With one eye on businesses abandoned in the wake of the financial crisis and the other on a new generation of investors, startup companies are now raising significant sums to challenge the hegemony of big banks and investment firms.
Since the beginning of 2013, venture investors committed over $800 million in new funding to develop businesses providing new investment, lending, mortgage and real estate, and wealth management services in the U.S. These startups have had their best quarter so far in 2014, when 13 companies raised $238.2 million in later stage funding — with at least $162 million committed in March alone.
Meyer “Mickey” Malka, the founder of the venture investment firm Ribbit Capital, raised $100 million at the beginning of 2013 to invest behind this thesis.
“We only invest in companies that are disrupting the experience for consumers in financial services,” Malka said. “Over the next ten or fifteen years we are going to see a whole new field of financial services brands that are being built.”
The opportunity to carve out new businesses in vast swaths of traditional financial services firms’ operations means new billion dollar businesses can be made, according to investors and entrepreneurs. “This is one of the only markets that’s actually measured in trillions,” said Adam Nash, the chief executive officer of Wealthfront, a startup investment management firm. “The market can be massively inefficient for hundreds of billions of dollars and somehow that is still not enough for the incumbents to go after.”
“Financial services industries are gigantic and are the least suited to making transformational changes in their own businesses,” said one venture capitalist whose firm invested in the $77 million round for OnDeck, a new small business lender.
Meanwhile, peer-to-peer consumer lending company Lending Club is entering the small business lending market with its own offering. “Since the recession small business lending has contracted,” said Scott Sanborn, the chief operating officer at Lending Club. The company is working on a private offering to a select group of investors to help bankroll the new initiative.
On the flip side of the lending and debt market, sits the Ribbit Capital portfolio company Credit Karma, a provider of credit reporting and eventually optimization services. That San Francisco-based company raised $85 million in its own later-stage funding round in March.
“If you think about financial services products over the past twenty years not much has changed. Applications have come online and things have gotten faster, but we think there’s a lot more transparency that we can create and a lot more efficiency,” said CreditKarma chief executive Ken Lin.
Investors are also looking at providing these services to the underbanked with investments in companies like the credit and financial services tracking tool InVenture.
Credit management and lending offerings sit on one side of the ledger, on the other are a host of new wealth management and investment services tools for a new generation of investor. “Over 46% of income in the country will go to Gen Y [the millennials] by 2025,” said Nash. His company, and others like Betterment have seen significant growth on the back of new demand.
“Today we manage about $420 million in investor assets,” said Betterment chief executive Jon Stein. “We grew 4x over the last year… and four times the year before that. We’ve grown about four times just about every year that we’ve been around since we’ve launched.”
Their growth, and that of other wealth management services is partially explained by the fact that the U.S. is on the cusp of an enormous transfer of wealth.
“We’ve got the largest generational transference of wealth ever, happening,” said Jarrett Lillien, the founder of Bendigo Partners and chief executive officer at its portfolio company Kapitall — a new online trading platform. “$40 trillion is going to change hands.”
Kapitall received a $14 million commitment from Lillien’s firm, Bendigo, and Linden Venture Fund to capture some of that wealth. Unlike Wealthfront, which expects millennials to take a passive approach to investment management, Kapitall wants to engage active retail traders on its platform. It’s the same business that Lillien pursued as an executive at Etrade. “It’s taking something old and making it new again,” he said.