UBS and Wealthfront last week called off a planned deal to sell the robo-adviser startup to the financial giant for $1.4 billion. Instead, UBS invested $69.7 million in the company at a valuation that Wealthfront described as $1.4 billion.
In its note discussing the end of the transaction and its latest fundraise, Wealthfront shared some useful information about its financial health, including that it will soon stop consuming cash to operate.
Why do we care about a transaction that failed to consummate? Information. Wealthfront’s notes on its financial results, crossed with its freshly affirmed valuation and what we know from external sources about its assets under management, provide an interesting window into what fintech companies may be worth today — and which might be overvalued.
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During the 2020-2021 peak of the last business cycle’s startup arc, we saw fintech companies riding high in terms of investment attracted, valuation earned, and, to a related degree, consumer interest observed. But as we have seen in the results of major trading platforms like Coinbase and Robinhood, there has been a softening in demand for investing products among consumers; given the generally lackluster lilt of the economy today, this is not a staggering surprise.
Where does that leave the worth of fintech startups that pool consumer capital for one reason or another? Let’s find out and compare what Wealthfront can teach pandemic high-fliers like M1 Finance and Acorns.
What’s AUM worth today?
Let’s collect some numbers. Barrons reports that Wealthfront has assets under management (AUM) of around $25 billion, while competitor Betterment has $33 billion.
AUM matters because it is a figure that we can use as a loose proxy for revenue at robo-advisers and similar. Wealthfront charges 0.25% of customer assets in fees. Betterment charges the same 0.25% while offering a higher-cost 0.4% service for customers that have at least $100,000 in assets on the platform.
It’s worth noting that while there are lower-cost ways to invest — Robinhood’s zero-cost trades, Fidelity’s handful of zero-cost index funds — the fees that robo-advisers Wealthfront and Betterment charge are pretty darn low. Especially compared to the fees that human advisers were once able to extract from consumers.
If we presumed — and this is an example of tortured mathematics — that both Wealthfront and Betterment are able to rip value out of their services at 0.25% across AUM, at their reported AUM levels their annual revenues would stack up as follows:
- Wealthfront: $62.5 million
- Betterment: $82.5 million
Those are not small figures, and they imply that both companies have reached sufficient scale to target a public-market debut in the not-too-distant future. That’s good context for us because it indicates that the robo-advising race did in fact create a handful of companies that will eventually be able to complete the full startup lifecycle from idea to startup to public concern.
Even more, Wealthfront is looking healthy today. As reported in its note from CEO David Fortunato discussing the end of its takeover by UBS and investment by the same:
We are continuing to explore ways to work together in a partnership and UBS has given us $69.7 million in financing at a $1.4 billion valuation. I am incredibly excited about Wealthfront’s path forward as an independent company and am proud to share that thanks to the hard work of our team and the trust you put in us, we will be cash flow positive and EBITDA profitable in the next few months.
Summarizing that for you, Wealthfront is recapitalized from a cash perspective and about to stop consuming cash to finance its operations. That’s a good place to be for a company that is suddenly about to stay independent.
Given Wealthfront’s simple pricing schema, we can have modest confidence in our revenue run rate estimate for its reported scale. Our Betterment estimate is likely a bit low because the company does have a more expensive tier of service. Still, at their known valuations ($1.4 billion for Wealthfront as disclosed, and $1.26 billion for Betterment, per Crunchbase data) we can get a bit of a range for the value of AUM:
- At Wealthfront, every $17.86 of reported AUM translates into a dollar of valuation.
- At Betterment, every $26.2 of reported AUM translates into a dollar of valuation.
From this perspective, Betterment is cheaper. This should not surprise. Given its reported AUM advantage and lower valuation mark — set in September of 2021, mind, while Wealthfront’s current price was more recently affirmed — Betterment is the better deal today from a venture perspective.
What about other companies? M1 Finance raised rapid-fire venture capital rounds in the last few years, most recently reporting a $150 million round at a $1.45 million valuation last July. The company wants to extract about 1% of AUM as revenue, its CEO said in prior interviews, meaning that it wants to extract more value per dollar of consumer assets. (We’re not making a judgment here as to whether M1’s revenue target differential is reasonable; the product mix offered, and pricing setup between M1 and Wealthfront-Betterment, is divergent enough to avoid direct comparison, unlike between the two robo-advisers.)
However, M1 only had $4.5 billion in AUM at the time of the above-noted fundraise, and the most recent data point that we can find from the company itself is that it reached $5 billion AUM last September. The markets haven’t done great since then, meaning that the figure did not enjoy tailwinds in the meantime. Even if we were to double the figure to avoid underestimating where M1 has managed to scale to, the company would still have a very different valuation/AUM ratio ($6.90) than its rivals.
From this perspective, the new Wealthfront investment appears inexpensive. Betterment even more so.
But! As M1 is targeting a greater cut of AUM as revenues than we anticipate from either robo-adviser, the resulting calculation is a little bit off; if M1 is able to monetize at 2x-4x the level that the robos are targeting, its metrics come into closer harmony with its rivals.
The takeaway from the above is twofold: By offering low-cost investing options, Betterment and Wealthfront need lots of AUM to reach public-market size, perhaps as much as $35 billion or $40 billion. For startups targeting similar demographics, that’s a useful metric. And if a startup with a similar pricing scheme does manage to attract that level of customer wealth, it will be, barely, a unicorn.
For the M1s of the world, younger companies able to raise at similar valuations during the 2020-2021 boom, they either need a stiffer fee structure or another pricing setup to generate similar revenues from smaller AUM bases. The inverse ratio of pricing to required AUM to reach public-market scale is worth keeping in mind when we examine business models in the consumer investing startup space.
I doubt that this was the expected result; Betterment was valued at $800 million back in 2017, when it presumably had a much smaller AUM base. Investors, therefore, expected more value to be generated from revenues extracted from consumer investing deposits. That’s a fancy way of saying that better fintech revenue multiples were anticipated, but in the wake of the Fintech Valuation Shellacking of the last few quarters, those prior estimates turned out to be rather wrong.
Which almost feels odd. After all, Wealthfront is about to start kicking off adjusted EBITDA, the private-market version of GAAP net income. You might think that such a company would be worth more given its implied revenue base. And yet.
This makes the now-defunct Acorns SPAC deal all the more interesting. After that deal went splat, Acorns raised more money, this time at a nearly $2 billion valuation, per TechCrunch reporting. Does that price make sense? We can’t really run AUM comparisons here because we lack that data for Acorns, and the company is more subscription-focused than the others we’ve discussed today. But we do know that the company indicated that it expected to reach $126 million in 2021 revenue and said that it “exceeded its public forecast” last year. Call it $130 million in 2021 against a March 2022 valuation of $2 billion and you get a revenue multiple of nearly 15.4x, albeit with a last-year revenue number against a present-year valuation.
That’s not that different from what we’re seeing from Wealthfront and Betterment, even if we’re not super confident about our estimated revenue run rates in their cases. Maybe that sort of multiple is all that fintech startups can dream of, provided demonstrated scale (if AUM-focused) or recurring revenue (if subscription-focused). Startups, take note.