Why We Invested in Embed
We recently announced our investment in Embed’s $60 million financing. We are excited to be working with such an outstanding team building the next generation tech infrastructure for securities execution, clearing, settlement, and custody. We wanted to provide some insight into why we invested into Embed and why we are so enthusiastic about the opportunity that lies before them.
PruVen’s interest in the developer API based infrastructure for financial services
Embed has built a developer-focused API-based platform for brokerage. In doing so, the company is enabling fintechs to focus engineering resources on innovating on the best possible solutions for their customers. At PruVen, we are attracted to forward-thinking founders who have a deep understanding of industry obstacles in the status quo and have the experience and understanding of the clients’ needs. Our team has had the opportunity to work with several developer-enabling platforms including Plaid, TrustLayer, and Pismo. With each of these companies, we have seen firsthand how agile and robust solutions like Embed can become catalysts for their industries enabling entirely new use cases that weren’t possible with existing technology, thereby greatly expanding the total addressable market. Several more reasons to be excited about the company are outlined below:
Exceptional team who understands the custody & clearing stack and the needs of the next generation of brokerages
Michael Giles, the Founder & CEO, and Lars Beal, the CTO, have deep domain expertise and extensive experience servicing brokerage customers that provide them with unique insight into the needs of emerging FinTech companies. At Michael’s previous company, they spent years building solutions on top of a key competitor in this space and became intimately aware of the challenges companies face as they implement brokerage systems. Furthermore, Michael served as the CEO and Lars was the Head of Investing Engineering of Cash App Investing at Square. During their tenure, they helped the company increase user engagement by tackling the challenges involved with enabling small dollar retail investing. It was also through this experience that they saw the challenges of the existing players in the ecosystem, and it sparked the passion for modernizing that brokerage infrastructure for what is needed today. The remainder of the team is a group of experienced software engineers, clearing professionals, and operations experts who are a strong base for the team that is growing quickly.
Embed can expand the market size to enable new products with better infrastructure
By creating a developer-focused API-based infrastructure for custody and clearing while decreasing the pricing to more of a platform fee, Embed will catalyze a new wave of innovation within brokerage. Engaging with partners through APIs makes cost prohibitive projects become possible and decreases the time it takes to bring new products to market. FinTechs that we spoke with that were trying to launch new solutions that require higher activity or lower dollar fractional share investing all pointed to the limitations of providers today. Embed’s solution was developed with these challenges in mind and the team is working with a number of existing Fintech companies to bring their solutions to market.
Attractive market opportunity dominated by low-tech incumbents
The size of the traditional custody services market is ~$27bn as of 2021 and expected to grow at almost 8% a year through 2025. Apex Clearing, an incumbent which is in the process of going public via SPAC, estimated a $100bn+ opportunity between self directed brokerage, traditional advisory brokerage, data aggregation, and digital advisory. This market is dominated by low-tech incumbents including BNY-Pershing who has over $40 trillion in AUM. While the near term opportunity is with rapidly scaling fintech companies, there remains a massive opportunity to disrupt entrenched firms. Furthermore, some high-profile defections from even the most tech savvy players increases our conviction that there is a clear need for a better solution in the market.
Macro tailwinds make this the right moment to go to market
More broadly, there are a number of macro drivers supporting companies who can bring better digital services into this market including the transfer of wealth from boomers to a younger more tech savvy generation. It is estimated that $68 trillion will pass from boomers to millennials over the next three decades. Furthermore, the growth of neobanks and FinTechs working with individuals who were unbanked and underserved has created increased demand for and access to brokerage services at the lower end of the market. Consumers are also getting engaged in brokerage earlier and with smaller dollar amounts than before. For practical reasons such as wanting to make smaller trades, and due to competitive dynamics, such as Robinhood offering no fee trading, the demand for no commissions and lower fees is strong and growing. Lastly, the digitization of financial services, which was accelerated by COVID-19, and lower interest rates driving demand for equities also support our thesis that Embed is bringing the best technology to the market at an ideal time.
Hope this provides the insight to understanding our excitement for Embed and what the future holds for them.