Why Amazon invested in smallcase? — ft. “The smallcase Teardown”
Hello Friends, Yash here!
Presenting you the first article in the series of “FinTech Teardowns”: where I will break down FinTech startups from a product, business, and market perspective. In this article, we tear down one of the hottest startups in the town which is now even backed by Amazon! Yes, Smallcase & also discuss why it’s poised to be India’s first Wealth Management unicorn. It’s a long one, but I genuinely promise you, that it will be worth the read :)
Let’s go!!! 🚀🚀
What’s Smallcase?
Launched in July 2016 by Vasanth Kamath, Anugrah Shrivastava, and Rohan Gupta — smallcase operates a platform for retail investors to invest in ready-made portfolios of stocks and exchange-traded funds (ETFs) — which it calls “smallcases”. Investors just need to connect their existing DEMAT accounts from online brokers like Zerodha, Upstox, Axis Direct, and in few clicks, they get invested in a theme or strategy of their choice.🙂
What problem are they solving and how are they different from Mutual Funds?
In India, favorite investment instrument has always been Fixed Deposits, Gold, PPF, Post Office, and other fixed-income instruments that are all considered safer than equities. While platforms like Zerodha, Upstox have disrupted the retail investing space by letting people open an account, trade, and invest in stock markets, equity investments are still considered risky by most Indians.
Back in 2015, smallcase saw that a lot of investors were wanting to go do-it-yourself (DIY) for building their portfolio. They were opening Demat accounts and the entire process of building a portfolio was left to them. So, they felt a need for a product, where you have a professional manager, portfolio diversification, and a theme. This made a lot of sense, but it seemed quite similar to Mutual Funds.
Then, is it really different? Not really! Just transparency and control. In Mutual Funds, you own a unit of mutual funds which they ultimately invest in stocks, whereas, in smallcase, you directly own stocks of the company. This way, whenever you buy a smallcase, you can actually view what you are buying and holding, sell whenever you like — so you have total transparency and control.
Obviously, this doesn’t make smallcase any better than mutual funds, but amazingly cool branding, sleek user experience, and GenZ’s urge to ‘Do-It-Yourself’ investing have done the magic for them!
Now, we know why they exist, let’s deconstruct their amazing products🚀
Product — The smallcase universe:
We all know Smallcase as a platform that lets us invest in a portfolio of stocks/ETFs or even creates customized portfolios. These portfolios can be thematic, sectoral, or can give exposure to various assets. These are rebalanced periodically (monthly or quarterly) as per the market conditions.
However, this is not the only product the company has. It has 3 more SaaS products in its suite. Let’s decode each one by one!
1. Smallcase Publisher:
This product enables any SEBI-registered professional to create their own smallcase. This was one of their killer moves. Let’s understand why and how they got the idea! 🤔
Earlier in 2017, all smallcases were created by the smallcase in-house research team (which is now Windmill Capital, a subsidiary of smallcase). This meant, they were the only manufacturers of smallcases. But, when they were onboarding Axis Securities as the second broker after Zerodha, Axis actually showed interest to create a smallcase. It was at that moment, they realized they needed to create a platform that enables portfolio managers to create, manage and sell their own smallcases.
Now, This served two purposes:
a) It helped them moved to a marketplace model, where just like ‘Amazon’ they are connecting sellers (portfolio managers) and buyers (retail investors).
b) Create SaaS for portfolio managers where, just like ‘Shopify’, they help portfolio managers to set up a landing page, manage subscriptions, enable trade executions, backtesting, and many more — This also solved many pain-points for them!
This amazing ‘SaaS+Marketplace’ model is the core engine that drives smallcase’s growth flywheel today 🚀
Today, 120+ independent research analysts (RAs), investment advisors (RIAs), and broker research teams create their own smallcases. Some examples of the interesting smallcase publishers:
- Windmill Capital: The majority of the smallcases sold are published by Windmill Capital, a wholly-owned subsidiary firm by Smallcase which has a Research Analyst (RA) license. They have 36+ smallcases and almost all of them are free.
- CapitalMind: Managed by Mr. Deepak Shenoy, one of the most popular portfolio managers. The Capitalmind Momentum subscription offers momentum-based investing smallcases and has recently crossed 100+ crores in AUA (Assets under Advisory) with 3500+ subscriptions. It charges Rs. 4000 for 3 months.
- Weekend Investing: Managed by another star investment advisor, Alok Jain, it also offers momentum-based strategies and pricing vary from Rs. 2500 to Rs. 11,800 for 3 months.
Interestingly, a couple of Mutual Fund houses like ICICI Mutual Fund, HDFC Mutual Fund is creating smallcases using their own ETFs which can be one of the growth ploys by them to sell their own ETFs.
2. Smallcase Gateway:
This enables stock & ETF transactions on literally any website/app.
For instance, Moneycontrol has integrated the smallcase gateway, where instead of just doing analysis on the App, you can also transact the stocks from the same platform through your favorite broker.🤯
Another instance, Kuvera is a wealth management platform and they wanted to offer stock investing to a user, and getting a broking license is not easy, so they just integrated the smallcase gateway and now their users can buy stocks from the same platform.
Think of the smallcase gateway as ‘Razorpay for stocks’, where instead of aggregating different payment methods, they are integrating various brokers. I personally feel smallcase gateway is the first “Embedded Investing” product in India.
What and how — “Embedded Investing”?
A few months ago, Amazon was looking to offer a way to let Indian users invest through its platform. Now, if they want to build it from scratch, it will take a lot of time & money. So instead they will just embed smallcase’s gateway, and now they can offer all stocks & smallcases through its own App! In fact, this might be one of the reasons, why Amazon invested in Smallcase to enter the Indian Wealth Management Space & continue its ambition to make the super app 🤯🤯
Now, coming back to smallcase gateway, they have already been integrated into 30+ Apps like Content & Research (Moneycontrol), Investing Apps (Kuvera), Mutual Fund Houses(SBI Mutual Fund). With this, Apps can enable their users to transact through any of the 12 brokers integrated. These brokers combined account for 80% of retail investors in India!
This gateway doesn’t come free. For an integration, an App has to pay Rs. 1.18 Lakhs annually. Then, you may ask why will any App like Moneycontrol be interested in integrating the smallcase gateway?
- Broaden their use case: For instance, integrating gateway on Moneycontrol helped them give a better user experience by enabling their users to transact stocks directly through their App.
- Revenue source: While there is no direct revenue for Apps here, but if the other App helps open a Demat account or sells a paid smallcase, smallcase offers them ~30% commissions. Since Moneycontrol has already a huge distribution, if this feature takes off, this will be a win-win situation for both.
3. Tickertape:
It’s one of the most comprehensive sources of data for research and analysis of stocks based on technical and fundamental factors. It’s not anything new or innovative, they just built a stock screener with a very clean and intuitive UI and that was the game-changer here. It is currently used by over 2 Million+ investors in India.
Besides, building a very strong suite of iconic products, smallcase has been amazing in partnerships too which has actually helped it to build such a seamless product experience. Not only they have integrated legacy brokers like HDFC, ICICI but they have also raised investments from HDFC Bank & Amazon, which shows how they have been mastering the trust game with even big institutions. The company has also tied up with 10+ brokerages — Zerodha, Upstox, HDFC Securities, Kotak Securities, IIFL Securities, 5paisa, Edelweiss, Axis Direct, and Alice Blue — which provide investors smallcases on their own websites. They also have a very seamless user experience with a very clean UI which further adds magic to its product.
Competitive Landscape — tricky one!
While you may think, that there is no strong competitor to Smallcase, but they are actually playing in one of the most competitive markets out there. However, Smallcase has totally nailed on rapid user growth with a very high NPS (net promoter score).
Here are some of their direct competitors:
- SAMCO- SAMCO, a stockbroker has recently launched a lot of products for investors & traders. One such product, Stockbasket lets you invest in an expert-selected basket of stocks, curated based on 25 intelligent stock rating parameters.
- Tavaga — They create portfolios of ETFs based on the risk profile of the user to achieve a certain goal like a vacation.
- Fyers- Fyers, a stocker broker have launched also launched a product, ‘Thematic Investing’, which allows the user to invest in themes just like smallcases.
- Stockal- allows people to invest in US Markets. They recently launched a stock basket for US Markets. Similarly, Kristal.ai also offers ETF baskets of US Markets.
- Wealthdesk — It’s very similar to smallcase, offering portfolios with multiple broker integrations, research advisors.
It is evident that a lot of players are trying to offer stock portfolios, but none has been able to achieve significant traction like smallcase. Apart from direct competitors, the company counts Zerodha, Paytm Money, IndMoney, ET Money, Groww, and Cube Wealth as indirect competitors. Nonetheless, their major competitor has in fact been Mutual Funds!
Growth, Traction & Funding
The room for the growth of smallcases in India is immense. In FY21, 14.2 million DEMAT accounts were opened compared to an average of 4.3 million in the preceding three financial years. And yes, It has been just the moment for Smallcase. Their users multiplied 3X from 9 lakh in March 2020 to 28 lakh in March 2021 & currently have more than 30 Lakh users. In FY21, the firm saw ₹8,000 crores invested through its platform. It has raised more than $60 Million from investors like Sequoia, Amazon, Faering Capital, Premji Invest, Blume ventures, HDFC Bank, Arkam ventures, DSP global, Zerodha Rainmatter, Kunal Shah, and more!
Smallcase is too good in marketing & branding. The way, they have made the concept of portfolio management & thematic investing so cool with such an awesome name ‘smallcase’, is simply amazing. Strong Word-of-mouth, shoutouts by influencers like Ankur Warikoo, Tanmay Bhatt, good social media marketing has led to its incredible growth. Further, its distribution by broker platforms as well as Investment Advisors & Wealth Management Apps has been a major catalyst to its growth.
The investing appetite of Millennials India is only going to grow in the future and startups such as Smallcase will be the catalysts of the movement.
Business Model: The Real GoldMine
Now, let’s get to the most interesting part, its super amazing business model. While most Investment Apps like Groww are struggling to get any revenue, smallcase has been successful in not only raking a good amount of revenue but also with excellent unit economics.🤑
Let’s understand their sources of revenue:
On the B2C side,
- Transactional revenue: Smallcase isn’t free at all, they earn revenue from each smallcase they sell. For instance, whenever you buy a smallcase through the Zerodha account, it automatically deducts Rs. 100 + GST. from Zerodha fund balance. If you are investing less than Rs. 4000, then it will deduct 2.5% + GST and this fee is much higher than even mutual funds.
- Tickertape: It also tiered-subscription plans where you get access to all premium tools, with annual charges being Rs. 1133.
On the B2B side,
Remember, we discussed that smallcase is very good at partnerships. That has actually paved the way for new revenue sources as well.
- Smallcase gateway: While it hasn’t seen much traction yet, but they have already 30+ partnerships, and they charge fixed charges of Rs. 1.18 Lakh/annually. If it blows up, then it can not only generate solid recurring revenue but also give them a huge presence and reach in other Apps.
- Revenue sharing: While in the case of discount brokers, smallcase charge you upfront. In the case of premium brokers like Motilal Oswal where you get charged for even buying stocks, smallcase takes a cut from them. Not only this, if you open an account through smallcase for brokers like Angel broking, they get commissions from those brokers too.
- Creators: Now, as mentioned earlier, almost all smallcases from star portfolio managers are subscription-based. Since, smallcase is providing them with a SaaS tool & its platform reach, which is solving a lot of their problems, why would it provide for free? They charge ~30–40% of the total subscription amount. So, this also ensures a steady recurring revenue for them.
While an exact overall revenue is not known, but going by the above, they may be profitable at the operational level & if their product continues to scale well, they will be generating huge revenues in the future.
Are smallcases actually worth it?
Personally, don’t think smallcase is the best mode of investing if you are investing a small amount. Buying Mutual Funds or ETFs directly is a better option. Why? Smallcase’s fees make it a lot expensive. For every transaction, you are charged ~ Rs. 100 by Smallcase, so investing atleast Rs. 10k would make any sense. If you are subscribed to Alok Jain’s Weekend Investing, where you have to pay ~30K yearly as fees, you have to invest at least 10 Lakh so that it makes any sense for the fees paid.
If someone is looking to make their first investment in equity investments, then it’s definitely good to start, because you are introduced to the art of portfolio construction with a sleek user experience and in a fun way. Further, it’s a perfect choice for someone who is looking to transition from Mutual Funds to Direct Stocks or wants to have a PMS (Portfolio Management service) kind of service from their favorite advisors but doesn’t have the required minimum capital of Rs. 50 Lakh.
Overall, it may not be a very good investment product, but it has found user’s love & as a business, it is definitely a good investment!📈
Final Verdict:
With very strong word-of-mouth, brilliant products, a robust business model, and a huge retail investment opportunity, it’s no doubt that they are poised to lead the Investment Advisory market in India. In fact, won’t be surprised if they scale this unique model globally to other emerging markets. They are also looking to add more products in the capital markets, adding more assets like REITs (Real Estate Investment Trusts) in their portfolios along with Financial Planning avenues. Currently, it’s valued at ~$200M, but we can see this valuation multiplying very soon & is certainly poised to be India’s first WealthTech Unicorn🦄
As Nithin Kamath (Zerodha’s CEO) says about smallcase, “The second best fintech startup focusing on Investing in India” 🚀🚀
