Monetizing Your Alternative Data With Eagle Alpha
While ICOs have come and gone leaving a bunch of broke suckers in their wake, artificial intelligence has gained so much steam now that it’s practically a commodity. Anyone can download a free artificial intelligence software framework, hire a few engineers, and begin coding away to solve some problem. Artificial intelligence itself is not a competitive advantage, but data is. If you have exclusive access to a unique data set, you can make some money by mining it for insights or you can sell it to financial firms who will then use it to try and generate alpha.
The term “alternative data” refers to non-traditional data sets that can be used in the investment process by anyone from hedge fund managers to portfolio managers. One firm that helps companies monetize their alternative data is Eagle Alpha.
Over 1,000 Alternative Data Sets
Founded in 2012, Irish startup Eagle Alpha has taken in $8.7 million in funding so far with their latest funding round of $2.4 million closing just last week which will be put towards the expansion of their data science, engineering, and sales teams. In a press release announcing the round, the founder of Eagle Alpha, Emmett Kilduff, spoke about how they plan to expand their number of data partners and enter “new verticals such as private equity and corporate entities.” With over 1,000 datasets, Eagle Alpha has the largest alternative data marketplace globally which they have divided into 24 different categories as seen below (we overlaid the number of data sets they have for each category in red text):
Eagle Alpha saw 2017 as a turning point for the alternative data space because “the broader asset management industry began integrating it into the investment process.” Since the company began, over 1,000 companies have used their platform to monetize their alternative data sets. Additionally, Eagle Alpha offers proprietary alternative datasets such as Ticker Signals which tracks how much attention investors are paying towards to the top 1,000 U.S. companies by analyzing trends of over 3,500 online search terms on a weekly basis. It’s early days for Eagle Alpha which predicts that “5,000 datasets worldwide by 2020 is conservative.” It’s something Goldman Sachs has coined “The Data Revolution.”
The Data Revolution
In January of 2017, few people may have noticed that the Johnson & Johnson corporate jet had been parked in Switzerland for five straight days, just a short drive from the headquarters of Actelion. Those who did take notice were several hedge fund managers who were tracking the plane’s movements on the Internet and placed a $766 million bet that something was up. Shortly afterwards, Johnson & Johnson announced the $30 billion acquisition of Actelion and their shares soared. This is just one interesting example among many we’ve looked at before where companies across all industries are unlocking value in their data. If you’re running a business at scale, then you’re accumulating data as a byproduct of business as usual – something we like to call data exhaust – and that data can be monetized:
Alternative data can be big data or small data, structured or unstructured. Eventually the label “alternative” will fall away and we’ll just refer to it as data – though if it follows the typical path of disruptive technologies, consulting firms will rename it with some snazzy term about once every four years. As you can see in the above chart, companies across all industries are increasingly turning to data monetization as an alternative revenue stream. If you’re a firm that has data lying around you’d like to monetize, Eagle Alpha has put together a 65-page report on how you might go about doing that which includes interviews with 18 successful alternative data vendors and 15 customers who are consuming the data. We made one of our underpaid MBAs sit down and pore through every word of that document so you don’t have to. Let’s start with talking about who is interested in buying your data.
Who Buys Alternative Data?
The first thing you need to consider is how you plan to distribute your data. In order to maximize your Total Addressable Market (TAM), you’ll want to consider distributing across the following channels:
- Raw data – For example, a comma-delimited text file that can be accessed via an FTP site
- Aggregated/Tickerized – Data that is tied to assets using common identifiers and aggregated at various levels
- Dashboards – Allows the user to browse the data and configure views that they find useful
- Reports – Customized reports that can be disseminated to users
Data quality is a major competitive edge, and merely implementing your data across all these channels will allow you to incidentally test your data quality. Eagle Alpha provides the platform so you don’t have to build all of this from scratch. Over 300 “buy-side” users then access that platform and consume your data. This is a good time to talk about “sell-side” and “buy-side” which can be defined as follows (courtesy of CFI.)
- The Sell-Side refers to firms that issue, sell, or trade securities, and includes investment banks, advisory firms, and corporations.
- The Buy-Side refers to firms that purchase securities, and includes investment managers, pension funds, and hedge funds.
It is not recommended that you sell your data to the sell-side as it dilutes the alpha opportunity. Says one of their clients “if the data is sold to the sell-side, we will see the conclusions through them so are very unlikely to pay for the data.” When it comes to exclusivity, forget it. Buy-side clients are not interested in exclusive access to data because of compliance concerns (material non-public information), in fact, if a vendor has several clients already, this is seen as a positive. Since Eagle Alpha has 300 buy-side customers on their platform, that part is sorted. Let’s move on to talk about how much money you can make selling your alternative data and how you should structure your pricing.
Monetizing Your Alternative Data
Vendors need to consider what return on data a buy-side firm can make by integrating their data set into an investment process. As one hedge fund put it, “At an (optimistic) 10% performance fee, a $100k dataset has got to improve overall performance by $1M a year – every year – just to break even.” Since data sets form a small part of a much bigger mosaic when it comes to driving investment decisions, value becomes difficult to determine. For example, you might look at “frequency of access” as one metric that can determine value for an asset management firm. The buy-side now has more data options than they know what to do with, and you need to ask yourself if buy-side firms are able to get similar data sets elsewhere.
Another pricing consideration is how you slice and dice the product – do you sell the entire set of data as a single subscription, or offer granular access from subsets all the way down to tickers? Hedge funds will typically look for “all you can eat” access via an Application Programming Interface (API). For each client type, the requirements will differ. Said one fund manager, “willingness to sell a proportion of the data for a relatively small fee is important and can lead to larger purchases later.” While equity funds are the most frequent buyers of alternative data, Eagle Alpha has seen a steady increase in the number of inquiries from both macro and credit funds which means the ability to “roll up data sets across any particular industry or geography” becomes important.
The majority of licenses are sold as annual contracts on a per ‘team’ basis. However, some buy-side clients “consider enterprise pricing as more valuable and won’t engage with vendors offering usage-based structures.” And “don’t even consider asking to link the fee to AUM/investment performance,” said one quantitative fund manager who prefers paying a single yearly subscription fee at an enterprise level.
For new data sets that are coming to market, it is critical to obtain feedback during the pilot stage to best understand how to market and price the data. It’s difficult to stand out now as so many alternative data offerings are available. Successful vendors understand that buy-side firms have different needs, so they adjust their products depending on the profile of a client. Vendors should clearly show where the data is coming from and demonstrate that there are no privacy concerns. The process of testing a new data set before purchasing it can take six to nine months, so vendors need to make sure they help explain their data sets while being responsive to any inquiries throughout the process.
Working with Eagle Alpha
Now that you have some idea of who your customer is and how you might go about pricing your alternative data sets, it’s time to actually start selling some data. Over 1,000 companies have used the Eagle Alpha platform to sell their data, and there are numerous forms that can take shape. Here are the six ways that Eagle Alpha says they can help you monetize your data:
- Freemium: we offer free marketing to our global client base for vendors who create and manage their profile on our platform.
- Sales Referral: we consistently provide fully qualified sales leads to over 100 Eagle Alpha partners.
- Premium Add-Ons: we have created solutions to help vendors overcome marketing, legal & compliance and sales obstacles.
- Sales Referrals (exclusive): where Eagle Alpha is the exclusive distributor to the buy-side we provide all the premium add-ons for free to boost sales.
- Dashboards: we build tailored dashboards for partner data sets broadening the addressable market of end-users.
- Joint Ventures: Eagle Alpha partners with the owners of unique data to build new data sets for the buy-side.
The next question might be what fees Eagle Alpha charges, and that’s where you’ll need to reach out to them and start having that conversation.
As we’ve discussed before, firms like Bloomberg and Nasdaq have entered the world of alternative data as distributors and are formidable competitors for Eagle Alpha. Given their recent raise, it seems like Eagle Alpha is able to hold their own and one wonders if they wouldn’t make a great bolt-on acquisition for other firms out there looking to play catch-up in the alternative data space. For financial services firms that already sell to the buy-side, it’s easy enough to add additional products into their Customer Relationship Management (CRM) system and cross-sell all these data sets into new verticals.
At the moment, equity investors are the biggest users of alternative data, but that’s changing quickly. With their latest funding round, Eagle Alpha plans to expand the number of customers that purchase their alternative data to “thousands of firms in the coming years.” If you have alternative data that you’re thinking about monetizing, Eagle Alpha provides the platform, the customers, and the expertise you need to get up and running. In a future article, we’ll take a closer look at how the buy-side uses Eagle Alpha’s alternative data to generate alpha.