Reflections on 6 years building neobrokers
Exploring what is next
Some news from me! I recently left Lightyear to start a company - more on that soon.
This marks an end to 6 years of building neobrokers around the world, firstly with Sharesies in New Zealand & Australia then Lightyear in Europe. It’s been a ride!
Here are a few parting reflections and predictions.
The leanest neobroker wins
You need to build the leanest, most efficient broker possible.
To accomplish this you are primarily solving regulatory and infrastructure problems. Regulation unlocks licensing, creates defensibility, and allows new products into new markets. Infrastructure creates an organisation that ships faster with fewer people as you get bigger, reduces dependencies on third-party vendors, and creates commercial leverage.
Few neobrokers will be able to achieve both of these things. Those that do will win over the long term.
Retail investors are consistently underestimated
Retail investors matter.
People using Sharesies or Lightyear, and retail investors in general, are constantly underestimated. By and large, they make good investing decisions. People are very good at learning and deciding what they want to do for themselves.
More engagement with investing and capital markets is a net positive and should not be exclusionary.
There should be more financial advice
The problem is not bad advice, it’s that there is no good advice at scale.
We need to be brave and unafraid to help people on their investing journeys.
The number of people seeking and acting on anonymous advice from internet strangers, especially on Reddit, is astounding.
Build wealth slowly
Compounding is powerful no matter how much you start with.
A very small percentage of investors day trade, they tend to be overrepresented in media with stories of huge gains or losses.
Most investing activity is pretty boring with investors regularly buying and building a portfolio over time.
When retail investors do sell, it can be for amazing reasons - to buy houses, pay for weddings, and even life-changing medical treatment.
Overwhelm is real
There are probably too many investment options available.
Most retail investors want access to their local market and then US stocks & ETFs.
If you looked at the global distribution of retail shareholdings: they would likely be highly concentrated across a few hundred US stocks & ETFs, with a long tail of small ownership beyond that.
Optionality is good as a broker, but only if you can deliver positive unit economics for each new investment you add. Otherwise, offer less choice.
High-quality customers are everything
Growth at all costs is over.
I’m skeptical of any financial services company offering high upfront incentives. You cannot outbid other companies for customer subsidies.
The same goes for anyone claiming zero commission.
This is in contrast to zero interest rate induced spray and pray acquisition, where acquiring any customer was perfect for topline growth, regardless of their underlying characteristics.
The best way to achieve positive unit economics right now is to target customer segments with meaningful amounts to invest. These are experienced investors, typically older, and with existing portfolios at other brokers.
You attract these customers by having an exceptional product offering. That means deeply understanding customer needs and quickly building products to address them. If you can continuously deliver value, they will move more assets to your platform. This is a key motion for lowering acquisition costs and increasing lifetime value.
You grow by the speed you ship
I cannot overstate how important this is. If you are not visibly shipping each week then you are heading towards irrelevance (this goes for any early-stage company).
Trust takes decades and requires deep pockets
If you look at the largest banks & brokers they all have one thing in common, they’ve been around for decades. This has allowed them to compound trust and become highly valuable.
The best way for a neobroker to be around for decades is to have deep pockets. Raise as much money as possible, always. This was a lesson I learned at Sharesies from the early Xero team.
Contrary to ‘bootstrapping’ or ‘raise once and never again’, you want to be a well-funded business with optionality. Neobrokers stand out because they are capital-intensive. When volumes increase, so do your capital requirements. This isn’t linear. You either need little or a huge amount of capital to operate, there is no middle ground. You need a balance sheet to scale and maintain trust over time. Especially if you want to survive volatility and compound for decades to eventually become the next Vanguard or Interactive Brokers.
Brokers are fundamentally misunderstood
We’re in a brokerage winter.
The best teams are heads-down building. They are doing everything possible to provide customers with the most value and the best experience, at competitive price points.
Those that succeed will become recession-proof. Brokers are cyclical and do particularly well in times of volatility.
You can still build an enormously valuable brokerage, these economic conditions should not be a deterrent. Those that emerge will be stronger and better placed to compound for decades.
Build vs partner
You have to carefully weigh up building vs. partnering. This is existential to most early-stage companies.
You cannot build a successful neobroker over the long term by solely relying on third-party vendors aka becoming a ‘neobroker in a box’ by integrating a set of APIs. This was a zero-interest rate phenomenon.
You lose leverage on commercials, customer experience, and become beholden to too many third parties.
It’s possible to start like this, but you need to have a solid plan to replace most of your third-party vendors with in-house solutions. To achieve this you need exceptional technical talent, your own licenses, and time.
Regulators are the ultimate master
Everyone underestimates the amount of time it will take to secure licenses from regulators. I haven’t seen one license issued on time, ever. Usually, it takes two to three times longer.
You need to adjust accordingly and be able to survive these wait periods.
It helps to have a reputation and standing in the industry. An experienced team matters.
Please subscribe if you find this content valuable. I’ll be writing more as I embark on this new journey 🚀
My next stop is San Francisco to join the OnDeck fellowship.