3046: Redefining Risk Management in the Age of AI and Finance

[00:00:04] [SPEAKER_00]: How does a fintech startup transition from a 13 million valuation to revolutionizing the way alternative data is used for the financial world?

[00:00:15] [SPEAKER_00]: Well, today I'm speaking with Sean Adler, CEO of Swan. And Sean brings a wealth of experience from the worlds of fintech and quantitative finance.

[00:00:25] [SPEAKER_00]: And he's going to be joining us today to share his insights on everything from AI and finance to navigating the challenges of inflated valuations

[00:00:34] [SPEAKER_00]: and in the secondary market. And also, what lessons founders and investors can learn from staying competitive in managing risk in this rapidly evolving tech world?

[00:00:44] [SPEAKER_00]: But ain't obscene setting for me.

[00:00:46] [SPEAKER_00]: Are you ready to make 2025 the year that your voice gets heard? Whether you're an entrepreneur, business leader or just someone with a story to tell,

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[00:02:47] [SPEAKER_00]: So a massive warm welcome to the show, Sean. Can you tell everyone listening a little about who you are and what you do?

[00:02:55] [SPEAKER_01]: Hey, so I'm Sean Adler. I'm the chairman and CEO of Swan, which is formerly GCI.

[00:02:59] [SPEAKER_01]: Swan is a alternative financial data engineering platform that empowers boutiques and small investment houses with alternative financial data engineering.

[00:03:12] [SPEAKER_01]: We've been featured in Forbes, MarketWatch, Yahoo Finance, and a number of other outlets across the globe.

[00:03:19] [SPEAKER_01]: And while some of the results have been compared to leading quant funds, what I value the most is the journey and being committed to the integrity of the company in spite of the temptation of a $13 million exit.

[00:03:32] [SPEAKER_01]: In my spare time, I'm an avid martial artist focusing primarily on Xingyi Quan and Ba Gua Zhang, which are striking and throwing arts respectively.

[00:03:41] [SPEAKER_01]: And I mention this because the temperament of a lot of people in startups, whether it's investment banking or derivatives trading or managing companies and entrepreneur can be reflected in the martial arts they practice.

[00:03:54] [SPEAKER_01]: And so the entrepreneurs tend to be more esoteric martial arts, whereas the investment bankers tend to do things like Brazilian jiu-jitsu.

[00:04:02] [SPEAKER_00]: Awesome. When I was doing a little research on you, am I right in saying you're a big fan of Guy Ritchie movies and Jimmy Carr? Quite a mix there. Is that right?

[00:04:10] [SPEAKER_00]: It's hard not to love Guy Ritchie movies.

[00:04:12] [SPEAKER_00]: Yeah, yeah. Have you seen the latest one on, I think it's Amazon Prime from World War II? Have you watched that one yet?

[00:04:20] [SPEAKER_01]: I have not. I've watched everything from The Gentleman to earlier films in 2003 like Snatch.

[00:04:28] [SPEAKER_00]: Awesome. Well, check that one out. It's something we maybe check out over the weekend.

[00:04:32] [SPEAKER_00]: But today we're here to talk about you and your company.

[00:04:35] [SPEAKER_00]: And Swan has developed this alternative data platform that has been described as rescaled quant funds.

[00:04:42] [SPEAKER_00]: So for anyone listening outside of this space, can you just explain how the platform works and what it is that makes it unique in the financial landscape?

[00:04:52] [SPEAKER_01]: Sure.

[00:04:52] [SPEAKER_01]: Sure. So a lot of the financial technology companies are B2C focused, especially in terms of anything with the public markets.

[00:05:02] [SPEAKER_01]: And so most of the financial institutions actually don't like a lot of the B2C platforms because, well, they may be functional as companies.

[00:05:10] [SPEAKER_01]: They may not have the kind of precision and detail that the institutions need.

[00:05:17] [SPEAKER_01]: And so where we come in with that is that, you know, we do a mixture of quant finance and tech development.

[00:05:25] [SPEAKER_01]: And so we've got an API and we've got a platform and we sort of tailor the algorithms into the interface for the API so people can construct their own algorithms.

[00:05:35] [SPEAKER_01]: And we work with a number of investment houses that are sending things on a mailing list.

[00:05:42] [SPEAKER_01]: And one of the most unique things is sort of, you know, aside from the quant finance, it's utilizing atypical factors like molecular pharmacology and, you know, time zones within some of the financial AI.

[00:05:58] [SPEAKER_00]: And before you came on the podcast today, I was reading one of your articles where you mentioned that unicorn poaching is common in the secondary market.

[00:06:08] [SPEAKER_00]: So for anyone listening that has not seen that article, can you just elaborate on some of the challenges that tech startups face with inflated valuations?

[00:06:16] [SPEAKER_00]: I say inflated valuations before we started recording today.

[00:06:19] [SPEAKER_00]: I was reading OpenAI is going to be valued at 150 billion, which blows my mind.

[00:06:24] [SPEAKER_00]: But you tell me some of the challenges that startups face with those inflated valuations and how founders can maybe better navigate this environment more effectively.

[00:06:35] [SPEAKER_01]: So it's complex.

[00:06:37] [SPEAKER_01]: And so Paul Graham once described startup valuations as, you know, voodoo.

[00:06:42] [SPEAKER_01]: And it's true in a sense because the valuations may be somewhat inflated, but the numbers are also relative.

[00:06:49] [SPEAKER_01]: And so, you know, you can have a company like OpenAI that's valued at 150 billion and it's static on the private markets.

[00:06:58] [SPEAKER_01]: But if it goes public, you know, it may go up and down.

[00:07:01] [SPEAKER_01]: And a lot of this is because of the structure of private equity transactions and the number of protective provisions in a lot of the private investment agreements.

[00:07:11] [SPEAKER_01]: And so, you know, founders can essentially sell a company for something, you know, significantly smaller, like 100 million and actually wind up with nothing if the investment terms don't coincide well with the exit terms from the acquiring company.

[00:07:27] [SPEAKER_01]: And I think that things like that can be a little bit mind blowing to a lot of earlier stage startup founders.

[00:07:34] [SPEAKER_01]: We sort of look at the numbers as absolute instead of relative.

[00:07:40] [SPEAKER_01]: And in terms of navigating that, there are no perfect transactions in private equity.

[00:07:47] [SPEAKER_01]: And the main way to sort of mitigate it would be to sell off a fraction of your equity during any fundraise.

[00:07:53] [SPEAKER_01]: And it could be, you know, doing a fundraise with VCs.

[00:07:56] [SPEAKER_01]: It could be an alternative trading system.

[00:07:58] [SPEAKER_01]: The liquidity on alternative trading systems is a little bit more continuous than selling off a portion during a private raise.

[00:08:08] [SPEAKER_01]: But it ultimately kind of depends on their goals as well as a lot of the terms that are structured into the investments.

[00:08:17] [SPEAKER_00]: Another area I know you're passionate about is the potential pitfalls of relying solely on backtests in quantitative finance.

[00:08:25] [SPEAKER_00]: So I'm curious from your background here and everything that you've seen and experienced, what are some of the key lessons that you've learned about balancing backtests with real world applications?

[00:08:35] [SPEAKER_01]: So it's important to understand, like what AI will and won't understand at this juncture.

[00:08:41] [SPEAKER_01]: And AI is near perfect and can surpass virtually any person for rule-based domains and things that are more finite.

[00:08:52] [SPEAKER_01]: Whereas if you present an AI model with things that are a little bit more complex and iffy, it may actually begin to hallucinate.

[00:09:02] [SPEAKER_01]: Whereas conventional human wisdom can sort of figure it out.

[00:09:07] [SPEAKER_01]: And a number of those things are reflected in the financial market specifically.

[00:09:12] [SPEAKER_01]: So for instance, Bristol Myers Squibb fired their CEO a few months back and the stock price dipped 20% and then it rebounded.

[00:09:22] [SPEAKER_01]: And so a lot of AI models will use natural language processing and they will parse out anything from SEC filings to news reports.

[00:09:32] [SPEAKER_01]: The dilemma is that the AI models wouldn't be capable of predicting some of the internal things that would happen beforehand, like board meetings and all of that.

[00:09:41] [SPEAKER_01]: And so there's a little bit of a dichotomy within the information specifically.

[00:09:47] [SPEAKER_01]: Additionally, like when it comes to certain things such as rate cuts, a lot of the mathematics behind that would say that, you know, currency values would go up or down depending on the rate.

[00:09:58] [SPEAKER_01]: And while that's true, sometimes the opposite happens.

[00:10:01] [SPEAKER_01]: And, you know, an equation would say that this is supposed to happen, whereas like the value is actually the inverse temporarily.

[00:10:07] [SPEAKER_01]: And that can be a bloodbath on leveraged markets like futures.

[00:10:14] [SPEAKER_01]: And I think that one of the most important things I realized is that it's really about stochastic design.

[00:10:22] [SPEAKER_01]: And so I think that managing, you know, beta weights, net liquidation values and sort of understanding how to work with the alpha and beta values within stochastic AI models is probably the best way to go.

[00:10:40] [SPEAKER_01]: And both entrepreneurial management and managing a portfolio are stochastic processes with some degree of discretion.

[00:10:49] [SPEAKER_01]: And it's the stochastic aspects that, you know, allow things to be rebounced when there's a lot of volatility.

[00:10:59] [SPEAKER_00]: And bringing it back to SWAN and the work you're doing there, I was reading, I think the company was valued at 13 million before a product release.

[00:11:07] [SPEAKER_00]: And how do you see the company's trajectory evolving with the current trends that you're seeing around alternative data and fintech innovation?

[00:11:16] [SPEAKER_00]: There's a lot of hype around AI at the moment, but really it's all about data.

[00:11:20] [SPEAKER_00]: That is where the magic is happening.

[00:11:22] [SPEAKER_00]: So how do you see your company evolving with some of the trends that you're seeing at the moment?

[00:11:27] [SPEAKER_01]: So we're working on our next release and are playing with a couple of different ways to structure the data as we work with customers.

[00:11:35] [SPEAKER_01]: And so the potential acquiring company in 2023 was a small boutique investment bank that wanted to essentially have us develop the product and then send it out on their mailing list.

[00:11:47] [SPEAKER_01]: And so we're working with a lot of those companies right now.

[00:11:50] [SPEAKER_01]: I think that in terms of absolute direction, we have the luxury of going a number of routes ranging from, you know, staying as a startup to catalyzing a quant fund.

[00:12:02] [SPEAKER_01]: And ultimately the scalability is going to be based on how that all evolves.

[00:12:07] [SPEAKER_01]: And that's because the way companies would work, you know, whether it's a quant fund or a startup is a little bit different.

[00:12:14] [SPEAKER_01]: And it would sort of change the trajectory and the product design.

[00:12:18] [SPEAKER_01]: And so there have been banks that are willing to, you know, essentially run placements for a larger fund.

[00:12:23] [SPEAKER_01]: The infrastructure behind becoming a neobank would be a little bit much and would potentially slow us down.

[00:12:30] [SPEAKER_01]: And so we're thinking a lot about financial product engineering and sort of importable AI models because structuring the data itself is almost more important than absolute data.

[00:12:50] [SPEAKER_01]: Because it ultimately varies and the type of data has a very profound impact on the algorithm and its execution.

[00:13:00] [SPEAKER_01]: So we are likely to stay a startup.

[00:13:03] [SPEAKER_01]: But I think that if we can, it would be wise to do both.

[00:13:09] [SPEAKER_00]: And one of the other things that stood out to me about you is you seem to be in quite a unique position at the moment with experience in both public and private equity markets.

[00:13:19] [SPEAKER_00]: So for anyone listening, what should late stage seed companies know about using alternative trading systems as an almost bridge between these two worlds?

[00:13:31] [SPEAKER_01]: So the alternative trading systems can offer a variety of mechanisms for liquidity for late siege to series A companies.

[00:13:39] [SPEAKER_01]: And so while there are a number of exchanges that will actually take seed to series A companies public, like the TSX venture in Canada, the LSE AIM in the UK, or the OTC markets in the United States.

[00:13:56] [SPEAKER_01]: A lot of these alternative trading systems are somewhere in between public and private.

[00:14:02] [SPEAKER_01]: And so they will push blocks of equity to dark pools that can essentially be traded as a semi-public equity.

[00:14:12] [SPEAKER_01]: And going public too early is actually somewhat unwise.

[00:14:18] [SPEAKER_01]: And the way that a lot of people can execute these transactions on secondary alternative trading systems is also dependent on which system it's being executed on.

[00:14:31] [SPEAKER_01]: So some of them are, you know, their own companies and they have an exchange that's specific to the company they manage.

[00:14:39] [SPEAKER_01]: Others will push it to a stock exchange.

[00:14:42] [SPEAKER_01]: But a lot of this also depends upon what the board and previous investment agreements sort of allow.

[00:14:53] [SPEAKER_01]: And in terms of that, most people are going to be on, you know, somewhat of a vesting clause if they raised a price round or they may not even have a valuation if they raised a convertible note, which can complicate things because they'd have to get some work done before it can actually be executed as a price trade.

[00:15:13] [SPEAKER_01]: So there's kind of a lot to it.

[00:15:16] [SPEAKER_00]: And one of the other things I love about you is you've been very open about some of the complexities of secondary liquidity for founders.

[00:15:24] [SPEAKER_00]: So how can any startup founders listening maybe better protect themselves from those golden handcuffs scenarios that we hear about while also ensuring that their company's growth and success are protected?

[00:15:36] [SPEAKER_00]: Anything you could advise around that?

[00:15:38] [SPEAKER_01]: Yeah.

[00:15:39] [SPEAKER_01]: So at this stage, I'm happy to sort of share my experience and a couple of logistical things.

[00:15:44] [SPEAKER_01]: But I feel like, you know, advisory is somewhat misplaced within larger companies and that I don't want to lead anybody astray.

[00:15:54] [SPEAKER_01]: So in terms of that, I think that internal alignment with earlier board members can have a profound impact because, you know, experienced board members can be worth their weight in gold if they're aligned with the founding team.

[00:16:11] [SPEAKER_01]: And so by using, you know, a lot of platforms or banks to execute raises or M&A activity, founders can essentially maintain control over the direction of the company.

[00:16:26] [SPEAKER_01]: But they may not get the same kind of growth or, you know, corporate development as they would with an experience board.

[00:16:36] [SPEAKER_01]: And there are no perfect transactions in private equity.

[00:16:41] [SPEAKER_01]: And so even if they kind of do go for, you know, an alternative trading system, you know, there are still golden handcuffs.

[00:16:51] [SPEAKER_01]: And so if you take a company public or you go on an alternative trading system, there's still going to be a six month lockup for, you know, insiders like executives or board members.

[00:17:01] [SPEAKER_01]: And that's why I kind of mentioned the alignment because any kind of transaction you engage with in terms of the company is significantly impacted by the internal alignment of people within it, as well as whatever institution you're interacting with.

[00:17:21] [SPEAKER_01]: And so the only real way to protect the founders to protect themselves from, you know, golden handcuffs is to raise in straight common stock.

[00:17:32] [SPEAKER_01]: And that's very much a contractual thing that's limited to a number of crowdfunding platforms.

[00:17:37] [SPEAKER_01]: There's virtually no VC firm or, you know, bank that's going to want to do a transaction in common stock.

[00:17:46] [SPEAKER_01]: It's very rare.

[00:17:49] [SPEAKER_01]: So that's where the alignment and the logistics come in.

[00:17:53] [SPEAKER_00]: And when I was researching you, you've been incredibly busy.

[00:17:56] [SPEAKER_00]: I mean, you've got an upcoming executive MBA at Cambridge and your background in both fintech and equity markets combined.

[00:18:03] [SPEAKER_00]: I'm curious if I was to ask you to look into my virtual crystal ball.

[00:18:07] [SPEAKER_00]: How do you foresee the next generation of financial technologies reshaping the investment landscape?

[00:18:13] [SPEAKER_00]: I know it's almost impossible to predict the future and the speed of technological change at the moment.

[00:18:18] [SPEAKER_00]: But how do you see all this evolving and panning out?

[00:18:22] [SPEAKER_01]: So I think that we're going to be looking at a different kind of financial market.

[00:18:28] [SPEAKER_01]: And a lot of that has to do with the development of asset-backed cryptocurrency and a lot of the alternative assets like art investment.

[00:18:35] [SPEAKER_01]: And so eventually I think that there will be potential to do sort of more obscure things with investments like, you know, hedging shares of Van Gogh against Tesla stock or Ethereum.

[00:18:50] [SPEAKER_01]: And a lot of that is because the tokenized stock can be linked back to cryptocurrency exchanges and can essentially be swapped for it.

[00:18:58] [SPEAKER_01]: And a lot of these cryptocurrencies are now available through major brokerages.

[00:19:03] [SPEAKER_01]: And while the changes are gradual, they're happening at a somewhat rapid pace within the private sector.

[00:19:10] [SPEAKER_01]: And I think eventually that's going to be reflected on a larger scale as the regulations continue to evolve.

[00:19:18] [SPEAKER_01]: And this doesn't mean that anybody should be carving out their ears to the face of a public company, though.

[00:19:25] [SPEAKER_00]: And one of the things I always try and do with my guests is see if we can manifest for them.

[00:19:31] [SPEAKER_00]: You've spent a lot of time.

[00:19:32] [SPEAKER_00]: I'm sitting down preparing for today's interview and having a chat with me.

[00:19:36] [SPEAKER_00]: And there are, what, 4,000 to 5,000 miles between us.

[00:19:40] [SPEAKER_00]: But some of the biggest names in business, VC, funding and tech, have maybe even been guests or maybe even listened to this podcast.

[00:19:47] [SPEAKER_00]: So if there's one person that you could have a private breakfast or lunch with because he or she might just get to hear this, who would it be and why?

[00:19:55] [SPEAKER_01]: Nikita Shamganov.

[00:19:57] [SPEAKER_01]: And so she was one of the reasons I was very interested in appearing on the podcast.

[00:20:01] [SPEAKER_01]: And I actually messaged him and told him I was excited to be here.

[00:20:05] [SPEAKER_01]: And I think what he's doing with NeonDB is brilliant.

[00:20:08] [SPEAKER_01]: And the way he manages logistics, like scaling workforces across the U.S. and European time zones, in addition to hosting podcasts with, you know, development shops in Portugal that have Russian interviewers and operations in Japan, is really brilliant and very nuanced in a way that most people wouldn't think of.

[00:20:31] [SPEAKER_01]: So I also think it's important to be realistic about this.

[00:20:35] [SPEAKER_01]: And in terms of the probability of actually meeting somebody, I think that this would be more likely than, you know, somebody like, let's say, Elon Musk.

[00:20:45] [SPEAKER_00]: What a great choice and a phenomenal guy as well.

[00:20:49] [SPEAKER_00]: We could see what we can make happen there.

[00:20:52] [SPEAKER_00]: But I will throw that out into the universe and see if there's a few things, strings I can pull behind the scenes as well.

[00:20:59] [SPEAKER_00]: And for anyone listening just wanting to find out more information about you, maybe they want to connect with you or learn more about SWAN.

[00:21:05] [SPEAKER_00]: Where would you like to point everyone listening?

[00:21:08] [SPEAKER_01]: All right.

[00:21:08] [SPEAKER_01]: So feel free to follow us on LinkedIn or X and visit the app, which is currently gzi.finance, but we'll be changing the domain name relatively soon.

[00:21:19] [SPEAKER_00]: Awesome.

[00:21:19] [SPEAKER_00]: Well, I wish you the best of luck with that.

[00:21:22] [SPEAKER_00]: I'd love to stay in touch and see how things continue to evolve.

[00:21:25] [SPEAKER_00]: We're already connected on LinkedIn.

[00:21:27] [SPEAKER_00]: So feel free to shout out any time in the near future if you would like to shout about anything.

[00:21:32] [SPEAKER_00]: And tell me if you do get that breakfast or lunch thrown in as well.

[00:21:37] [SPEAKER_00]: But more than anything, just thank you for sharing your insights today.

[00:21:39] [SPEAKER_00]: Really appreciate your time.

[00:21:41] [SPEAKER_00]: Absolutely.

[00:21:41] [SPEAKER_00]: Thanks for having me.

[00:22:42] [SPEAKER_00]: And on that point, you know, I'm going to walk off into the sunset.

[00:22:45] [SPEAKER_00]: I will return tomorrow with another guest.

[00:22:47] [SPEAKER_00]: But thanks for listening today.

[00:22:48] [SPEAKER_00]: And I will speak with you all again tomorrow.

[00:22:51] [SPEAKER_00]: Bye for now.