The small-cap that aims to outgrow its big brother

Mia Kwok

Livewire Markets

Customer-centricity is a lost art. In the realms of tech (fintech, social tech and tech startups), putting the customer at the centre of the business model is really one of the first steps to survival. But that's easier said than done. 

Raiz (which launched initially as Acorns in 2016, before splitting from the parent company in 2018) has managed to hold on to its customer focus over the years. And the way it approaches this was intriguing. 

I've covered my fair share of start-ups (even worked with a few) and it can be hard to keep sight of the customer when you're chasing the latest tech or next VC-dollar. But I was fortunate to chat with Raiz CEO Brendan Malone just after Raiz's full-year report was released about all this and more. I also spoke with Dean Fergie, director and portfolio manager at Cyan Investment Management, who is an investor in Raiz (ASX:RZI). He shared his insights with us on the recent full-year report, board spills and his overall investment thesis. 

What is Raiz?  

For those who aren't familiar with the company, Raiz began as a digital micro-investing platform. It provided a unique service because it would automatically round up your purchases and put your "spare change" into an investment portfolio of your choosing. You would be saving and investing without thinking about it. 

"You've got a better chance getting $1 fifty times, than getting a $50 note once," said Malone. 

"That's what Raiz does. It breaks down the barriers to entry ... and it's in the palm of your hand," he said. 

Raiz has grown significantly over the past few years to encompass more sophisticated investment strategies, such as custom portfolios (in a build-your-own style) and exposure to different asset classes, like Bitcoin (which Raiz has capped at a maximum 5% for investors). 

Raiz also recently acquired SuperEstate, a superannuation platform, to cater to Super Guarantee customers. 

The aim, said Malone, is to cater to the investor's journey from those who have never saved nor invested, to those who know exactly how they want to invest and why. 

What do investors think about Raiz? Here are the numbers.

Raiz’s parent and largest shareholder (Acorns Grow) is due to list on the NASDAQ via a SPAC in early 2022 at a valuation of US$2.2 billion. Fergie believes Acorns can be a good benchmark for Raiz investors. 

"Notwithstanding Acorns Grow’s stated desire for “global growth”, on our numbers, the comparative valuation on either customer numbers or revenue (with 4 million customers and US$90 million in revenue, Acorns Grow is approximately eight to 10 times the size of Raiz) puts Raiz in the ballpark of $3.60 per share," said Fergie. Raiz currently trades around $1.90 per share.

"Although, given Raiz's expansion into high growth geographies like Indonesia and Malaysia, where it is gaining significant customer traction, there is a strong argument the Raiz should even trade at a premium to its parent," said Fergie.

"From a financial perspective, there is a high level of both operational and financial transparency," said Fergie. 

"RZI releases customer numbers every month and, given both the distinct and recurring nature of its revenue streams, the process of estimating the top-line is almost as easy as it gets. RZI’s top-line revenue grew 40% from $9.8 million to $13.4 million with a narrowing of the EBITDA loss from negative $2.3 million to negative $2 million which I think was an excellent outcome," he said. 

Like many newer tech businesses, Raiz continues to invest in growth both here and overseas and so a small bottom-line loss is not unexpected. 

In fact, with more expansion plans, I was curious to know if Raiz will see higher spending in the coming years. 

"Whilst expanding is been a priority for us and we want to create that sustainability. I don't want to have to keep going back to the market to raise money. So we made sure that we're closing those gaps," said Malone. 

"We're not a growth company that is growth at all costs," he said.

Fergie points to the strong balance sheet ($19 million in cash) and the recent achievement of cash-flow break-even. He is also enamoured by the scalability of the product. 

"I’d say the one negative trait is the high level of beta (correlation to equities) involved in an investment in financial markets exposed business. If global markets take a tumble, both the share price is likely to fall but so does the underlying business in respect to FUM, creating somewhat of a double whammy. However, we strongly believe, the structural tailwinds and organic growth well exceed the risk from any potential medium-term market retracement," said Fergie. 

Have a bright idea? Park it here.

The reason I'm so interested in customer-centricity is that Raiz is hitting a growth spurt with upcoming Asia expansions and a sticky, growing customer base. When you have periods of rapid growth, it pays to keep an eye on the customer.

Malone is just bursting with customer stories. From the Raiz customer he started chatting to at the West Burleigh shopping centre while on holidays, to the friends and family friend who come to him for investing tips and advice. 

For Malone, the biggest problem Raiz solves is not "how to invest?" but "how do I think differently about money?" 

Raiz has a customer-led ideation process, which it calls "the carpark of product developments".

The Raiz team, including Malone and Group CEO George Lucas, will sift through a batch of some 30-40 customer product suggestions that come in each day.

"Yeah, some of them are terrible," admits Malone. "But some of them are really good. And we go 'Cool, we're doing this' ... The tech guys, George and myself sit around and ask - what are our priorities, because it's all customer-driven."

Raiz Kids is an example of a customer-led idea which they have brought to life.

"Raiz 2.0 is due out in a few months ... it is a full rebuild of both the back-end and the front end user experience. And that's what customers have asked us for," said Malone.

The new iteration will feature sub-accounts, or read-only accounts, which means that kids whose parents hold accounts in their name can get visibility over their accounts, the investment process and the overall growth of their savings.

So when Malone says he wants to capture the whole lifecycle of an investor, he really means from the earliest notions of saving, investing and monetary value.

Fergie adds that the educational element of Raiz is a huge benefit for investors too.

"Clearly financial education and wellbeing is of growing community importance and Raiz’s facilitation of this in an easily accessible and cost-efficient manner gravitates us towards this business as an attractive fundamental investment proposition," said Fergie. 

"I am a Raiz client," said Fergie.

"My kids have Raiz accounts and I have no hesitation in recommending it to friends and colleagues wishing to start a nest-egg through cost-effective and diversified long-term investments. As a satisfied personal customer, I think there is no better advocation for a stock market investment," he said. 

Trouble brewing in paradise? Or just another board stoush? 

The Raiz share price took a little dip last week at the news Group CEO and shareholder George Lucas was seeking to spill the board and oust three directors in the process. 

Raiz had lodged a 249D with the ASX on Thursday 2 September and on Friday morning the share price was looking wonky. 

Volatile leadership can be bad for business, but from Fergie's perspective, reshuffles of this nature are not unheard of. 

"It wouldn’t be the first time a founder/executive director and major shareholder has had differences of opinion with a newly-incoming independent chairman, particularly if they both have strong personalities," said Fergie.

"However, as a shareholder, it’s certainly disappointing that any aggrievances haven’t been able to be resolved internally."

Raiz has yet to comment beyond the ASX and a general meeting will be set in order to vote on the motion to remove the directors. 

Where to from here? 

Raiz will need to soothe these internal tensions if it wants to present a focused growth strategy to the market. I wonder if this is a sign of growing pains to come, or a necessary nip in the bud so the company can sprout in a new direction? 

For Raiz to set itself apart from the herd, it will need to continue to uphold the values it preaches. 

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Mia Kwok
Livewire Markets

Mia Kwok is a former content editor at Livewire Markets. Mia has extensive experience in media and communications for business, financial services and policy. Mia has written for and edited several business and finance publications, such as...

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