Thursday morning I woke up, checked my email and saw the news that Oranj is winding down operations.
This development is somewhat shocking, as fintech has been very hot in 2020, with COVID-19 tail winds spurring user growth and venture investors eager to make investments in great companies.
Over the course of the day there were a half dozen additional articles all with their own set of contributors sharing perspectives on what went wrong. While entertaining, these were all just opinions. The only person who really knows why Oranj decided to shut down is founder (and per his staff, sole funder) David Lyon.
So, what exactly went wrong? Why didn’t it try to sell its IP? Why didn’t Lyon look for outside capital? And perhaps most important, what does this mean for advisortech?
One challenge Oranj faced is shared by nearly every advisortech company: It was relatively small, without the prospects of getting much larger.
Oranj introduced the first “freemium” model to advisortech. If you used select money managers in its Max marketplace, the product was free. There was an additional cost if you wanted to utilize your own models or have enterprise flexibility, but overall it was still low compared with the largest portfolio management/accounting software vendors. In order to make its pricing work, it needed to reach massive scale, which unfortunately didn’t happen.
The most recent reports indicate that it has 500 customers. If you assume an average revenue of $500 per customer each month, it would equate to $250,000 of monthly recurring revenue. Between 45 employees, a Chicago office and all the third-party services required to run a modern cloud-based web application, it’s safe to say Oranj likely had monthly expenses in the neighborhood of $500,000.
Suffice to say, the math didn’t work. If it were to double its prices, it would lose its only real differentiator: price.
Advisortech is an intriguing business to get into, especially for financial advisors who want to put their own spin on solving problems within their own practice. Sometimes they are wildly successful (think Orion Advisor Solutions or Riskalyze), as thousands of other advisors share the same pain points and the advisor-entrepreneur is able to execute. But this is generally the exception, not the rule.
More often than not, the advisortech companies that last are small businesses with reasonable recurring revenue (less than $5 million). They have solid margins and become lifestyle businesses. Over time, without reinvestment and reinvention, the businesses slowly experience customer churn and disappear.
Meanwhile, a small number of large businesses control the vast majority of advisortech spend, often via enterprise deals with advisor networks like broker/dealers. They achieve enough success to get modest VC backing, and a select few attract significant VC/PE funding. At the very top of the food chain are an even smaller number of public companies.
This type of tech ecosystem is highly fragmented and limits access to capital and innovation. At the core of most advisor businesses is a custodian and/or broker/dealer. On top of that, you’ll find a portfolio management system, planning software (often multiple), research software, client portals, CRM, marketing tools, and on and on. Between a client’s fee and an advisor’s net profit are multiple layers of cost and complexity.
With over $6 trillion of client assets managed by RIAs alone, the total revenue generated by all the vendors is likely over $6 billion each year, and that doesn’t include the billions of dollars asset managers earn from advisors. The vast majority of that revenue is controlled by fewer than 10 big custodians and big tech vendors, which represent a modern-day oligopoly. Rent seekers are more than content with minimal innovation, enjoying increased revenue on the tail wind of the fast-growing RIA segment (plus market growth and advisor business growth).
This offers a perfect opportunity for disruption, but advisortech companies must think bigger.
In many respects, what the industry needs is a Shopify for advisors; a turnkey solution that allows small businesses to operate at scale, fully digital and deliver a delightful client experience. It should be inexpensive, easy to use and require little to no training. Solutions that are focused on solving 80% of advisor needs but with a focus on the 20% of features needed to do it.
We’re not there yet, but hopefully what happened to Oranj serves as a wake-up call to advisortech entrepreneurs. To truly innovate advisor technology, we have to be different, focused and not afraid to think big.
Jason Wenk is the founder and CEO of Altruist.