Technology Industry for Advise Is Shook by the Venture Capital Slump

Technology Industry for Advise Is Shook by the Venture Capital Slump

Creativemass, a financial services software provider used by the likes of AMP and Bombora Advice, went into voluntary administration on March 15, and was scooped up by liquidators HoganSprowles.

Creativemass’ flagship product WealthConnect caught the eye of AMP in 2021, promising “to deliver a high-quality technology solution” for its advice network and build on the foundations of ClientHUB, the firm’s proprietary practice management solution.

WealthConnect aimed to be a “uniquely modern technical solution” by leveraging Salesforce and offering advanced financial planning, wealth management, and broking capabilities.

As part of our licensee proposition, AMP Advice is committed to providing technology solutions that allow advice practices to deliver high quality advice more efficiently. We are working with the administrator to support the best way forward for the Creativemass business and remain on track with our plans to deliver a new CRM platform to the network,” an AMP spokesperson said.

Creativemass was founded in 2017 by Michael Rouse. In mid-2020, US investment banking services provider Republic Capital Group injected an undisclosed amount into Creativemass.

In the lead up to its demise, Craig Grogan was appointed chief executive in March 2022, taking over from Alex Ulrich.

HoganSprowles went to market seeking expressions of interest from potential buyers that might be interested in snatching up Creativemass, which comes with intellectual property such as software and code, a decentralised client base infrastructure, as well as a book of client contacts.

“The company has a dedicated onshore development team with key industry relationships and a core distribution partner,” the advertisement said.

HoganSprowles was also appointed liquidator of TIQK, a startup that provided an automated and objective assessment of financial advice, promising to audit Statements of Advice within a matter of seconds.

Founded by Lane Cipriani in 2016 and led by Steve Brown as chief executive between 2019 and 2021, TIQK went into liquidation on March 6.

In 2018, Practifi offered advisers access to TIQK, which promised to review every aspect of advice generated.

Brown’s predecessor and chief executive at the time Steve Thomson said the integration “allows Practifi users to have the power to seamlessly audit Statements of Advice at their fingertips”.

Peter Worn, joint managing director of Finura Group, told Financial Standard that advisers should approach tech partners thoughtfully, “rather than going all in on an ambitious technology project”.

“Go in eyes wide open and consider potentially what are some of those things that could go wrong. Firstly, acknowledging that because it is a startup, there is a chance that things might not work out. Don’t necessarily take on something that’s so big that if it goes wrong, it’ll potentially damage your operations, your business or your brand,” he said.

His second recommendation is doing the obvious due diligence.

“I would look at who are the founders and investors for this business. What is their track record? How committed are they to see this through? Does the backing of this company line up with the promises they’re making? We see a lot of pitch decks where some pretty grand and ambitious promises or plans are put forward yet haven’t raised the amount of capital that would even remotely get them there,” he said.

Dry powder dissipates

Numerous industry metrics show that global venture capital opportunities are waning. It was imminent that the impact would ripple across Australia’s startup community.

S&P Global Market Intelligence reveals that fintech funding drastically dropped from about 1000 rounds worth US$26 billion at the end of 2021 to just 599 rounds of US$8 billion recorded year on year.

Over the next 12 months, investment analytics firm Preqin forebodes investors will allocate less to venture capital after witnessing a reversal in the capital committed compared with previous years.

Nearly three quarters (74%) of investors Preqin surveyed believe that venture capital assets are overvalued, an increase from 69% in 2021. They also predict that inflated asset values will experience a correction.

Together with tech companies like Meta, Amazon, and Microsoft continuing to slash their workforce in droves, and the uncertainty and contagion risk sparked by the collapse of Silicon Valley Bank, S&P Global warns fintechs not to expect the amount of capital that flooded in before COVID-19.

Worn said the issues facing startups in the advice tech sector are no different to what is happening broadly in the technology sector over the last few months.

“Valuations have really been compressed and the appetite for venture capital in all sectors has been heavily reduced,” he said.

“Startups struggled with I would call ‘product market fit’ or sufficient revenue to be independent businesses in their own right so, they were still dependent on raising external capital in an ongoing manner.”

Understandably, backers have high expectations and want to see startups hit key milestones before they deploy any additional capital.

“Many startups that folded weren’t achieving their milestones or that the risk appetite of their backers simply disappeared,” he said.

Another evident trend is the high cost of salaries, with young tech companies hiring expert software developers and engineers to build the infrastructure.

“That means retaining talent has been very hard for startups. If staff get a sense that companies are struggling or running out of money, they’re going to go to safe places to work and a more secure environment,” Worn said.

Interestingly, there are teams comprising people that understand the industry well but have no experience building software or launching a startup. Conversely, some teams have technical people, but do not have people that understand the industry.

“When you’re working in a really specific niche, like wealth management or financial advice in Australia, you must have both sets of skills, which can be hard to achieve,” Worn said.

Startups are renowned for burning through piles of cash and the inability to make profit or at least break even in the first few years.

The top reasons why US startups fail, CB Insights found, is that 38% run out of cash and/or fail to raise new capital after conducting a post-mortem of about 110 companies.

What becomes troubling is when the company can no longer pay its employees. According to Glassdoor reviews, former Creativemass employees were allegedly not paid superannuation and wages for months, with one review claiming management was “pretending to change pay cycles from fortnightly to monthly and back to fortnightly, hiding the fact that they are experiencing cashflow issues”.

The third, more financial advice-specific trend, Worn said, is the shrinking adviser market.

With the number of advisers slashing by half, many business plans and assumptions put together three or four years ago by startups and their investors don’t hold true any longer.

“They were counting on the adviser population, hoping to sell their software solutions into the major banks that are providing advice. That’s just not the reality of the advice market. Now, it is a highly fragmented small business market,” he said.

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