Personal Capital is Acquired for $1 Billion, Lemonade IPOs and PayPal Joins the Crypto Club
Today, we’re joined by Lex Sokolin to talk news and current events.
Robo 1.0 success Personal Capital was acquired for nearly $1 billion by Empower, a major retirement savings manager.
Softbank-backed insurtech darling Lemonade IPOed at less than $2 billion, in a successful fundraise and listing, and has since seen it’s market cap rise to over $4 billion. The IPO is a landmark for an insurtech industry in desperate need of successes.
And PayPal announces the impending launch of crypto trading to its 325 million users. The move isn’t overly interesting in its own right, but the implications for the crypto space are worth exploring.
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Thank you very much for joining us today. Please welcome, Lex Sokolin.
Full transcript:
Will Beeson:
Lex Sokolin, welcome to Rebank.
Lex Sokolin:
Hi, thanks so much for having me on again.
Will Beeson:
Great to talk with you as always. Few interesting things that we could dive into this week, let's get to it. Personal Capital was acquired by Empower, which is this huge kind of retirement savings manager. I think it's a part of a Canadian life insurance company, maybe Personal Capital, kind of an early wave, maybe robo, but with more of a human angle. It felt for a while like they were trying to find their way. Sold for about a billion dollars, largely flat to I guess their most recent raise early 2019. You're the digital wealth expert. I'd love your views on this.
Lex Sokolin:
For those following the sector closely, there's a lot to unpack as it relates to the recent spate of digital wealth management exits. And I think this one is really interesting and I would characterize it as a very large success for Personal Capital and for robo-advice more generally. So a couple of things to say, the first is Personal Capital was always a registered investment advisor at first. So financial advisory firm first, and then technology enabler second, which meant that their target market was not the broad retail, $500 Robinhood user or Acorns or Stash user. Their target was always mass affluent, or maybe coming up on high net worth. So that $250k to a million type range customer who would in the past be maybe a low end Morgan Stanley, Smith Barney customer, or maybe just getting into the wealth management shops.
Lex Sokolin:
And it's a great space to compete in. If you can acquire those customers, this is what, when I was thinking about NestEgg, very much the segment I thought made sense. And the way Personal Capital built their business was to take pieces from the playbooks of many other FinTech companies. And in particular, I think it's due to their founder and CEO who had been at some point who ran, I believe PayPal and Intuit in different capacities, and then was on the boards of various financial planning software companies. And so Personal Capital brought together data aggregation. So I think today they have maybe two to three million people using a Mint-like service to aggregate their holdings, to understand their net worth statements. On top of that, they built financial planning software and then a funnel from that free experience into an investment experience and service by a financial planner with a fairly expensive price point for a robo-advisor of 90 basis points down.
Lex Sokolin:
And in part they justify this because they don't think of themselves as a robo-advisor, but as a digital wealth planner, or a digital wealth manager. And so it's interesting to see this more grounded hybrid firm have an exit with a billion dollar valuation granted only 825 of that is paid on closing, and 175 is paid as an earn out. That's still a pretty big number for $12 billion in assets under management. And so it's probably four to five times more expensive than what you would pay for a traditional registered investment advisor in this space. So the technology piece really amps it up. And I think at least it's a very powerful comp for the digital investing industry.
Lex Sokolin:
The other comment I would make is, who is the acquirer? Who's buying the stuff now? Because five years ago, the answer would be BlackRock. It would be the asset managers that are trying to go after the advisory market, or that are trying to go direct to the client. In this case, it is a retirement provider. So a 401k provider. I actually had my Barclay's plan transferred to them a while back, which is why when I saw Empower, I knew it. I knew what that was. And if you dig into what Empower Retirement is, it's actually like you said, the Great West Life and Annuity insurance company.
Lex Sokolin:
So underneath the wrapper for the retirement provider is a much bigger portfolio manager, right? Of all the pool of invested capital and a very traditional type of provider that is not focused on B2C, but goes through employers and is really like a bulk asset allocation provider. And so I think to me that signals where maybe the next wave of change and innovation will happen for digital wealth. And that the 401k industry and the IRA, and sort of like the employer-led set of solutions are very much due for a refresh.
Will Beeson:
Yeah. All right. So for kind of a FinTech digital finance person like me, Personal Capital seems like a no brainer yet they only have 22,000 customers, which is literally a rounding error for any large financial business. Why do they only have 22,000 customers and why not two million or 20 million?
Lex Sokolin:
Because that's not their key metric. Their key metric are the assets that they manage. So, Personal Capital has @12 billion in AUM. They charge a little bit less than 1% on that. So your revenue run rate is going to look like about $100 million in revenue. Now you take an Acorns or a Stash and you might have a million customers with $5,000 each, or $1,500 each, and you might have then $5 billion in assets under management, or like half of this number. And you might charge 25 basis points. So a quarter of what Personal Capital charges. So $100 million divided by half is $50 million, and then your pricing collapses again. So you're running a $25 million in revenue. And if you look at someone like Betterment who is one step down market from Personal Capital, there's less... The services for Betterment are... And for Wealthfront, I would say are much more point solution and focused.
Lex Sokolin:
And the average customer is maybe a third of that in Personal Capital. And so with Betterment at a $20 billion assets under management number, maybe you have 200,000 clients and maybe you're running at $50 million of revenue. So Personal Capital is acquirable to a big incumbent like Great-West because it has these fairly traditional economics focusing on assets under management, focused on fees, generating revenue, but still growing. And also having that two and a half million free user footprint. Like we shouldn't forget that if you do just look at their user count, it is multiple millions. It's just that those multiple millions are the top of the funnel, their marketing costs. And then they convert into the 22,000 larger paying clients, which are the core engine of the monetization.
Lex Sokolin:
Just one last point on that is, when I was in the Lehman wealth management business and we had something like... It's a long time ago now, but I'm thinking something around $70 billion or maybe $150 billion of assets charging on average about a percent, the whole business had only 40,000 clients, and it was seen as a success to lower the number of clients and make much more efficient the matrix of clients that you serve. And I think this is a philosophical and generational difference. For me personally, I would rather go free to billions of people rather than go more profitable to the select few. But I do think that Personal Capital has built a solid piece of software, a valuable business, and has created a quantitative comp for the industry which is helpful to others following its path.
Will Beeson:
Yeah, well, I guess the number that jumped out to me just in comparison with other digital wealth management companies, if we can call them that, it looks like their average customer has something like 15 to 20 times the assets on the platform as a Betterment customer. So, clearly fundamentally different either just net worth of client base or percentage share of that wealth. So that's interesting. Yeah, I don't know, I guess maybe the... Where my mind tends to go on all this stuff is if it's so great and it sounds like it is, why do only 22,000 people use it?
Lex Sokolin:
I think the answer is multifold, which is I think two to three million people use Personal Capital. So I'd go back to that distinction. And then there are lots of businesses that have 200 customers and have multibillion dollar values. Not everything is retail so I think is just a different segment. If you for example talk about Starling, you don't expect Starling to deliver a banking services to five million small businesses, because that's not how the demographics work out. You expect to see 10,000 to 200,000 small businesses driving the majority of the economics for a small business bank. Similarly, in a wealth management business that goes up market, high net worth, family office, or even mass affluent as in Personal Capitals case, you're not going to see the same sort of retail type numbers that you would in a much lighter weight app.
Will Beeson:
Makes sense. Switching gears, insurtech Lemonade IPOed within the past week and early signs are that it was successful... Successful in the current sense of the word with respect to IPOs, as in that it happened, especially in the context of SoftBank backed companies IPOing. And I think the stock was up something like 100% or more in the first two days of trading. It's kind of attract back since then, but out the gate, public having raised a decent chunk of money and a pivotal perhaps moment for insurtech, what do you make of this?
Lex Sokolin:
I think Lemonade is a fascinating company in many regards and what they've done really well, probably better than anything else that they've done is become literally the mascot for insurtech. When you ask a person in our industry to name an insurtech company, especially a consumer insurtech company, it's Lemonade. Maybe somebody will think of Oscar and then commonplace names run out. You start to get into claims management or like AI based underwriting or stuff like that. And so by having a breakthrough brand, I think they are just in some ways a magnet for capital that is interested in the digital transformation of insurance, and is trying to find something that they can easily understand. So Lemonade, what do they do? They provide renters insurance on objects. So you can go around your apartment taking pictures of objects, and then uploading that and image recognition would characterize the object.
Lex Sokolin:
And then based on a large database of things that they have give you a quote. And a lot of this is enabled through... Well, another way. All of this is enabled through a mobile app. A lot of this is enabled through a chat like interfaces and 70, 80, 90, whatever percent is automated, meaning that you get immediate underwriting, and then you get immediate claims, assessment and payout. So as far as the actual machine of providing the intro... Like looking at the thing, providing some sort of risk assessment, providing cover, turning it on, opening an account, and then paying people out in the case of damage, that software machine is super tight. And I think really meaningfully outperforms the user experience of every other competitor in the space. And Lemonade loves to talk about that they are getting a lot more people to try and pay renter's insurance that otherwise would have fallen out of the process entirely.
Lex Sokolin:
And so they are growing the market by participating in it. And if you look at the statistics, Lemonade customers are... The majority of new customers for the categories in which Lemonade plays do accrue to Lemonade. Now, as a percentage of the whole, it's very small, but as a percentage of new incremental customers, they're doing a really great job. And I think you take this marginal unit economic story and why that is what is powering this absolutely fantastical public market performance. I was really fundamentally surprised. I didn't think it would look like this. And in particular, what happened is that Lemonade's... From their last private market valuation of two billion has floated $320 million on the public markets, and is now popped up to like four to five billion in enterprise value. And this is with all of the public equity analysts looking at and analyzing their insurance business model, which to me seems like really fast, and really quite expensive on a revenue base of about $60 million to be valued at $4 billion.
Lex Sokolin:
You can clearly see the revenue multiple there being 50x, 80x, which is a private market valuation expensive, but it's really quite unusual for the public markets. So I think it's a really interesting story if there's going to be a lot of volatility, the end result is going to anchor around whether Lemonade continues to put up the 200% growth that they talk about, or that they've been able to demonstrate over the last couple of years, and then adjacent to that, that they're able to demonstrate that the incremental dollar that they're earning in revenue is not negative dollar, which is the case today. So, every dollar they earn today, they lose more on than they make. So it's a complicated story, but I think a fantastic example again of value creation for at least some players.
Will Beeson:
And yeah, I'm going to get back to this idea that having a stake in the ground and the public markets insurtech company who is genuinely changing the way that this type of insurance is done and will now be subject to the public scrutiny, so hopefully everything goes well. But also importantly, in terms of transparency, even the perspectives, even the filing documents, just the light that that shines into operations, the business model, the inner workings of insurtech, and hopefully now the multi $100 million plus personal exits for founders, just provides more stimulus for increased activity in insurtech, which I think we can all agree hasn't necessarily delivered the level of innovation at the speed with which a lot of us would have maybe expected, still feels like there's a lot of work to do in that space and look forward to seeing it unfold over time.
Lex Sokolin:
Yeah. So this is a very purposeful and engineered outcome. I mean, in the scheme of things, Lemonade is a young company. It's less than a decade old. And from the very beginning, the founding team was looking towards an IPO, that was the path. And they engineered the economics and the traction of the company to hit these numbers from the very beginning, right? To hit these curves. And they engineered it in the sense that the money they raised, when they needed to press the growth button and raise more money, they did it. When they needed to work on telling the story about the underwriting becoming less loss leading, that you're losing less money on your pool, they have been able to show that improvement. Now at the moment of time today, it's still the underwriting loses money and the company is burning through its cash, but the trends all look right.
Lex Sokolin:
And it was a very purposeful path for the founders to the IPO. If you were to ask me like what would be the public market valuation on an insurtech with $60 million of revenue, I would have said somewhere between $250 million and $500 million would have been my guess. And they've done 10 times that size. And I think that's a testament to their storytelling ability and their ability to position the company so that the public markets interpreted in the most positive way.
Will Beeson:
All right, switching gears a little bit, I'm picking up a couple crypto related topics. So PayPal reportedly, gearing up to offer crypto to its hundreds of millions of users. On one level this is not interesting because everyone kind of does that already. If you're Square, or if you're Coinbase like buying retail crypto is kind of a soft problem. That said with PayPal's reach, it's huge. Obviously hugely influential public company perhaps interesting for the retail crypto industry more broadly. At the same time... And here I'll be interested in your views. Just general skepticism perhaps about the relevance at least now, this stage of the cycle of retail, crypto, like buying Bitcoin and Ethereum, and HODLing or whatever, it just doesn't seem as interesting or as fun as it used to when you could look at like 10 to 100x volatility on any given day. And potentially it feels like some of the more interesting stuff is happening elsewhere in the crypto ecosystem, which we can get into. But yeah, initial thoughts from where you sit around this, PayPal entering retail crypto piece?
Lex Sokolin:
I think there are a lot of places you can get 100x volatility if you really want to find them though I wouldn't recommend it. Look, all of it is incremental, and all of it is helpful. With Square in the game, for sure PayPal has to be thinking about this too. Stripe is not as explicitly in the game, but some of our listeners might remember that Stripe was one of the founding brothers was associated with a project called Stellar, which was supposed to be a Ripple payment crypto protocol, like something in between Ripple and Ethereum. And Stellar, I believe ended up buying another project called Chain. Chain was supposed to be a payments blockchain infrastructure company, which had raised quite a bit of money as well.
Lex Sokolin:
So I think Stripe has kind of an unknown to me, in a sense, they backed a public blockchain that didn't quite work out or get the adoption they might've wanted, and potentially that, that burned them out of the market. But regardless, I think all of this stuff is incremental. It erodes friction to engaging with crypto assets. And I think the interesting thing isn't buying the crypto assets for speculation or for diversification, but to use them in daily life as a payment unit. And so until people are getting their direct deposit paychecks in their Coinbase or in their MetaMask wallet from companies that do their business on blockchains, I think it's going to be tough to have commerce that is denominated and based in crypto assets.
Lex Sokolin:
But I think this is an incremental step to give you another example from just yesterday, I believe Binance, which is the largest crypto exchange outside of Coinbase bought a company called Swipe, which is a card that lets you spend your crypto assets using Visa rails. And stuff like this makes sense. Coinbase also has a Coinbase pay offering to merchants so that you start to marry the holdings that people have accrued of digital assets with economic activity that people actually care about, which is how do I buy a sandwich? How do I pay my rent? How can I pay my contractor? And so I'm positive on this PayPal news, although like you I don't think it's going to be dispositive.
Will Beeson:
Yeah. If you look back over the past year or so, Bitcoin is largely tracked like mainstream equity markets, and there was all this talk a few years ago about either Bitcoin being a cyclical or countercyclical. Looks like there's some equity like characteristics now that's kind of from an asset value standpoint, then you're talking about crypto as a means of exchange. Is it worth? I mean is the industry updating its view, its hypothesis around the role of either Bitcoin, or individual cryptocurrencies vis-a-vis traditional currencies, or monetary forms?
Lex Sokolin:
So I'm not a crypto trader. So my view on prices is both uninformed and always wrong. So maybe in that case, it's useful because you can just take the opposite and be right. But I think the Bitcoin thesis is well established and fairly proven. There was definitely a narrative of Bitcoin as the apocalypse hedge, and as the digital gold. Like you say, correlations with traditional assets, depending on the time period you pick the correlations converge, but then on other time periods, they diverge entirely. In traditional investment management, if you're looking at a one year time period, it really is meaningless. You need to look at correlations over five or a 10 year time horizon and I think it's been a complicated set of shocks over the last year.
Lex Sokolin:
And end of the day, like the reason why you would have correlations from assets that have different fundamentals, like a bond or an equity or timber and Bitcoin is because the person holding all those assets is the same and is experiencing the same financial situation. So for example, if some asset does really well, but then I as the holder of that asset am in a financial crunch because a bunch of my other assets did poorly, I will sell my good well-performing asset, which will drive the price down in order to generate cash, right? Or maybe I'm going risk off. Like I don't want to have exposure to any volatility, and so then I go from 5% in cash to 40% in cash across all my holdings.
Lex Sokolin:
And so this is how people manage portfolios of large sizes. And therefore, you create correlations of things that have different fundamental drivers. Bitcoin's fundamental underlying drive is not like the performance of the equities of corporations. It is, can this technology or remain secure in order to continue to write an update and store a ledger of monetary value that people use for savings. And I think to that end, it's proven its use case. In terms of the other crypto asset classes, I think Ethereum's done a pretty strong job of identifying its use case as a place where developers build smart contracts based applications as the world computer, and the metric I look at there isn't price fluctuation, but it's much more the number of users for applications as well as the number of times that the software contracts are executed.
Lex Sokolin:
And that means, like running the actual software. And I think the latest metric I remember is that every day, two million contract calls, software calls are being made across the network. Something like 20 million times or 30 million times per month. And that's the number that keeps increasing. So if more software exists on the network and if more and more of it is executed, to me that seems like a real reason to believe in that currency. The last bit I'll say for Ethereum just because we're on the topic is, an example of a software that is really interesting and innovative was recently announced by a protocol called Aave. Aave is a decentralized finance lending protocol. It's a place where borrowers bring a desire to... Let me back it out. Lenders bring an asset to lend out and borrowers borrow that asset and pay some interest rate.
Lex Sokolin:
And so there's an enabled market on that protocol between those which sets an interest rate. And then people can also take out loans, sort of it's called a flash loan. It's a loan that you take out in between moments of time, in between the blocks being written to the blockchain. And so the announcement that Aave had recently was about powering loans that are negotiated in the real world through a legal agreement, and then anchoring that agreement into the defi protocol and then having money flows, including interest and including collateral all happened through the DFI protocol. And so you're moving out of just the use case of like trading assets around and into the real world use case of, I need to get a mortgage for my house. I need to take out a student loan. And so I see that as the infrastructure that's being written in order to do the next generation of this.
Will Beeson:
Fascinating. Wow. I thought it was a lot more to potentially dig into there on, in future sessions. Let's wrap it for now. Lex Sokolin, thank you very much for joining us today.
Lex Sokolin:
My pleasure. See you all next time.
