Updated: Sep 13, 2020
As the round will likely close quickly, I have published this first blog ahead of the campaign launch. I will not release confidential information, so i've omitted/used older data where necessary (e.g. "high growth" vs "x% growth"); Please consult the campaign materials for this information.
Please also make sure you see the disclosures, disclaimers and risk warning at the bottom of this post.
Sector: Fintech |
Stage: Generating revenue/Scaling |
Freetrade is a zero commission, mobile-first stockbroker (AKA "neobroker") founded in 2015. They are disrupting the UK/EU brokerage industry, where £10+ fees per trade and shitty apps have been the norm. They target the millenial investor market.
Pros ✔️Well financed (VC backed, oversubscribed crowdfunding, no venture debt)💰 ✔️High growth (150k users, ~70k active; 500% user growth YOY) 🚀 ✔️High Transparency (Most KPIs known, or easily estimated)
✔️EIS relief (advance assurance as yet unconfirmed but highly likely)
Cons ❌Highly competition risk (Trading212, Hargreaves Lansdown) 🏁 ❌Talent (engineering) shortage in UK ⚙️ ❌Low revenues & loss making 📉 ❌Highly regulated industry: For Neobrokers, regulation has been a key risk (e.g.
Robinhood was fined by SEC for poor compliance). Regulation does, however,
act as a barrier to new entrants, reducing competition somewhat.
❔ Valuation might be considered high based on financials, but might be
justified if based on growth.
Product/Market fit has been achieved, de-risking the investment (People clearly want the product, the task now is growing the user base further)
Product quality risk. App store, Google play and Trustpilot scores are >4 but may be misleading (ECF investor bias). Number of stocks = key product quality metric , which lags competitors (~600 vs Trading212's 3k and HL's10k stocks) and may lead to churn (users leaving to go to a different broker)
The product is only partially monetised; Trades free but ISA fee levied at @£3pcm, no premium accounts as yet
Relatively low technology risk: Freetrade relies on Google cloud, an autoscalable platform, arguably reducing likelihood of paltform failure/tech risk (e.g. Robinhood outages have led to a class action lawsuit )
💡See competition section for more information on the product, especially how it compares to the competition at the time of writing.
💡 Near/medium term product developments include premium ("alpha") accounts, Openbanking integration, European stocks (incl LVMH, Mercedes-Benz and Inditex (Zara)) and a pricing feed that's accurate to seconds.
💡 Shortage of engineers in UK; Recent key hires include head of Product Duncan Leslie (Ex-Monzo and Hargreaves Lansdown). There was mention of establishing an office in Leeds (a cheaper source financial talent) and/or the Netherlands (more engineers)
💡An important broker specific KPI known as "AUA" (investment per user) has not been included (exact number unknown), but it's known to be growing well.
💡Although disputed by Freetrade as untrue, coverage from CityAM around high staff turnover was negative publicity that may hurt Freetrade's ability to attract talent
Key performance indicators. Hover over KPIs to get notes or definitions.
N.B. "(E)" denotes an estimate or substituted figure, e.g. forecasts made in 2019.
💡Startups aren't black and white, data is often unreliable - even company filings! e.g. Where turnover <£10m, startups aren't legally obliged to audit accounts.
As growth is so important, please see below a chart showing Freetrade's growth (bold, right) against their main competitor Trading212 (faint, left). There are only 3 data points for Trading212; take these forecasts with a pinch of salt.
Below is a spreadsheet on competition I made in google sheets. Scroll right to
browse through competitors. Please click on the image to enlarge it.
Note that this is not an exhaustive list of competitors (excludes STAKE, Etoro, AJ Bell, etc). It might be worth summarising Trade Republic though, although information on them is scant: they're a neobroker in Germany, who charge 1 euro per trade, have 150k users, 1bn in Assets under admin (AUA) and have raised 67mn EUR from tier 1 VCs (Accel, Creandum, Founders fund). Their valuation is unknown.
I should probably mention Revolut too. Whilst recent data on them is also too hard to come by, I've personally gauged their threat level as low:
- They lost their head of Trading (Ex-Freetrade founder)
- They are principally involved in banking. Trading is a project they haven't yet monetised but encourages loyalty to core (banking) product (i.e. 'loss leader')
- Their roadmap slated Limit orders, After-hour orders, ETFs, ISAs, European stocks, etc for Q2 2020 - none of these have yet been delivered.
//Think of investment returns as a function of valuation, not exit. You can't reliably predict whether the exit will be £1bn or £100bn (or even >£0), but a lower valuation will increase your return in any non zero exit scenario (let me also stress that, paradoxically, zero is the most likely exit scenario for startups).
*Whilst I cannot publicly disclose the round 6 valuation as yet, I will admit it is on the higher side of consensus forecasts*
💡 Although the (post-money/'after-funding') valuation jumped from 2.1 to 52.8 from round 1 to round 5 (a ~25x return at first glance), the return is actually just ~12x. This is due to dilution, i.e. everytime equity is raised (new share issues), your % stake shrinks.
Startup valuation = (Revenue) x (revenue multiple)
This method is popular because revenue is a reliable and comparable metric for loss making companies. The revenue multiple is discretionary, i.e. set by the investor; the 'Better' the startup, the higher the multiple. One might consider Freetrade's team, growth, financials, etc in deciding an appropriate revenue multiple.
e.g. Bux's revenue multiple was ~8 in a 2019 raise; so any Freetrade valuation >8x revenue might be considered high.
In a given VC/Angel portfolio many startups will fail and a few perform spectacularly.
A common rule of thumb is that if an investment can exit to return the size of your portfolio, it is a sound investment. So, in an equal-weight ECF portfolio of 30 startups, you might want to only make investments that could potentially return 30x your investment. If the potential return was only, say, 15x, investors might demand a 50% reduction in valuation to get that potential return up to 30x. Remember that forecasting a return like this is highly speculative.
Below is a snapshot of a return estimator made in google sheets. To play around with initial investment, starting valuation and exit valuation, click this link.
Then: Go to File > make a copy
Then, with your own copy of the spreadsheet, you'll be able to play around with the values (i've put in a drop down menu for ease of use)
⚠️The (significant) effects of dilution , share preference, etc have been ignored
for simplicity. Dilution can be *very* severe, e.g. large equity raise in a heavy down-round.
⚠️Remember: Startups are high risk; statistically, the most likely outcome is failure!
💡 Its always worth researching exits: If there's been alot of mergers/acquisitions in the space (e.g. Degiro) and the IPO market is strong (brokers are doing relatively well), the exit potential is high, thus possibly de-risking the investment.
Financial commentary 💳🏦💸
Freetrade operate a freemium subscription model (i.e. free to use at it's core, with the best features accesible for a fee), monetising 'free-riders' by earning interest on their cash holdings.
A series B/capital injection is slated for late 2020/early 2021.
Freetrade has no venture (aggressive) debt; Venture debt often demands high interest rates and can cause dilution by converting to equity.
2018 company filings show that (in order) Wages, Rent and Software were the three highest costs. This could be positive as they could be considered largely fixed costs (leading to profits/breakeven) rather than scalable (wages=debatable) costs.
Terms & EIS 📝🏛️💵
💡 You will likely own your shares directly, as FT have done in previous raises, rather than Crowdcube holding them on your behalf. This is often considered to give you more control over your investment (no nominee decision-making,etc)
💡 pre-emption =/= anti-dilution.
- Pre-emption = right to invest (if you want) in any future rounds.
- Anti-dilution = auto-issuance of (often free) shares to stop dilution in future
💡 Freetrade will likely be EIS eligible as they have succeeded in every past application for EIS relief. The surest proof is an "advanced assurance" document that you should hopefully see in the campaign.
Freetrade had VC firm Draper Esprit invest in their series a round in 2019. The institutional-grade due diligence done by VCs is great validation, but aggressive VC terms can often hurt earlier investors.
Draper Esprit is a reputable firm that holds stakes in Transferwise, Crowdcube, Revolut, etc
Long track record of profitable exits, e.g. Lovefilm, Graze, PodPoint, etc.
~1/3 of Draper's stake was via EIS & VCT (i.e. similar terms to the crowd), aligining interests with the crowd
They haven't made any early investments (seed to series B) that have become unicorns (valued at £1bn+), casting doubt on their ability to 'pick a winner'.
Tim Draper (famed investor in Robinhood, Twitter, Bitcoin, etc..) doesn't do the actual investing at Draper Esprit, a common misconception.
❔ I couldn't find filings on any preference rights (aggressive terms) of the non-EIS/VCT portion of Draper's investment, but I would advise healthy caution as almost all VCs expect these rights.
❔ Draper Esprit's co-investment in this round would be a positive signal.
Shareholder Communication ☎️📻✉️
Expect regular (~quarterly) updates on Product development, User numbers, Roadmap, key hires, etc. They have a reputation for sharing good and bad news. Few companies are this transparent in crowdfunding.
Financial information is a bit more sparse, typically given in the most detail during their crowdfunding rounds (which have been every year) 💡A week or two after the campaign has closed, you will receive a disclosure email from Crowdcube well worth reading - It'll state anything unusual that came up in their due diligence. Ofcourse, I'll update this blog with the gist for your convenience 😉
COVID-19 strategy 🦠😷🔒
-Stockbrokers benefitted (market crash, media exposure). Some brokers have implemented waiting lists; Freetrade's onboarding process is largely undisturbed.
81% of startups have frozen or slowed hiring, FT has done neither, with staff working from home and new hires being onboarded remotely
Freetrade has utilised Remote work and onboarding to continue growing during the pandemic
Govt Future fund (startup support) likely not applicable to Freetrade as they may not meet the terms. It is likely Freetrade will have an oversubscribed round in any case.
And that's it! Thanks a bunch for reading, especially if you got to the end. Please do tell me what you liked and didn't like; I always want to learn!
Feel free to join the discussion on freetrade in the forum
Ofcourse, wishing you all good financial, physical and mental wellbeing in these crazy times! 'ppreciate y'all.
| Not financial or legal advice | All opinions my own | Please do your own
research | Capital at risk |
| Startups are illiquid | Don't pay dividends | Suffer dilution | Usually fail |
| Even tax relief is at risk |
Disclosure: I am a shareholder of Crowdcube, Freetrade and Bux. I have decided not to invest in this campaign, as i'm content with my current exposure.
Whilst I can't share confidential information, for any questions please feel free to comment in the forum, or even email me (firstname.lastname@example.org).
References (non-exhaustive; will be amended)
Freetrade 2018, 2019a, 2019b crowdfund pitch decks and Q&As
Freetrade Community Forum (Including CTO,CMO AND CEO AMAs)
Freetrade's Full Accounts, Companies House UK