Investing marketplace Covestor raises $12.75 million Series B
Covestor, a website that allows people to mimic the investments of others, has secured a large Series B round of funding to expand its executive team and product offering.
The $12.75 million deal comes from from existing investors Union Square Ventures, Spark Capital, Amadeus Capital Partners, along with Bay Partners. Previously Covestor raised $11.1 million across three rounds of funding from those firms as well as Betaworks. Covestor has $13.5 million AUM, a figure which has grown by 40 percent this year.
Last year, Covestor brought in self-described "hired gun" CEO, Covestor’s CEO, Asheesh Advani, who previously sold his peer-to-peer lending startup CircleLending to Virgin Group and served as CEO of Virgin Money USA. As part of the terms of his hire, the company moved its US headquarters to Boston from New York. Boston is "not quite as provincial as it might sound" for a finance-focused company, Advani says. The wealth management industry is actually bigger there than in New York, which is more heavily focused on trading and brokerage businesses. Fidelity, Putnam Investments and State Street are all headquartered in Boston, for example.
Aside from Advani, hiring is a big part of the new capital raised -- the company has already allocated a chunk of its new funding to hiring a few big names including Chief Investment Officer Sanjoy Ghosh. He was previously Director of Investments at PanAgora Asset Management.
Covestor now has 25 employees spread evenly across Boston, London, and New York with one in Israel. Even though the company became a registered investment advisor in the US in 2009, it didn't really build an American operation until Advani joined in 2011, he says. Since then, he's worked hard to professionalize the platform.
It seems every week a new startup emerges to disrupt some aspect of the money management industry. Some of the most well-funded startups include Betterment, which has $210 million in AUM and $13 million in VC backing; Wealthfront manages $250 million worth of assets and has raised $30.5 million in VC backing. LearnVest, which is a registered investment advisor, has $24.5 million in venture backing from; SigFig has $8 million in funds. Envestnet, founded in 1999, has a platform which allows clients to invest in hand-selected managers. The company had $98.3 billion worth of AUM as of year-end 2012.
With $13.5 million in AUM, Covestor is smaller than its peers. The site differentiates itself with a marketplace strategy that allows investors to "follow" a portfolio manager. Thanks to a managed account system that integrates with TD Ameritrade or Interactive Brokers, Covestor can replicate that portfolio manager's trades and investments in real time. Since Covestor is a marketplace, the top performers tend to rise to the top. Clients can actively choose managers to follow, or passively sign up for a diversified "set and forget" model.
It's novel, but it works. As of June 6, Covestor's ten most popular managers beat the S&P 500 index by 21.6 percent gross of fees over the last year. More than 100 money managers are on the platform. The idea is that these smaller money managers will outperform large hedge funds because they can make fast decisions. Covestor is meant to eliminate the ego, instinct, opacity and steep price tag of the analog money management industry. Covestor's asset managers charge clients a small management fee of between 0.25% to 2.00% and takes a cut of the manager's fee for listing on the marketplace.
Bringing money management online via marketplace was overdue, Advani says. "Ten years ago it would have been really hard to do Covestor. Now we are the only place where you can compare the track records of money managers." Covestor has replicated half a million trades for its 10,000 users and around 300 asset management clients.
Advani say his company tries to differentiate with its vast array of choices and options. Clients can passively follow one asset manager, or pick and choose a variety for a more diversified portfolio. The asset managers range from hedge fund managers who want to market themselves to retail investors (it helps that hedge funds are somewhat out of vogue with institutional investors, so they have no choice but to go downmarket to retail investors) to experienced money managers who work with individual clients on a daily basis.
The company's biggest challenge going forward, aside from heavy competition from online money management startups, is in the other market. Advani fears the stock market may be overheated. In response, he's got managers on the platform taking contrarian bets with "all-weather models," meaning they won't outperform the market when it's up, but won't underperform when it's down.