When evaluating financial services startups, the ability to scale customer acquisitions is often the biggest risk factor according to Bain Capital Ventures partner and industry expert Matt Harris. Given this fact, when Harris first encountered SigFig, a six year old financial advisory platform, it was the company’s unique publisher-driven growth model that made it stand out among a class of what he views as largely “commoditized service providers.”
Today, Bain Capital co-led SigFig’s $15 million Series B funding round alongside Union Square Ventures (USV), with participation from existing investors DCM and other angel investors. USV partner and former Lending Club investor John Buttrick will join SigFig’s board of directors.
SigFig was initially known as Wikinvest, an investment tracking wiki, and pivoted to its current advisory business model in May 2012. The move required that SigFig become an SEC-licensed Registered Investment Advisor (RIA), but enabled it to begin offering consumers recommendations for how to optimize their investment portfolio with regards to fees, management expenses, and risk adjusted returns. The company relies on data-driven analysis to deliver “unbiased, scientific portfolio recommendations,” according to co-founder and CEO Mike Sha. SigFig allows its user to link accounts from more than 100 different brokerages – the average users links four – and offers programatic recommendations within 60 seconds of signing up.
“The central problem with the investment advisor industry is that the interests of advisors are rarely aligned with their clients’,” Sha says. “Also, the industry has evolved to focus primarily on higher net-worth individuals, [which offer the highest fee potential].”
SigFig, on the other hand, doesn’t take commissions on trades or collect an asset management fee. Rather, it utilizes a business-to-business-to-consumer (B2B2C) distribution model through which the company licenses its Web and mobile investment tools to publisher partners in exchange for a revenue share. To date, SigFig has announced partnerships with CNN, USA Today, and Yahoo Finance, with others signed but not yet disclosed publicly, according to the company.
“I’m sure that others will try to duplicate this model, but I honestly think they’ve already run the table and will not be replaced,” Harris says.
In addition to these licensing fees, SigFig also generates referral fee revenue when a consumer switches investment advisors at its recommendation. As my colleague Erin Griffith pointed out previously, the creates the potential for a perverse incentive for the company to encourage frequent account hopping. But Sha dismisses this, citing SigFig’s fiduciary duty to its clients as an RIA, and also pointing to the company’s growth and high rates of retention as endorsements of its client-centric philosophy.
“Our recommendations are driven by data,” Sha says. If a client is being overcharged or their portfolio is underperforming, the platform highlights that information and recommends a solution, the CEO went on to explain. Otherwise, SigFig focuses on offering portfolio transparency and monitoring tools.
With the shift in strategy, SigFig was able to grow the value of assets users manage through its platform – which is different than assets under management in a traditional RIA sense – by 132 percent in the last 12 months, crossing $50 billion in total assets in January of this year. For Sha, and his investors alike, this rate of growth is a testament to the appeal of SigFig’s offering.
“If we weren’t offering a better experience that our competition, we wouldn’t be seeing the adoption rate that we are,” Sha says.
Bain’s Harris adds, “We see the future of financial services as lower fees and additional services. For most companies, this is a difficult model to follow profitably. That’s why we view their media partnership model so favorably. They’re essentially getting paid to acquire customers.”
SigFig has yet to “optimize for revenue,” Sha says. Rather, it’s focused on growing its audience as rapidly as possible under the belief that “there are plenty of ways to monetize once you’ve reached scale,” according to the CEO. When deciding which investors to invite into its highly sought after financing round, alignment with this strategy was a key factor. Bain’s Harris and USV’s Buttrick, both of whom are veterans of fin-tech investing, were in complete agreement with the approach.
The company’s latest funding round will bring its total capitalization to more than $20 million according to its CEO, who declined to share the exact total. Wikinvest raised $2.5 million in 2007 under its initial business model, “and then we raised some additional capital bringing the total to the high single digit millions prior to this round,” Sha says.
For both Sha and Harris, the biggest competition for SigFig is not other technology startups, but rather the status quo. That said, rapidly growing companies like Personal Capital, Motif (backed by Goldman Sachs), and others are targeting the same users. The company attracts a slightly younger demographic than the traditional financial services firm – it sees 35 to 55 years old as its sweet spot – but even in this category, less than 50 percent are considered as comfortable eschewing human advisors in favor of algorithms when constructing and managing their portfolio. This is a ratio that is steadily climbing, but continues to present an obstacle to mass adoption.
SigFig received a major vote of confidence in this round from two of fin-tech’s leading investors. With an unusually efficient customer acquisition model, a large new pile of cash, and an increasingly deep bench of industry experience and advisory muscle, the company is well to continue its assault on the investment advisory status quo.
[Image source: Photoextremist]