2023 is over: Will D2C investing platforms become venture-backable again in 2024?

Aaron Polhamus
9 min readDec 30, 2023

Yes, but only if founders write new playbooks.

In 2023 many VC-backed investment platforms saw underwhelming exits, bankruptcies, and busted IPOs, shaking investors’ confidence in the vertical. For the past decade, the plan for many investment startups has been:

  1. Find an initial growth hack in order to
  2. raise lots of money,
  3. spend aggressively on ads while
  4. slashing prices to acquire market share in order to
  5. get to the next funding round,
  6. and work out the unit economics later.

The investments business is good for investors and fundamentally important to humanity, but in order to prosper the next generation of platforms are going to need to write new playbooks.

The investment industry underwent two significant revolutions in the past 30 years:

  1. Digitalization: In the mid-90s and early 2000s, moving investing online. TD Ameritrade and ETrade led this era, benefiting active investors who enjoyed direct control over their investments.
  2. Democratization: This wave started in the early 2010s with the rise of mobile-first platforms and zero-fee pricing. This era lowered entry barriers, attracting many first-time investors. These investors joined the market during a period of exceptional post-financial crisis returns. Robinhood is the iconic disrupter from this era.

Both revolutions shared a common theme: they occurred overwhelmingly in the United States and Europe. Subsequently, founders around the world, including us at Vest, aimed to replicate this success in emerging markets, and investors were eager to back them. “Building the Robinhood of [insert country / region]” became the fundraising premise for hundreds of global startups.

As 2023 ends, the VC-backed wealth management sector finds itself in a time of crisis but also of reinvention. We were all so excited about this business in 2021, and then the music stopped. What happened, and where do we go from here?

What happened?

Inflation spiked and interest rates increased, affecting all startups (unless you worked on AI), especially those in investments. This rise in rates led to higher capital costs and reduced investor risk appetite, making previously attractive investments less appealing. Investment-focused startups were hit hard as stock markets corrected and deposit interest rates rose. For the first time in more than a decade, large parts of the financial industry experienced systemic stress. Despite these challenges, companies who raised large amounts of capital 2019–2021 continued to invest heavily in marketing. CAC rose while growth slowed, a hard place to be if you were a pre-profitability, subscale startup trying to raise capital to finance opex. Companies and founding teams began to break. Ours was very nearly one of them.

However, this is just a surface-level explanation. There are deeper, structural issues causing underperformance in investment platforms:

Vitamins and painkillers 💊

Traditionally, startups should aim to provide “painkillers” (urgent solutions or need-to-have) rather than “vitamins” (nice-to-have). In the investment sector, easy money from equities acted as a painkiller during the bull market, but this shifted during market volatility. Now, the challenge is making investment feel like a necessary “painkiller” in tougher times, especially for young investors facing uncertain financial futures with weak or non-existent social safety nets as the generations before them age and birth rates continue to decrease.

Race to the bottom on pricing 📉

The shift to zero-commission trading during the democratization wave boosted growth but put pressure on the industry’s unit economics. Zero commission is now the norm and the first-mover advantage has been eliminated. However, VC-backed wealth platforms are still under immense pressure to grow exponentially. Without an obvious alternative growth catalyst, many founding teams respond to this dilemma by deploying capital to buy growth at questionable CAC/LTV ratios. Some even subsidize prices to compete. For example in Mexico leading neobanks today offer deposit interest rates of 15% — a full 4% higher than the central bank rate.

TAM to valuation mismatch ⬅️➡️️

As investment democratizers pushed out to the global stage, they entered markets that — while less saturated — are much less wealthy, making it challenging to achieve the level of scale required to deliver a venture-scale outcome.

For example, a healthy take rate on assets under custody (AUC) is around 1%. A platform with $1bn of AUC at a 1% take rate will make $10M in annual revenue. Assuming that a growth stage startup in this vertical receives a 10x valuation multiple on annual revenue, in order to reach unicorn status this platform will need to reach $10bn of AUC. This an impressive feat even in a large, mature market like the U.S.

Operations and compliance 👮

Balancing compliance and operational investments with growth and innovation is tricky. Over-investment in compliance can stifle growth, while under-investment can lead to significant risks.

Founders who are in the “grow or die” mindset struggle to navigate these tradeoffs. The result is frequently catastrophic downstream regulatory or infrastructural failure, or at a minimum “compliance debt” that must be managed at great cost sooner or later in order for the business to continue to scale.

Where do we go from here?

A startup is a company designed to grow fast…The only essential thing is growth. Everything else we associate with startups follows from growth…For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people.

- Paul Graham

In 2022, tailwinds that pushed equities to historical highs since 2009 became headwinds, as higher inflation drove higher interest rates, and geopolitical conflict threatened globalization. Populations are aging and will soon begin to decline in many countries. Viewed in this light, it’s hard to escape the conclusion that today’s young people are going to have a harder time building wealth than the generations before them.

Source: Goldman Sachs as of November, 2023
Source: https://www.advisorperspectives.com/commentaries/2016/07/21/what-will-happen-to-the-stock-market-when-interest-rates-rise-part-1
Source: https://phys.org/news/2023-03-global-population-peak-billion-2050s.html

And yet there are other forces at play. As populations age and decline they place less strain on the environment. AI will transform industries and generate enormous economic surplus, even as it creates risks to be carefully managed. Advances in green technology, particularly energy, open the door to sustained economic growth without a proportionally negative impact on the environment.

Source: https://ourworldindata.org/grapher/energy-consumption-by-source-and-country
https://fintechnews.am/fintech-usa/49291/generative-ai-to-produce-up-to-us340b-yearly-in-additional-revenues-for-the-banking-sector/

Against the backdrop of these powerful global drivers of risk and opportunity, it is more important today than ever before to proactively build a financial future. At the same time, investing well will likely get harder. Investment platforms will need to adapt to the changing times as well. We are focused on tangible growth in 2024 because only by building a fundamentally sustainable business will we earn the privilege of serving our customers for decades to come. Here are some of the core ideas that are driving our thinking as we look toward this exciting, uncertain future:

Rethinking delivery of value ✨

When we first launched Vest we offered the industry-standard zero-commission model, monetizing through secondary means and possibly — in the future — via subscriptions. As the market shifted, however, this approach became unsustainable. Shifting to a fee-based model was initially unpopular. What some customers most valued the most about our product was that it was free, and they quickly churned when we began pricing.

As we spent time on the ground in São Paulo and Mexico City engaging with the customers who stayed, however, they told us how to serve them better. Our team became less focused on vanity metrics like AUM or new account creation, and more focused on cohort-level net deposit volumes and NPS. Net deposits stabilized, trading volumes went up, and NPS — after a rough initial dip — began to improve. This month is on track to be our best yet for trading fee revenue. While the initial churn hurt, by pricing for delivery of value we raised the bar and forced ourselves to be more rigorous than ever about how we serve our customers. This is having a powerful impact on how we build and execute our product roadmap.

Artificial intelligence 🧠

The large language models powering today’s cutting edge AI applications are going to shift paradigms in our industry. In particular, we think that the walls between self-directed investing and advisory will begin to disappear. Rather than having some apps dedicated to active trading while others focus on robo or personalized advisory, we believe that AI will allow investors to seamlessly receive as much or as little direction as they like. Think of how you can manually override a self-driving car by simply grabbing the wheel. Investing is going to evolve in that direction in the coming years.

While fees in the wealth advisory industry will likely come under pressure, those who incorporate AI into their workflows will find themselves able to spend less time on the rote, manual aspects of the job, and more time focusing on each customer’s unique and particular circumstances, deepening their value proposition to clients.

2023 was just year one: this technology will accelerate exponentially going forward. At Vest we are deploying AI across customer support, UX research, software development, and robo advisory to be sure that our customers and partners are reaping the benefits of this technological transformation.

Rethinking distribution 🛣️

Direct-to-consumer (D2C) models are expensive to scale when not supported by compelling underlying virality. In a capital-scarce environment this has prompted many formerly D2C startups to pivot toward B2B, where aggregated value can be tapped more directly. Our mission is to empower millions of people to build long-term wealth and gain greater control of their time and energy. For many of our prospective customers, this means that we need to work with their financial advisors. This has led us to B2B2C, partnering with local wealth advisors to build a better platform for asset dollarization while continuing to directly support their customers with our core offering.

As we build our beta application for financial advisors with our first cohort of test users, we’re finding that our D2C business actually compliments and reinforces B2B2C. Both customers and advisors feel comfortable working with a company that has some degree of local name recognition, and everybody enjoys a beautiful product that works well.

Strategic M&A 🤝

The TAM-valuation mismatch insight drives our thinking around strategic M&A, as well as the importance of building a global platform.

Today there are hundreds of sub-scale wealth platforms who have their own product development, compliance, platform, and administrative cost structures. When combined with a tight funding environment, this lays the foundation for closures and consolidation. In this environment, sub-scale projects can see enormous benefits from well-executed M&A. While a $200M book of assets wouldn’t get any attention at a major brokerage firm, platforms like ours experience material increases in cash flow efficiency from an acquisition of this scale, incorporating the additional revenue streams while stripping our 70–90% of redundant operating overhead over a period of 4–6 months.

This is not an easy way to grow your business, and many companies that engage in M&A fail to realize its value. The brokerage industry — perhaps because of its commoditized nature — seems a bit different in this respect, however. Basically all of the Digitalization pioneers — e.g. E-Trade, TD Ameritrade, OptionsHouse, Scottrade — either used acquisition to accelerate growth, or were themselves acquired by larger firms like Charles Schwab.

M&A won’t deliver a venture-scale outcome to our investors and it’s no substitute for building a scalable, tangible growth engine. When properly executed, however, it can transform the P&L of sub-scale projects while expanding their global reach.

Wrap-up

It’s been a hard year, but a transformative one, and we are a stronger company for it. If you’re a founder in the investment vertical and we haven’t met, I would love to connect with you and hear about your experiences building in 2023 and what’s on your mind as we enter 2024. If you’re an investor who is interested in the space and I can be helpful in any way, please give me a shout. I’m especially interested to speak with you if you’re an investor who’s soured on investment tech: I’d like to understand what it’s going to take to get capital providers and entrepreneurs teaming up again to create investing experience built for a world that’s changing more quickly by the day.

Hope to chat soon. You email me at aaron [at] mivest [dot] io or on LinkedIn at @aaronpolhamus.

Wishing fellow founders, in particular, a happy New Year 🎉🥂

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Aaron Polhamus

Working with Team Vest to transform how retail investing is done throughout the Americas 🌎