As the race to stay on the forefront of technology continues, ScratchWorks, the industry’s wealthtech accelerator, recently launched Season 3 of its “Shark Tank” style competition in a new virtual format.
Known as the place for emerging fintech and wealthtech companies to gather and gain instant fame and valuable investments from the industry’s leading RIA firms, ScratchWorks featured three hand-selected innovative companies this year.
Under normal circumstances, ScratchWorks is held in a live general session at an exclusive industry conference. However, due to the pandemic, it recently used video for its online debut in a four-episode streaming series that culminated in a record-setting level of investments.
The event was sponsored again by Fidelity Institutional and the University of Colorado’s Leeds School of Business, and finalists were judged by leaders of top RIAs from across the industry. The investor panel included Marty Bicknell, CEO of Mariner Wealth Advisors; John Eadie, founder and managing director of Covenant Multifamily Offices; Shannon Eusey, CEO of Beacon Pointe Advisors; Jon Jones, CEO of Brighton Jones; and Michael Nathanson, chairman and CEO of the Colony Group.
Collectively managing more than $80 billion in AUM, these five firms are leading the way for investing in the wealth management space via the ScratchWorks accelerator. In fine fashion, David Canter, head of the RIA and family office segments for Fidelity Institutional, returned to his role as host and chief deal negotiator.
First up was Lifeworks, a financial advisor platform that provides growth-minded advisors with proven systems, tools and templates to support and enable a scalable, fee-based subscription model for financial planning and wealth management.
Its platform also provides automated digital onboarding, clearing house and credit card processing, combined with a digital marketing solution to drive the growth of ideal prospects, all delivered through a modern, comprehensive and unified advisor and client technology experience.
Lifeworks founder and CEO Ron Bullis opened his pitch for $1.8 million, roughly a 6% stake of his company at a $30 million valuation, by saying, “Wealth management is broken.”
Bullis’ own experience in setting up his RIA firm as a breakaway advisor opened his eyes to how the industry has a value misalignment under the AUM model, as clients pay for commoditized investing while advisors are giving away what clients really want and will pay for — financial planning.
Also, advisor technology today is made up of disconnected systems that create an inefficient and disjointed advisor and client experience.
“To win the future, advisors will need to win the client experience,” Bullis said. His answer to this problem is a unified approach to technology, combined with digital marketing and the right combination of custody, trading, rebalancing, compliance and reporting tools that he and his team designed and integrated into one environment using the latest Cloud-native technologies and a unified data model.
Several ScratchWorks investors were skeptical of Bullis’ attempt to try and build the next “silver bullet” unified tech stack.
“This has been tried before, and you’ll be up against some major players such as Salesforce, Envestnet and others, so I am out,” said Jones. Nathanson and Eadie also bowed out of the negotiations due to similar concerns.
Bicknell, though, was intrigued. “I see the vision, I love the platform, but I’m stuck on the valuation,” he said, countering Bullis’ initial request for $1.8 million for 6% of the company with an offer of $1.8 million for 12% of Lifeworks, which brings its valuation down to $15 million from $30 million.
Eusey also countered with a similar but smaller offer, though she was willing to bring in additional investors.
After deliberating for a short minute, Bullis quickly accepted Bicknell’s offer. “Welcome to the Mariner family,” Bicknell said, smiling broadly as the first mega-deal for ScratchWorks Season 3 was struck.
Next up was Act Analytics, an analytics platform that provides insights on thousands of publicly-traded companies and funds across 200-plus environmental, social and governance factors to help advisors better align investment portfolios with their clients’ values.
CEO Mike Unwin began his pitch for $1 million, or 10% of the company at a $10 million valuation, by explaining, “We want to make sustainability mainstream.”
Unwin then described the technology integrations and distribution opportunities Act Analytics has built. They’re impressive for such a new company and arguably support a premium valuation of the firm.
Interestingly, despite the fact that the judges all lead large RIA firms working with wealthy families, their investor clients have different levels of interest in ESG investing.
“Frankly, this is a very challenging space for us as we definitely are reading about ESG and its popularity,” said Eadie. “However, we are not having any client inquiries, so for that reason I am out.”
Similarly, Bicknell said he wasn’t interested in the technology solution since his firm wasn’t constructing ESG portfolios. But if Act Analytics could serve as a separate account solution, he “might be interested.”
The other three investors — Eusey, Nathanson and Jones — are all actively involved in ESG investing and were interested in the platform, but not at the $10 million valuation.
“It’s a very crowded space, and I worry about adoption,” Nathanson said. Jones agreed. Eusey floated a potential deal at a valuation of $2 million to $3 million.
But despite host Canter’s aggressive prodding, Eusey could not get Unwin to budge on his higher valuation.
While there was no deal made on the ScratchWorks’ virtual stage this year, Act Analytics and three ScratchWorks investors agreed to continue to talk about possible opportunities offline, with all parties optimistic that some type a transaction could be made.
The final participant was ReAllocate, an “allocation intelligence” enabled platform that analyzes the risks of direct real estate investments and helps advisors build investment portfolios aligned with their clients’ risk tolerance.
CEO Adam Hooper began his pitch with another big ask: $3 million for 15% of the company, representing a $20 million valuation. Hooper also asked for advice and guidance from the ScratchWorks investors on how to best position and navigate Reallocate in the RIA industry.
The plan of digitizing direct real estate investing and making it easy to consume as an asset class for advisors definitely caught the attention of the panel.
“I love the business and would love to invest in it, however, I struggle with the valuation,” said Bicknell, expressing a view echoed by the four other investors.
When presented with a counteroffer from Eusey of $1.5 million for 15% of the company at a $10 million valuation, Hooper declined. It looked like there would be no deal as the event concluded.
Canter and Hooper joined a later video session to discuss what had happened between the original filming and the final editing of Season 3.
“I’m here to let everyone know that today we signed a term sheet with a Marty Bicknell-led investment group for the full $3 million ask and couldn’t be more excited to have this team of investors on our side,” Hooper proudly announced, wrapping up ScratchWorks with its largest deal to date.
Canter ended the final episode in his inimitable style: “For emerging fintech and wealthtech companies looking for their big break to garner industry exposure and the potential to pitch for millions of dollars from the ScratchWorks accelerator, Season 4 is now currently open for submissions.”
Find out more at www.scratch.works, where you can view all four episodes of ScratchWorks — Season 3.
Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry. He can be reached at [email protected] or on Twitter @NexusStrategy.