Amid $90 million 'A' raise, 33 Google executives join two Google CEOs and 140 VC investors to launch 'kickass' robo, pitching AI, performance fees and private equity to accredited investors
Wealth technology experts have doubts that even a transplanted Google AI super brain will ask the correct right-brained questions, but they also see promise in a no-brainer VC distribution pipeline.
11 min read- Arta Finance secured $90 million in Series A funding, backed by Google executives and VC firms.
- Arta, staffed heavily with ex-Google employees, aims to disrupt wealth management using AI and alternative investments.
- Critics question Arta's reliance on AI, suggesting it's more about fundraising than innovation.
- Funding may enable Arta to 'buy growth' and access retail investors through VC-backed distribution.
Brooke's Note: There was a time when RIA experts breathlessly opined that someday Amazon or Google would enter the RIA business and blow everybody away. In 2022, it is happening, finally, with Arta, and we are all immune to the ‘wow’ factor. It feels a touch like Trump's return to Twitter. Yet maybe Caesar Sengupta, Eric Schmidt and the rest of the pedigreed Google crew were waiting for this exact moment. The markets are all depressed, VC euphoria is absent and disillusionment with automation and technology, in general, is also rising. FAANG companies are disgorging workers. It's a contrarian's delight, but of course, it comes with the caveat that people who can sell advertising against online search results may not attract rich people to buy RIA services that are infinitely more risky, complex and highly regulated.
A fledgling Mountain View, Calif. start-up overflowing with former Google executives just raised $90 million in a Series A round, partly backed by past and present Google CEOs.
Arta Finance announced its Series A raise Nov. 2.
The financing round landed the blessing and financial backing of Google CEO Sundar Pichai, his predecessor Eric Schmidt, VC shops Ribbit Capital, Coatue, Sequoia Capital India, and 140-plus private investors.
The start-up is tumescent with ex-Google talent, too; almost half, or 33 of its 67* staff worked at Google, according to the company's website.
The headcount is far larger than a typical start-up's.
The firm is owned by eight co-founders and several VC firms, all of whom own less than 10%. Caesar Sengupta serves as CEO and owns 10.05% of Arta.
“Arta is not a typical start-up,” says co-founder and CEO, Caesar Sengupta, via email.
“Robos were cutting edge 10 years back ... [but] by bringing together sophisticated financial tools with the latest in technology, we'll be able to unlock the financial superpowers of the ultra rich and help millions more people."
Beautiful, dirty, rich
What raises at least a yellow flag with experts is the heavy pitching of artificial intelligence as a differentiator. AI has struggled to make a dent in the RIA business.
“Just because the people involved are experts doesn't mean AI makes sense in what they're doing," says Iraklis Kourtidis, co-founder and CEO of direct indexing software provider, Rowboat Advisors, via email.
"The main problem AI solves in wealth management is the problem of raising at a good valuation,” he adds.
Brian Murphy, founder and chief investment officer of Mountain View, Calif. RIA Pariveda Investment Management is equally skeptical.
But he says Arta's Series A guarantees it access to backers who will spend to ensure the firm's robot gets in front of retail eyeballs.
“[With the] tie up with Sequoia Capital India, Ribbit, and any later private firms [Arta] bring[s] on, they [get] excessive funding to get their products in front of the retail crowd,” he explains, via email.
“[It] looks to me like venture capital may be attempting to 'buy growth' via these platforms," he adds.
For now, Arta is using its “AI” solely to manage its public markets portfolios and to assess client risk.
But Arta's Series A may rely far less on AI and much more on Wall Street's favorite business model – creating a vertical play of product and distribution.
Say what?
Both Kourtidis and Murphy caution that applying AI, even by Google's finest, to wealth management problems may not yield difference-making gains in capabilities.
“The team seems to be well equipped from the AI perspective, but I question their ability to use AI meaningfully in the ways that they contend," says Murphy.
Robo-advisors hit lull in everything but VC backing as reality fragments their identity
“Are they using AI for tactical investment decisions? For asset allocation decisions, based on other personalized factors? For due diligence on private investments? … [What problem] is AI actually solving?” He asks.
"There are much better technologies than AI for solving many [wealth management] problems.
Gamechanger
Arta's headcount is also too heavily weighted toward software, Murphy adds.
"[There’s] no noticeable expertise in personal finance to date on the team."
Sengupta counters that Arta's expertise really is a gamechanger.
"[Our] founders include people who have spent a long time in Google Research, working [on] AI and machine learning … in products that are used by hundreds of millions,” he says.
"Our team’s track record shows we’re serious about creating meaningful step-change innovations," he adds.
The fact that so many of the executives that built Google Pay and ChromeOS have jumped ship to the same start-up is a leap from engineering firepower at other similar efforts, according to Shailendra Singh, Sequoia Capital India principal and an ex-Google exec.
"[They're] uniquely accomplished in having built multiple cutting-edge products used by billions ... it's rare," he says, in a public statement.
Benchmarking performance
Sengupta pitches Arta as a kind of hotrod, with direct indexing, hedge fund quant strategies, AI investment analysis, access to cheap loans, and private credit, equity and real estate investing, all welded onto a robo chassis.
“In terms of simplicity, ease of use and costs, Arta is similar [to a robo] … a Model T and a Tesla are cars … [but] Arta is tech through-and-through [and its] AI managed portfolios are way more advanced,” he says.
“[We] offer the customization of a dedicated financial advisor, with the scientific rigor, data and technology-driven methodology of advanced quantitative hedge funds and the simplicity and lower cost of passive investments,” he adds.
Inside the Brain TrustCaesar Sengupta founded Arta with seven other breakaway Google engineers, including head of product Charles Dong, formerly head of growth at GooglePay, and Chirag Yagnik, a former research and machine intelligence engineer, now a research and engineering executive at Arta. Sengupta spent 15 years at Google, most recently as vice president and general manager of its payments and 'next billion users' (NBU) initiative. For six years, he worked as product lead for ChromeOS. He leads Indian non-profit The/Nudge Institute. Arta's co-founders also include the engineers Zelidrag Hornung, formerly senior director of engineering at GooglePay and ChromeOS; and Mark Striebeck, formerly a Google engineering director and David Shapiro, chief business officer for Google's “NBU initiative.” Rounding out its list of founders are former Google director of product management, Edward Chiang, who will work in a ‘product’ role at Arta, and Felix Lin, formerly vice president for Google's payment ecosystems, whose current title has yet to be disclosed. Arta's individual backers are also A-listed and include noted ex-banker Betsy Cohen, Google product management VP Ambarish Kenghe, former Google execs Baris Gultekin and Tania Aidrus, former Sequoia partner Tim Lee, and Scott Joachim, partner at giant law firm Goodwin Procter. Ram Shriram also invested in Arta's Series A. He's a founding member of Google's board, the founder and managing partner of VC shop Sherpalo Ventures, and a long-standing technology executive with stints at Netscape and Amazon in the '90s. |
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The company backtests its model to measure its performance against the S&P 500, and records the results on its website.
Arta portfolios outperformed the S&P 500 by an average of 1.4% a year, over the last 15 years, according to the firm.
Yet its heavy emphasis on private equity and VC investing could come back to bite it, says Murphy.
“Returns in all of these sectors are highly skewed ... A small percentage of managers garner an abnormally large percentage of the returns
"If you aren't invested in the top managers ... your returns end up being worse than the publicly traded stock market.”
Fee dilemma
Arta already lowered its fee from a range of 10 basis points to 50 basis points, down to a flat 10 basis points, the ADV says under “material changes.”
The Arta website says performance-based fees are an option though its ADV says they are not
If it does opt for performance fees, instead of, or alongside traditional AUM-linked fees, it could be in for a rude awakening, says Murphy.
"Regulators don't allow performance fees unless the schedule is symmetrical, [so] if you charge me 1% for 5% outperformance you have to give the client 1% for 5% under-performance,” he explains.
“How do they intend to implement performance fees? Especially when they include private investments?" He asks.
"There's an incentive to mis-mark private funds to make performance goals,” he adds.
Accredited only
Ultimately, the company says it's building its RIA to deliver ultra-high-net-worth services, cheaply, to merely high-net-worth investors.
And, its sales pitch uses every buzzword in the book: family office, alternative investments, direct indexes, risk-managed, machine-learning-assisted and human-touch soothed.
Arta will also eventually add tax accounting, legal, and insurance services, according to Sengupta.
“We believe that a kickass financial strategy and a stable, secure, happy future shouldn’t be the monopoly of the ultra-rich,” the firm's website says.
“Everyone should have a chance to take charge of their financial life in the same way that wealthier people do.”
But at Arta, the mass-affluent need not apply.
Arta's customers must be both accredited -- i.e. have more than $1 million in the bank or an income of $200,000 a year -- and be able to invest an initial $100,000, according to the firm's ADV, although some reports put the initial minimum at $10,000.
AI a buzzword
The firm also claims money won't buy all of Arta's love.
Investors must also show they can handle the ups and downs of private markets, where high risk, illiquidity and slow gratification can test patience and nerves.
Arta also abides the human factor in its blank slate master plan --something legacy robos did in retrofits.
“AI is a buzzword and often misused, however … [it's] enabling us to scale the offering to more people faster with the ability to still engage with humans where needed," Sengupta explains.
"Arta uses tech and humans where appropriate,” he adds.
Arta is also following the current robo playbook of adding more investment options to bread and butter ETFs, according to Betterment founder Jon Stein.
"The traditional 'robo' continues to broaden and widen the investing choice ... and you can expect to see more and more investment choices over time to deliver on that promise," he says, via email.
Apex aced?
Arta relies on BNY Mellon Pershing as its custodian, which built its brand as the custodian for robo-advisors. Apex typically has the inside track with fintech startups, originally clearing for firms like Robinhood and Wealthfront.
“[We’re] uniquely positioned as a platform for firms like Arta … [which] selected Pershing after extensive due diligence of our technical capabilities,” says Pershing CEO, Jim Crowley, via email.
“We're thrilled to collaborate with them,” he adds.
Pershing will also give Arta customers access to a credit line so they can borrow against their investments, Reuters reports.
“It's pretty exciting for us as a 238-year-old bank … to be on the leading edge of something as innovative as Arta,” Crowley told the news agency.
Arta runs its software on Google Cloud, according to FintechFutures.
The year-old firm lists zero AUM on the SEC ADV it filed, Nov. 1, as Arta Finance Wealth, although all eight of its co-founders have seeded the firm's AUM with their own capital, as have an undisclosed number of the company's angel investors, according to Sengupta.
Arta is only accessible through smartphone applications available on the Google Play Store and Apple App Store.
BusinessInsider reports that Arta's staff has, in fact, swelled to 80.
For its first 20 months, Arta went under the moniker Arbo Works.
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