Didn't your parents ever teach you that wealthtech
If not, the past year and a half has
Startup capital that once felt like free money suddenly came with a heavy cost, and difficult market conditions put the squeeze on would-be fintech founders and innovators who didn't have enough meat on the bones of their business plans to attract VC dollars. In its most recent "State of Fintech"
As recently as last spring, analysts were confident the surge that pushed funding for
But as Diana Ross reminds us on the hook of her
So what the heck happened to all the cash, and why is it so hard out there out there right now?
"Interest rates," Bruckenstein said. "I think in fintech in general, when money is cheap, people are willing to take more risk on some of these ideas. And when money is tighter, people devote a little more scrutiny to the deals. And I think that's what's happening.
"I think there was a lot of money raised that probably shouldn't have been raised for some crazy stuff. And I think that's pretty much over."
But the industry veteran points out that one should not simply look at fintech as a whole and draw firm conclusions about the wealthtech space.
After all, wealthtech is its own beast, and taps its foot to its own rhythm.
"I think our space is somewhat unique. Because there are regulatory requirements around it, and because it's just a little bit different. It's a weird kind of niche," Bruckenstein said. "This is a very discrete market. It sometimes moves in different ways, and there are different drivers."
A wealthtech arms race
Kendrick Wakeman, co-founder and CEO of WealthTech Strategy Partners, believes the answer to whether or not 2023 is as bad as some of the research suggests is both yes and no.
Wakeman, who is also the
He said there are a number of good reasons investors have backed off in recent months, citing factors like bank failures and low market volatility. Wakeman added that investors were paying "way too much" just a couple of years ago.
"I think there was a radical sobering up involved. Obviously, wealthtech is not immune from the backing off of the venture capital community. And what's happening now is there are a lot of firms that, for whatever reason, didn't raise enough capital back in 2021," he said. "Maybe they were just being too cute with managing dilution. Or maybe there was just an assumption that you could just simply hold up an umbrella and get the financing done whenever you wanted to. And as a founder I can tell you, there's always that feeling of, 'Well, we're really far down the road with XYZ client. If we land that deal, valuations can change. So let's just see if we can get that done.' And now, they're struggling."
Wakeman said VCs' business model "embraces the notion that everybody falls flat on their face." Because of that, they're really looking for one or two big hits.
If a firm is not a hit, backers tend to move on with both their capital and human attention.
"They've got limited resources, just like any other business," Wakeman said of VCs. "But there's a second thing that's going on in the marketplace, specifically in wealthtech, that's different from other industries. We have a lot of different single point solutions in the marketplace. That means there are a lot of companies that are solving one problem or two problems for financial advisors with technology. And part of it's because when wealthtech really started to kick off 10 or 15 years ago, a lot of people were looking at the wealth management industry and saying, 'Hey, these people are operating in the Stone Age. They need to start applying technology to scale up their business.'"
Now the number of single point solutions has become a problem in its own right, Wakeman said. It is one of the reasons so many firms are chasing the dream of an
"And people are getting close, but they're not quite there yet. In the meantime, these single point solutions really need to become part of a larger solution. That, combined with more of the financial elements that we just discussed, are kind of driving a huge strategic interest in both acquiring good technology and functionality, and selling it," he said.
Wakeman explained that these conditions have created a bit of an arms race in the niche wealthtech space that WealthTech Strategy Partners says accounts for less than a fifth of the overall fintech market.
Multiple players are working to add functionality as quickly as possible to establish themselves as the definitive all-in-one platform. Wakeman believes that within the next two years, nearly every advisor will have either purchased a new system or upgraded their old one.
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"Whatever that timeframe is in their mind, there's a corollary in that, after that, nobody's going to buy a new system for seven years," Wakeman said. "If you are building a big platform, you want to add functionality so you can hold yourself out as that be-all, end-all platform.
"And then hopefully when things settle down, if they settle down, you'll have a good client base from which you can then still grow revenue."
'Responsible growth' amid difficulties
Interest rates and market difficulty aside,
He said a look at the first-time attendees of the annual T3 conference reflects that shift.
"If you go back four or five years, 20-somethings with an idea could raise $5 million and talk about how they would get into wealthtech. A few of those folks did well. Many of them did not. Many of them had questionable business plans, if they had a business plan. And I think what we saw at the last couple of T3 conferences is that the companies that were new and that were coming into the industry had proven leaders," he said. "People who were older. People who had probably been at some other company that raised money already, had a successful exit and were starting something new. Many of them had long track records in the business. And a lot of them were putting at least some of their own money into these new ventures."
One firm with such a lineage is Conquest Planning, a Canadian financial planning technology startup that earlier this year
Established in 2018, the Winnipeg, Manitoba-based firm relies on its proprietary, AI-based strategic advice manager to remove the trial and error that comes with building financial plans. It's also led by the
Evans first broke into the fintech game when the ideas that would eventually become NaviPlan came to life in 1990 as a part of his graduate school research project.
Brad Joudrie, chief revenue officer at Conquest, said investor mindsets have evolved. Instead of just chasing growth and top-line results, he believes we are now operating in a more responsible fundraising environment.
"I do think there is gunpowder. I do think that people are looking to deploy capital, although in a more conservative fashion. Gross margin or a path to gross margin is probably the greater impetus for people to responsibly invest than previous environments," he said. "I still think you're seeing good businesses that have strong foundations have growth, but they have responsible growth and are finding ways to fundraise in this environment. Fortunately, we were one of those businesses."
Joudrie points out that the evolved, conservative mindset even applies to buzzy, still developing technologies like artificial intelligence.
"I see private equity and venture capital looking at AI more from a purposeful standpoint than just 'XYZ company.ai.' That's not interesting," he said. "What's interesting is when people have found a real application for it."
Joudrie added that something he hears from friends in the venture capital community is that investors are looking to potentially do follow-on rounds or double downs for companies that they see progressing.
"Those are the ones that they're holding cash back for. So that's maybe a trend you'll see in the coming months and years … more follow-on investment rather than new stakes being taken," he said.
Leaning into the pain
With the knowledge that startup capital hasn't completely vanished, it is important to understand that securing it will continue to be difficult as long as interest rates remain high.
"A lot of folks until very recently thought that by the end of the year the Fed would start cutting rates already," Bruckenstein said. "I thought that was ridiculous. Even if they're done raising rates, and I'm not sure they are, I think rates are going to stay higher for a little bit longer than people anticipate. So I don't think in the next six to nine months that there's going to be a lot of money available."
For veteran financial planner Reese Harper,
"I love the startup world. It's stressful. But I've learned to see stress as a pretty good sign that I'm onto something now," Harper said. "We're going to have to go through some hard stuff to grow and learn. But that's kind of how you make it work in a software company. You just have to lean into the pain a little bit.
"When it gets hard, you have to keep staying curious. Otherwise, there's nobody left to solve the problem."
Harper, who also founded Dentist Advisors in 2007, developed and launched Elements amid the pandemic to give advisors and clients a way to measure financial progress across a variety of indicators.
And even during the dark days of late 2022 and 2023, he continued to tweak his startup's offerings while adding new elements to Elements. In September 2022, the firm launched a one-page plan app under the direction of then new hire
During the holiday season,
Despite the innovations and announcements, Harper doesn't shy away from the fact that things have been tough.
"If you look at reported revenues from all the startups in Q2 of 2023 and back to Q2 of 2022, it's like the worst it's been in six quarters. And by a mile. I mean, we just went through a 'crush our dreams' quarter," Harper said. "The market is scared. Customers are scared. Investors are scared. Revenues are declining. Interest rates are rising. It just makes sense. That is the state of affairs, and I think Q3 might be worse. … My view is there is no strategy right now that is going to be the silver bullet."
But even as he describes the difficulties, Harper does so with a wide smile on his face and a palpable enthusiasm that shines through the screen on a Zoom call. As hard as it's been for firms to acquire capital, he feels like he has acquired a great deal of knowledge during the lean years.
And for founders who are going to succeed, Harper believes pursuing their mission, and not money, is going to be a difference maker.
"The best ideas definitely emerge in times like these. At Elements, I'm convinced we've become smarter in the last 90 days than in the last 12 months," he said. "Because when growth is screeching to a halt, and there is nowhere to hide, and consumers don't have extra cash, and businesses are worried. … What happens is all the little things that were kind of hard to see are obvious now. Because you don't have as many resources, you're constrained and you can't afford another mistake."
Making the worst of times the best of times
The current environment means stakes are high and errors can be costly. Unless, of course, you approach the situation by focusing on what is working instead of what isn't.
For
Designed and developed by experts in trust and estate law, personal financial management and data security, the firm's mission was to bring innovation to the often inaccessible estate planning process.
In the aftermath of that fundraising effort, the company rolled out an AI legal assistant and tapped well-known industry talent to refine its efforts. So when looking at the gloom and doom outlined by analysts regarding the lack of capital in wealthtech, Loureiro said he holds "a contrarian position," stating that it's not interest rates that are holding companies back. It's their execution.
"To me, the market right now is as good as it has ever been for companies with good fundamentals. And that's what I'm seeing right now," he said. "Do you have a good team? Have you found a product market fit? Do you have traction? Because every week, I'm still getting inbound inquiries. I'm talking to investors. We still haven't done a Series A (funding round) yet. So in my opinion, I believe these moments are as good as any."
Loureiro also has some advice for founders who may be feeling the pain as they try to either find initial support for their startup or make themselves attractive for an acquisition that could breathe new life into a struggling venture: Don't let fears about the market keep you from taking the next step. The cyclical nature of the space means that those who can thrive now will certainly feast later.
"Resilience is characteristic for good founders. So you have to have that in your DNA … but VCs are out there looking for great ideas," he said. "If you have a good idea, I would not sit on it. Someone else might steal your idea."
How to make it out the other side
Startup leaders should expect rejections to flow in their direction the way funds used to. But "no" isn't the end, Harper said. It's a jumping-off point for the next step.
"I got rejected like 140 times for one check," he said. "You've got to care about the damn problem, and you have to find one other person who cares about solving the problem with you."
One piece of advice Wakeman gives to his clients is to try and learn as much as you can from each failed pitch.
"My father always said that the second best answer is a quick no," he said. "One of the things that I found very valuable when I was raising money is if they said no, I would ask them why. What do you think are the big challenges? What is turning you off? And a lot of times these people, if you just ask them, they'll let you know. And if you hear them say the same thing over and over again, you know what you need to work on. So listen to them."
For Anders Jones, CEO and co-founder of Facet, a fintech firm that pairs digital financial planning with virtual access to advisors and one of Financial Planning's
Like Harper, Jones says this has been a period of learning, stating that the past 18 months have been more illuminating than the three or four years prior.
"Now is the time where real businesses are built. You don't have to have to have the same discipline when money is cheap and plentiful," he said. "On a personal level, this is a very difficult environment to operate in. But if you make it out the other side, you learn a ton. And once you've seen that and you've felt it, you know how to do it and you'll never go back."
As we ride out the
"The last couple of years have sort of been like the wild animal spirits raging in the market. And sort of anything went in terms of just dollars chasing investment opportunities. Anytime you have an environment like that, there's going to be a lot of companies that get funded that don't deserve funding. And there's going to be a lot of false hope created," he said.
But natural selection will work its way into the equation. Solid ideas with practical applications will survive, and those survivors will be in a position to deliver true value to financial advisors.
"We don't know yet what the killer apps are. I couldn't look at the field of all of the AI companies that are out there and say, 'Oh yeah, that's the one,'" Jones said. "You actually kind of need the froth so that you can see all of the different potential things that can happen. And then it'll sort itself out over time.
"In the most macro sense, it's actually a very healthy thing."
