Can Robinhood and Acorns grow into their Valuations?

  Source: Learnvest

Source: Learnvest

Microinvesting apps got a massive boost last week in credibility and funding. We've written before about the difference in model between web-born roboadvisors and mobile-born microinvesting apps, with the key being a focus on attention versus a focus on assets. How do you monetize $500 accounts? You get millions and millions of them. How do you do that? Give out free candy.

Take Robinhood, the free trading app just reached a $5.6 billion valuation, based on a $363mm round. Autonomous partner Vincent Hung looked at the stats: Robinhood has 4mm users, which is higher than E*Trade’s customer number of 3.7mm. But so far, the company's focus on Millennials, and potential for these accounts to eventually become lucrative, does not seem to have impacted any of the large e-brokers in terms of growth metrics or industry economics. This implies that Robinhood is comprised of low asset value / high turnover accounts. We also wonder whether the 4mm user figure is also the active account number.

The investment was led by DST Global, Sequoia and Kleiner Perkins. These are smart venture capital names, but we are starting to have doubts. Robinhood has been raising money like it's their only business, burning through that cash to fund growth, and raising again. This is the social network  growth strategy -- burn until you become a monopoly, and then control the market. But is that worth $1,400 per user, nearly all of which pay nothing to consume services that have positive costs to manufacture? If premium subscriptions costs $10 per month, then it will take more than 10 years for a user to justify the acquisition cost. Or perhaps this investment is just a probability-weighted bet on finding the next Coinbase, which runs at a $1B+ in revenue

Another example in Acorns, with 3.3 million users, which just received a $50 million investment from BlackRock. BlackRock has been explicit about building out a digital wealth platform of the future. They are owners of FutureAdvisor and part owners of European roboadvisor Scalable Capital. So it's not a surprise they continue to invest in digital wealth solutions that could distribute their products. Today, much of that distribution is done through advisors and financial planners, but this investment suggests they want to get closer to the consumer, directly through an app. It's a hedge in case Millennials change behavior and rely on apps and chatbots, instead of advisors. 

  Source: Acorns

Source: Acorns

We like Acorns and the behavioral hack of how it helps people save intelligently, but such an investment has to be analyzed in context. And this context is the shut-down of Learnvest inside Northwestern Mutual -- several years after Northwestern bought Learnvest for $250 million. Attempts at changing investor behavior are difficult and expensive, as are attempts to integrate innovations into large financial institutions. So while the Acorns deal is not as absurdly priced as Robinhood, it still highlights the need for Fintechs to grow up and build out their own business models. Because raising money isn't it.