For a digital-first firm, NextCapital's newly inked $16 million funding deal features two enviable elements -- a healthy financial commitment, and more importantly, partnerships with two asset management giants.
In the coming months, industry analysts say, the competition for such deals will intensify as the bar for digital advice firms seeking funding rises and traditional investment firms become more selective of digital partners.
"The run-of-the-mill robo isn't going to attract investments anymore," says Alois Pirker, research director for Aite Group's Wealth Management practice.
Rob Foregger, co-founder of NextCapital and formerly Personal Capital, acknowledges the challenges ahead for digital advice startups in the market, which have received over $300 million in total from venture capitalists, according to Morningstar. "It's going to be harder and harder for standalone players to get funded in the marketplace," Foregger says.
NextCapital's funding is a mixture of support from traditional players such as AllianceBernstein and Manulife, as well as noted fintech VC Route 66.
Foregger, who also co-founded Personal Capital, attributes the deal to NextCapital's uniqueness, which has focused on building out an enterprise platform that operates inside and outside the 401(k) market.
A key selling point, Foregger says, is NextCapital's fully configurable platform, allowing for tailored solutions across multiple channels. "We have to be able to work with their existing brand and existing distribution, rather than having them fit us," he says.
Foregger considers Morningstar and Financial Engines, which recently acquired The Mutual Fund Store, as main competitors.
The firm has already established relationships with several firms, Foregger says, who are responding to the inevitable demands that the DoL fiduciary proposal will place on the retirement savings industry.
"We see retirement as a big place, and there is going to be incredible disruption and industry change before our eyes, with the fiduciary standard driving that," he says. "The DoL is requiring the industry to provide non-conflicted best interest advice. The way to do that is through scalable tech-based advice."
The new funding will allow the Chicago-based firm to make a number of investments, Foregger says, including expanding its current staff of 38 by half.
"Our objective at the macro level is to lock up the enterprise digital market," he says. "We believe we're going to be a survivor."
Noting the recent announcement that the market's third-largest indepdenent digital advice provider, Personal Capital, was seeking funding or a potential buyer, Aite's Pirker says the need to differentiate is critical now for digital-first firms to survive.
"The pendulum is somewhat swinging from the startup space to the large firms starting to roll out their digital versions," Pirker says.
"Look who's in driving seat -- firms with custody, asset management service, big scale shops. When you have a business model built on scale, clearly the firms with tremendous scale will dominate the space. So coming from a startup perspective without scale, assuming you will reach that scale on you own is a tall order."
Foregger says NextCapital is in agreement with such analysis.
"The market understands digital advice is going to be big market, there's no question the smart money inside the industry knows the active management industry is going digital over the next decade," he says. "But even if you can be a great standalone company, the lion's share of digital assets are going to be won by incumbents."
Pirker says digital-first firms have to examine their business models to see how they can specialize or differentiate themselves in the coming year.
"Now it's a very different game," he says. "Startup firms will have to be a lot more different in how they position themselves, whether it is fine tuning their distribution partnerships or entering the institutional game more decisively.
"The big change in how market will look like in course of next year is that the right ideas will get funding," he adds.
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