One of the biggest players in the robo advisor space is adding $60 million to its war chest.
Betterment has announced a new round of private equity funding led by Francisco Partners, whose Peter Christodoulo will join Betterment's board of directors. Private equity firms Bessemer Venture Partners, Menlo Ventures and Northwestern Mutual Capital, all of which have invested in previous funding rounds, also participated in the latest financing round.
With $1.4 billion in assets under management (second only to Wealthfront's $1.7 billion in AUM among digital firms), Betterment has also begun to provide automated investment management services to traditional advisors via its Betterment Institutional offering.
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Around 90 advisory firms are already using Betterment Institutional, according to Jon Stein, the firm's founder and chief executive.
FUNDING PAYING FOR NEW HIRES
Betterment plans to use a portion of its new capital to "add resources" to that part of its business, Stein says, aiming to add 90 to 120 new employees by the end of the year. The new hires will be used to build out the "personalization and advice" part of its retail business, Stein says. The new funding will also be used, he says, for "more fulsome retirement planning," improving data usage and helping clients answer what he says is the most frequently asked question: What should I do with my money?
Launched in 2010, the privately held company claims to have more than 65,000 customers; it does not disclose its revenue, although a recent Wall Street Journal story reported it was no more than $10 million so far. This week's investment brings its total funding to $105 million,
Recent funding deals have valued other robo firms at about 25 times revenue, the Journal article said. While that same article speculated that Betterment could be valued at more than $500 million, Stein characterized that figure as "rumors" with "some basis in conversation."
PROFITABLITY CONCERNS
Many observers from the traditional advisory industry assert that capital-intensive digital firms like Betterment have little chance of ever being profitable.
While the new round of funding helps bolster Betterment's position as an industry leader, profitability concerns remain. says Sophie Schmitt, an analyst for Boston-based Aite Group. "The additional funding more than doubles the VC capital Betterment has received to date and puts the firm in a more comparable position financially to Wealthfront," Schmitt says. "It should be able to focus on client acquisition, both retail and institutional. Betterment is also investing in more expensive traditional media, TV ads in particular, to accelerate its client acquisition and asset growth to achieve profitability as quickly as possible.
"The big question is how quickly they can reach profitability and can they do it within the time frame venture capitalists expect," Schmitt continues. "They have the platform and a compelling digital solution. The key is marketing and building trust and recognition with retail investors nationwide."
Stein, meanwhile, calls the critiques "laughable."
Betterment "can and will be a very profitable business," he says. "We already are profitable on a per customer basis. We don't need to manage trillions of dollars to be profitable but we do want to manage trillions so more people will have better solutions."
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