Acorns is raising $565 million to Robinhood-ize itself; lately, that includes self-direction options and buying fintechs

Acorns is raising $565 million to effect an urgent revamp that looks like a mash up of Robinhood, SoFi and a roll-up.

The Irvine, Calif., robo-advisor for micro-accounts will get $400 million through an initial public offering by merger with a special purpose acquisition company (SPAC). The deal values Acorns at $2.2 billion.  

A private placement will fund the other $165 million. Combined with previous raises totaling $202 million since its 2012 founding, it will have $767 million to fuel its ambitions.

CEO Noah Kerner will also sacrifice 10% of his equity stake to Acorn customers as part of the recapitalization. See: NBCUniversal and Acorns join forces in $105-million mega-round in play to make two millennial quagmires into one big monetization play

Acorns only realized $71 million in 2020 revenue but projects $126 million this year and $309 million in 2023, The Wall Street Journal reports.  

The company also forecast that its user base would surpass 8 million subscribers by 2023 -- up from about 4 million today. See: Mindful of 'Snapchat' dynamic, BlackRock takes big Acorns stake after the micro-robo wins 2.2 million investors in 12 months

When NBCUniversal made its $105 million investment in acorns in 2019, the valuation was at $860 million.

Rounding up

Acorns launched as a specialist in 2014 with paradoxically both a hyper-idealistic and cynical bent.

It became the one robo-advisor -- idealistically -- focused on micro-balances for Gen Z investors with low financial literacy, low income, low balances and high debt.

It was also the robo-advisor -- cynically -- that believed investors needed to rack up credit card spending to make the medicine of saving and investing go down.

Investors were drawn to the opportunity to "round up" VISA card purchases to the nearest dollar with the extra pennies flowing to a robo-advised little nest egg.

Now, that gimmicky beginning is giving way to a more mainstream mission.

"Public listing accelerates Acorns ability to build financial wellness system for everyday Americans," states the SEC filed release announcing the SPAC IPO.

"Financial wellness" is the term financial services firms use to distill what a retail consumer gets out of doing business with a financial conglomerate.

Acorns has been on a conglomeration binge in recent months -- something Walmart is doing from scratch with "Hazel," its fintech startup. See: Walmart names its robo-advisor 'Hazel' and stocks up on talent with star hire from Citi, but its financial services venture still remains an enigma

In April, Acorns announced it is buying Kleiner Perkins-backed Pillar, a student loan debt manager. A month later, it bought Harvest, a fintech startup that uses AI to help users reduce debt and electronically negotiate bank fees.

It made retirement accounts an option after buying Portland-based Vault in 2017. 

Evolving model

But part of that wellness is also about giving -- Robinhood-style -- investors greater agency.

Acorns plans to begin allowing investors to choose individual stocks for 10% of their holdings, its CEO told The Wall Street Journal. 

"Acorns will be on the right side of history," Kerner said. "We are not a grow-at-all-costs company."

Acorns could please historians if it evolves its business model, says Will Trout, analyst with Javelin Strategy.

"If the “right side of history” angle refers to creating a one-stop-shop for banking, investing and other functions a la SoFi, then I agree with Noah. They can use the $565 million to build out the platform to include the self directed investing angle with a crypto twist," he said. 

Acorns throws shade on cryptocurrency on its website. "Because the value of cryptocurrency can fluctuate dramatically in a day, it's a speculative investment, and we don't want to gamble with your money," it states. 

Paying off

One thing that makes Robinhood's revenue model challenged is the way it earns revenues, literally, a dollar at a time.

It sells subscriptions with the base level at $1 a month for basic investing and jumps to $3 to add retirement, banking and direct deposit. There's also a $5 "family" rate that includes gifting and rewards.

Trout applauds the subscription model -- even if it's sneakily expensive for low-balance investors relative to what they might pay on AUM at a Betterment or Wealthfront.

"It is a model that has clearly paid off for the firm," he says. "But does it pay off for the investor given that monthly fees of even a few dollars translate into high fees when converted into actual basis points?"

The Acorns investments made up to now will also pay handsomely for investors that include PayPal, Ashton Kutcher, Jennifer Lopez and BlackRock.