The Failure Of Financial Web Startups

16 comments Written on July 13th, 2013 by
Categories: Startups

This is going to be a long post.

Investopresto, a finance portal, shut shop a couple of days back. They follow other illustrious startups to create financial web sites and eventually run out of steam, like paisa.com , moneysights, moneyvidya and many others. This is tragic, and even more to me as I co-founded and shut down Moneyoga three years ago.

Hasn’t Anyone Succeeded?

Some may say the lack of success is the no product-market-profit fit, and others will say it was the lack of funding. These are strong contenders for reasons, but let’s stop right here and look at the successes.

  • Moneycontrol has won the media battle. With decent , video from its group company CNBC-TV18 and an enormous amount of publicity. While I’ve heard that they are independently profitable, the company they are in (Web18) has been unprofitable for most of the last six years. And they can raise money at the drop of a hat.
  • Value Research Online has lasted more than 10 years as a mutual fund information site.
  • Jago Investor has a personal portfolio advisory and coaching service; Manish and his partner have build a great business, even if it’s not one of enormous scale yet.
  • Zerodha is doing well. FundsIndia.com just raised another Rs. 20 crores, which might not mean they are profitable, but at least they’re not out. Similarly, Policybazaar raised another round recently.

Other current players:.

  • Blufin has an extraordinary board and team.
  • MoneyWorks4Me is strongly pushing their subscriptions.
  • Scripbox has entered as a mutual fund intermediary that makes investing simple.
  • PPFAS – not exactly a startup, but still – has just set up a mutual fund.
  • MProfit is selling a great product (even free) to help manage portfolios.
  • Perfios intends to become your personal financial helper.

So why don’t people succeed?

There is just one reason. That they don’t make money, period. You need money to run a business (and then, profit). You can get that money by “financing” cash flow – where you raise equity or debt to pay the bills. Or you can survive on “operational” cash flow.

Financing wise, life is tough. We are in a different zone with startups today. Some will never make money but are in so much demand they can raise how much ever they want. Like eCommerce a few years ago, like Payment Gateways in 2013 and like dotcoms in 1999. The financial industry is not a hot one. So it will have to make itself worthwhile by making operational money instead.

Operationally, you have to find revenue. It’s not easy, and the barriers to entry are small. Revenue is anathema for most web startups, and their cost structures are so inflated it’s difficult to make revenue that is enough. Staying small and lean helps, but a hard-nosed focus on revenue is just as important.

What’s with revenues?

You can make money in multiple ways with a financial site.

  • Advertising. Print media stalwarts like Dalal Street Journal and Capital Markets, who run a lean shop, have thrived. So have the TV giants. In the online world Moneycontrol and (surprisingly) Yahoo Finance and Eco Times close for company. These are big established media players and to beat them will need more than a fancy looking product. Adsense gives you nothing.
  • Leads: Some financial product players pay for references.  Unfortunately, this model has been tried and wasted as the per-lead rates are low (as low as Rs. 10) and regulation cuts out middlemen. PolicyBazaar has an innovative offering here.
  • Transactions: Brokers like Zerodha and intermediaries like FundsIndia make money off transactions you make on their platforms. The market size here isn’t very big and customer attrition is very high.
  • Technology:  Retail trading software like Amibroker are famous and make great revenue. The big trading software giants in India are Financial Technologies and Omnesys. MProfit is .
  • Data: Reuters and Bloomberg rake it in, selling data. In India, there’s Value Research, selling data and analytics like ratings as do Global Data Feeds. Business plays like CMIE, Dion Global, Tickerplant and CM Online have stayed.
  • Subscriptions: The barrier to entry here is that unless you’re well known, no one will bother.
  • Education: Courses, certifications and placements. Since SEBI requires players to spend a part of their managed asset fees on investor education, there are opportunities here.
  • Money Management: Start a PMS, Become a fund manager, start an AIF Hedge Fund. This avenue may be lucrative if you have the right strategy, though it needs a higher amount of capital to start.

Most players want to be in the media space. The rest are sparsely populated.

But the big play guys who have gotten trampled are supposed to have:

  • Great UI/UX
  • Give you great access to data (bought in raw form from players like Dion/Tickerplant)
  • Rudimentary but great looking screeners.
  • Simple analytics like debt-equity allocation charts.

These are unfortunately, not the pain points India has, that people will pay for, or that advertisers will line up for.

I will live with horrible UX if it solves a real problem. (People using IRCTC, India’s largest ecommerce site, do that regularly) The data from Dion/Tickerplant is often outdated and sadly, wrong. The screeners don’t give you enough to actually make a trade. These don’t solve a serious problem just yet.

The Pain Points

Can anyone solve the KYC and document problem? Every darn financial instrument needs a KYC, mostly with the same documents – ID-proof, PAN Card copy, Address Proof and so on. Some need an “in-person verificiation”. Who’s tried to solve this? CAMS/Karvy have a business solution to digitize docs. Yes bank recently allowed you to upload documents to open an account. In person verification is done by users over a video link. These aren’t holistic but are at least attempts to solve a serious problem.

Cutting through the bullshit. Most financial products are badly designed, or missold. You’re never told what you need to know in simple terms. You’re never told that if you don’t bother to understand this product, you should not invest. You’re never told the negatives of the financial product you’re pitched – and there is no easy way for you to find out.

The lack of an integrated trading software. Traders are a big market – not because of numbers, but because they’re at the market every day. Abroad they get great tools to analyse, visualize and trade all at the same time. Yes, give me data, but allow me to trade as well. Current broker web and application interfaces are rudimentary. This segment can only be handled by a brokerage, because of the stranglehold on third party software by the likes of Omnesys and FT.

Mobile Market Data and Analysis are currently in a different era. If you want the “fundamentals” or any advanced charting you have to jump through hoops.  Fixed income, currency and options markets are almost absent in whatever few mobile interfaces we have. This is a pain point if you consider how much time people spend travelling and that markets now work for longer hours than ever before.  

The pain points are NOT: I want to see great looking UI. Or that I want a faster web site. It’s not the lack of a “financial social network”. These are great ideas but there are bigger problems to solve first. No one I know cares – and while anecdote is not fact, the players who focussed on these elements are getting left behind.

The Problem

Financial application companies in India need to think smaller. Because the market isn’t that big. Probably a million traders, and probably two million investors or so is the total addressable market size.

It’s fashionable nowadays to think only big. Address the 100 billion dollar market. You have a limited runway and most startups fail, so why not try to hit it big? This is sane advice but if you have a niche that you can address and they want a product, it is still worth your while.

What do you want to make out of it really? Change a few lives, make about 20 crores of your own money? You could do that if you build a company worth 50 crores – and an acquisition of this size is quite achievable. If you can think smaller, it might help; plus, all those big thinking players are running out of market size in the financial space.

But this necessarily means standard angel investors or VCs can’t be bothered. So what? Most niche industry investments happen through industry players anyhow. Most angels and VCs I know will happily admit they don’t know a darn thing about the stock market.

You might say people just aren’t interested in personal finance or stocks.

But people aren’t interested because, like Santosh of Moneysights reminded me of what I told him, people are getting 10%+ increments per year and 40%+ when they change jobs. Who cares about saving and investing when you’re getting that kind of income change? Anyhow – that is just an excuse.

India is a tiny investing demographic. It could change tomorrow, it could take 10 years. You just don’t know. No one was buying online in 2002. Suddenly everyone is today. So the financial web site that succeeds will, like ecommerce, have to stick around.

Real estate is both an investment and a consumption good. If it’s your first house, you spend so much on it and take a large loan on, so you don’t have enough left to really invest. Insurance is usually hard sold as a tax free investment, and so people pile on; and that leaves a bad taste so they get wary of everything else.

Regulation could be a problem or a benefit. Strong regulation is needed; too many people are cheated in this business. Mutual fund commissions have been cut because it’s universally accepted that such commissions shouldn’t be built into the product, they should be charged for separately. The insurance industry sees huge misselling, and with their regulated expenses, rules are framed to ensure that investor money doesn’t “leak” out, say by giving big referral commissions to a bank owned by the same group. Brokerages have crippled the system before, so they’re looked at with an eagle eye. Media plays aren’t deeply regulated yet, but they are getting looked at.

The regulator is not the problem, though people like to blame them. The marketplace thrives even when there is deep regulation (the largest growing sector in India has been banks, and they are the most regulated industry in the country). 

The underlying issue is that you have to stick around for a LONG time to make money. Even in the US, Investor's Business Daily (IBD) turned profitable after 19 years.

The Problem isn’t just Indian

Worldwide, financial websites haven’t done all that well. I’ve seen tons of people startup but not make it too big; and the size of even these aren’t much.

One success story was Wallstrip, but it sold at a $5m price tag, which many people think is too small. Clearstation.com was one of the first successes in the space, selling for $35 million in 1999 to eTrade.com. Stockpickr.com by James Altucher was sold to TheStreet for $10 million. The most famous of them – TheStreet.com – listed at a $1 billion valuation in 1999. Now it’s valued at $60 million, 14 years later.

Thinkorswim (a discount broker with a fabulous trading tool) and Wealth-Lab (a system trading software) were acquired by larger players recently. Motley fool (fool.com) is a private company, and supposedly reasonably profitable.

(Of course, mint.com sold at a fantastic $180 million valuation to Intuit)

However most others are either in their early stages, or struggling to find a large exit. The market for traders isn’t that big. Investment gestation periods are long. Transactional plays are expensive.

The struggles are worldwide. Human traders are being replaced by computers and large firms are taking over the action from the small trader outfits. That means it’s not a game of number of investors, it’s a game of the amount of money – and that’s not a game a financial website can play that easily.

The Answer.

I wish I knew. (But I wouldn’t tell you)

So Is This The End?

Of this post, nearly. But not of the industry. It will come back again, once we’re off the growth path and people will need to learn to invest their money rather than depend on the massive inflation/GDP growth push in the last decade.

I’m in the financial domain, so my interests are vested, but I’d like to say there is a lot more to come.

The lack of success doesn’t mean no one will succeed. It’s not that this company was too early. Or that the market isn’t great. Or that investors won’t put in money. Some of us failed in our execution, that’s all.

Manish Jain (MProfit) has it right:

A startup’s sole purpose is to figure out the market and create a product for it. The question is whether the need for such a tool exists or is it just a mirage?

Soon, one of us will succeed, and that will change the game. Till then, we’ll just have to struggle and fight.

Disclosure: Investopresto and MoneyWorks4Me have advertised on Capital Mind. I’m an advisory board member of Zerodha. Many of the companies mentioned have good friends working with or founding them.   

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

16 comments “The Failure Of Financial Web Startups”

Deepak,

I don’t have anything substantive to add other than my essay in NextBigWhat. Just wanted to say one thing:

//Brokers like Zerodha and intermediaries like FundsIndia make money off transactions you make on their platforms. The market size here isn’t very big and customer attrition is very high.//

Wrong and wrong. Sorry.

I know you wish us well (thanks!) and did not mean this specifically as a critique of our business model, but the target market size for investment solutions is big (and growing) and at FundsIndia, attrition is very, very small.

Trading is a different ball game, though. I don’t have specific insights into that.

Regards,

Srikanth

Hey I do wish you well! Sorry but I’ll call you out on this. Market size is small is true; the target can be anything you want it to be considering we have a billion plus people, but the addressable market for it is much smaller and probably in the low millions. Growth wise, let’s put things this way: Total number of retail folios in 2009: 4.69 cr folios, Number of retail folios in 2013 (march): 4.14 cr. folios. (AMFI Data). There’s some deduplication effort but really, the growth isn’t showing. It’s been a downhill battle.

This is not a bad thing. You can be the biggest in a decent sized market, and if you can get 10,000 cr. of AUM, (1% of industry) you will be in line to make 50 cr. at a 50bps commission. It’s the getting of 10,000 cr. that is a challenge, and perhaps it can’t be done from MFs alone, but it is achievable.

Attrition for zerodha is also very very small. But the problem isn’t that people leave. It’s that people do a few transactions and then stop. I’m sure you’ll see that in fundsindia as well. It’s also true for most AMCs that measure their growth in number of folios.

Deepak,

My addressable market size is every single person with a net-banking account, not just people with folios in MFs presently. We’re trying to skate to where the puck’s going to be, if you know what I mean. It needs patience, persistence, and yes, a deep pocket to keep on keeping on.

And, lack or stopping of trading transactions is not a big deal for us – SIPs, trail fees, you know the story.

Srikanth

Understood on the trail/AUM fees. Here’s hoping the regulator doesn’t shut THAT down!

Going after netbanking people is a good idea, but honestly the market of those people investing also seems to be coming down. The problem is that overall numbers are falling. Will speak about it in a separate post.

Hi Srikanth

Will you be able to share any of fundsindia numbers… folios, AUM, Breakeven, promoters capacity, future..

shinu

Shinu,

Apart from saying that we’re well-funded and well situated for the future, I can’t share specifics for competitive reasons.

Sorry,

Srikanth

Great article.

However some issues:

1. Is visibility or bottom line the criterion of success? You say you have “heard” moneycontrol.com is independently profitable but not the flagship. Despite having a market leader in CNBC TV 18 and high traffic at moneycontrol, the consolidated entity is making losses. So what does it say of the business model? Or what does it say of the investors pumping in money into the group without any hope of returns?The proof of success is cash-flow. What is the point in putting up a high-density web site when visitors do not bring in any revenue? Let the site go behind a pay wall and then may be you can write another article on its success or failure.

2. As I see it, there are two many financial web sites for the size of the market. The same problem with the TV medium: too many GEC and news and business channels. Even the US, the largest equity market, does not have so many finance web sites. And it has just one homegrown financial newspaper: WSJ.

3. You have correctly touched upon the problem of lack of trading tools available at these web sites. If the aim of these web sites is to provide info, then, like you mentioned, there are already strong top-of-the-mind legacy properties that are doing a commendable job.If the aim is to garner fee revenue by rendering advisory services, just look at the struggling online shopping sites. Indians are wary of using credit cards online. Also, for advisory, investors prefer face to face interaction. Ever wonder why so many customers are being duped by banks’ relationship managers but few want to pay financial web sites for advise?

4. Alas, the pool of equity investors is very small in India. Those who want to invest prefer to do their own research or use research from leading properties to back up their hunch. For this I blame some sections of the media, particularly the personal finance segment, which has scared investors with horror stories of price rigging, broker manipulations and what not. No doubt their stories are not fiction but then fraud and forgery are found in every market. Even goldsmiths do not offer pure gold nor do our neighbourhood atta mill and developers use inferior quality cement. This section has brainwashed investors into focusing only on mutual funds and have sang their praises. This is because mutual funds are major advertisers with this section of media. So it is quid pro quo.
5. The action is shifting to the derivatives market, which is complex to understand for retail investors. And as you correctly mentioned, not much coverage on the financial web sites as major participants are institutional investors and traders. Therefore a vicious circle.
6. Volatility is another concern. Investors get upset if the stocks in the portfolio do not show a secular rising trend day after day. Adding to their fear are repetitive forecasts of doomsday by any gora skinned expert visiting our shores during a bear market. (Reverse also true during a bull run.)
7. Offline/online brokers have strong networking/ sales team to garner business by virtue of their brand recognition. No wonder ICICIDirect is the largest online broker. Most startups spend their money in hardware, software and people manning the backoffice.
8. The success (in terms of visibility and not revenue) of Yahoo and Eco Times online are due to the leveraging of their brands. Readers of Eco Times will automatically think of its online version for news, while users of Yahoo mail might go to the finance section.
Startups have to depend on word of mouth. Long gestation period, which becomes a torturous during a bear phase.

A long response to your long post

Amar

One pain point that I see is the quality of advisors. If somebody can build tools to empower the advisors and help them increase their business, I am sure they will succeed.

And I can see that with a deeper understanding of the market, players like FundsIndia, MProfit and FutureAdvisor are looking to solve that problem. More power to them.

Good article. I think personal finance is over rated. One doesn’t need a phd to understand ULIPS are bad, traditional insurance is bad. For someone who doesn’t understand equity, MF is good as instrument. But they just mirror the index (or worse). ( Except for 1 or 2 good funds). Look at this. The end user relies on planner,(the personal finance websites), the planner might rely on rating agency ( or some might do on his own) to recommend funds, the mf relies on fund manager and the broader index. :-)

For the equity, people are not ready to pay for data. Moneysights was an awesome site for stock data. Great UI/UE too. Feel sorry for them. I now use moneyworks4me. Its good too. But I use only for historical data and don’t use their paid recommendation service. If one knows equity he/she doesn’t expect stock advices. If one doesn’t, then chances are he/she wont use invest directly. Even if they do, they get out once the price falls.

And the the problem for these products is that , people are busy in corporate rat race and don’t give any importance to personal finance.

Very good analysis of Indian online startup business landscape!

This is a real good post, some points which you have raised of the regulator and the industry,, well who should start first.. the user or the regulator.. It’s a chicken and egg situation.. No one wants to start the good thing,and have better working and a healthy competitive environment. Everyone wants to be number one,,and for that miss selling ,targets,achievements is what is focused on, really is this what the industry should be doing – customers are neglected in this bargain, customer service, customer information all is at stake..!!

This is the industry some will stay and some will fall out.

Deepak,
Don’t you think it is not the failure of an idea that is called PMS, and Financial Management?
I think you can initiate a BIG UNIVERSITY offering courses on FINANCIAL MANAGEMENT. It is sheer lack of Financial Literacy that is the prime cause for these HICCUPS. People with great ideas are simply failing because they do not understand wht they are offering. They themselves are at a loss, but are ready to offer solutions to others.
Many of these startups are also intend to show this as business loss. You should verify with their FORM 16′s……

Equity master is an example of a financial web startup that isnt betting on trading. There’s a fair amount of credible content and tools which you an access on a subscription model. You then have the option to buy their product or DIY at a online /regular broker….eitherways they arent hardselling their commission products as much as their advise. Merely offering the option to trade is commoditized but what will tilt it in the clutter is the credibility of advise. Equitymaster has a fairly small user base but a fairly sticky and hi spending user base. So probably there is not as much pressure to keep adding users blindly

Interesting post! Financial web startups have limited scope for business, most people access a financial product only throgh Agent, Friend, Banks, Investment shops, Brokers. A human touch is needed if anyone wants to build a viable online financial website.
I would like to post an idea here: If someone builds a website which can file Income tax returns and also answers small personal income tax queries for little less fee like Rs50. It would be great personalised service.

If you are on advisory board of Zerodha, please “advise” them to have a fully integrated trading system. Something like the Interactive Brokers TWS which has API to connect to any software.

Even an API for software like Amiborker will help. I don’t trade too much, but would love to have everything in one place(integrated trading environment).

Now it is too cumbersome with ZDHA. Get third party data, use plugins, then automate your trades- sick!

It’s coming! Wait for it :)