FreeTrade Crowdfunding 2023: Record Revenue despite Valuation Drop

For London Tech Week 2023, FreeTrade held a community CrowdFunding meetup with Adam Dodds (FreeTrade Founder), Viktor Nebehaj (COO & Co-Founder) & Paul Brooking (CFO).

So far, 1.4 million people have entrusted over £1.4 billion pounds with FreeTrade.

FreeTrade also achieved the Which - Recommended Provider for Investment Platforms in May 2023.

As this was a Crowdfunding round, the valuation & current share price were all announced (see below).

Table of Contents

• Base Case vs Growth Case
• Valuation
• Client Acquisition & Demographic
• Features

Base Case vs Growth Case

FreeTrade put forward 2 different outlooks on the company both a "base" case and a "growth" case, all depending on how much they can raise in this round of crowdfunding.

The main differences between the 2 cases is that the "Growth" case requires an extra VC round of investing and focuses on spending more on marketing with a push in the EU market too. In this scenario, the aggressive EU expansion will continue work in Sweden and then expand to other Nordic Countries.

The base case however, will have more of a UK only focus with a slower EU expansion.

Regardless of both cases, the feature release schedule is unlikely to change as neither cases have an expected growth in engineering team size.

FreeTrade currently makes interest on the money it holds for customers with May alone making £558,000 in interest. For both the base & growth cases the interest rate assumption is using the forward looking interest rate curve with rates flattening in 2024 and falling away in 2025.

Base/Growth Funding

In 2023, FreeTrade have already raised £5.5 million in an internal funding round. For their "base" case, they only need to raise another £2 million, however for their Growth case, they will need around £6.5 million.

In both scenarios, funding is no longer required in 2025 onwards, however growth case will see 1 last large Venture Capital round in 2024.

Currently (as of early June 2023), they have over £7 million as "expressed interest" in their CrowdCube campaign.

Base/Growth Estimates - Yearly

AUA - Assets under Administration

Financials - Quarterly

So far Q1 2023 has been FreeTrade's best quarter yet with Q2 soon to be the best as well.

The EBITDA last month was a loss of £700,000 however Freetrade already have contract negotiation gains of £350,000 per month coming up in the next couple of months. These are contracts that have already been re-negotiated and are just waiting on the renewals to start.

This means FreeTrade only have £350,000 per month they need to make up before they are profitable. This is expected to be achieved through Security Lending and Mutual Funds.

FreeTrade also announced they have a 85% gross margin which due to owning their platform is only due to increase as the scale of the customer base increases too.

Income Streams

Valuation

The new valuation of FreeTrade is £225 million, with a share price of £2.60 per share (86.6 million shares).

This valuation comes at 9.1x Estimated 2023 Revenue and 6.4x Estimated Base Case 2024 Revenue.

Viktor did mention that they went on the lower end of the valuation however they are happy to do this for the community rather than for a VC round.

Crowdfunding Setup

The different levels of the crowdfunding campaign will be:

• £500+ = FreeTrade Swag
• £1000+ = B Shares Direct (Instead of Crowdcube nominee)
• £5k+ = A Shares (with voting rights)
• £10k+ = Monthly FreeTrade Performance Info
• £50k+ = B Preference Shares

Convertible Note 2022

For those that invested in the last Crowdfunding campaign you were given a Convertible Note which as of this funding round will convert. This will convert at a 20% discount of the valuation given today, meaning the note converts at a valuation of £180 million.

Valuation History

To understand the current valuation (below) we first have to take a look at the valuation history of FreeTrade:

* May 2022 was a convertible note round priced at a maximum of £400 million but actually converted at a valuation of £180 million

Despite the 65% drop in valuation since Nov 2021, the market has also dropped dramatically too:

• RobinHood - Down 70%
• HL - Down 40%
• ARK Fund - Down 60%
• Nasdaq - Down 15%

Client Acquisition & Demographic

Customer Acquisition

The current status on Client Acquisition is that FreeTrade are trying to acquire more higher quality customers through a variety of means:

• Mutual Funds - Hoping to enable those "larger" 100k+ portfolios to move from HL (Hargreaves Lansdown)
• Partnerships - Such as the recent "Which" recommended provider will help build trust with larger portfolio customers

FreeTrade confirmed "FreeShares" are still a very cost effective route for customer acquisition, however alongside influencers who also bring in a lot of new customers they tend to attract lower quality customers too.

Membership Prices

It was commented that membership prices are likely to be reviewed every year for potential increases.

FreeTrade's Customer Demographic

Average Portfolio Size per Plan:

Of all new customer - almost 70% are new to investing. This is great to hit the vision "to get everyone investing" however the short term strategy is to attract the £500k+ HL portfolios.

Features

Proxy Voting is due soon as well as auto-investing monthly.

Stock Lending

FreeTrade will enter a simple contract with customers and lend on their behalf to major banks such as Bank of America or JP Morgan. FreeTrade will gain an interest on this Stock Lending and will give a proportion of this interest back to the FreeTrade customer.

It was suggested that those on higher plans will receive a greater split of the interest.

Stock Lending and the interest gained from this feature will contribute to the revenue growth & profitability of FreeTrade.

Mutual Funds

Mutual funds continue to be the "next" big feature.

FreeTrade chose not to comment on whether mutual funds will be using their own proprietary technology or a 3rd party provider for this feature. However, it was confirmed that the cost to FreeTrade is not too dissimilar than UK Equities.

Bonds, Treasuries, Guilds and Money Market Funds are on the radar soon too.

More European Stocks

French, Italian and Spanish stocks won't be available until the Financial Transaction Tax has been implemented into the platform. This is estimated to only be a small amount of work but doesn't appear to be a current priority.

Missing Features

FreeTrade acknowledged they are aware there are many features that are stopping HL customers from choosing FreeTrade:

• "Don't have the funds I want"
• "Don't have web"

The community then added:

• Joint Accounts
• JISAs

Sweden

It was announced many years ago that FreeTrade would start working towards releasing in Sweden however it was only last year that the iPhone App got released. Adam admitted it was just a lot more work then they expected. There are still a few more features causing delay in Sweden:

• Band ID Support (Sweden's new e-ID)
• Android App (Still not released)

Podcast

Adam & Viktor have for a while been hosting an internal Podcast. Soon they wish to make a public version too, with episodes with different members of their team.