How to know if your investment platform should practice product-led growth
“Individual investors, whether motivated by short-term trading or long-term investment goals, may permanently alter traditional market dynamics going forward, including the ways in which retail investors, market-makers, clearing firms, brokerages, wealth managers, and hedge funds interact.” Deloitte Report 2021
Traditionally private investment space is driven by institutions, ultra-high net worth individuals, human relationships, and a white-glove approach. In recent years, many private equity and debt companies were founded to democratize retail investors’ access to one or another traditional asset class, and the growing number of alternative investment platforms started to rely on self-service investors. Advancements in payment processing, accreditation verification, electronic signatures, and communications allowed companies to significantly automate routines and lower operation costs, which enabled lower investment minimums for investors. Now, investors can start with $10 on some of these platforms. Sales-assisted investing is being replaced by self-service and self-directed investing.
Quick summary of growth factors:
These emerging best practices allow the most successful alternative investment platforms to achieve product-market fit and scale:
Alternative investment platforms
Look at the following breakdown of investment platforms by year founded and assets under management (AUM) if publicly available. Many noticeable and successful by AUM investment platforms rely mostly on self-service investing.
Roles of regulations
Alternative investments in private equity and debt come with regulations, e.g., Reg D, Reg A, Reg CF, and Reg S. Regulations describe specific requirements, such as how a company can sell securities and to whom, the maximum offering amount, restriction on secondary trading if any, and reporting with regulators like FINRA and SEC. The choice of the regulation will significantly impact a software solution to enable self-service as well as a salesperson (an investment representative or account manager) profile.
Reg D. The most popular regulation by AUM is Reg D; it is usually a choice for real estate crowdfunding platforms like Cadre, Crowdstreet, RealtyMogul, RoofStock, or such farmland investing platforms as FarmTogether or AcreTrader. It is also used for private debt financing on Percent and Yieldstreet. To invest in a Reg D offering, an investor should be accredited, which narrows down the population to ~13.6M households (10.6% of all American households were accredited in 2020).
Reg A. This is increasingly used to sell shares of such collectibles as artwork, cars, magazines, and books on platforms like Masterworks and Rally. Arrived, a recently founded but already well-backed platform that allows buying single-family house shares, uses Reg A as well. Reg A significantly reduces the operational burden by eliminating accreditation verification requirements. This translates to more software product opportunities with instant transactions and fewer people in a back office. Self-service investing becomes a huge growth opportunity yet to be realized in such companies at scale.
Reg CF. This is the youngest and most significantly changing regulation that is often used for startups fundraising. As always, early-stage companies tend to burn out. Companies like Republic and WeFunder use RegCF, and no accreditation is required.
Reg S. This regulation is rarely used by investment platforms on a standalone basis but rather as an addition to the regulations above to allow for international investors, who might not need to meet US requirements for accreditation.
Non-publicly traded Real Estate Investment Trusts (REITs). These are used by real estate platforms like Fundrise and RealtyMogul, are available to non-accredited investors. Similar to Funds, REITs are usually diversified across multiple investments and eliminate a waiting time to the next individual investment opportunity, which might not be readily available at all times.
No regulation at all. Surprisingly, some companies that look like investing platforms actually skip the regulations altogether. Why? They don’t need to sell shares. The asset costs fit into one buyer check.
Vinovest sells packages of wine and whiskey bottles. Yes, those are closely analyzed and tracked over time. But it is a bottle of wine; investors can buy it the same way they would do it themselves in a winery if they knew the market better and they can even sample the product.
Alt sells sports cards. An investor bid and buy as if directly bidding and buying on eBay but fancier and with less hassle.
International investors
Can investors from overseas still participate? There is no citizenship requirement for owning stocks of American companies, but there might be other restrictions related to underlying assets or legal structure. For example, each state has different laws regulating foreign ownership of agricultural land. In Oregon, only citizens or persons who have applied for citizenship can purchase state land.
In addition, the Patriot Act of 2001 led investment firms to implement more requirements for verifying investor identities for non-U.S. citizens. Identity verification, as well as special tax treatment, international bank accounts management, and international payments processing create extra operational work. But given huge interest from people around the globe to invest in alternative assets and lower cost of acquisition for companies, some of the most innovative platforms are already capitalizing on this untapped growth channel.
Advanced tech-stack
Today, investment platforms can rely on SaaS companies to build efficient operations. Usually, integrations are seen as solutions that work on existing clients’ banking setup. Investment platforms can integrate with services verifying and linking bank accounts, providing payment operations, KYC and AML checks, accreditation verification, secondary trading, shareholder stock transfer, and accounting and reporting, among others.
A step forward would be understanding abstraction, such as how virtual accounts and ledgers can help an investment platform venture resolve bottlenecks to scale. Vinovest creates a virtual account for each counterparty that enables them to have 100% reconciliation, including wire transfers. Ledgers allow for tracking user balances and transactions in applications. Companies no longer need to build these solutions in-house, and they can instead focus on core business.
Around 2019, banks and payment platforms started to offer Banking as a Service (BaaS) solutions for fintech startups or companies looking to add financial services. BaaS gives much more flexibility to implement unique financial products and own client experience end-to-end. For investment platforms, it also provides a new way to comply with the regulatory requirements in regard to transfer facilitation. With bank accounts opened on a client name and the client controls the money flow, the investment platform doesn’t need to become an intermediary bank account anymore. At the same time, the company has full visibility into funds, balances, and transactions, e.g., Masterworks opens bank accounts with Synapse banking as a service platform for clients to participate in secondary trading.
The way an investment platform is built will define the potential for creative solutions and significantly affect the quality of operations and client experiences. Having prompt and accurate information and instant status updates on all steps of the user journey available in the palm of their hand at all times is a huge differentiator.
Investment minimums
Traditionally, the investment minimum needed to let an investor into offering was fixed. It was possible to negotiate the minimum amount on a one-by-one case, but otherwise, it was seen as an exception, such as with a benefit to an employee for example.
At a scale of hundreds of thousands of investors, modern investment platforms try new ways to meet investor and company needs and optimize investor conversion.
Fundrise operates nontraded REITs and interval funds and thus doesn’t have to set minimums on an individual offering level. Fundrise has investment plans with account levels broken into buckets of $10, $1,000 (most recent), $5,000, $10,000, $100,000 minimums (as seen in mid 2021).
Roofstock offers an easy way to buy the whole single-family rental (SFR) or a portfolio of SFRs. Roofstock One was launched initially in Feb 2019 as an investment platform for buying shares of individual rentals but, in Nov 2021, they relaunched and now offer stock in REITs created for sets of single- and multi-family houses starting with $5,000.
Deal-by-deal offers usually start with a fixed minimum amount and can be based on a maximum number of investors allowed in a deal or other factors, and can vary by company significantly, even within the same asset class. In real estate, Cadre would typically have a $50,000 minimum, while RealtyMogul’s maximum is $35,000 and Crowdstreet’s $25,000.
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While accredited investors might be not sensitive to $5,000 investment minimums, non-accredited investors, if eligible to invest, expect minimums as low as $100 to start investing.
Liquidity for traditionally illiquid asset classes
The primary market occurs when securities are created during initial investment offerings. A secondary market ensues when investors in this offering want to sell or buy these securities. Investment platforms have increasingly created their own in-house broker-dealers, because it is unlawful for a non-broker-dealer to accept a commission in connection with the sale of securities. Creating a broker-dealer seems like the appropriate thing to do, although it is costly and time-consuming. However, another approach would be to work with a third-party broker-dealer, and to operate a secondary marketplace at scale, a company would also need a licensed alternative trading system (ATS) to enable order matching.
In Reg D, the secondary trading of securities is restricted, meaning that it is not particularly easy to liquidate an investment before the end of the hold period, which can be 10-15 years for some assets, such as farmland. Cadre does a great job offering quarterly liquidity opportunities for individual offerings, but with 5-15% discounts to NAV, meaning there is no way for investors to set the price. Their broker-dealer services are provided by RealCadre LLC. YieldStreet offers Prism Fund quarterly buybacks, and they are not registered as an investment adviser or broker-dealer with SEC or any state securities regulator.
Reg A places no restrictions on secondary sales. In combination with waived restrictions on accreditation, companies can lower the cost of acquisition by offering anyone securities with lower minimums, having a bigger investor base, and a striving secondary market with more traders on it realizing returns sooner. Masterworks built a secondary market as a board showing bids and asks where investors have to set the price and monitor the board themselves. Historical trades are available for each artwork showing monthly active trades, with significant premiums and discounts happening each day.
Non-publicly traded REITs were meant to be illiquid. For example, Fundrise allows either change in allocation preferences between REITs with different strategies for future investment or a request for capital withdrawal, with few details on the process.
Many alternative investment platforms actively explore ways to create a secondary marketplace with third-party broker-dealers and alternative trading systems (ATSs).
Sales-assisted investing
During the product market fit stage, investment platforms hugely rely on human involvement. Sales or investment representatives, or even founders can provide a wealth of knowledge about various aspects of the business without giving actual investment advice to close first offerings. Close conversations with investors also give the opportunity to listen to actual problems people are trying to solve, weed out the most frequent questions, and identify product improvements and opportunities.
As the user base grows, investment platforms organically transition to self-served, product-led growth. At this stage, a company understands that the investment platform is intuitive, and investors are realizing value without hand-holding. This might be a good time to look at the breakdown of the LTV/CAC ratio by product vs sales-assisted investments. A huge factor would be whether an investment platform has bespoke offerings or a segment of investors with higher checks that would justify the costs of an account manager. In the pool of investors, companies will likely see whales—clients with millions to allocate. The chances are high that they would do robust due diligence on such companies and would expect a contact available to answer any questions.
“The key question to ask is: Who does a better job selling the product: the sales team or the product itself?
In this case, “better” is quantifiable. The value of every customer will be the lifetime value of that customer minus the cost of selling to that customer. This means that there are two inputs into “better”: which method of selling leads to more valuable customers and which method of selling leads to more reasonable and scaleable selling costs?
There has been a big move toward product-led growth in recent years, because technology has gotten to the point where products can do a much better job selling themselves and people are more willing to be self-service in their purchases. That said, there are verticals that require high-touch sales.
As an example, a number of real estate companies tried to reduce the real estate agent’s role in selling homes — they were not nearly as successful as Compass, which focused less on replacing the agent, and more on amplifying the agent. The home real-estate market is still sales-driven rather than product-driven.
In the investment space, there has been significant growth in self-service products like Robinhood. But many financial products are still primarily sold via sales teams.
The decision to focus on a product-led vs. sales-assisted model should be forward looking. A good litmus test for this decision is asking: In 3-5 years, what % of a company’s sales will be self-service vs. sales-assisted? If 80% are self-service, then you must invest in product-driven growth now. If 80% are sales-assisted, then the product should focus on amplifying the sales team rather than replacing it.”
Continuous supply of investment opportunities
It might sound obvious, but a reliable and scalable pipeline of investment opportunities is a crucial factor in the success of the investment platforms.
Providing deal-by-deal investment opportunities in an industry with many institutional buyers might be a tough game to play. One of the most popular solutions to having continuous offerings is to use Funds. Funds have an investment thesis for investors to decide if investment strategy and goals are a good fit for them. The investors do not participate in the decision-making process on each individual deal in a fund. Examples include YieldStreet Prism Fund, Cadre Direct Access Fund, EquityZen Growth Opportunity Funds, CrowdStreet Build-to-Rent and Multifamily Fund, and FarmTogether US Farmland Fund LP.
Another good example would be AngelList’s rolling funds for the venture capital industry. Rolling funds allow continuous syndication. Investors follow a flexible, quarterly investment schedule rather than a one-time commitment to a fund. An investor participates in the investments the fund makes for each quarterly fund the investor invests in.
For prospective investors, an active offering they can participate in is the best way to learn about the platform and investment opportunities. Having long windows of empty marketplaces hurts growth like nothing else.
Should your investment platform practice product-led growth?
In early days, investment platforms are doing a lot of high-touch sales and ad-hoc projects, but in the long run, there is a need for strong tech and product mindset to scale.
That said, investment platforms can mix and match. There is no right or wrong answer to what kind of regulations to follow or what works best to grow an investment platform. One can target institutional capital and qualified purchasers, another can focus on retail investors. A company strategy will define product strategy. It all depends on where an emerging fund, asset manager, or a direct-to-asset-owner company sees the business opportunity, where their strengths belong, and the specifics of the asset itself.
“As in many industries, rapid advances in technology have allowed for disruption to come from a radical focus on the customer. But it's important to keep in mind that some strategies will still use sales-led growth to meet customer needs, while other strategies will focus on product-led growth. The company strategy and the product strategy should come from extensive work understanding customers combined with an understanding of the technical capabilities now available for investment technology.”
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