Betterment, one of the robo-advisor firms, raised an additional $70 million in financing this month, according to Bloomberg and others. This values the company at $800 million, although such valuations on pre-market companies are largely meaningless. (Mental note: Write article about the so-called valuations of pre-exit startups.) Is this additional Betterment investment a good idea.
According the article, the company has nearly $10 billion under management, which begs the question why they need to raise more money.
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A money management company with $10 billion under management should be profitable. The need to raise another $70 million suggests the company is not profitable, and that begs the second question. At what level CAN the company be profitable? An can a Betterment IPO happen fast enough?
Can Stand Alone Robo-Advisors Survive?
Obviously, as an add-on product at an already staple financial brokerage firm like Schwab and Vanguard, as well as a low-cost offering at big banks like JPMorgan Chase & Co., roboadvising clearly makes sense.However to break into the market, standalone roboadvisors may have guaranteed their own failure before they even had a chance to start by offering their services at too low of a price point.
The $10 billion already under management at a firm like Betterment simply generates too little revenue to cover costs due to an unrealistic fee structure. As a result, Betterment is adding on “human advice.” Ironically, the concept that robo-advisors were found upon is that roboadvisors replace the need for non-roboadvisors, i.e. humans.
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The only way for the human advice to save the company is for it to make up for the apparently money losing business of robo-advising. In other words, success requires charging enough for human advice to not only be profitable, but to cover the losses of roboadvice as well. One wonders how this model possibly works out in th already highly competitive world of human financial advising.
Roboadvising plus human advising is really nothing more than what the big financial firms already offer, albeit with a much smaller marketing budget, and lower overall revenues. In other words, at this point, it looks like Betterment will never make money. It’s best case scenario is to survive long enough to get a buyout from a bigger firm with more money than sense, like the Jet and Walmart situation, or Yahoo and Tumblr years ago.
Betterment IPO and Future?
That’s where this $70 million investment comes from, VCs looking to extend the lifespan long enough for a buyout to save their previously sunk investment. Whether this is throwing good money after bad, all depends on the Goldman Sachs, and Bank of Americas out there. Will they swoop in and save the company, or wait to buy its bankrupt assets?
These days, your guess is as good as mine whether someone decides its worth throwing a billion dollars at a semi-recognized name backed by brand name venture capitalists or not. What I do know, is it’s probably easier to trick a Yahoo into thinking a cash incinerator with glossy name and a tech press fan club is a good big money investment, than a Wall Street firm that should know exactly what those internal financials really mean.
In either case the Betterment IPO will likely never happen now.