Last week, we hosted another virtual investor Q&A with yet another star panel: CEO Simon Rabin, COO Sharon Miles and lead investor and Chairman, Richard Frank.
Investors and investors-to-be had the opportunity to send in their questions in the lead up to the Q&A, as well as covering what Chip is all about, what we’ve achieved, what our strategy is moving forward and the details around our investment round, what it means to be a Chip investor - a bit more clarity on the convertible element of it.
Simon: Approaching four years ago, we set out to build a product that made it easy to save, and once they’ve saved the money, make it seamless to get the best possible return.
We’ve got this open banking powered algorithm that plugs into your income account, whoever you bank with, and analyses your spending, and then every couple of days sweeps an amount of money into Chip.
Inside Chip, you can create savings goals and behavioural cues to help you save more and reach your personal financial goals.
Simon: We’ve raised about £12.5million in equity investment to date, that’s been in various increments throughout the years.
In the last eight months, we’ve seen significant growth which has put us in a position where we’re able to raise a significantly larger amount which, broadly speaking, is going to be around £30 million.
We’ve decided to split it into two parts, the first part being a 10million convertible investment, the second 20million equity priced investment.
The reasoning behind this falls in line with the UK government's initiative called the Future Fund, which enables companies like us that are utilising the convertible loan not mechanism, to have the funding matched up to £5 million, so it seemed like a bit of a no brainer.
The only catch being is that we have to have this part of the round closed before the end of September as per the terms of the Future Fund.
In simple terms, someone participating in the round will invest their money now and then that investment converts into shares at a later date, at the issue of the second part of the investment, but at a share price that is at least 20% discounted from the second part. VCs often use this mechanism to reward or incentivise investors taking part slightly earlier in the round.
One of the conditions negotiated by the Future Fund is that before the investment converts to shares at the next equity round, it earns 8% interest (or 8% coupon) which everyone who participates in the rounds will receive.
At the point of conversion, the investor can choose to take that in cash if you've invested an amount more than £1,000 or you can choose to actually convert that interest/coupon into shares.
Simon: No, it doesn’t. Only the amount you invest now will convert into A shares.
Simon: We have two investment classes, A shares and B shares.
They both rank exactly the same in terms of ownership so if you own 1% of Chip as an A shareholder, it’d be worth exactly the same if you were a B shareholder with 1%.
Similarly, if we were ever to sell the business, they’d be valued exactly the same.
There’s no threshold which makes this round more accessible, everyone will be classed the same, which is quite exciting.
Where they differ is where A shareholder has a vote so for example if we were to be acquired, we’d have to pass a shareholder resolution, we’d have to get 75% of voting shareholders to sign that off.
There’s also pre-emption rights which enables an A shareholder to invest at future rounds on the same terms as incoming investors.
Simon: No, there isn’t going to be EIS relief available on the convertible relief. EIS is tax relief that’s available for equity investments.
I’ll caveat that you should seek your own personal tax advice, too.
Richard: The reasons change all the time - every day I think of a new one.
At the time, the thing that captured my imagination was the basis of the business being to provide people with the ability to save, which particularly in the last six months, has been key to everyone.
Saving has been something that’s been ignored in this country so when Simon came to me with an idea for a business that was championing the idea that helps people save, it seemed to be a no-brainer.
I have been so impressed with the people Simon has subsequently brought on. I’m very lucky, I get to spend a lot of time with the management team in the business and what sets this team apart is that they’re all single minded about trying to achieve success for the business and success for people inside the business.
Simon: On the top line you have digital wealth managers like Nutmeg or Hargreaves Lansdown, who are more focused on the mass affluent people, the people who already have some accumulated wealth and savings and they provide a platform for them to manage that wealth.
On the other side, there are other accounts that do roundups and micro investing that’s more hobbyist.
But i see an enormous gap for the mass market consumer, normal people, that perhaps don’t have large amounts of accumulated wealth, they’re not served very well by these robo-advisors and these digital asset managers
They’re looking for a digital savings account, something that will basically enable them to start by saving up for their holiday, for Christmas, for their flat deposit or a car and build out from there and then perhaps maybe move that money into investment funds
Richard: A lot of our competitors are only interested in how your investment is and are only willing to take customers on if they’re willing to pay a monthly fee to an investment account which will then be invested.
Sharon: It’s probably naïve of us to think they won’t do something - I know we’ve all got our own retail bank apps.
Having worked in that banking industry for 20 years, big banks don’t work quickly, they have layers of bureaucracy and legacy tech that we simply don’t have which is a good thing for us.
It means we can get things to market in days and weeks, which the equivalent would take the big banks maybe months or even years to do.
It is not part of their core proposition - it’s ours.
We are nimble in the sense that we can go to our community, read what you want to see, and start building it.
Richard: Classically, the high street and institutional banks generally tend to watch a marketplace once they feel it’s matured, they pick the leader in that marketplace and buy it rather than start a business and try to make a marketplace.
Sharon: Our scale does get us through the door with banks and opens that conversation, as we have to have a certain amount of saving potential that they’re interested in.
Secondly, we are constantly working with brokers, dealing with them commercially to pass all of that return directly back to our customers.
We do have to be mindful of sustainability of the business and we need to make sure we can give our customers value. If we want to generate revenue from the things that we’re doing, and we’re starting to see the value now.
We have a lot of other interest bearing products in the pipeline - again, watch this space.
Simon: Very simply, the growth strategy has remained the same for the best part of the last two years.
What COVID has done for us in the last nine months has demonstrated the need for us to accelerate that.
The opportunity is in front us now and we need to capture that so that’s why we’ve had to bring forward those plans to raise more capital.
Simon: Over the last seven to eight months, our algorithm picked up that people have been spending less, which in turn has enabled them to save more, and since, we’ve seen over 100% increase in deposits in the app.
We’ve seen a general increase in people's consciousness, finances, financial security. It has really validated what we’re doing.
Despite a lot of turmoil in the economy as a whole, it’s been a pretty strong year for us and now we’re in a position to host our biggest crowdfund to date.
This is really going to allow us to propel the business forward, build a whole new suite of products and features, moving a little bit more onto investment accounts with the launch of our premium Chip account, ChipX, as well.
It will also allow us to scale up the team and really expand our engineering team which will increase our capability to build more products and features.
Sharon: In terms of future products, it’s a three pronged attack.
First off. we’re offering our market leading rates and returns.
On a similar note, we want to give customers access to investments and funds, where if you’re wanting to take more of a risk and invest in funds, we give you seamless access to.
Thirdly, there are ancillary products, like insurance.
There is a whole remit of products we’re looking to offer, with a whole range of features we’re looking to introduce on top of that, while enhancing our existing goal and autosave features.
Sharon: We’re currently a team of around 70.
Throughout the COVID period, we’ve been distributed all over the place. We have quite an international team.
The key thing I’ve noticed since last Christmas, in terms of the growth, has been in our engineering function - we now have multiple squads that take care of certain features and product sets and that’s helped with scaling the enterprise.
We’ve moved onto a new scalable platform, more sustainable and resilient.
We’ve also brought in experts in financial operations as well, to match the banking and payment mechanisms being implemented.
Even in the fun world of marketing, they’ve been able to grow thanks to the use of partnerships and PR.
Simon: The benefit of having a team of this size is the agility, the ability to move quickly.
However, the reality is that we are constrained by the engineering resource that we have and in having an engineering team of around 30, although it sounds like a lot, at times we have to make some difficult decisions as to where we have to direct that engineering resource.
At some of the earlier stages, our community and investors had a lot of patience and understood that it took a bit of time for things to be rolled out, or for things to be rectified.
We bring in the best in class engineers, and we achieve that through scaling, not just in terms of volume but in terms of skill - we want to make sure we’re building a technology product that is suitable for acquisition that is better than it’s incumbents.
That’s why companies like us are so capital intensive in the beginning so we are able to scale the capabilities and the platform and the customers and that’s how we build value.
Simon: Our current roadmap at the moment means that in a few weeks coming into October we’re going to be opening out different account tiers. We’re going to be opening up our premium account, Chip X, which has existed in a couple of different forms to date. Seamless access to investment funds and then we are going to expand that out to a few other products, so customers are able to deposit into those funds as easily as they would their savings.
Beyond that, we’re going to add ISAs and LISA wrappers in response to feedback from customers.
We’re also going to be making a number of changes to the core account. Without getting into too much detail, we’ve migrated from e-money infrastructure to FSCS protected accounts.
As for international expansion, the opportunity in front of us is without a doubt global, but our immediate opportunity is to reach five, ten million customers. Coming into Europe there is an addressable market of over 100million consumers that fit the profile of the Chip customer that we have now.
Going into 2021, the focus is still very much on the UK.
We’re over 250,000 savers and that’s just the tip of the iceberg, so watch this space.
Remember your Capital is at Risk and past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you might get back less than you originally invested.