Nutmeg becomes latest firm to tap up its mailing list for venture capital investment

Robo-sales provider Nutmeg has announced that it is to offer shares in itself to its user base.

Eligible Nutmeg users will be able to invest via the CrowdCube platform before non-Nutmeg users.

According to its last published accounts (Dec 2017), Nutmeg made losses of £12.1 million on turnover of £4.5 million. It has never made a profit and has survived since 2011 on the welfare of venture capital investors, who hope that it represents a new model for mass-market saving and investment; the 21st century answer to the Man From The Pru.

In Nutmeg’s basic business model, users fill in a risk questionnaire, and depending on the results are offered a risk-targeted portfolio (which may be fixed allocation, actively managed or ethical, with the latter two being more expensive). Nutmeg also offers financial advice on an ad-hoc basis.

For a non-advised investment (Nutmeg users only receive advice if they pay £350 whenever they want a review), Nutmeg is expensive, with all-in fees of just over 1% for the two actively managed options. By contrast it is not hard to set up a simple DIY portfolio with a low-cost multi-asset fund held via a platform, with total costs of below 0.5%.

The advantage Nutmeg offers over DIY platforms for novice investors is the assurance that you aren’t going to permanently lose your money in a poorly-chosen investment, because Nutmeg won’t let you invest in one; only in risk-targeted portfolios. For more experienced investors who do not need to be protected from themselves, Nutmeg is unattractive, because DIY platforms offer more choice at lower cost.

So clearly Nutmeg’s users are ideally suited to be asked if they want to invest their money in a single share with an inherently high risk of 100% loss.

Right.

Just how many of Nutmeg’s users filled in their risk questionnaire and came out with an ultra high risk profile which indicated that investing in a single, heavily loss-making startup with potential 100% loss is suitable for them? Does Nutmeg’s risk profiler even go that high?

Nutmeg users who invest in the company are running a double risk. If Nutmeg runs out of money and goes into administration, not only will they have lost any money they invested in Nutmeg, but they could be locked out of their Nutmeg portfolios until the administrator can sell Nutmeg’s book to another platform.

Nutmeg is the third prominent fintech firm to tap up its mailing list for investment in the company itself, following Monzo Bank (which told its users that they could use their overdrafts to buy Monzo shares) and Chip (an app which periodically moves savers’ money into a non-FSCS-protected client money account based on an algorithm).

In both these cases it is similarly unclear how much intersection there is between the company’s millennial saver customer base, and high-net-worth / sophisticated investors for whom high risk investment in a single startup is suitable.

If Barclays or Lloyds sent out emails to all its customers inviting them to invest their savings in Barclays / Lloyds shares and boost the share price, the FCA and PRA would come down on them like a ton of bricks (you would hope). And note that blue-chip FTSE 100 shares are less risky than a startup like Nutmeg (but still extra-high-risk with potential for 100% loss).

But hey, these aren’t boring old banks, these are exciting fintech companies with apps and shit. The old rules don’t apply to them. Move fast and break stuff, right?

Should I invest in Nutmeg’s crowdfunding round?

Any investment in a loss-making startup is by its nature extremely high risk.

Successful venture capital investment requires investing in a large number of high-risk startups in the hope that the few who make high returns will compensate for the large number that go bust.

It also requires thorough due diligence to filter the startups that have at least some chance (but a low chance) of being a “unicorn” from the delusional, the fraudulent and the no-hopers.

If your plan is to just invest in Nutmeg and not in a large number of startups into which you or your advisers have conducted thorough due diligence, you may as well stick your money on the horses. Or better, leave it where it is.

Before investing investors should ask themselves:

• How would I feel if Nutmeg went bust and I lost 100% of my money?
• Do I have a sufficiently large portfolio that the loss of 100% of my Nutmeg shares would not damage me financially?

Any Nutmeg user who originally invested in Nutmeg’s portfolios looking for a simple, hands-off, medium-risk solution, should ask themselves what has changed since then that makes them want to invest in high-risk venture capital shares.