In 2018, I wrote a piece questioning whether the digital wealth model and market could ever reach profitability.
As Nutmeg reports a 28 per cent increase in losses after tax, up to £19.3mn in 2021, it feels like a good time to reflect on this question that hangs over the automated advice and scale/start-up sectors.
You cannot reflect on this question without first acknowledging that in four short years the tech-enabled advice sector has undergone dramatic changes. Nutmeg was acquired by JP Morgan. Scalable Capital closed its UK retail business. UBS closed Smart Wealth, only to purchase Wealthfront. Vanguard entered the market with all their brand clout.
More fundamental, beyond entrants and exits, was the emergence and sophistication of advice engines that began to move the capability of advice technology beyond simple decision tree, investment advice. Technology became capable of delivering more holistic advice and enabled businesses to find the right blend of digital and human for success.
The losses reported by Nutmeg reflect the modern economic dynamic start-up ecosystem and investor behaviour. Traditionalists argue that profit is sanity, and that growth should be organic through reinvestment of cash generated by the business. A sensible approach but one that delivers steady, moderate growth.
However, the way we assess the equity value has shifted. Company valuations are derived from future potential, a perception of an innovative culture, proprietary disruptive technology and the potential to drive social change.
The rise of Uber, Airbnb, Twitter and the like broke ground by achieving staggering valuations based on a scale-up model; validate that a highly disruptive business has product-market fit; and use private equity funding to rapidly scale the business and pivot to profitability once economies of scale have been achieved.
This model is not unique to Nutmeg and digital advice; their contemporary in the pension aggregation market, PensionBee, posted losses of £23.7mn in 2021. By my calculations, Nutmeg has now posted losses totalling around £116mn since 2012. But losses are not the full picture under the banner of success in the scale-up ecosystem.
Crunchbase reports that Nutmeg received around $153.6mn (£125mn) across eight funding rounds. Contrast that to the £700mn sale to JP Morgan and investors have got a healthy return.
Furthermore, the scale-up model looks to be working for Nutmeg. Nutmeg’s assets under management have begun to grow exponentially. Assets grew by about £500mn a year between 2016-20, before increasing by £1bn in 2021, reaching £3.5bn. Nutmeg is already reporting £4.5bn halfway through 2022.
Client acquisition, often touted as an expensive barrier to scale, has followed a similar curve, growing from around 100,000 in late 2020 to about 140,000 by mid 2021. Turnover may be ‘vanity’ but grew 70 per cent, albeit this is staggering in the context of a 28 per cent growth in losses.
I commented in 2018 that digital wealth or robos look to be holding a strong hand just so long as they can stay in the game long enough to reap the potential rewards.