Bellafiore/Nvstr/8-15-16

Investment Memo: Nvstr

I.

Introduction
Nvstr represents a fairly early-stage fintech startup that has thus far raised an undisclosed
amount from 8 separate investors, according to Crunchbase, after being founded in April
2015.
Based in New York City, its two founders Patrick Aber and Bernard George bill the company
as a smarter, simpler, social online platform that empowers investors of all skill levels to
enhance their profitability.
Nvstr has built an intuitive, user-friendly platform which allows customers to buy and sell
stocks and ETFs as one would on traditional online brokerages while additionally being able
to view and share investment ideas from other connections on the site and seamlessly
integrate these ideas into their own portfolios.
Furthermore, Nvstr aims to educate less savvy investors by providing access to expert
opinions on certain stocks which its users can also incorporate into their own portfolios. In
this way, Nvstr believes it can engage and enable investors of all skill levels while
revolutionizing the way users construct intelligent, profitable, portfolios.

II.

Competition
As online brokerages and social online trading platforms are nothing new, there is a fair
amount of direct and potential competition that could hinder Nvstrs growth.
-

Direct Competitors (SparkFin, Robinhood, EToro, ZuluTrade, Ayondo)

Traditional Online Brokerages (E*Trade, Charles Schwab, TD Ameritrade)
Automated Trading (Wealthfront, Betterment)
Social Financial News Platforms (StockTwits, Benzinga)
Barriers to entry

Nvstr certainly has the potential to become a powerful player in the social trading landscape
due to its impeccably built, engaging, and simplistic website which will serve to attract users
of all kinds of skill levels to the platform. It does however, face stiff competition and barriers
to entry from a large amount of more traditional firms looking to integrate more social and
digital content into their platforms, as well as from some growth stage players in the social
and automated trading spaces that are looking to fill the same void in the market as Nvstr is.
Nvstr will need to focus strongly on developing and integrating richer social media tools into
its platform as well as on rapidly increasing its name recognition in order to attract and
retain potential users to its platform.

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III.

Key Risks
A. Traditional Online Brokerages
Nvstr is certainly not alone as an online brokerage and indeed is entering a crowded field
with powerful players who have held strong positions for many years. Thus, the number one
risk facing Nvstr currently is likely a larger online brokerage firm integrating similar social
functionality into its own platform and squeezing out Nvstr, whose potential customers
would likely opt to remain with their traditional brokerages in this scenario, should they be
offering a comparable service and quality. This is a large risk, as a number of firms looking to
capture and retain the burgeoning millennial investor pool presumably Nvstrs primary
customer target have drastically increased their digital capabilities with apps and other
social tools aimed at attracting this new group of investors.
B. Growth Stage Social Trading Platforms
Secondarily, purebred social trading platforms such as ZuluTrade, Ayondo, and EToro have
existed for a number of years and pose a direct threat to Nvstrs ability to attract users
already within the social trading space. A key advantage Nvstr has here however, is its
usability, which is far more intuitive than any of these three platforms, making it more
attractive to amateur investors. Additionally, these and other social trading firms have little
market penetration and name recognition indeed, because of SEC regulations, EToro and
Ayondo are still un-operational in the United States leaving a large portion of the market
still up for the taking. Nevertheless, as social trading becomes more mainstream, these and
other firms will be powerful competitors.
SparkFin In many respects, the closest platform to Nvstr on the market today is
SparkFin. Cofounded in 2015 by Jason Pang and famous hedge fund manager Howard
Lindzon, the company aims to allow you to learn the market for free, and profit
forever. Since its founding it has raised aprx. 1.5 million in one round and has attracted
much more media than Nvstr due to its high profile founder. The threat to Nvstr exists
primarily because SparkFin has created an equally intuitive, simplistic platform focused
on attracting investors of all kinds of skill levels and utilizing the power of social-media
to help them learn the ways of the market and leverage this knowledge to build their
wealth. Also SparkFins centerpiece a curated feature called Expert Lists, which
allows users to integrate their friends and experts investment ideas into their own is
extremely similar to Nvstrs Thought Leaders tab, and perhaps even an improvement
on it. Importantly however, while SparkFin is already available for download, it still is
unable to allow its users to execute trades directly from the platform; though they are
working towards this capability. Nevertheless, given that the company plans to face the
social trading market head on while using very similar methods to Nvstr, it certainly is
one to pay attention to.
Robinhood Though there is nothing social about it as of yet, there is no ignoring
perhaps the most popular and promising fintech startup of the last 5 years. Having
raised 66 million in three rounds from 24 investors including the likes of Andreessen
Horowitz, Google Ventures, and interestingly, Howard Lindzon of SparkFin since its

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founding in 2013, Robinhood has garnered heavy media coverage and is changing the
online brokerage game. Its key selling point is of course that all the trades made on
Robinhood are commission free to the user, a marked departure from the traditional
online brokerage model. And while again, there is no feature that currently allows users
to interact with one another as they would on Nvstr, Robinhoods popularity and worldclass management would allow it to seamlessly transition into this space should the
company decide it wants to pursue the social trading market. It therefore cannot be
overlooked as a potential competitor to Nvstr.
C. Social Financial News Platforms
While the major players in the Social Financial News space, StockTwits and Benzinga, are
purely platforms built around communication and not actual stock trading, they should
nevertheless be on Nvstrs radar. Both platforms are similar in look and feel with a few
unique features between them. Each allows users to post and comment on financial-related
topics and share actionable ideas about investments, trades, etc. and each boasts a fairly
robust and active user base of expert Wall St. type traders. Interestingly, Howard Lindzon is
also the co-founder of StockTwits the more successful of the two platforms. This is worth
noting because, though it currently does not offer a News feature, should Nvstr decide to
differentiate itself by implementing one there is a possibility Lindzon could attempt to
merge his two companies together thereby giving SparkFin an already polished financial
news platform with a solid user base something which Nvstr will obviously lack out of the
gate. Additionally, should either StockTwits or Benzinga decide to integrate a trading feature
into their platform, they would immediately become direct threats with dedicated followers
that would undercut Nvstrs ability to attract users.
D. Automated Advisors
Finally millennials, who are attracted to simplicity and trusting of tech, are ditching
traditionally and self-managed online brokerages for automated advisors (typically
considered RIAs) such as Wealthfront and Betterment. These firms also pose a powerful
threat to Nvstr as again, they syphon a portion of their most important consumer base
towards a more laissez faire method of investing. Nvstr however, has looked to counter
this by integrating some differentiated automatic investment tools into their website.
Nevertheless, Nvstrs defensibility of its own platform is made more challenging by the
existence of these already established firms.
E. Barriers to Entry
The idea of the online brokerage has existed for a long time and is a popular one. However,
whereas traditionally the area of ones personal finance has been private, millennials who
are inherently more welcoming to, and indeed place value in the idea of sharing are slowly
changing that. Thus, while social trading is still in its relative infancy, it is poised to grow
significantly in the coming years as the Facebook generation enters the workforce and
begins to earn money they can invest with. Importantly, they will look to invest this money
in a familiar way, which is where social trading is poised to capture a significant portion of
the market.

Bellafiore/Nvstr/8-15-16
As with all nascent industries however, companies looking to enter the social trading space
will face a number of obvious barriers to entry, primarily put in place by larger, more
established firms looking to transition into the new market before start-ups can poach their
customers away from them.
Nvstr will inherently face these barriers as well and may find it difficult to wrestle customers
away from their traditional brokerages due to the hassle and time it will take these preexisting consumers to switch their assets from one service to another. This will be even more
difficult to do if traditional firms begin to offer stronger social media packages on their
platforms.
Furthermore, Nvstr will have to wait for the idea of social trading to fully catch on, which may
take longer than it anticipates. This, coupled with a lack of name recognition, could doom
Nvstr early to being an insignificant player in the space.
Finally, as social media is a network-effect driven space where the first few major players out
of the gate capture large market shares, Nvstr will have to be keen on offering a quality,
easily recognized product that users will flock to until it becomes inherently unprofitable not
to have an account on the site. If the firm fails to do this, it will likely flounder and have
difficulty retaining customers as they move to different firms more effectively riding the same
social trading wave.
IV.

Privacy and Legality Concerns

Briefly, it is important to note the prominence of privacy and legality issues which surround
the social trading market.
Firstly, there is some concern that users, who are traditionally tightlipped and hesitant to
share their investment ideas even with family, will not take to the idea of a social network
for their investments. This is a real concern for Nvstr, which will have to clearly show it can
add value by allowing users to share investment ideas in order to educate themselves about
the markets and build their portfolios. Only then will users already using more traditional
online brokerages be attracted to Nvstrs features. However that being said, it is important
to note that Nvstrs primary target demographic is likely millennials who are more tolerant
to the idea of sharing. Also its worth noting that Nvstr will have features which allow users
to control how much or how little of their portfolio connections can see. Effectively, should
they choose, users will be able to trade on Nvstr completely privately as they would on any
traditional online brokerage. However importantly, should their accounts be private, users
will still be allowed to utilize Nvstrs educational features and follow the investment ideas of
friends and experts alike.
In terms of legality, there are many regulations in the United States which Nvstr will have to
maneuver around. Many of these regulations are in place to discourage insider trading and
other such practices which would make the market disproportionately unfair. Also, things
such as buddy and copy trading hallmarks of platforms such as EToro which allow
users to automatically execute trades their followers are making are illegal in the US
because they introduce too much risk and effectively allow uncertified individuals to
manage large sums of money. Thus, Nvstr will need to be wary and considerate of these and

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other legal issues as they move forward and introduce different features into the platform.
From a business perspective, this could make innovation move just a little slower and
potentially introduce added legal costs into Nvstrs bottom line, though as of now these
concerns are only hypothetical in nature.
V.

Leadership
Promisingly, Nvstr is well built and well managed and will only get better as it looks to
incorporate quality social media tools into its system.
While currently Nvstr maintains only about 10-30 full and part-time employees, it is looking
to bring on new talent as it expands and prepares for its upcoming beta launch.
Its cofounder, CFO and COO Patrick Aber, is a Harvard educated former portfolio manager
who has previously invested with Merrill Lynch and The Carlyle Group among other
prominent firms. While Nvstr represents his first entrepreneurial undertaking, Patrick is
passionate and knowledgeable about both investing and fintech and has tremendous vision
for the firm.
Cofounder, President and CEO Bernard George, also a Harvard graduate, is a former investor
at J.P. Morgan and Merrill Lynch. He has held high level management positions at Credit
Suisse and C12 Capital Management.
Finally, Hayden Cacace, Director of Product Engineering at Nvstr and graduate of Michigan
University, has himself founded his own company and held prominent production positions
at various firms. Additionally, he has significant software development experience from both
Wireless Generation and Electronic Arts.

VI.

Revenue Model
A. Traditional Revenue Streams
As is the case with most traditional online brokerages, the most easily tapped and obvious
revenue opportunity will come from trading commissions. While Nvstr plans to charge a
specific amount per buy/sell trade, for confidentialities sake, I will instead use two
hypothetical figures one below the industry standard and one approximately at the
industry standard for commissions to calculate potential total revenue. Using these
figures, a fairly rudimentary revenue model can be created as follows:
# Of Unique Trades per day X Commission per trade X 251 = Estimated Annual Revenue
*251 is the approximate number of trading days per year found by accounting for weekends
(365 X 5/7 = 260) minus nine holidays (260 - 9 = 251).
**This is a conservative figure, as though trading is only open 251 days per year, users are
able to place trades 365 days per year, which are then executed once trading opens again.

Bellafiore/Nvstr/8-15-16
Following this model we can see different potential revenue according to different
scenarios:

Scenario 1
Scenario 2
Scenario 3

Number of
Trades per day
25,000
50,000
100,000

Commission per
Trade
$4.50
$4.50
$4.50

Days per Year

251
251
251

Estimated
Annual Revenue
28.24 million
56.475 million
112.95 million

While obviously a percentage of the total estimated revenue would be allocated to

operational/administrative costs etc., it is easy to see that even with fairly modest estimates
of trade volume as well as conservatively calculating revenue by using the number of
trading days per year instead of total days per year, Nvstr still has the potential to be
extremely profitable.
If we instead increase commissions to $7.00 still slightly below the industry standard
commission rate of $8.00 we see these scenarios:

Scenario 1
Scenario 2
Scenario 3

Number of
Trades per day
25,000
50,000
100,000

Commission per
Trade
$7.00
$7.00
$7.00

Days per Trade

251
251
251

Estimated
Annual Revenue
43.93 million
87.85 million
175.7 million

Again, while these scenarios are purely hypothetical, based on figures well below and
slightly below the standard commission rate in the industry, it is not difficult to discern that
should Nvstr capture a large enough market share to hit these trading figures which again,
as they are modest, should not be difficult then the firm, which has high profit margins to
begin with, should be able to be highly profitable early on.
B. Alternative Revenue Streams
While again, commissions on trades are the most obvious and standard revenue stream for
online brokerages, due to Nvstrs social media offering, there are potential opportunities for
additional pricing models.
Firstly, Nvstr could be in a position to charge a premium fee to willing users which would in
turn give the buyer access to premium content such as more extensive portfolio analytics,
discounted commissions, a more complex suite of social media features etc. This fee would
likely have to be strategically integrated into the platform once Nvstr had garnered a
significant and active user base so as not to risk stunting the firms growth early by giving
curious consumers the impression that it is primarily a paid service.
Additionally, Nvstr may be able to integrate some light advertising into its platform for
various financial firms, publications, and products. While Nvstr should be careful not to
make these advertisements intrusive on the user experience, its status as a social media
platform may influence users to be more willing to accept the occasional banner or pop-up

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ad than they would be on more traditional online brokerage platforms. Again however, it
would be prudent to add such things later in the companys growth cycle so as not to deter
potential users from adopting the service early on.
Finally, while highly inadvisable early on due to its potential to keep users from adapting the
service, if Nvstr manages to solidify a substantial and significant user base, it could consider
charging a small, one-time fee to new users in order to gain access to the platform. While
this would have to be a carefully overseen move, it could benefit Nvstr by making it appear
like a top-quality service. However, it should be noted that few online brokerage firms
currently charge an entry fee to their users.
VII.

Exit
While again, social trading is not an exceedingly new idea, there have been few exits in the
industry thus far.
As mentioned, there are a number of companies with similar business practices to Nvstr. Of
these companies, EToro and Ayondo are the two most popular and comparable, though
both are not yet available in the US and instead operate primarily on European markets. Of
these companies, EToro has been the most successful, and from 2007 to present has raised
72.9 million dollars in 4 rounds from 16 investors according to Crunchbase. Also, though
there are varying reports on this figure, the company currently boasts approximately 2.85
million users in 200 countries.
Ayondo, which also operates primarily in Europe has raised 10.28 million in 5 rounds from 6
investors since 2008. However its worth noting that its most recent investment of 6.28
million came in April of last year.
As for traditional online brokerages, for comparison, one of the most popular companies
E*Trade Financial released earnings of $474 million in the second quarter of this year. And
as of December 2015 there were over 3.2 million active users on the site.

VIII.

Recommendation
Nvstrs company tagline is Invest Better. Together. Its cofounders are focused not just on
creating a platform where users can buy and sell assets, but a place where they can connect
with one another and learn to discuss a topic many dont know much about in an intelligent,
productive, and ultimately profitable way. As discussed earlier, the Nvstr model of inclusion
and sharing is one which appeals to a millennial generation that is currently entering the
workforce in numbers. Many of these millennials, be it for a lack of interest or because they
grew up during a recession and mistrust large financial institutions, have little knowledge of
how to invest in the markets. Yet, they will soon need a place to invest their money and they
keenly understand the power of social networking more than any generation before them.
Thus, they will look for an outlet that bridges this divide in a familiar way, and if they see an
opportunity to do that while being profitable, they are going to take it. This is why I believe
Nvstr and the social trading market on the whole are poised for massive growth in the
coming decade.

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Therefore, though it carries some inherent risk due to heavy competition and because it
exists in an industry that is still flying just under the radar, I believe Nvstr is a superb choice
for investment with tremendous upside potential.
Where other firms entered the game too early or are too complicated to become
mainstream, Nvstr is entering at the right time with the right platform. Its leadership is
excellent and understands that simplicity and usability are paramount when it comes to
engaging investors of all different skill levels. Furthermore, in an industry with fairly low
costs, it should be able to become profitable relatively quick.
If an offer for investment is ultimately extended, it would be prudent to focus primarily on
implementing a strong advertising campaign, both about Nvstr itself and about the potential
power of a social trading network in general. Once the company goes live, it will also be
important to work with management in order to develop and continue integrating a more
robust social media offering into the platform in an effort to attract and retain new users.
Finally, as with all new firms, it would be wise to ensure that Nvstr grows at a healthy,
manageable rate, so as not to make it difficult to keep up with demand or deter new users
with a platform that is still in its early stages of development.