Wealthfront
From 0 to 25 billion in assets under management
The story of Wealthfront starts back in 2007, in the middle of one of the worst recessions in US history. Dan Carroll, an extremely successful trader, was upset with his parent's financial advisor. When Dan took a look to assess the recession's damage, he quickly noticed the poor management of his parent's portfolio, leading to huge losses. He knew why, too. Financial advisors made all their money from their largest clients and didn't have time for the smaller ones. Dan wanted to do better, so he started KaChing, a platform to bring the best investment tools to small investors.
In Dan's assessment, mutual funds lacked transparency, and hedge funds were reserved for the ultra-wealthy. With KaChing, he wanted to democratize trading information and highlight the trades that sophisticated investors were making.
Andy Rachleff, a retired venture capitalist, saw this same problem while lecturing at Stanford: smaller investors (often his students asking for advice) didn't have a good place to put their money.
A quick background on Andy. Andy took a challenging but well-defined path to wealth. He graduated from U Penn in 4 years then spent two years as a financial analyst. From there, he went straight to Stanford for an MBA. After Stanford, Andy spent around ten years at three different venture firms, getting promoted to general partner at the last one. Fifteen years after graduating from college, he started Benchmark Capital. After ten years at Benchmark and a few legendary investments (eBay, OpenTable, Snapchat, Twitter, and Uber), Andy "retired".
Dan and Andy meet.
Andy became passionate about democratizing investing services and spent time researching the space. He came across Dan's KaChing beta, which was already getting some traction. While Dan didn't initially like the idea of working with a VC, Andy was able to win him over. In 2008, the two set out to work on KaChing full time.
Kaching started as a paper trading platform where users could compete for the best portfolio. The original pitch:
"KaChing is the ultimate destination to learn just how good of an investor you are. Create your portfolio and compete online with friends, colleagues or anyone else for the title of best investor. Will you be good enough to rank among the site's best investors?"
Social investing was a fairly common idea at the time. This TechCrunch article from 2008 highlights several competitors.
KaChing separated itself with an intelligent distribution strategy via the Facebook apps marketplace (when that was popular). It was the number one financial app in the store. I'd guess this is what led Andy to reach out.
Andy coming into the company in 2008 was another huge differentiator. He is arguably one of the most connected people in the valley and had an immediate impact. Not only was he a skilled operator that invented the term "product-market fit," but he also had some friends ready to invest.
The kaChing seed round came in at three million dollars with an all-star lineup, including Marc Andressen and Kevin Compton. At the time of their funding in late 2008, kaChing hosted 350,000 portfolios, with 20,000 generating positive returns.
Around the seed round, kaChing was hopping into its next stage by becoming a registered investment adviser with the SEC, which enabled them to trade real money. It was a solid strategy:
Get great traders to build a following
Allow ordinary people to mirror the trades of the great traders.
Moving on to 2009, the company was pre-revenue, had 3 million in funding, and a small team consisting of Dan, Andy, and a few programmers.
The company kept growing primarily through inbound methods. Facebook marketplace drove growth, and in mid-2009, they landed on MyYahoo, Yahoo's homepage, which featured other apps like Mint and WordPress.
In October of 2009, they started allowing users to invest real money. Customers were able to deposit a minimum of $3,000 and choose a trader to mirror. When a "genius" made a trade, their follower's portfolios automatically matched it. This feature was their first aim at monetizing nearly two years after launch.
At the end of 2009, KaChing raised another 7.5 million dollars in funding led by DAG Ventures. The TechCrunch article is titled "kaChing Raises $7.5 Million To Turn Mutual Funds On Their Heads". They positioned themselves as the anti-hedge fund with ultimate transparency and accessibility.
2010 was a big year for the kaChing team. KaChing officially became Wealthfront and, by the end of 2010, they had over 100 million dollars in AUM (assets under management).
They went from 0 to 100 million AUM in under a year and a half...talk about traction.
At this point, Wealthfront had 25 approved fund managers who were beating the S&P 500 by over 6%
In 2011, the Wealthfront we all know started to come together. They launched their algorithm-powered wealth management advisor. A customer would answer a few questions and then deposit funds to be automatically invested. They'd also charge a fraction of the fee a typical advisor would, only .25% on assets above $25,000 (compared to 1.5-2.5%).
An aside: This new product is interesting because the "algorithm" is not complex. Wealthfront had a few funds they picked out and would allocate either more in stocks or more in bonds, depending on a user's self-assessed risk score. Technologically, nothing was that advanced, but the experience was seamless. The app's usability seems to be the primary competitive advantage.
After launching their robo-advisor, the company started to grow even faster. They raised several rounds along the way.
Series B - March 20th 2013 - 20M - 170M in AUM
Andy Rachclef retires (again) as CEO - December 2013
Series C - April 2, 2014 - 35M - 800M in AUM
Series D - October 27, 2014 - 64M - 1B in AUM
Andy Rachclef returns as CEO - November 2016
Series E - Jan 4, 2018 - 75M - 9.5B in AUM
They've continued to grow, currently managing over 25B in assets!
While they are growing, I'm a bit bearish on Wealthfront as a whole. In the best case, they are making around 62 million a year on fees. With about 250 employees and a very conservative 150k per employee yearly cost, they pay out nearly 40 million a year. Including other expenses, it seems a relatively low margin, especially when you consider the competitive climate.
As just one example, Vanguard has over 200 billion managed, only charges .3% (.05% more than Wealthfront), and includes access to a financial advisor.
They are also pivoting a bit with a recent announcement they will allow investors to pick and choose ETFs. They may add the ability to handpick stocks in the future, moving more closely to Robinhood.
We'll see how the company ends up. Wealthfront seems to have an excellent product team and continues to innovate in that space. They may be able to create a moat but aren't out of the woods yet.