A VC

Seth Goldstein has finally made public (on his blog of course) his partnership with Lew Ranieri.  The two of them are building a company together called ROOT Markets.

For those of you who don't know who Lew is, he's the father of the collateralized mortgage market which revolutionized the housing finance market in the 1980s.

Seth and Lew have designs on doing the same thing for Internet advertising and lead generation. They see an online advertising market which is large but still relatively inefficient and want to use the same formulas used on wall street to open up the mortgage market.

Seth calls it "Wall Street Meets Madison Avenue" in his long and thoughtful post on his partnership with Lew and the ideas behind ROOT Markets.

For those of you who aren't inclined to click on the link, I'll give you my favorite part of the post:

In the same way that the mortgage security market transferred credit risk away from the balance sheet of operators and into the portfolios of professional investors, a media futures market will enable non-advertisers (aka speculators) to take on the risk from the balance sheets of publishers.  Publishers will be happy to hedge out their inventory, limit earnings volatility, and focus entirely on creating value-added programming; rather than spending their time speculating whether CPMs are going up or down.

Similarly, companies (ie the buy-side) can concentrate entirely on developing better products and service.  Their marketing groups can focus on creating and communicating their brand images, while their sales organizations can simply specify the kinds of customers they are looking for and the prices they are willing to pay; the Media Futures market will take care of the rest.

It's a big idea with plenty of execution risks in front of them, but it's fascinating to watch these two guys bring the lessons of wall street in the late 70s to the online ad market in 2005.

The tagline of Seth's blog is "somewhere between Madison Avenue and Wall Street lives the future of both".  If you live in NYC, you know that historically Madison Avenue was in midtown and Wall Street was downtown.

ROOT Markets, Union Square Ventures, and most of the interesting companies working in the online business in NYC are located between Soho and 34th Street.  I totally agree that between Wall Street and Madison Avenue lies the future of both.