Being an investor in the previous 2 rounds, I decided not to invest and here is why.
I. Imminent competition from Revolut, Robinhood.
As far as I know, Revolut is very close to launching its free-commission trading service. Rumour is that they are waiting for the investments from large VCs including SoftBank. And they are in many more countries than Freetrade. Imagine if Revolut launches the free-commission trading to individuals, bundled with their fantastic banking services, how could Freetrade survive? And it’s going to be in multiple countries not just in UK. They have the tech infrastructure, and the people to make it happen.
Not to mention that Robinhood is hiring in UK. They have got the tech know-how in US which is a much larger and complicated market than UK. Once it launches, it may be in the entire Europe.
So what Freetrade claims to be their key competitive advantages: their brand, their tech, their team, their community and their products seems very vulnerable all of a sudden. No?
II. Incumbent brokers are catching up quickly.
Don’t forget there are so many existing brokers that are quick to catch up. Interactive Investors, HL, eToro, AJ Bell, Charles Stanley etc etc all know about Freetrade. And they are catching up quickly. The incumbents may be old-school in their customer service and community management, but they are much stronger in products and technology. I read from an FT article that the incumbents are able to cover much wider stocks and funds, and have much stronger connections with market makers to ensure that the execution price is the best, or much better than the price you get on Freetrade.
III. Two original co-founders departed and one of them joined Revolut.
This is my biggest worry: it’s not just competition, but actually, now Freetrade has the wrong cap table.
And this is by far the biggest red flag ever. Originally Freetrade has 3 co-founders, who I guess all have substantial stakes in the company. However 2 of them have since left. Their ex-CTO even left to join competitor Revolut. This happened just a few months ago. How could any VC invest in Freetrade if that’s the case?
IV. Wrong cap table after this round
Following the point above, expanding here. Now that Freetrade has done 3 rounds and I think the company is now close to 40-50% owned by the crowd. After this round, it will be 50-60% owned by the crowd. If VC comes in, since it’s the first institutional round, they usually ask for 20% of the company. No VC would like such cap table structure. Freetrade from my point view almost committed suicide because this round it fails to get any VC investments. Mathematically, VCs simply won’t get interested anymore. This is worsened by the fact that the ex-CTO (now in Revolut) may also own a large chunk. Even if hey may not, the cap table is still very much VC-unfriendly. Some may wonder why bother VC? I will explain in the next point.
V. Unit economics are terrible, and the cap table is wrong, hence no VC would ever invest
The last raise was just a few months ago, and Freetrade raised 3M pounds which is a lot of money. Now it is back again for another raise. What I really struggle to understand is why Freetrade still fails to get any VC investments? Obviously the company has very high cash burn given that the team is more than 40 people. I don’t think that it can generate meaningful revenue in the next 12 months. The realistic question here is how much money they need to raise in this round to sustain the cash burn? If they raise 4M pounds in this round which is again a lot of money, it should last no longer than another 9-12 months, because the 3M pounds from the last round only got them from Sep 2018 to April 2019. Again, from their roadmap, I don’t think in the next 12 months, they will generate enough revenue to keep the company alive, unless they raise again.
So Freetrade may say they dislike VC money and this may sound music to the ears to some of us, but practically without VC money, the company simply is very very difficult to survive into 2020/2021. Each round needs to be much bigger than previous one given the fast growth of headcount and fixed costs such as office rent. So perhaps in 12 months time, Freetrade needs to raise again, and it may need more than 5M pounds. That is extremely difficult to achieve without any big VC investments. The crowd’s money is going to be limited one day, and that will happen in round 5.
I still remember when Freetrade in its early 2017 raise said the following 12 months they projected to have 3.6M pounds of revenue. They didn’t launch the app until the 2nd half of 2018! At the time I didn’t let it stop me from investing. But this now makes me wonder if the management really knows what they are doing, financially and even operationally.
I think the first 2 points are well aware by all of us, maybe some of point 3. I don’t think competition is the end of the world for Freetrade because it will always have loyal customers. But I think point 4 and 5 are very much neglected by a lot of us, and they are critical to Freetrade’s survival in 12 months.
Risk-reward for the next 12 months for any investments in this round is massive to the downside, so I’m not going to invest.
Ps. perhaps this may offend some people, and cause some arguments. I am happy to be convinced. And just in case, please do not delete this post, FT team.