As a technology venture capital firm, San Francisco-based First Round Capital has raised a half-billion in funds and has invested in almost 500 companies, including Uber, Square and Warby Parker.
The firm has a portfolio of fintech investments as well, including a group of credit and payment firms, such as Better Finance and Bill.com. But to date, it hasn't offered up any investments to robo advisor firms.
Speaking with ReinventWealth on the sidelines of a panel discussion on funding held at the Museum of American Finance, First Round Capital co-founder Howard Morgan explains why, and what digital-first advice firms need to do next to remain competitive.
Your firm has made investments in fintech companies, but noticeably absent are any automated investment firms. Why not?
It's because of the cost of customer acquisition.
A lot of them have come out saying they want to work through these CFPs and RIAs, and the cost of acquisition there has been enormous.
The channels to reach them are difficult and expensive, and so nobody has come to us with a plan that we've seen that really gets them there easily.
Some analysts have pointed out that Betterment is close to becoming a unicorn with a billion dollar evaluation.
Well they are accumulating assets, and so is WealthFront. WealthFront is really a solid team. They're doing a great job. The question is, can they get enough assets under management fast enough?
That's the goal for them and how they're acquiring customers now is still in a very retail sense, can they do that wholesale too? Can they find partnerships that really get them to a lot of people at once?
What can they do to help them get over this hump of customer acquisition cost and the momentum that established firms have as they move into this market?
I think they should partner with the midsized firms that are not the Fidelitys or the Vanguards, and partner with those that would share some of the revenue.
Instead of reaching the millions of customers Fidelity has, reach the million that one of the smaller players has, where there is a need on both sides.
Some firms see the attractiveness and believe enough in the disruption potential that they have given all of these firms lots of money – is that a bet that could pay off?
They're disrupting because the millennials are more likely to go to new players, they're not pushed into Fidelity or Vanguard, and they may be in some of their 401(k) stuff, but not always. And they are reachable through Facebook advertising or by a similar audience.
They're getting the cost of acquisition down, but the question is can they get it down fast enough.
Is there potential pivot for any of these firms other than an acquisition, like what Future Advisor did with BlackRock?
It's B-to-B-to-C. It's partnering with the regional brokers who can't afford the technology investment. So [I'd advise to] partner with six regional guys. That's the first pivot.
Within financial advice, can digital disruption's momentum stall or die off? If a larger firm like WealthFront gets acquired, for instance.
If they do get acquired the platform continues to run, that's what people want. It's the platform that people are getting value out of. I think the industry is now established. Robo advice is happening and it's going to happen more and more.
Everybody is going to need robo advice, where they can charge lower fees but still get access to larger AUM.
- Deutsche Invests in Tech, Uncertain About Robos
- Keeping an Eye on Robos, But Investing in People
- Wells' Robo Decision: Build it or Buy it?