It seems like I could start writing a series around this theme, after “Why did Northwestern Mutual pay $250m for Learnvest”.
FT Partners – who were the advisors of Blackrock in the transaction – produced an excellent document that not only summarises the transaction, but also lists all the main transactions (M&A and funding) in the robo-advisor space.
The valuation of the deal is not public, and is rumoured between $100m and $200m. The previous valuation from their VC round was $75m a year ago, so $200m for example wouldn’t seem crazy.
In the case of FutureAdvisor, the traditional valuation metrics clearly do not apply. If FutureAdvisor was valued as a traditional asset manager, their valuation would be more around $30m assuming they have around $1bn under management. Why would Blackrock pay such a premium for a startup that is clearly growing, but hasn’t yet proven its revenue model ?
My view is that there are 4 main reasons why Blackrock bought FA, (or Northwestern bought Learnvest, BBVA bought Simple, etc.):
– Acquires a product with a user interface that gets client traction. The difficulty of creating a product that appeals to consumers shouldn’t be underestimated.
– Helps to launch a new offering, integrated with their existing ones, very quickly.
– Injects innovation in their organization, through the integration of the startup team.
– Signals to the organisation, and the markets, the strong focus on innovation.
It is interesting to note that Blackrock is one of the most innovative asset managers with Fidelity (e.g invested in Lending Circle and Prosper, invest directly in p2p loans, etc.), and are very involved with startups in general. With that insight, that they decide to buy (vs build) is something to consider for financial institutions when looking at their innovation strategy.
For startups that manage to build a strong product, but find that customer acquisition is too expensive, this would be a natural exit strategy. For traditional finance, that is a way to boost their innovation efforts at a moderate cost. For these reasons, we are likely to see other similar deals in the future.
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