Betterment Valued At Nearly $500 Million In New Round

Online financial adviser Betterment LLC has raised new funding that values it at around $400 million to $500 million, according to people familiar with the matter.

New York-based Betterment is closing a new $60 million round, the company is set to announce on Thursday. The new round was led by growth equity firm Francisco Partners, with existing investors Bessemer Venture Partners, Menlo Ventures and Northwestern Mutual also taking part in the offering.

Betterment the latest fundraiser among a group of online financial services firms—known as roboadvisers—that aim to attract investors, particularly younger ones, with mobile apps and automated tools that allocate portfolios to maximize gains and minimize taxes. These advisers have no branches and offer minimal human advising, but charge fees well under 1% of assets.

According to Corporate Insight, a financial services industry data provider, roboadvisers managed roughly $19 billion in assets as of December, up from $11.5 billion in April of last year.

But even at an early stage, these firms have attracted a wave of private funding, as investors bet that they will win a piece of the $17 trillion assets overseen by traditional wealth managers. Robo-advisers took in $290 million in venture-capital funding last year, according to CB Insights, double the total in 2013.

“Robo-advisers are using software to automate [financial advice] at zero marginal cost,” said Peter Christodoulo, a partner at Francisco Partners, which is based in San Francisco. “They are disintermediating one of the most inefficient markets there is in financial services.”

Last year, robo-advisers including Wealthfront Inc., FutureAdvisor and Personal Capital Corp. also raised new funds. In recent fund-raising rounds, Wealthfront was valued at $700 million, and Personal Capital was valued at $250 million, The Wall Street Journal previously reported.

Founded in 2008, Betterment has now raised a total of $105 million. It has amassed about 65,000 customers, giving it a user base that is twice the size of rivals. Its accounts tend to be smaller: It manages about $1.4 billion in assets, versus about $1.8 billion for Wealthfront, according to the latest figures given by the companies.

Betterment now has about 90 employees, and expects to grow to 120 this year, said chief executive and co-founder Jon Stein.

“We’re hiring more engineers, more product managers, and more investment analysts to build out our advice and optimization tools,” he said.

Some investors have expressed concerns that robo-advisers are already highly valued relative to their size. Betterment and its larger rivals, including Wealthfront and Personal Capital, each generate $10 million or less in revenue at their current size, the WSJ has reported.

At its current market value, it Betterment is priced at more than 40 times its revenue—a level akin to Internet companies, not to financial services firms.

Fees at Betterment range from 0.15% to 0.35% of assets, depending on the size of the account. It offers some of its tools, including one that sells some positions to minimize tax liabilities, to accounts starting at $50,000. Mr. Stein said that Betterment was still in the early stages of “optimizing” its pricing, as it was trying to build its asset base.

In addition to seeking consumer funds, Betterment’s institutional arm provides many of the same services to traditional professional advisers, including at Fidelity Investments. Some established wealth advisers, such as Charles Schwab Corp., are launching their own automated platforms.

Mr. Christodoulo said that Betterment is now poised to grow its asset base rapidly and could be successful even if it takes only a small sliver of the $17 trillion wealth-management market.

“The basics are all there right now, and [Betterment] has reached escape velocity,” he said. “We think Betterment is the best positioned in the sector. The numbers will be big.”

Additional reporting for this post was contributed by Gillian Tan.

Demos, Telis. "Betterment Valued At Nearly $500 Million In New Round."

The Wall Street Journal. 19 February 2015.