 next to every estimate on the site.




4.   Did you always know that you someday wanted to found your own company, or did you realize that was your destiny after beginning work in a traditional company?

I’m an accidental entrepreneur. I did not initially plan to start a company. I was involved in a variety of entrepreneurial endeavors growing up like selling different products and giving tennis lessons. I never really had a regular job working for someone else. But I assumed that I was going to go work for a hedge fund, working my way up the ladder. I did that at first. Then, I was given the opportunity to work for an amazing finance technology start up. The idea to leave and start my own venture simply presented itself there; it was not an end I was striving to achieve.


Follow-Up Question:  Taking one additional step back, let me ask how you initially decided to join a hedge fund with the intention of working your way up?

I am an autodidactic, which means I do not learn well in traditional school settings. Rather, I learn best basically by reading books and following people around. I did not study finance in school. I actually studied economics and war theory. I thought I was headed for the CIA, the State Department or the Rand Corporation. I was planning on doing a Ph.D., working myself through the ranks of one of these organizations. However, I realized that I did not have the patience to endure another five years of school by the time I was half way through my undergraduate program. I was reading a lot of behavioral finance literature, especially books on different types of investment strategies. Viewing markets as a puzzle, I was interested in all of the different moving pieces, the behavior of the different groups of people. I was especially interested in how that behavior was affected by different market movements.

About this time, my father bumped into David Geller walking down the street in New York City one day. I had grown up playing tennis with him as a kid, but never knew his profession. It turned out that David, who was about 42 at the time, had been running a successful hedge fund. When they began talking about me, David remarked, “If he wants to become a trader, have him come up an interview with me.” Shortly afterward, I returned from San Diego to interview with him. One interesting aspect of the interview was that he did not any finance or math questions. The interview was quite strange, like talking to a psychologist. David asked me lots of psychological questions. When I arrived, he asked me to put together a packing box in his office, indicating that he had to take care of work in another corner of the room after which they would begin the interview. I tried to put the box together, but I could not. I could not seem to assemble it no matter what I had tried. After about a minute and a half, I went over to David to tell him that I was unable to assemble the box. Replying,”Don’t worry about it,” he began the interview.

David hired me as a quantitative trader, a job I loved. About a year later, when we were discussing some behavioral finance issues at lunch, he asked, “Do you remember the box?””Yes. Was there a reason you asked me to put it together?” I replied. David explained, “The box is designed so that it cannot be assembled. The activity is intended to assess how you react when you cannot solve a problem. I wanted to know if you become frustrated and smash the box or neglect to tell me about it.” David then explained that different types of psychological profiles are suited to different types of trading. What makes a person good at the type of trading his company did was not their intelligence or financial knowledge but their profile. Elaborating, David said, “If you had not said anything but simply sat their resolutely, you would probably be a good value trader. But you would not be a good quant trader. “My behavior, namely notifying him of the problem, was why he hired me.




5.   Japan’s economy seems to have become stuck since last April, when the consumption tax was increased. How would you evaluate the Japanese stock market currently compared with the US market? What Japanese companies interest you? Why?

I am not familiar with many individual Japanese companies other than Softbank and a few others. Regarding the market as a whole, I think what Abe has been able to do is interesting. He seems to have stimulated the economy and the stock market to begin growing again. However, because Japan has some serious demographic issues, I am not sure if I would be investing heavily there. I think that the economy is incredibly dynamic and the innovation amazing, but the demographics are going to hold the economy back. Consumer stocks do not do well in Japan as consumer businesses are not a growth sector.




6. What is the most challenging aspect of being an entrepreneur?

When you run a hedge fund or manage a money book at a fund, you follow a very specific strategy and process. Every single day, you execute this same strategy. Over time, you develop a rhythm, and that rhythm is what makes you effective. It’s what makes you successful. When you found a company, when you wake up every day, you have to figure it out all over again. Every day, you have to wake up and make it happen, push the work forward. But you do not always know how to do so. You have to learn so many different skills and ideas along the way, not only about how to build a business, but also about product-market fit. You also need to learn what your customers want and how to build a better platform. You have to attract people, hire them into the team, and attract investors, too. There are so many different moving parts! Figuring out how to configure them all is challenging, but also fun.




7.  What advice would you give to young business professionals, college and even high-school students interested in starting a business?

Learn how to code. My advice in a nutshell is simply that. If you can code, you can build anything. And if you can build it, you can test it. If you continue to test new things, you will eventually hit on something that works. I would suggest starting with Python or Objective C or the new, global Apple language Swift. Learn Python and Swift. If you can code mobile, specifically, iOS applications, an amazingly powerful distribution platform that allows you to gather people easily, you are set. Everything is going mobile.




8.  I understand that you are a passionate hockey player? What are your other hobbies and interests?

I surf a lot. Whenever I can take a vacation, I go chase waves. Surfing is an amazing experience that calms me down. My other passion is international relations. I still read a lot of foreign policy and research out of several think tanks. I am fascinated by the large gap between how research is done and how policy is actually created. I also read a lot of behavioral finance for pleasure. The field is so interesting. We have so much to learn about it. It’s a really fun hobby.


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