Christmas came early at Vestwell as it accepts $125 million of unsought capital; Lightspeed persisted for months, with an IPO already penciled-in as early as 2025
Lightspeed came out of nowhere, wanted in and Vestwell CEO Aaron Schumm liked the people and the money.
11 min read- Vestwell secured $125M in Series D funding led by Lightspeed at a $1B valuation.
- Lightspeed's investment gives them a 12.5% stake and fuels Vestwell's growth plans.
- Vestwell anticipates profitability within 18 months, eyeing a potential IPO in 2025.
Brooke's Note. That was fast! The deal market has been dead for maybe a year, but now every day seems to bring a new transaction. The money is actually chasing them – if the deal is promising. Vestwell sure looked like it might be yet another good soldier to die on the battlefield, littered with firms trying to help small investors. But with Aaron Schumm, an experienced ‘RIA’ executive, at the helm, some apparently great technology and a few tailwinds -- like timing and favorable state rules in the making – Vestwell seems to be ready to make spirits bright. For now, Lightspeed Venture Partners is brightening Vestwell's holidays and assuring it that high-interest loans – never mind coal in its stocking – are probably never going to be on its list of big concerns.
Vestwell just doubled its venture capital funding at a $1 billion valuation in what is likely to be its last major capital raise – then again, it really wasn't expecting this one.
The New York City 401(k) recordkeeper to micro investors just raised $125 million in a Series D round led by Lightspeed Venture Partners. The move takes its overall funding to roughly $227.5 million over five funding rounds.
Founder and CEO Aaron Schumm expects to hit profitability within 18 months, and an IPO potentially soon after is a “real possibility,” he told Bloomberg.
“It’s probably our last raise. We hadn’t planned on it," says Schumm, via email.
"It gives us a lot of cash to put to work accelerating growth… and Lightspeed made a great case about how they can be additive,” he adds.
Lightspeed, which apparently gets about a 12.5% stake for its $125 million, may have money burning a hole in its pocket. Investors just tossed it $7.1 billion in July a year ago, earmarked for early stage companies with an eye on capitalizing on tumult.
"We intentionally architected a reinvestment team three years ago to prepare for a market correction,” the release states.
Breaking records
Schumm also insists his firm was headed into the black, even without the raise.
“Vestwell [could have] run organically from today through profitability without raising outside capital," he said, in September.
“It’s a welcome and exciting surprise.”
Schumm says Vestwell has delivered “well over 100%-plus annualized revenue growth" – a figure he expects the firm to at least sustain by year-end 2023.
“Nearly every month in the last 18 months has been a record-breaking month of growth by volume and, or new revenue,” he added.
In fact, a back-of-the-envelope calculation suggests that Vestwell is now earning a minimum of $86.4 million a year in fees from plan participants – up from roughly $12.3 million in 2021.
In the past couple years, Vestwell's 401(k) plan participant count grew about 640%, according to the firm. “Thousands” of RIAs also use the Platform, according to Schumm.
On top of that, Vestwell earned roughly $561 million annually from plan sponsors last year, up from $37.4 million in 2020. See: After 401(k) account growth catapults ahead of curve, Vestwell CEO scrambles to make big hires and abdicates chairmanship to freed-up Lori Hardwick.
Manna
Schumm's says Vestwell wasn't out with hat in hand on the VC circuit, when Lightspeed approached.
"We weren’t expecting Lightspeed to proactively approach us with the offer to lead our next funding round, given we had not planned to raise any capital," Schumm says in a release.
Yet, possibly, Lightspeed connected the dots after reading a Sept. 13 article in RIABiz, “Aaron Schumm unveils expanded Vestwell vision -- and M&A plan."
The article laid out clearly that an M&A plan was afoot at the firm – an inorganic growth vision where capital is traditionally additive.
Aaron Schumm is in the catbird seat after the biggest cat in the Wall Street jungle, Goldman Sachs, validates Vestwell by taking a big bite of a new $30 million funding round
Following the raise, Lightspeed partner and financial technology expert, Justin Overdorff, a Wharton grad and former Stripe M&A exec, joined Vestwell's board.
Eight of 12 Vestwell board members represent its VC investors. See: Aaron Schumm is in the catbird seat after the biggest cat in the Wall Street jungle, Goldman Sachs, validates Vestwell by taking a big bite of a new $30 million funding round.
Green fields
Although an acquisition is not imminent, according to Schumm, it certainly remains a possibility, especially with $125 million burning a hole in Vestwell’s pocket.
“We’re not actively engaging someone, right now, to go buy anything, but we’re always talking to businesses, just like we’re talking to investors,” Schumm explains.
“A lot of companies created over the last decade-plus seemed like great businesses on their own … but without the right point of entry, they don't get the engagement
"The beautiful thing about Vestwell is we're the catalyst of savings as the core access point,” he noted in September. See: Vestwell makes its big move -- nixing FIS's recordkeeping for the 401(k) super-bot it built.
Build or buy
Initial reports stated roughly half, or $62.5 million, of the raise is earmarked for acquisitions right off the bat; Vestwell has made two acquisitions since its 2016 founding.
The remainder will be spent on product development and sales and software hires. But the budget is not so cut and dry, Schumm says.
“It’s not explicitly earmarked for acquisitions," he explains.
“We’ll put the first half to work almost immediately across areas where we’re focused on; the other half we haven’t allocated an initial road map. It gives us optionality to build or buy as we see opportunities.”
The raise lifts the firm's valuation to roughly $1 billion, according to Bloomberg sources. Vestwell declined to comment on the figure. Its last raise brought in $70 million, in July 2021.See: Vestwell raises another $70-million, which it needs as it burns cash.
Untapped potential
Although yet to turn a profit, Vestwell has become a byword for technology chops in the retirement and savings market, which lags in software development and capabilities, industry observers frequently note.
Over the last year, it rebuilt the lion’s share of its own software, both to keep it as modern as possible and to bring in-house a number of processes it previously outsourced, according to Schumm.
Fidelity is the nation's largest defined contribution asset recordkeeper with about $3.5 trillion, but Vestwell's ambition is to become the Fidelity of micro 401(k) plans.
Story Timeline
Vestwell has lured VC investors like moths to a flame because of the untapped potential for servicing small businesses at scale. See: See: Will Fidelity win as Vestwell accounts mature?
Massive market
"This country has 32 million small businesses, but still less than one million provide a workplace savings program. There are 100 million people in this country still under-banked and under-saved,” Schumm told RIABiz in September.
“We haven't scratched the surface on the impact we can have,” he added.
Indeed, the recordkeeping industry – led by Fidelity and Vanguard Group – is massive.
U.S. retirement accounts held $35.4 trillion, overall, in March 2023, including nearly $10 trillion in DC plans and $12.5 trillion in IRAs, according to ICI data.
Pre-emptive raise
The Biz Vestwell sells 'institutions' – like Morgan Stanley and JPMorgan – state governments and payroll companies access to 401(k)s, 403(b)s, IRA’s, 529 college savings plans, HSA plans, ABLE (529A) programs, and student loan repayment services. Other education, child saving plans and annuities will soon follow. It also sells its software on a white-label basis to firms including Morgan Stanley, BNY Mellon Carson Group, and Voya Financial. Vestwell also offers managed accounts through partnership with Franklin Templeton. The Cost Vestwell charges plan sponsors $500 to set up a basic plan and $100 a month after that. It charges $6 per plan to participants enrolled by a firm. The costs of Vestwell's other non- retirement-based services are subject to negotiation. |
Four years into startup, Vestwell makes its big move -- nixing FIS's recordkeeping for the 401(k) super-bot it built with Goldman Sachs' VC money
Fin Capital, Primary Venture Partners, Goldman Sachs, FinTech Collective and several other prior investors re-upped their investment as part of Vestwell's latest raise. Lightspeed, Blue Owl and HarbourVest invested for the first time.
None have responded to a request for comment.
In September, Schumm stated Vestwell had a healthy runway, pre-agreed credit facilities and was “funded for perpetuity," although he did not rule out a raise.
Lightspeed and Vestwell opened dialogue earlier this year. Schumm says he repeatedly rebuffed their interest, but the two firms had good “chemistry," which led to a raise, he explains.
“We said, 'We’re not raising; it’s not on our radar,' and they said, ‘No, we want to do this now,’ and we got to the point of saying, 'Okay, this makes sense, let's make it happen.'”
“Its commitment to the thoughtful execution of its plans assures us of its stability and growth potential," says Overdorff, in the release.
Vestwell is demonstrating not only a strong, healthy enterprise SaaS business model but also a clear, decade-long vision, he adds.
Service menu
The bulk of Vestwell's product road map has been widely publicized for some time – healthcare savings (HSA), emergency savings (ESA), and child savings.
Those are all typically low-margin businesses, but now Vestwell is getting into annuities distribution – albeit with an unnamed partner. Margins are known to range higher, in part because annuities tend to be sold, not bought.
“We’re building out a lifetime income structure, with a larger partner and building that in 2024,” Schumm says.
There will be an annuity structure: Do you have an annuity in a plan, or work with an asset manager we’re partnering with, where they have similar products that can be [used] in an ETF or CIT? he adds.
Also imminent is the increasingly ubiquitous addition of an ‘AI’ chatbot, currently in beta-testing, and a revamped mobile service.
Vestwell launched pooled multi-employer plans in September, too – a rip-roaring success, according to Schumm.
“I didn’t think it had this much traction, but it’s really been cool how that’s been picked up, and other big players are leveraging Vestwell. ”
Volume play
Vestwell: By the Numbers Today:
Oct. 2021:
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Vestwell has also been growing like gangbusters among state savings programs, winning every available state contract since Jan,2022, including in Colorado, Virginia, and most, recently, Maine and Delaware in partnership with Colorado SecureSavings.
"We’re now the leading partner in this field, and currently power 80% of the live state auto-IRA savings programs in this country,” Schumm told TechCrunch, Dec. 21.
It needs the level of volume such plans afford, given its low per-employer and per-saver fees mean profit is contingent on a constant influx of new clients to increase scale.
Government plans are an “underserved market,” says Andrew Besheer, practice director for wealth management at Datos Insights, via email.
Vestwell should be able to offer a much more cost-efficient solution than any legacy provider and build brand loyalty in what’s somewhat a bluer ocean,” Besheer adds.
“If they’re buying pieces that allow them to bring a fuller offering to the table, say employee education, maybe they start delivering workplace investing programs beyond just retirement, then they probably put down even deeper roots."
No upmarket push
Vestwell has no intention of taking on Fidelity at the higher end of the market; instead, Vestwell wants to sell software to the giant market incumbent, Schumm says.
“It’s very hard for large incumbents to come downmarket. It’s not apples-to-apples … [but] we’d love the opportunity to be Fidelity’s engine in the small market.
"Pick the name of a larger company, they could leverage Vestwell to … those they can’t currently reach,” he says.
Lisa Asher, strategic advisor for wealth management at Datos Insights says Schumm is right to push-back against the narrative of compete or die.
"I can’t speculate as to how Fidelity is viewing Vestwell’s prospects, but the space itself is vast and there is a lot of runway," she explains, via email.
"There are roughly 33 million small businesses in the US and estimates show two thirds of those do not offer retirement plans,” she adds.
Goldman M&A guru aboard
Vestwell recently appointed former Goldman executive Danya Dumbrill Early as chief strategy officer, and tasked her with managing the firm's M&A strategy, keeping Vestwell's VC backers in the loop and working on corporate business development.
“She has picked up speed quickly,” says Schumm.
"She formulated the entire go-to-market strategy for emergency savings [forthcoming] … she’s been great," he adds.
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