THE British public has long been accustomed to depositing their earnings in a bank account, or investing through an established stockbroker. But Nick Hungerford wants to disrupt the centuries-old wealth management industry, in precisely the same way that Metro Bank is trying to change banking.
Nutmeg is an online discretionary investment manager that builds and manages diversified portfolios for all levels of wealth (the minimum investment is £1,000). Within each portfolio, clients get a mix of up to ten asset classes, ranging from private equity to gold. Hungerford believes he has found a gap in the investment management market: he is targeting those customers who lack the knowledge – or time – for DIY investing, but “don’t have £1m to invest, and are therefore not of interest to stockbrokers”.
A NEW APPROACH
Hungerford’s business model is based on what worked for Amazon for books, or Zappos for shoes. “I am cutting out the focus on sales, instead putting more resources into customer service and investing itself,” he says. But if the opportunity for huge gains is so great, why has no one done this before? Hungerford lists a number of reasons. To begin with, the incumbents have no incentive to change their approach, as they are profiting from the existing system. In addition, it is a high barrier to entry industry. “A small company needs a vast sum of money to penetrate this market,” Hungerford says.
The Exeter graduate, who “always wanted to be a teacher” got the encouragement he needed during the second year of his MBA course at Stanford. To his 64 contemporaries and professor, Google’s Eric Schmidt, he pitched his business plan. Only three students said they wouldn’t sign up to the idea. Schmidt instructed him to “get on and do it”. For six months, Hungerford tried to exploit his continental charm (“I walked Sand Hill Road in my flip flops looking as European as possible”) to persuade Silicon Valley’s venture capitalists to invest in his business.
Tim Draper – the first investor in Hotmail and Skype – agreed to get on side. Why, therefore, did Hungerford then start Nutmeg in London, rather than California? “The reasons are threefold,” he says. First, the British government approached him and “put forth a compelling case”. Soon after, the Financial Services Authority also contacted him to discuss “the urgent need for innovation in Britain’s investment industry”.
Secondly, a closer look at the macro picture – notably that there are as many people in Europe as America, but that, according to the OECD, the household savings rate is close to three times as high in the euro area as in the US – made him reconsider. “What’s more, technology adoption is very high in Europe – the UK has one of the highest rates of conversion to internet banking of anywhere in the world.”
Thirdly, the company secured investment from Pentech Ventures here in Britain (bringing its total backing up to the “tens of millions of dollars”). But there is a fourth reason. Hungerford knows that London’s position as the world’s leading financial centre faces fierce competition from the likes of New York and Hong Kong. And he has (patriotic) aspirations that Nutmeg could help London retain that position.
As such, he was at Downing Street the day before our meeting, discussing what the government could be doing to support entrepreneurship and boost financial services. And he informs me that he now lectures at universities across the globe, trying to encourage people to start companies in Britain.
For other entrepreneurs, Hungerford accepts access to funding can be the biggest stumbling block. “You have 300 venture capitalists in Silicon Valley, with 5,000 angel investors. In Britain, there are six such companies.” But for Nutmeg, the toughest challenge was getting its first 1,000 users. “When many people have invested in you – and you in yourself – there is a lot of pressure. But I really believed in what we were doing.”
The company was founded in 2011, and in April 2012 opened to 100 users. “But people were unfamiliar with the brand, and unsure whether the concept could work. And finance is a boring, complicated subject to most people. Sitting down and dealing with your money is always at the expense of watching 24. So we have to convince people that this is worth those ten minutes of TV – and that can be a slow process.”
With a low interest rate environment, the public are starting to take more interest in managing their finances. And Hungerford thinks the retail distribution review is driving customers – perhaps unwilling to pay for financial advice – to his site. Since Nutmeg was founded, its model has been replicated six times in the US, once in Germany, and once in Italy. It may be only a matter of time until someone copies the idea here in Britain. “But, given the worries we had over getting our first 1,000 customers, having people move away from the incumbents can only be good for our business”. The site now has 16,000 users.
Hungerford assures me Nutmeg is no flash in the pan. It has “a huge infrastructure, and is not set up to be a build and sell business”. And Hungerford says that, for better or for worse – because some days he laments how all-consuming startup life can be (“it’s my job, my life, my girlfriend, my parents”) – its high-profile investors are not interested in making a small amount of money. “They want to make the next Facebook,” he says.
CV NICK HUNGERFORD
Company name: Nutmeg
Company turnover: N/A (16,000 registered users)
Number of staff: 36
Job title: Chief executive and co-founder
Studied: Economics at Exeter, MBA at Stanford
Drinking: Protein shakes, decaffeinated tea and Japanese lager
Eating: Everything. In life and in work I’m like Oliver Twist – always asking for more
Reading: Escape from Camp 14, by Blaine Harden. It is humbling
Favourite business book: Innovator’s Dilemma, by Clayton M Christensen
Talents: Functioning without sleep
Motto: “Et Dieu mon Appui” (and God my help)
First ambition: To be a teacher
Heroes: James Bond, Jonny Wilkinson, and John Bogle
Awards: Finance 40 Under 40, Finovate Best in Show 2013