We acted for Nutmeg’s Board in the company’s ca. €50m fund-raise near the end of 2016. It was the largest reported equity fund-raise across all fin-tech sectors in all of Europe during last year. The key round terms were publicly disclosed by the lead investor Convoy Financial, because they are a public HK listed company. The investment was struck at a pre-money of ca. €125m for a business still in the early stages of its revenue ramp.
In the past few weeks we have been asked repeatedly what were the key ingredients that helped make this fund-raise happen successfully in an uncertain Brexit environment.
Here are the key reasons, which we believe are applicable to a broad range of fin-tech growth companies in Europe:
- Mature team – For an overseas investor like Convoy making their first investment in the UK, having a complete team which was mature and experienced made the difference between investing and pulling back. Many European fin-tech businesses lack any senior leaders who have deep experience in the sector. For perspective Convoy met 30+ robo-advisors before choosing Nutmeg, and stated this was their number one decision criteria in the end.
- Leadership brand – Nutmeg’s brand awareness in London was equal to Hargreaves Lansdown a £6B market cap wealth manager, and Fidelity, the fund management giant. Moreover Nutmeg’s customer experience NPS was +54, perhaps the highest in its industry. This was before Nutmeg even revved up TV advertising significantly. Brand is a major driver of trust, which in turn fuels customer asset acquisition.
- Huge market with incumbents that move slowly – Wealth management is a multi-trillion-dollar market, chronically poorly served by incumbents. Wealth managers charge 1-2% to underperform the market, destroying client returns. And the industry has been doing this for decades, with little incentive to change. Robo-advisory is disrupting this market everywhere, and in 10 years robo’s share of assets will be 10-100x current levels. The sheer scale of the market puts any €100-150m valuation into context; it’s a modest price to pay for early market entry when disruption value potential is already clear.
- Transferability of the platform to Asia – Convoy and its co-investor Taipei Fubon Bank did significant diligence before investing to ensure they could use the Nutmeg platform in Taiwan and HK respectively. While the customer UX needs adapting of course, it became clear the platform and tech stack were easily adapted to multiple Asian markets. Demonstrating this feasibility at a conceptual level was essential before both parties committed.
- Simplicity of the equity story – Nutmeg’s core equity story was brutally simple. The company had grown to £600m+ AUM (as reported), and had a profitable customer acquisition engine and a clear path to multiplying customer numbers over the coming 2-3 years. The story was brand driven, performance-underpinned, UK business to consumer focused. So much so that Convoy and Fubon felt that they were valuing and funding Nutmeg’s UK business and the Asian leverage was ‘cream on top,’ more than validating the deal for them.
- Strong, consistent unit economics – Inherent in the equity story was strong and improving unit economics. US robo-advisors have suffered due to persistently high customer acquisition costs. It is expensive and hard to build a brand above market noise in the US market, easier in the very sophisticated, but smaller and denser, UK market. Therefore the value of Nutmeg’s brand investment over the past few years could be directly leveraged into improving customer acquisition costs and lifetime value. This fund-raise was a clear case of brand directly contributing to equity value in fin-tech.
- Product roadmap clear – While Nutmeg’s proposition and brand were strong, the company also worked hard on articulating its product roadmap. For obvious reasons we are privy to quite a bit of detail we are not able to share here, but suffice to say the Company has a clear idea of what it will evolve into, and it’s a larger and more complete vision than just being an active allocation robo advisor. Moreover Martin Stead the CEO was very clear in the key steps required to execute that vision, something all serious investors found refreshing.
- Broad outreach to strategic and financial investors – Nutmeg’s round was the culmination of a broad range of discussions with both financial and strategic investors. As the funding climate for European fin-tech softens in the next year or two (in our view, its already softening), exploring a broader range of potential investors, in a staged process with plenty of ‘warming up’, we think will be critical to maximising the potential from a larger, later stage fund-raise.
In discussions with many European fin-tech companies since the Nutmeg raise, we are struck by how many ‘violate’ several of these factors, even ones they control completely. For example, simplicity of equity story is sorely lacking in many fin-tech propositions; its as if teams see value in complexity. Or unclear articulation of the product roadmap, when it should be possible to set out precisely and clearly what both the vision and the execution steps are.