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Startups typically describe their growth with exponential, not arithmetic, rates. Last year Wealthfront and Betterment's AUM grew by over 10% a month, growth has since fallen to less than 5%. What are these two robos going to do? Growth rates are declining, costs are sky rocketing, revenues are underwhelming, incumbents are fighting back, and investors are questioning. I'd look for both of these companies to seek an early exit at an average valuation or change their business model.
Their AUM of roughly $2.9 billion each, accumulated largely in the past two years, delivers revenues of $7m or so a year. That is not enough to sustain around 100 staff each as well as hefty marketing budgets. Total costs are likely to be $40m-50m a year, according to one fintech grandee (neither firm discloses the data). Scale is vital, as every new client brings fresh revenue at little extra cost. AUM in the tens of billions of dollars, if not hundreds, will be needed to break even. The two firms’ venture-capital backers, which have poured over $100m into each, expect initial losses. But even they will hope for profits in years, not decades.
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