Morning Markets: An app that wants to help you save and invest is looking to ring up a big new round at a high valuation. Let’s recall what we know.
This morning Bloomberg reported that Acorns, a startup that helps people save and invest small amounts of money from everyday transactions, is “looking to raise more than $100 million” at a valuation that could be “north of $700 million.” If successful, it would put quite a lot of money into the class of services that help people get into a savings routine.
The small savings apps are a group of services that we’ve covered here before at Crunchbase News. Gabriela Barkho wrote about it twice for us, first looking at Acorns and competitors, and then later on when she drilled into Stash, an Acorns challenger.
The context helps make the Acorns round sound more reasonable. As there are a group of services that are growing concurrently in the market for small savings, demand must run deep. And that makes sense, as Americans often struggle to save. (It isn’t hard to find data that makes the point.)
A large market means big companies can form. But Acorns is still small, as it turns out. The same Bloomberg story pegs Acorn’s assets under management (AUM) at “more than $1 billion.” That’s pretty low, especially given the company’s business model which charges a small-dollar amount ($1, $2, or $3 per month) for its various service tiers.
Prior reports indicate that Acorns had a different model before, taking a 0.25 percent fee off accounts of greater than $5,000. I suspect that that was just too high a cost, especially as Fidelity and other large financial providers look to provide low-cost index funds that can sometimes have no fees at all. Paying Acorns 25 basis points was steep.
We can tell, therefore, that the firm is a SaaS business that drives revenue based on account volume, not AUM. So let’s play a game. Let’s say that the average Acorns account has $1,000 in it. I bet many accounts have a few dollars, but some also must have a lot more, so let’s toss out $1,000 as a starting point. At a billion dollars in AUM, that’s a million accounts. At the mid-point of its pricing, $2 per month, that would shake out to $24 million a year in revenue. At $1.5 billion in AUM holding our other estimates static, it grows to $36 million.
(You can quickly come up with your own estimate by changing average account balance to raise and lower the number of accounts that Acorns may have off its AUM. You can raise and lower its AUM and tinker with its average revenue per account. Email in your estimate if you are especially proud of it.)
That’s not bad! But we don’t know the firm’s cost of revenue. If we presume software-level margins, Acorns’ revenue is somewhat impressive. But if it costs more to create, invest, and manage investment and savings account than it costs to support enterprise software, Acorn’s revenue would be less attractive than it may appear in relation to its peers.
All that is a little riff on where Acorns may be and nothing more. But I think that we can see that at a $700 million valuation Acorns will be pretty richly valued. Even if you cut the average savings amount to get a higher number of accounts, the firm’s revenue multiple is going to be high, unless its AUM is far over the $1 billion mark, or perhaps its customers love to spring for its more costly plan.
But it’s 2018, and there’s a lot of money around. Acorns can probably raise again, and more, at a higher valuation than it did this summer.