Rick Ferri wrote: ↑
Wed Mar 27, 2013 2:23 am
Venture capitalists (VCs) have committed over $27 million to Wealthfront by my count. That might seem absurd given the fact that they have very little in assets ($170 million) and charge a 0.25% fee. A RIA of similar size and fee might be worth $1.3 million (3x annual fees).
I thought the VCs were nuts at first, then after thinking about this for a long time, and after visiting Wealthfront and meeting several people including Andy Rachleff, this might turn out to be good venture capital
investment. Why? Because this a technology company first and an investment management firm last.
My predictions is that Wealthfront will sell to Charles Schwab or another large investment company for between $80 and $120 million in cash over the next 2-3 years. This won't be because they're a huge success at gathering assets. Rather, it will be because Schwab or another firm will see the value in the technology and be able to apply it across their entire platform. It's a wealth multiplier for Schwab or whomever.
Here's how I see Wealthfront (formally KaChing) and where I predict they're going:
1) I see Wealthfront as a technology company. They write software that's intended to change an industry - in this case, personal investing.
2) They're showcasing their software through an investment company (formally KaChing and now Wealthfront).
3) The company first tried to attract clients as KaChing by picking active managers begining in the fall of 2009.
4) Although "KaChing" reportedly attracted $100 million in assets in the first year, it's not enough to continue the model.
4) In October 2010, Rachleff does a 180 by adopting passive investing using exchange-traded funds (ETFs) and changing the name of the company to Wealthfront.
5) New business acquisition is slow They wait for Linkedin and Facebook IPO and capture some of that money, although not nearly the level anticipated. What's missing is credibility. Rachleff wisely brings on Burton Makiel as CIO and puts his touch on the portfolios and his face on the advertisements. Assets increase due to some good press. They also hire heavy-hitting former Linkedin marketing talent. This leads to round-two of $20 million in VC funding.
6) The company announces this $20 million is to be used to market the firm and improve technology (getting on with big custodians like Schwab would be a big improvement also, IMO.)
I believe spending $XX million in marketing will buy the company at least $1 billion in assets and perhaps $2 billion, but it won't buy $40 billion. That's the number Rachleff said he Wealthfront needs make this a VC success in it's own right (see my earlier post).
Here is the catch - Wealthfront doesn't need $40 billion to make the VCs happy, they may not even need $2 billion.
I say again, this is a technology company first and an investment management firm last. Wealthfront RIA is a showcase for software. It's the techology that makes the company worth worth $80-$120 million to Scchwab or another large boker-dealer
. They can use the software as a force multiplier in different ways to attract many billion in assets and grow their own AUM.
That's the story behind Wealthfront, or at least the way I see it on this 27th day of March, 2013.