Raiz (Acorns) IPO: A Reflection on ASX Tech Listings
It is always exhilarating to watch an Australian tech company go from pre-launch to eventually listing on the ASX via an IPO. The gates are finally opened to every-day investors. Consumers now get the chance to not just use the products they know and love, but also own a piece. While, listing companies get the capital they desperately need to keep growing quickly. It’s a good trade.
Yet, unfortunately, the ASX is also plagued with small tech companies performing shady back door listings, outright fraud and overall business mismanagement (looking at you GetSwift). However, every so often a tech company comes along, such as Xero, that shines a bright light on the ASX listed tech scene.
So which bucket does Raiz Invest belong in? Well, it’s hard to tell either way at first glance, but there are definitely some red flags.
Background
Raiz Invest (Previously Acorns Australia) offers the average Joe the ability to regularly save and invest through their web and mobile app.
On May 9th, Raiz lodged their prospectus with ASIC for the issue of 8,400,000 fully paid ordinary shares at an issue price of $1.80 per share to raise approximately $15 million. This gives Raiz a indicative market capitalisation of $119,213,978, underwritten by Bell Porter.
Raiz has over 155k paying users and $170 million funds under management with promising horizontal and geographical growth prospects.
Core products include:
- Raiz Portfolio
- Raiz Superannuation
- Raiz Kids
- Raiz Rewards
- My Finance
- Round-ups, Lump-sum, Recurring Investments
Raiz lowers the bar for individuals to start investing in a managed portfolio of local equities, international equities and bonds. Yet, it is also one of the most expensive ways to get started investing, with a reported 6.22% management fee for the median account.
Metrics
Raiz has managed to grow rapidly with a relatively small amount of capital. Raiz has secured over 155k paying users, spending $1,445,097 on marketing expenses since launch, creating reasonably healthy and improving business metrics.
2016 Metrics:
- Cost of Customer Acquisition: $9.16
- Average Revenue per User: $2.77
- Lifetime Value: $10.27
2017 Metrics:
- COCA: $9.55
- ARPU: $7.74
- LTV: $28.67
The majority (71%) of Raiz’s revenue comes from the $1.25 they charge users with an account balance of above zero. Another revenue stream, account fee (8%), is the 0.275% per year charged monthly for accounts with above $5000. This is recurring revenue.
Interestingly, Raiz generates a decent amount of revenue from advertising (12%) to third party and marketing leveraging Raiz data.
The remainder of Raiz’s revenue comes from Brokerage Netting (9%), effectively any profit they make from fractional investing round-ups or spreads.
Red Flags
Raiz is without a doubt a company that ‘raises’ eyebrows when it comes to red flags. It’s previous complex corporate structure with Acorns US and extravagant CEO pay only noted in fine print add to the uncertainty of their valuation and future growth prospects.
- CEO and Founder being paid over $500,000 per annum. It’s a startup, not a large corporate. This is probably the largest red flag of them all. CEOs should set an example for employees as the leader of the company. Taking a disproportionately large salary so early stage dries up valuable resources for the company to expand the team and accelerate growth.
- CEO and Founder being paid a $1m cash bonus at IPO. Yes, the company is being listed on the ASX, but at a questionable valuation that still makes it only a large(ish) startup at Series B or C. Even worse it’s cash, not equity, which would be acceptable to incentivise a founder. That $1m is nearly 7% of the total capital raise.
- Team being paid a cash bonus at IPO. Once again, the team effectively have a cash bonus, because their shares are now liquid and tradable. Vested equity would be more appropriate and logical to incentivise the team longer term.
- Platform built in US and brought to Australia without a tech team. This means the team, skills and expertise that built the initial platform is in the US not in Australia. Future product development is likely to be slow and/or costly as engineers need to be brought up to speed.
- Large rebrand, yet no change of intangibles+goodwill. The name change was likely a legal requirement to 1. List on the ASX and 2. Expand out of Australia using the licensed Acorns US platform.
- No Competitors. What. Ok. Sureeeee. This is just hand’s down incorrect. Spaceship Super and their recently launched Voyager mobile-first platform (almost identical to Raiz) is a massive competitor in Australia. A quick look into other markets such as Vietnam reveals there is a growing number of micro-investing apps such as Finhay. Furthermore, their core competitors aren’t other fintech startups, but incumbents such as Vanguard who offer low-cost ETFs. A lack of respect for your competitors shows a lack of respect for your own business.
- $4,000,000 for AFSL seems high. This is especially the case, because the AFSL is licensed from another subsidiary of which the executives have a lot of vested interest in.
The model just doesn’t add up. Based on my modelling, the numbers just don’t justify the current valuation which is asymmetrically priced.
At their current valuation, Raiz is required to aggressively grow user numbers and funds under management at over 150% while restraining business costs and improving ARPU and COCA metrics. This is all into new hyper-competitive international markets with low GDPs per capita that they have yet to test and launch into.
It’s basically priced so optimistically that even a small growth target miss would see the valuation completely unwind from the stock.
Buying into Raiz at its offer price seems neither logical picking apart the intricacies of its revenues and profits or on the back of an envelope.
A more reasonable valuation range at this point in time is likely between $40–60 million, of which they probably should have raised from accredited and institutional investors who have the knowledge, time and experience to invest in high-growth / high-risk startups.
Opportunities
Raiz has a large number of growth avenues to increase paying user numbers, funds under management and eventually the bottom line.
- Geographical expansion. Raiz is uniquely placed to tap emerging asian markets, such as those countries listed in their prospectus: Indonesia, Malaysia, Thailand, Vietnam and Singapore. Emphasis should be put on expanding into higher GDP per capita markets first. Countries such as Malaysia and Singapore are prime candidates as relative ARPU and account balances will be higher.
- Raiz Superannuation. Raiz hasn’t given many details on their super product, however, it could provide stiff competition to incumbents. Competing on low fees will be tough — as Raiz already has relatively high fees for managed ETFs.
- Raiz Advertising. Expanding third party advertising and marketing leveraging Raiz data could help increase average ARPU, especially in lower GDP per capita countries.
- Further Horizontal Expansion. Future product updates and releases could help increase revenue. It’s easier to up sell your current users, than acquire new ones.
Risks
All companies have risks. Startups have significantly more. The Raiz Prospectus outlines all key risks, here are the highlights.
- Failure to establish new brand. People talk about the companies they like and rave about the ones they love. A rebrand can wipe all intangible value out over night and slow growth. Imagine a conversation with a friend looking into an entry level investment platform: “Google Acorns, it’s a really useful tool.” vs. “Google Raiz, it’s a really useful tool… no, spell it with a ‘z’. There’s no ‘e’ on the end. Here, I’ll do it.”. Superficial things like that matter.
- Expansion into new and unfamiliar markets. Definitely a substantial risk not to be underestimated. Raiz has never expanded past Australia, building a team who is capable of international expansion is hard, but once you have a great local team, you can scale rapidly.
- Loss of key suppliers. Raiz is reliant on key suppliers to perform the core of their business. This includes third party suppliers such as AETL (Raiz Investment Account) and DIY (Raiz Superannuation Product)
- Additional requirements for capital. Post-IPO cash is $13,712,940. In order to expand to international markets, Raiz will potentially need to raise further capital from equity or debt markets.
Conclusion
Firstly, I’d like to wholeheartedly congratulate the team and leadership behind Raiz for creating a burgeoning business. I personally know just how hard it is to build a successful startup from my own experiences as a founder and startup employee.
With that being said, valuing a company significantly above what it is worth is dangerous.
It’s dangerous to everyday investors who do not always know how to create financial models, evaluate risk and opportunities.
And it’s dangerous to the future of your business, as significantly missing growth targets can stunt or even kill your business when you try to re-dip into capital markets.
Here is one final thought that is always important to keep in mind.
Just because you use the product, doesn’t mean you should invest in the company.
Investing is about keeping your emotions out of your decisions.
I use Raiz, but I won’t be buying the stock.
Mandatory Disclaimer: The information in this blog and the links provided are for general information only and should not be taken as constituting professional advice from the author. The author currently has no stock ownership in Raiz.
Financial Model
Thanks to Billson Porter and Jay Stanic for assisting in the Raiz Analysis.
Author Bio
I’m a 20 year old startup founder who is experienced in driving online growth, having previously built eccomerce startups from $0 to $250k in revenue in 3 months. I now work on Sempo. We are reinventing the way the world does humanitarian relief by enabling NGOs to rapidly and efficiently deliver cash assistance.
