6 reasons I'm NOT investing this time, from someone who has invested in previous 2 rounds

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.

VI. Overpromise.

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.

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Very interesting points. I have been concerned by some of those myself. I still believe freetrade will be bought out/sold off to someone or something rather than simply go bust. I think they will get a VC investment, we will be massively diluted - but will my investment that has made say 10 times and gets halved be worthwhile? I do feel uneasy and my head tells me don’t invest your maximum, but my heart says do it!

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A couple months ago I was sure I was going to invest, but over that time looking at all the new competition sprouting and co-founders leaving I’m not sure anymore.

Some really good point raised on top of that which I didn’t think of.

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I don’t agree that not having VCs invested is something bad. I don’t like how VCs are operating their investments. What they want in most cases is to chase a big revenue expansion without thinking about profits. Then they push for an IPO with overblown multiples so they can cash out, get their returns and give the hot potato to the public.
Robinhood for example has changed their business model drastically and is pushing people to use margin trading and complicated financial instruments to people with little to no investing experience. This will definetely hurt their brand long-term.

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Personally I think having the guts to remove a non performer is a huge positive and not an easy decision to make no matter who they are.

The world is evolving and I see crowdfunding as the future. VCs will need to adapt to this new world and I think a lot are starting to. So again personally does not concern me.

I haven’t seen a a single FinTech not be overly optimistic on forecasts. Virtually every project starts out with a grand vision but reality always catches up. Welcome to start ups.

Since Ian joined the pace of development has been very impressive. He mentioned there is 90% less code since he joined…

The UX, fee structure, transparency, etc is a big sell for me.

Bring on revolut and robinhood. Like the challenger banks there is space for more than 1 challenger broker. Freetrade are focusing on one product. Revolut are focusing on everything everywhere so I’m willing to bet on who will have the better product.

I will be investing again

You are buying a vision not a DCF model.

Don’t get me wrong this is a very high risk investment! You should be prepared to lose what you invest! But the potential upside is also very large given the risk.

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Interesting comments. How have you derived that the company is 40-50% owned by crowdfund?

Re your point about CTO, I understand that he left because the delay in delivering the app. After he left and new VP of engineering joined, there was indeed huge push in product delivery with both iOS and Android apps out. This makes the commitment on the product map tangible and believable. From this point of view, it was a positive decision by freetrade and would be viewed positively by any investors.

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@Follie81’s reasons are very interesting and could be summarised as competition is on the way and the proposition doesn’t have a particularly deep moat, unit economics aren’t strong yet, cap table may make future financing harder or impossible, and cash burn is high. The latter worries me most, however a long-term successful outcome clearly requires scale so cash must be burned. Startups are hard.

Re point 3, the Oct 18 confirmation statement had:
Dodds 10,010,192 A shares
Fioranelli 8,190,000 A shares
Mohamed 3,520,000 A shares

I make it that the co is 55% owned by those three names. I agree that having 30% of the co held by former execs isn’t great (and maybe there should have been some kind of clawback clause in the shareholders’ agreement. But we are where we are.)

I’d add a minor point VII, Crowdcube’s 1.5% fees.

As we’ve discussed in a different thread, it’s hard to calculate the expected value of a startup, so :man_shrugging:

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Point 5 (V) - wasn’t the last raise 1 year ago?

The app completely not working for iOS 10 users the day before the campaign is also not a good thing.

Why are people using IOS 10?

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I use it because some of my apps won’t work on later versions.

I’d complain to the apps that can’t run on the current iOS over apps that don’t run on dated iOS versions :stuck_out_tongue:

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Yeah, I know, I know, but if the developer doesn’t exist any more but I still like the app, there’s no-one to complain to. Might need to finally haul my phone into the modern day.

People really don’t like this fee. Seems reasonable to me. They need to earn revenue somehow.

Seedrs fee is often higher given it’s based on performance but they don’t get as much grief.

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This is a little bit off topic but there’s been some more discussion about Crowdcube (& Seedr’s) fees here -

Should Freetrade use Crowdcube or Seedrs for the next crowdfunding round?

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We’ve located and fixed the issue and we are awaiting an approval from Apple to push the fix out asap. Sorry this is impacting you :sweat:

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It’s not the fee itself for me. It’s the fact we either accept dilution or pay the fee.

Imagine if HL, AJ Bell, Interactive Investor, or some of other financial institution decided they want to charge you a % fee without any alternatives. Would that be acceptable?

Look how aggrieved people were with IG last year. So why was that unacceptable yet this is?

Interesting breakdown thanks. My thoughts on this:

  • I: Competition - I’m not worried about competition, particularly not Revolut given their press recently and lack of actual execution in this space. Lots of smart, experienced people think you should not worry about competition. Freetrade could compete with Revolut on integrity alone - would you trust revolut with your life savings?
  • II: Incumbents - This is more of a worry, as they could use anti-competitive moves to hinder freetrade, but I think their business model in many cases (hl for example, focussed on funds), will make it hard to compete.
  • III: Founders departed - the former CTO simply didn’t deliver, so I’m pleased that side of things has changed. It is a shame the original founders are not there, but the current team seems strong to me and have been delivering well (iOS app, and now an Android app too, and a new backend as well). I’m pretty hopeful about the current team on all points, they seem to be executing well to me. The shareholding is unfortunate but will be diluted over time and be less and less of an issue.
  • IV: Not sure these numbers are correct, where did you get them from?
  • V: The last raise was pretty much exactly a year ago, not months ago (a significant difference). Re VCs, they may never need them, and if they do they can easily dilute existing shareholders, this happens all the time. I would be interested to see a rough cap table of the largest owners.
  • Vb: Unit economics don’t matter at this stage IMO, they’ll make it up in volume! No seriously they need growth then they can worry about making money from users. There is a clear path to profit from enough users.
  • VI: This is inevitable, and not malicious or deliberate. Timelines always slip, esp. in software. They have been delivering well since the new team was in place I feel - the apps are looking and working great IMO and features which make money are starting to appear at a good rate (ISAs, Alpha etc).

To your points, I’d add Growth as no VII - this is my biggest concern - freetrade won’t work except at scale (user count, not AUM), so they need to scale Monzo-huge in the next year or two to pull it off and make enough money to cover salaries etc. I’m fairly confident they will though. The nice thing about crowdfunding for freetrade is it’s a great way to get exposure to customers - almost everyone crowdfunding is interested in owning shares and investing, so it’s a great channel to introduce new users to the app and they do appear to be taking growth seriously. The nice thing about their model is they don’t need to scale AUM, just user count to make this work, so lots of small investors is fine (underserved by current brokers, turn into big investors later).

The biggest concern you’ve raised which I think is totally valid is cashflow and runway - there isn’t a lot of it, and crowdfunding will make it hard to bridge that gap as they grow. Freetrade is probably burning money right now, and is not making very much. The next couple of years though will tell, and companies destined to be large usually burn through a lot of cash scaling up and have some sticky moments when the runway is perilously short.

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Hey @lizmcp. Sorry if you were affected by this. I posted an update here: Problem with latest update on IOS

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Interesting post, I share some of the concerns. My 2 cents:
1: Rather relaxed about this, those who will suffer the most are incumbents. However, Revolut is super strong in the UK, this is why FT needs to derisk by launching a second market as quickly as possible.
2: True, but FT made increasing available stocks/funds universe a top priority. Hence, this won’t be an issue further down the road.
3: Founder churn is something that happens quite often in early stage start-ups. However, there is simply no way that the former CTO could join Revolut without his non-compete clause being waved. In order for this to happen, I think that he had to forfeit/sell/loose all/chunks of his stake. Transparency from the FT team could help here.
4: Not sure about these figures, and the concern isn’t valid imo. Why? The VC could very well buy out parts of the crowdequity participants.
5: This is actually my main concern. Initially, I though that this crowdfunding round would be combined with a VC round. Why? At current burn rate, I don’t see how FT will be able to survive more than 12 months without raising again. Their bet is probably to produce sexier metrics and international expansion in order to be able to negotiate better terms with VC, but it’s a risky one. But hey, this is what start-ups are all about…
6: Let’s wait for the deck before speculating on metrics. Overpromising is so common in start-up funding that I wouldn’t bother. Since the last round, FT delivered on everything they promised and the release pace has increased dramatically.

I would add another concern: European expansion. Setting up a subsidiary in mainland EU, winning regulatory approval, build a local team, launch will require serious skills/capital. I would very much like to see a clear roadmap and indications on which market will be the first target.

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