Leading With Impact
The finance industry is a bit of a paradox. On one side, you have high-frequency trading, where machines talk to machines and trading happens nearly instantaneously. On the other side, you have relationship-driven work: mergers and acquisitions, IPOs, and debt issuance.
Consider debt. Bankers build relationships with CFOs and executives over time. When a company like Apple, Google, or 3M wants to borrow money from the capital markets (a process known as new issuance), they tap those bankers, who work the phones, email, and chat messages to organize investors and get the deal done.
At least that’s how it’s been done for decades. But a company called DirectBooks is changing that, replacing the flurry of chats, calls, and emails with a technology platform that streamlines communication between banks and institutional investors.
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Managing a coalition of banks and institutional investors, all of which have different needs, wants, and levels of technological sophistication, is a well-met challenge for the DirectBooks leadership team, who have collective decades of experience in fintech investing.
I spoke recently with DirectBooks CEO Rich Kerschner and chief operating officer Yvonne Wang about the company’s approach to innovation.
MIT Sloan Management Review: The DirectBooks platform launched in 2020. Can you talk a little bit about how things got started?
Rich Kerschner: A group of nine banks got together to build a technology platform that would centralize the process of how underwriters communicate with institutional investors. I came onboard in 2019 to form that centralized company, which launched as DirectBooks.
A common reaction at the time was, “Why now?” This is a very common refrain with innovation — the idea that “this is fantastic, but why didn’t you do it earlier?” There are plenty of reasons why it didn’t get done earlier; some of them have to do with market forces being aligned to drive change. But there also were many technological innovations coming to bear that served as enablers that we didn’t have before, such as cloud computing.
With DirectBooks, we’re taking a process that was working well enough but was often fairly manual, given that every bank had its own technology, and we’re streamlining these connections using a common set of structured data.
How is this use of technology different from what was done in the past?
Yvonne Wang: Previously, new debt issuance was largely a voice business — email, chat, unstructured data, bilateral communications. There were no data standards to enable automated workflow.
Kerschner: That created an acute set of pain points for institutional investors and, to some degree, for the banks as well, because an institutional investor has to make a decision on a transaction in a matter of hours on investment grade issuance. That means that noise in the communications flow is problematic. If you can reduce that noise and have a standardized process, the benefits are huge.
Let’s go back for a moment to the idea of how things were being communicated with different individual approaches. What’s the impact there?
Wang: All of this communication previously occurred on disparate platforms. Now those communications and documents are all in structured data, so institutional investors can easily do whatever type of credit analysis they need to do to decide whether to invest. These investors can assess a deal quickly versus having to read through an entire prospectus for a few key pieces of information. Investors are sophisticated and know which pieces they’re interested in.
Now, instead of reading hundreds of pages of text, information always arrives in the same format. Investors can quickly do their research throughout the day and be able to indicate to the banks how interested they are in a deal, which the banks can then collate and pass on to the issuers.
Kerschner: Our platform eliminates a lot of opportunities for mistakes. But our innovation story is not actually the technology — it’s the workflows that had to be agreed upon by all of these players in order to utilize that technology. Developing those took over two years, and in some ways, we’re still refining them.
How do you narrow focus for those refinements?
Wang: In order to design a better product, you have to understand your community. Our success is based on how this community works together and uses the product. It only works if the community uses it, likes it, and agrees to a certain standard.
I talk a lot in my work about strategic disappointment. You can’t please everybody, even inside one organization. You can bring everybody along on the change, but that’s not the same as giving everybody what they want. As a leader, you have to be OK with disappointing people. How does that show up in your work?
Kerschner: When I did fintech advisory board work, a lot of my time was spent teaching management teams how to learn to say no. Because if you say yes too often, you wind up disappointing everybody, and that’s wrong too.
We’d rather let people down by telling them “No, we can’t do that” than let them down by failing to deliver. So we’ve remained disciplined, and we spend a lot of time teaching the team how to prioritize what tasks can be done at the same time and what things are absolutely sequence dependent. That might mean that you’ll have something a year from now instead of three months from now, but when you get it, it will make sense to everybody.
You have 20 or so engineers on your team. How do you support your engineering talent? How do you get them to understand the priorities?
Wang: We make engineering a community activity. Despite being a really small company, we run consortium meetings attended by hundreds of individuals, with bank participants who are very active advocates.
Kerschner: If you want to drive change for a bunch of institutions with 100-year-old business models that they’re trying to evolve — and their institution and the activity they engage in is regulated — you have to be careful. It’s not Silicon Valley, where you can move fast and break things. We have to keep going, but we can’t move so slowly that we don’t drive any progress. We’re constantly recalibrating. Some of that just comes from experience, but the reality is, this has never been done before.
One of the benefits of this not being my, or Yvonne’s, first time leading a team is that we understand that nobody’s perfect. We’re going to make mistakes, but we will keep going.
How do you manage a conversation with so many participants?
Wang: You have a lot of people telling you what to do, and you have to embrace it. The meetings require discipline, especially for managing feedback. We have it down to a science. Constituents often disagree, even within their large institutions. We actually run consortium meetings across all those groups to ensure everyone involved is aligned and laser-focused on whichever problem we’re trying to solve.
Kerschner: Consortia can be an amazing accelerant to progress because the stakeholders and users are already part of the ownership and governance structure. Nine banks founded us, but we have more than 20 on the platform, each with its own level of technological sophistication, some with more advanced systems than others. We have all these cooks in the kitchen, so we don’t wait for everybody to agree on everything. We explain what we’re doing and why we’re doing it, we take feedback, but we don’t let it slow us down. It’s a tricky thing, but if you get it right, then everybody’s moving forward with you.
It’s fascinating, because the amount of communication happening back and forth with stakeholders almost feels like a parallel process to what you’re doing in the new-issuance market.
Wang: We started this conversation talking about how it’s a relationship business that’s changed by technology, but we run tech like a relationship business. This is done with discussion and negotiation. We communicate very early on with stakeholders. I am also a firm believer in groups of three. If you can get any three banks or any three investors in agreement, then you gain momentum for broader adoption. We get commitments, and once we get those commitments, we don’t waver from that.
Kerschner: Because of our success and the trust we’ve built, we’re in a unique position. Banks are now coming to us with problems they see in other areas of their business that they would like us to consider solving. Our highest-level goal is getting institutions to tackle a collective action problem. You need a trusted, central party to do that. We have the respect of the community, and that’s a great place for us to be.