Recompound is a startup. We initially received a small pre-seed investment from STRIVE in 2022 to experiment in the fintech space in Indonesia. After iterating our product 12 times in a year, we’ve finally come to build Recompound. Fast forward about another year, here we are!
If you are a serious early stage investor, give this article a read and I am a LinkedIn message away. If you find this opportunity interesting (we are actively fund raising), we can have a call and I’ll help you build your conviction.
If you are a series A investor, fingers crossed if this round goes well, we plan to bring in an even more interesting growth that you wouldn’t want to miss in one to two years’ time.
If you are just a casual reader, I think this will be a good exercise for you to evaluate the potential of a business. This is just like evaluating whether a business enough is good for you to buy their stocks!
Before we begin, what is a Startup?
A startup is a company that is designed to grow fast. How does a company grow fast?
Solve a problem that is felt by many people (big market).
A startup needs to have a huge market. I can be solving people’s problem, but my market might be small. For example:
I could open a Botswana cuisine restaurant targeting the Botswanian community in Jakarta. Number of people from Botswana in Jakarta isn’t many. So growth will be slow and it would not be counted as a startup.
More importantly, a startup needs to solve a problem. I can have a very big market and have a super huge company without meaningfully solving people’s problem. For example:
I can buy $1 Billion worth of IPhone, and then I sell every one of them at 10% discount. My sales is really huge at $900 million and I will be a friggin huge company because the market for IPhone is huge.
But I am not solving people’s problem meaningfully, Apple does. I just made $0.9 for every $1 I spent 😢
So when you (1) solve a real problem and (2) market is huge, you will get rapid growth. That’s the main characterisation of a startup.
Side note: I’d argue that solving people’s problem is more important than having a huge market. Because if you solve people’s problem, you’d at least have a business. If you have a “big market” but not solve anyone’s problem, you’ll end up having a liability especially if you raise from investors.
The Problem
Let’s get back to the basics. What problem is Toby & Budi solving?
Today, people still don’t know how to invest.
Don’t take my word for it, see the data for yourself.
In 2022, there are ~$70 billion invested in the stock market by retail investors. You can go to KSEI, look at retail stock ownership data and calculate retail performance — I did just that. That same year, IHSG went up by 10% but retails as a whole grew only by 2%.
This is all of retail that includes legendary investors who are crazy good at investing (returning >26% per year). But as a whole, growth is only 2% which means that majority of retails actually lost money. This problem is deeply personal to me as I have seen my family burning their fingers in the capital market for the longest time (it just doesn’t get solved).
Why not just buy a low cost index fund?
Easy peasy. Yeah we don’t have that in Indonesia, and this is probably why Recompound is not founded in the US, where passive investment solutions are probably good enough (I haven’t talked to the users there yet but if you look at startups like Titan, probably they also believe individuals cannot invest).
Instead, what we have in Indonesia is equity mutual funds. We have written a couple of blogposts arguing how Recompound is a better alternative. In short, performance of equity mutual fund is likely to be bad in the long run because of its inherent structure and not really determined by how good the fund managers are. If you have not read the blogpost, have a read part 1 and part 2. Our investment lead, who himself comes from a traditional institution, attests to that too.
Consequently…
We have high savings rate as people are afraid of investing.
Our savings rate to GDP is considerably higher than that of India. In the big 4 banks, I looked at their financial statements and we have around $300 billion in savings, yielding little to no interest.
So how big is the market?
I can add more figures such as the number of retail investors, upper middle class Indonesians, working professionals, people subscribing to privilege banking in Indonesia. I have looked them all and number is huge.
If I were to estimate, total addressable market (TAM) is at least $1 billion. But again, none of this matters if the problem does not get solved.
The Solution
We are building a personal Chief Investment Officer (CIO)
And people love us (read: people pay us money, they want to pay us more money, and tell their friends about us).
What’s the value proposition of having a personal CIO? A CIO’s job is to help their boss with their investments. For Recompound now, we help with people’s Indonesian equity investments and we ensure:
Safety
All funds stay in the boss’ hands. We have no access nor control over those funds.
Incentive Alignment
We make money when our boss makes money. We only charge a performance fee (0 management fees)
Talent
We scout for talented investment professionals with a strong domain knowledge.
But we are actually more of a tech company. Why?
In the US, you would need to pay ~$200k for a CIO per year. In Indonesia, you only need to have $3k in investible asset to get a CIO (Recompound). This is only possible because we have built a rigorous and comprehensive tech stack at the back end to enable the little guys to get their personal CIO.
I know investors would roll their eyes if they see another tech company pitching their ideas. But the truth is, tech is really key here so that we can capture a sizeable number of people.
And people love the product, not because we built the tech (now it is mostly Nextjs, Python, MySQL and a bit of ChatGPT). But because of our value proposition to our customers, we have increased our pricing twice within a year, to keep up with the growth of early adopters.
Are We Trying to be a Hedge Fund?
I don’t think I will be a Ray Dalio or a Warren Buffett. Budi and I personally invest and we do pretty well in the Indonesian equity public market (which is why we start with Indonesian equity), but that’s not our core strength.
We definitely plan to work with even better and more talented fund managers (for e.g. we’re now working with Erik Hartanto). Not only would this allow us to handle more customers, but it would also be a good opportunity for these bright fund managers. Let me elaborate.
The market size is just so big
You’ve seen that size of savings $300 billion. Let’s say Recompound can capture $10 billion, you wouldn’t expect me or Budi to single-handedly assist the investments of all that money? Isn’t it wiser to engage with at least 500 fund managers that assist $20 million on average. Why?
$10 billion is a huge amount of money and they should not be invested only in Indonesian equity with a market cap of $700 billion. The larger the money, the harder it is to be handled by a single person. It can be invested in the US, Indian, Chinese, etc equity markets or other asset classes like bonds and FX.
Do I, Budi or Erik have expertise in these assets? No.
Talented fund managers from asset management houses are leaving (read their frustrations here). To us, this is a nice opportunity to tap into their talent. So the long term plan for us is to definitely capture more fund managers to give them access to help people with their investments.
Capturing $10 billion? There’s no way. If there is a way, why haven’t people done this?
Because it is hard.
State of Asset Management today
Let me give you an illustration of the state of financial industry in the investment space today:
In an asset management house, there will be a group of people called fund managers who are deemed investment experts. What they do is they get feedback from the market and sales team and they create various types of investment products.
The sales team then takes this universe of investment products and then sells it to you. As a reward for selling these products, they get a commission. Unfortunately, sales do not have to care if the investment product does not perform well.
Why? This is because source of commission is from you, not from how good the performance of investment products you purchase. Once they close you as their client, IDR 2 million goes to their bank account (this is just an arbitrary number). To hell what happens to you later!
So the more asset management house spends on sales & marketing, the more they have to get you to pay. Which means, you would get less investment value. John Bogle (Founder of Vanguard Group) criticised this setup this interview.
This setup has been going on and on since the 70s and 80s till today. It is archaic stuff.
State of Asset Management for our kids (hopefully)
In the 21st century, people know that investing is important. People also know that not everyone can be good at investing.
We think the industry should be altered to the following setup:
Yes, no more sales. With technology, customers (i.e. you) should receive full investment value from the investment experts and pay according to the investment value that has been received.
Also, investment experts should pay to technology provider for them to have access to you. Not only this gives technology provider cashflow, it also ensures that investment experts have skin in the game. (i.e. you want to help people with their investments? You need to stand to lose something if the people don’t get value).
Our argument is simple: good fund managers exists today, and you (people who need to but can’t invest) also exist today. But the technology is not quite there yet. We plan to build it.
I hope with this illustration, you would understand why no one has built this and my bet is that Artificial Intelligence will play a sizeable role.
If you are an early stage investor, this probably would be the biggest contrarian bet you make in your career
Industry Landscape
Everybody is focusing on:
How do we sell more mutual funds?
Which influencers or celebrities can bring the most AUM? Or robo algorithm that allocates different mutual funds based on a customers’ risk profile?
How do we get people to trade more?
How do we get a sleek UX in our mobile app? Let’s hire a super expensive UIUX designer and software engineer who worked at Google. If they design our app, people are going to trade more!
We are focusing on:
Building tech to scale and make a personal CIO accessible to more people, so that we can disrupt mutual funds instead of selling them
Building tech to get talented fund managers on board so that we can have competence in a wider variety of investment strategies and asset classes
Marketing sorts itself out if people find value in the product. Good UIUX usually don’t solve people’s problem. Good product with a strong value proposition does.
VC Landscape
Furthermore, past investments made in fintech or wealth tech startups might have not gone according to plan.
Negative sentiments is perfectly understandable, and it becomes harder to raise capital. But it is also a blessing in disguise because you get connected to people who focus on first principles rather than those who tend to follow what others are doing. And we think this would lead to better capital allocation that leads to good growth in the economy rather than the era of cheap money.
Hint: you also usually get stocks at a bargain when sentiment is bad.
Closing Remarks
Thank you for reading this far, I hope it is clearer now if Recompound is VC investible or not :)