Episode #326: Startup Series – Viktor Nebehaj, Freetrade, “We Want Everybody To Have Access To Investing”

Episode #326: Startup Series – Viktor Nebehaj, Freetrade, “We Want Everybody To Have Access To Investing”


Guest: Viktor Nebehaj is Freetrade’s CMO and Co-founder. He can be found penning the weekly Freetrade emails, as well as major company and product updates.

Date Recorded: 6/9/2021     |     Run-Time: 52:05

Summary: In today’s episode, we start with Viktor’s early days at Google. Then hear how he went all-in on a crowdfunding campaign for Freetrade and loved the product so much he joined the company as a co-founder. We dive into the company, which offers commission-free brokerage without payment for order flow or margin lending. Viktor shares how the company makes money, what the appetite for this product has been like in Europe, and what it was like to navigate the craziness of 2021.

As we wind down, we hear about Freetrade’s crowdfunding experience, with seven total rounds raising roughly 60 million dollars.

As a special offer for listeners of the show, visit freetrade.io/MEB and get a free stock worth 3 – 200 GBP.

Sponsor: This episode is sponsored by Bitwise. The Bitwise 10 Crypto Index Fund is the world’s largest crypto index fund. It holds a diversified portfolio of cryptoassets, including bitcoin, ethereum, and DeFi assets. Shares of the fund trade under the ticker “BITW” and are accessible through traditional brokerage accounts. Shares may trade at a premium or discount to net asset value (NAV). For more information: www.bitwiseinvestments.com

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 1:38 – Intro
  • 3:37 – Welcome to our guest, Viktor Nebehaj
  • 4:55- Viktor’s origin story
  • 9:15 – What led Viktor to invest in Freetrade and later join the company
  • 9:52 – Overview of Freetrade
  • 10:48 – Differences between the US and European financial markets
  • 16:28 – Freetrade’s business model
  • 19:06 – Is payment for order flow even legal in Europe?
  • 22:11 – Sponsor: Bitwise
  • 23:02 – Viktor general perspective on the past year
  • 28:09 – How it felt to watch the launch of their app
  • 34:36 – Lessons learned over the past five years
  • 38:21 – Future plans for Freetrade
  • 40:46 – Potential group swell support of the retail investor space
  • 42:04 – Freetrade’s crowdfunding experience
  • 49:28 – Viktor’s most memorable investment
  • 51:56 – Learn more about Viktor; community.freetrade.io; freetrade.io/meb to get a free share when you sign up


Transcript of Episode 326:

Sponsor Message: Today’s episode is sponsored by Bitwise. You’ll hear more about them later in the episode.

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Welcome, podcast listeners. Today we have another episode in our Podcast Founder Series, where we invite kick-ass entrepreneurs to chat about their experiences from the front lines of starting a company. We cover everything from newly-minted startups still struggling to make it out of their garage, all the way to the elusive unicorns that are either transforming traditional business sectors with innovative ideas or creating entirely new ones through cutting-edge technologies.

Either way, the result will be total catastrophic failure in bankruptcy or hundreds of millions of dollars of revenue and a valuation worth north of a billion dollars. Listen in to hear the tales of blood, sweat and tears as these founders try to change the world. As a disclosure reminder, I’ve invested in most, if not all of these startups, and will look to invest more as they continue their startup journey. Please enjoy the next episode in our Founder Series.

What’s up, friends? We’re back with the first of many episodes in our Startup Series. We’re kicking it off with a bang. Our guest today is the co-founder of Freetrade, whose mission is to get everyone investing by making it simple and commission-free with the stock broker you can trust. In today’s show, we start with our guest’s early days at Google, then we hear how he went all in on a crowdfunding campaign for Freetrade, loved the product so much he joined the company as a co-founder. Then we dive into the company, which offers commission-free brokerage, but without payment for order flow or margin lending costs.

Our guest shares how the company does make money, what the appetite for his product has been like in Europe, and what it was like to navigate the craziness of 2021. As we wind down, we hear about Freetrade’s crowdfunding experience with seven total rounds raising roughly 60 million bucks. As a special offer for listeners of the show who are across the pond, visit freetrade.io/meb and get a free stock worth €300 to €200. Again, that’s freetrade.io/meb. Please enjoy this episode with Freetrade’s Viktor Nebehaj. Viktor, welcome to the show.

Viktor: Meb, thanks for having me. Really appreciate it.

Meb: Where do we find you today?

Viktor: In a very hot high-rise plant in London, the UK.

Meb: I miss London. Last time I was there we held a meet-up in a couple great pubs as you want to do in London town, and the vibe at the time was all about Brexit. And nobody knew anything from anyone else. They were all confused. There seemed to be no outcome. What’s a vibe like in the UK right now?

Viktor: Well, it’s all about the pandemic and the lockdown now. Regarding Brexit, I think marginally that’s confused, but I think a lot of that still remains. I mean, it definitely impacted our industry finance, but, yes, the pandemic totally overruled that. And been under very serious lockdown since basically March. A little bit of episodic easing in the summer, but since November, like, everyone was at home. You could not go anywhere.

So, yeah, that’s the vibe. It’s opening up now, so you would see people hanging out in, like, big stores. Everyone’s fed up with the lockdown. People are going to pubs, lots of people on the streets. Little bit Mediterranean vibe because it’s, like, 96 degrees Celsius here.

Meb: Yeah. You didn’t always get your start in London. I think the circuitous path involved a little bit of Eastern Europe as well as some time at the Googleplex before starting Freetrade. Give us the quick origin story, how you ended up where you are.

Viktor: Eastern Europe indeed. So, I was born in Hungary. That was part of the Eastern Bloc when I was born. 1979, if you believe that. That was a long time ago. And I actually spent my first 10 years under communism, so I had very vivid memories. I was in a pioneer, which is kind of like a Boy Scout, but Soviet style. Then the whole thing came crashing down, which is a pretty tremendous experience to be honest. And then the ’90s big society upheaval, kind of like everyone was kind of poor.

Like, just reflecting back on it, I would not even know what investing was, no, my family or anything like that. Entrepreneurship was very much a prime ordeal. No one really was doing that, a little bit maybe. 2004, we joined the EU, so that’s when I finished university. And it was a really interesting situation because you could go anywhere in any of three countries, the United Kingdom, Ireland or Sweden. These were the first countries. And now you can work without permission basically in any EU country. But I was like, “That’s fantastic. I really like Ireland. I want to spend maybe a year abroad,” that turned into, like, 15 later.

And I was really interested in tech. So all my peers at the university, they wanted to go into banks. It was all about finance, and that’s where they ended up. And I was like, “This whole internet thing is really awesome. Maybe I can do something related.” So I discovered that a lesser known tech company, lesser known by European standards, called Google opened an office in Dublin. So I applied. I had maybe like 10 interviews at the time. It was pretty all structured. And then they hired me. So I basically packed all my belongings into a duffel bag. Everything fit, and then I flew to Dublin.

That was my first time there, and I joined Google, and I basically spent seven years there. I built my carrier there and I had a great time. So that’s how I got my start. It was really interesting because all my peers that ended up working with banks, we know what happened in 2008, so that was really interesting time. Google obviously did really well.

And then, after then I felt after seven years I still had a lot to learn, but my learning plateaued. I went to Asia. I lived there for a while. I did an MBA, came back to Europe, and then to London for personal reasons. I was, kind of, unemployed, I guess you can say that, I mean, consulting and whatnot. But then I saw an advertisement on the Tube. That was the platform, Crowdcube, which is equity crowdfunding.

So I was like, “This is fantastic. You can invest, like, basically any amount. You don’t have to have hundreds of thousands of pounds to invest in a startup. You don’t have to have your own solicitor. You can basically go ahead and put money in a startup and the platform takes care of everything.” So I invested in the very first crowdfunding round of Monzo, the very first crowdfunding round of Revolut, which is probably a little bit more familiar for your U.S. audience.

Monzo is more like, I guess a chime type of neobank. And my third investment was the most important, which was Freetrade. That was the first crowdfunding ground that, now my co-founder and CEO, Adam did, basically put a pitch deck together, put it on Crowdcube. And I was like, “This is fantastic.”

I moved to the UK. I thought it would be a very sophisticated financial market. I was looking, to be honest, for a local equivalent of Robinhood. We all have this generational experience of having been on the waitlist, only later figuring out it’s only for a U.S. customer base. So I was like, “This is fantastic.” And I basically looked across all my bank accounts across Ireland, Hong Kong where I live.

That’s what all my money into the UK, and I invested everything I had. So I was left maybe with, like, £15 until the end of the month. Thankfully, my girlfriend was employed, so I wasn’t that at risk of becoming homeless. But basically I put all the money I had into Freetrade. Then Adam reached out to me, or I reached out to him. I can’t remember, but we hit it off. I really liked him. And one thing led to another, and I joined him to build Freetrade as his marketing guy originally. So, yeah, that was quite a journey.

Meb: I love the concept of finding this product, investing, and then liking it so much you decide to join the actual company. What year was this, kind of, when you started doing the investing as far as the timeline for the crowdfunding?

Viktor: 2016. The summer of 2016 was very hot when it comes to crowdfunding. That’s when kind of like really large fintechs crowdfunded in London. And I joined Freetrade basically in 2017.

Meb: Okay. So within the last five years. All right. So, we’ll come back to crowdfunding later because I’m a little curious what the state of affairs there is now, but tell us what Freetrade is. Like, what did you see about this concept and idea that really got you excited?

Viktor: Yeah. Freetrade is a commission-free brokerage. So we provide stocks, UK and American stocks as well, and ETFs. And people can invest commission-free. We have all the local accounts you can wish for in the UK. We have an ISA account, which is probably similar to maybe a 401(k) or a Roth IRA type of tax-sheltered account in the U.S. We charge a flat three pounds per month for that. And we have self-invested personal pensions, which is basically what’s on the tin.

It’s a pension account, and you choose to invest your own pension, which is a fantastic structure as well. It comes with some tax relief as well. So that’s what we provide. And we continuously develop the product. And in the coming months, we are expanding into Sweden as our first international market, and then the rest of Europe later this year.

Meb: So, talk to me a little bit about…we’ll get into, kind of, brokerages in general, but there tends to be, at least in my understanding, some fairly stark differences between what the investing landscape looks like in Europe than in the U.S., and then forget about other countries, too. I mean, I often will complain ad nauseam about costs in the U.S. and then my friends from Canada or Japan, or wherever be like, “Dude, you haven’t seen anything.”

You know, some of these, South America, they’re like, you’re complaining about some of these costs, my God. So tell me a little bit about, kind of, just the general European market, and then we can kind of dive down specifically a little more what you guys are doing and how things are structured.

Viktor: Yeah. Absolutely. As a starting point, investing in Europe historically was not really mainstream per se. It’s more part of the culture in the U.S., and culturally, I think Americans are more willing to take some risks and willing to lose some capital. Europeans tend to be more risk-averse culturally. So there is that kind of backdrop. However, around, like, five years ago, with Freetrade, we had this vision that an investing account is going to be almost as mainstream as having a bank account or a checking account, really normal. And the reason we believed that was just where the world has been heading.

So, some of your guests can explain this even better than me, but it’s like there’s not many places where you can put your money. Basically, whole interest rates and inflation looks like you are basically, up until very recently, you are paid a premium just being long on equities. And that’s where the growth is, and that’s where growth is coming from, virtually all of it, companies innovating, becoming more effective, inventing things. And in terms of the market in Europe, it was not really easy to invest.

Some of the incumbents in the UK, they are really expensive. And that’s typically in the European market as well. You would pay for one transaction, something like £12. That’s probably $15, $16 if my mental math is correct, maybe even more depending where the exchange rate is. It’s really expensive, and that’s been the norm up until very recently. And that’s been the norm in basically almost virtually all European markets, very, very expensive. Same in Japan and Canada, like you would hear from your friends.

But we thought that there is a generational change, so people need to do something with their money. There is money in Europe, so there are really developed, rich countries, and basically 100 million-people market, and they need to find a way to put that money to work. So that’s been our thesis. Our thesis was that we are basically at the recipes of all this change and we can be a company that drives this change, and is at the focal point of this change, saving … and all that stuff, that’s stock of history for us. You will not really receive any meaningful return. We are talking like literally 0.01% kind of return that you would get with some savings accounts.

Meb: When you guys got started, the name is pretty clear, was this the sort of state of affairs where you guys were the totally new, only entrant in this world of sort of commission-free? Was it something where everyone’s doing it now? How was the sort of progression of what you guys launched and the uptake of it?

Viktor: When we launched, we were basically the only ones doing this. And it’s becoming more and more mainstream, not quite with the incumbents, but we see, kind of, like small upstarts popping up offering ESG-focused ETFs for commission-free, or having like topical focuses. So it’s becoming more mainstream. But when we started, it’s almost like borderline. We’re not taken seriously. People just would not believe that people will actually invest, but we have almost 800,000 signed-up users right now, so close to a million. So, I guess the story is developing already.

Meb: So, the interesting idea in my mind, too, is that the environment, and you can correct me, the U.S. stock market has been in somewhat of a romping, stomping bull for the past decade, for the most part. You’ve had some jiggles in the interim, but for the most part, largely outperforming other markets. UK hasn’t really been that sort of experience. So, are most of your investors investing locally? Are they investing globally? Are they all trading U.S. stocks? What’s the sort of composition?

Viktor: That’s actually a very interesting question because, yes, like you said, U.S. market, romping and stumping. And it’s incredible how popular U.S. stocks are across Europe. You would maybe expect that European countries, maybe German people would be interested in, like, French stocks, but there’s not survey and data. That’s not necessarily the case. What we do see is home market bias. So about 50% of our customer base, 50% of their investment on average is in local UK investments, UK stocks, the other 50% in U.S.

And they just have this connection with local companies whose products they use every day. That’s our thesis. That’s why they investment. And, you know, there are some success stories in the UK. The FTSE 100 is not necessarily our success story itself. I mean, recently it’s been doing actually quite okay, but historically it’s not an amazing, outstanding investment. But there are some companies there are unknown gems in the UK, and local people actually understand which ones tend to be higher-performing companies.

Meb: So, kind of, get into the meat of the discussion now, thinking about what you guys do. Talk to me a little bit about your business model, how a brokerage like Freetrade is structured in your jurisdiction versus the typical, and then we can branch off into all sorts of different offshoots from that.

Viktor: So, something very important to understand when it comes to the European markets, that capital markets are not as competitive as in the U.S., which means that everything is more expensive. Like, running a type of business like Freetrade in the U.S. would be much cheaper. And early on we figured out that the best way to decrease our cost is going direct to the source and connect to the plumbing of the capital markets more directly.

So something we invested early on was our invest platform, which is our own clearing engine, and it basically does the brokerage, heavy lifting, which means that we are not relying on a third party when it comes to core brokerage activities. But it took one and a half years and 10 engineers to develop it. I mean, still it’s, like, incredible. I mean, hats off to the team. It’s just, it meant that it’s a trade-off. We could not deliver new features until that was done. So we had to do this, like, large upfront investment to really get started.

And before that, actually, we always called ourselves Freetrade, but actually the instant order was one pound before we introduced our own platform to cover our cost. So now the trades are commission-free. And in terms of our business model, we make the bulk of our revenue currently from FX. So when all our customers are in the UK, they have sterling-based accounts. When they buy U.S. stocks, then the exchange…their currency prompts sterling to U.S. dollars. So we charge a modest 45bps on that, and that’s part of our revenue. But we don’t want to depend on that, so we have multiple revenue sources.

The second one is subscriptions. So I mentioned the ISA account, which is the tax shelter investment account, tax-efficient. That’s three pounds per month. And we really love the kind of, like whole high-quality this, like, monthly recurring revenue is. It’s really, with the FX, that goes up and down depending on there is a big meltdown in the U.S. markets, we see our customers investing a lot more then price is greater. But that varies. Subscription is very … for us.

And the other source of revenue which is currently not really resulting in a lot of money would be interest on the invested cash of our customers. But the Bank of England decides how high the interest rate is at. Not very high right now.

Meb: Yeah. I mean, if you look at historical brokerage like Charles Schwab, and you can correct me because I’m sure you know more than I do, but ballpark, if I recall, it’s like half from that interest spread, and then all the various other things kind of mixed in versus a more in-the-news competitor like a Robinhood which gets it largely from payment for order flow and, kind of, margin lending. Are those two categories you guys implement as well? Are those categories that…I think, correct me if I’m wrong, the Europe…is payment for order flow straight up illegal, or not allowed?

Viktor: It is. That’s our interpretation of the rules, that it’s illegal to do payment for order flow. We reached out to the regulator as well to get better interpretation and clarification of the rule. We are actually not allowed to do that, but we also don’t find that that business model is actually something that we would ever want to introduce on our customers. We disagree with the philosophy behind that. We think there are conflicting interests when it comes to people.

And in terms of margin lending, so early on we decided that we want to create a product that’s healthy for our customers. Our goal is to help them create a healthy, long-term investing habit as opposed to chiming that on the meme stocks, kind of, like gambling type of behavior. That’s not something we want. So we decided not to do margin landing at all because we consider it something that only very sophisticated people should use. And Freetrade is not the best for that. So we decided that we will never implement margin.

Meb: So, does that mean people can’t trade options?

Viktor: They can’t trade options.

Meb: I’ve been very vocally critical of Robinhood, and I spend a lot of time trying to reflect and say, look, I think a lot of these companies…and I’ll put acorns in the same bucket. I say a lot of companies…I reserve the right to be wrong, and it’s complicated because in some way it brings a lot of investors that may not have entered into the investing world, but also it enters them, in my opinion, through the wrong door, meaning they learn all the wrong lessons and get incentivized to do all the bad things.

Now, maybe they’ll, sort of, graduate from that experience with a lot of scars and understanding of how, sort of, the world works, but also the gold standard in the U.S., I consider to be Vanguard. In a world where you could invest in Vanguard, it would have been nice just to go there in the first place, excluding obviously what we’re doing. And so the problem I always have is driven so much by incentives.

And we say, look, if your broker is incentivizing you to do all these bad behaviors, you probably need a new broker, or you need a new partner. And it’s the same in life. You know, if your friends or family members are leading you towards the path that you don’t want to be on, it’s a hard decision to make, but the reality is that you probably need to reflect and just get a different partner.

Viktor: Absolutely.

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Meb: I imagine you have a fair amount of perspective on the past year in markets and what’s been going on. I mean, I thought 2020 was a particularly crazy time, and then 2021 just rolls in and says, “You haven’t seen nothing yet,” particularly with a lot of the interest in the Wall Street Bets community and others on meme stocks.

The struggle I have so much is that the media, there’s so many competing narratives, many of which are misleading and wrong, and so it’s good to have someone like yourself who knows a lot more about the guts of what’s going on. What’s been your general perspective on the past year? I’ll let you take that in any direction you want, but there’s been certainly a lot going on.

Viktor: All right. I hope you have time. That was the people’s whole year. And, I mean, let’s also reflect on what kind of incentives the media has when they narrate what happened in the past 12 months plus. They are going to focus on, kind of, like the most riveting, most crazy stuff and take it out of proportion. I’m not saying that what happened with the meme stock is not significant and dramatic as well, but I would put it in perspective. So, the pandemic and what it caused, it basically blasted us forward maybe like a decade easily in various ways.

Like in the UK, I mean, ecommerce was already very developed, but, I mean, now for everyone it’s pretty normal to order groceries or their food via their apps. And it absolutely had an impact on people starting to invest. And we looked into that. We talk to our customers all the time. We send surveys. We have user research team as well talking to them.

And basically what happened in our findings was that, well, people ended up with a quite a bit of free time and quite a bit of money. You don’t commute, you don’t spend on food outside. And investing is something that’s been on the to-do list of a lot of people to learn about. And honestly, a lot of people were bored as well. So that’s, kind of, like the genesis of that kind of, like, really large uptick in investing. That’s how it looked like.

And the media, kind of, took it in a certain direction and focused on certain narratives, but whenever we survey our customer base, and that’s a really significant population, I would say, we find that most people are reasonable. They are focusing on pound-cost averaging, dollar-cost averaging type of behavior every month. They invest in ETFs. They have their conviction bets.

Like, people love their green energy companies or, kind of, like the convictions they have about the future. And, yes, like, some people invest in meme stocks and they definitely buy into the narratives they see on Reddit, but we find that’s the large minority. But that’s what really gets the limelight when it comes to narrating the past year, and that’s not what we see.

We also run our own online community forum, which we moderate. I think, with Reddit, the kind of trouble is that it can be taken in lots of very wild, very cowboy directions. And we as a company, we are authorized and regulated by the FCA, the local regulator. So every material that we put out, a website, an online forum, it’s subject to certain standards and expectations.

So we moderate giving like a straight up investment recommendation, “You can do that. You can provide a target price.” It’s very important when it comes to the online community that you can’t, like, monitor and moderate it correctly, so diverse thoughts, kind of, like, get shared as supposed to, kind of, like, people hyping each other up.

The other aspect of what happened and meme stock as well, they actually really love the democratization that went down. It is actually absolutely a mission for us. We want everybody to have access to investing and everybody to develop this healthy habit. And in a way, what happened in January, for example, it’s like pouring fuel on the fire. It’s a trend that’s already been going on. With the meme stock, it got a lot more exposure, and as a result, a lot more people can get into this healthy habit.

But, yeah, there is that small minority that gambles, and, you know, that’s kind of human behavior. Some people, you know, want that. They enjoy the adrenaline. They post their loss-porn on Reddit. Some people go into that knowingly in an informed way. Fine. There are people who like going to a casino, kind of, like putting everything on red. That’s fine. We should not regulate that, but I think the media focused very much on that.

We’ve also seen a lot of conspiracy theories, of course, like everyone else. It’s like it’s very important to communicate transparently and giving a really good account of what’s happening because the brokerage, like, the technical aspect of running a brokerage is actually quite arcane and complex, and it’s like really good soil to, like, see conspiracy theories, which are not really helpful for a society, I don’t think. I think an informed society is much better. But, yeah, all in all, it’s been an incredible year for us, and we gained a lot of customers. And most of them invest very sensibly. That would be my summary.

Meb: I think a lot of the narratives got parts of the discussion wrong when Robinhood and others had to kind of shut down and pause. Was that something you guys had to experience, too? I imagine there was a pretty large uptick in interest and demand from retail investors wanting to set up accounts and trade. Do you guys go through the same experience? Or if not, what was it like?

Viktor: We went through very wild experiences. So we did not go through this without having to shut down the market temporarily for a little bit. It was actually really wild because I went on Sky TV live news, I think on a Friday morning on January. And I was saying things like that we have absolutely believe, and we absolutely do, which is we are on the side of the retail investor. We are not going to shut down the market arbitrarily.

And I finished the interview. I opened working on Slack, and I get a message from our VP of product that, “Hey, our FX provider that helps us providing the FX exchange, they just told us that they have to limit our bandwidth by 90%. So they want to, kind of, like, put us back to where we were, like, I don’t know, 12 months ago.” So I was like, “What? Where is this coming from?” And it was a really intense day because I made the statement. We all, as a company, have been making these statements. And we ended up having to shut down buys that day of U.S. stocks, and we had to explain that to our customers.

And in the past feature was like, kind of, navigating this, kind of, like, very narrow space of not badmouthing your partners. We thought it was fair for them to be able to explain themselves, and for us all to take time to understand why we were limited that much, but also, like, very transparently going to our community, to our customers and saying that, “Well, we have to do this. This is caused by our FX partner. And this is the logic. This is our guiding principle, which is, ‘Treat customers fairly.'”

It’s a principle that the FCA demands us to follow, but it’s also something that we innately follow. We want to treat our customers fairly always. And we felt blocking buys and prioritizing sells so we were able to get out of a position, if you wanted to, it was just the right sort of trade-off for us. But it was a very tough sort of thing to manage.

And we had a lot of Twitter messages, and I still have probably like hundreds of hundred Twitter DMs from various random people who wanted this to stop, who were telling me their version of the conspiracy theory, that sort of stuff. But all in all, we managed to communicate transparently and get through this together with the team, and then we spent the whole weekend implementing the technological solution for the FX limitation. Our engineers implemented the way to batch FX orders. So, on Monday we were open for business again. But, yeah, that was a very intense weekend, for sure.

Meb: I think part of the challenge, everything comes down to structure. I think the concept of payment for order flow, short lending revenue, it’s unclear to a customer how, traditionally, brokerages make money on all these different routes. And the cool thing potentially, and I haven’t used y’all service, but this concept of the subscription model allows you to, kind of, take a step back.

And I think of the same way as a RIA or a fiduciary in the U.S., where you’re by law supposed to work in the customer’s best interest, and to really take out all the stops. And so I was saying on Twitter numerous times, and feel free to comment, I said, look, if you’re going to do payment for order flow, if you’re going to do short lending, like we do on the institutional level, we give it all back, I was like, why not set it up where, kind of, like what you guys do? But say, look, we’ll at least share it with the customer.

Say, like, we’ll give you half, which some brokerages, I think, do on the short lending. I don’t know any that do on the payment for order flow. But it’s like a whole totally different mindset of, if you have two Venn diagrams, one is, every decision is driven by, “Is this in the customer’s best interest, and can we still stay in business?” And on the other is like, “How much money can we make from this person?” And it’s like everything is influenced after that initial cultural sort of mindset. Make any sense? Got any thoughts?

Viktor: Absolutely. You use the word “structure,” which I think is very important because you want to set up your business in a way that is structured. People are incentivized to do things in the best interest of customers. Like, historically, personally, I guess all of us have been used and abused by financial services companies in the past. That is definitely the way I feel about many of the financial services firms handling customers.

And that’s the promise of fintech. With the commoditization of technology, we are able to build new-generation companies that prioritize customers, that put customer interests first and foremost. And that’s a very easy thing to say. The meat of it is really structuring your company and setting incentives so that everything that you do is aligned according to the best interest of the customer. That’s why subscription, for example, that is the best source of revenue for us.

So, we actually have a premium account called Plus where you get an extended stock universe and different order types like limit orders, stop losses, and that’s £10 per month. And we continuously develop that account. We are adding more and more features because we want to build something that people feel is worth paying for.

And once we have that really high-quality revenue, that’s monthly recurring revenue or yearly recurring revenue even with a discount, that’s fantastic because we are incentivized to work for the customer, make the account better. We work hard to make sure we retain those customers and they continuously find value in that account type. That’s really what we focus on.

And it’s not like we don’t want to diversify our revenue sources. You always want to stand on multiple legs. So we are looking at stock lending as well. And our CEO, Adam, he’s ridiculously customer-oriented. So his thinking is, like, from the get-go, “Can we find a way at least for our Plus members to share that revenue with them and make it opt-in, or something like that?” We want to have that revenue and, like, absolutely, we just want to do it in a way that we are incentivized to get it the right way, if that makes sense, in a way that we don’t harm our customers.

Meb: Yeah. So, tell me a little bit about what you guys have learned. You’ve been doing this for five years, and I imagine, you said almost a million customers, so you’ve probably had every possible customer interaction 10 times over. But as far as best practices on design, some of the conclusions often are not necessarily intuitive.

The example I used to talk about was, unlike notifications for a client, some groups want a ton of education and input, and others are like, “Wait, I should be worried about market volatility. Like, I wasn’t even looking at my account. Now you tell me I should be…” You know, so what have you guys learned over the last five years? Things you did wrong, things that you think have been useful?

Viktor: Yeah. Absolutely. I mean, there have been a number of things that we did wrong and a number of things we actually managed to bless … And both of them are great sources of learning. And, yeah, like you said, every sort of customer interaction 10 times over, one of the sort of learnings is a little bit unusual, and I think your U.S. audience might find it like really, really unusual, is just the power of crowdfunding. Which is like, our original growth route was…and every company wants to have a growth route.

You want to have a way to, kind of, like a feedback loop of how you develop your devoted customer base. We actually meet them, shareholders in the company, which was made possible by how … structured in the UK. I understand, in the U.S., until maybe a couple of years ago, you had to be like a high-net-worth individual to invest in these kind of raises, but it’s fairly normal in the UK. You get even like tax cuts when you invest in startups.

Like, as a retail investor, you get 30% off, 50% off in the form of tax relief if you’re investing in startups. So we leaned into that, and then that was the seed of our community. And we learned, like, how important that community is, because you want people advocating for you. Even though it’s ridiculously hard to build a brokerage, it turns out, fine.

We, sort of, knew, but an outcome of that is that when we get started, we have to prioritize what feature, what design we choose to go with. And we started with a very low-cost version, no pun intended, of the app, very simple. And it was very useful to have these community of people who were very forgiving, and gave us a chance, and gave us product feedback, like, very direct product feedback. When it comes to design and the push notifications that you mentioned, what we always learn is like, only bother people with value that you create for them.

Like, a lot of times, companies mindset is like, “Oh, I need to reach this objective. I want to make revenue.” And that, sort of, filters into what they do and what kind of push notifications they send, and how they design the product. I mean, you want to optimize, but you always have to keep in mind like, “Am I creating value for my customer?” The way I’m reaching them is like the type of communication that they actually derive value from. So that’s very important.

And we invested a lot in, like, education as well, like you referred to, but, yeah, people are different, and not everyone necessarily wants kind of like blog posts type of content in the app about what an ETF is.

So what we learned, and that’s something we want to do better in the future, is, like, you want to understand your customers really, really well. You want to build a CRM system that classifies your customer exactly. There are people who just, like, start out investing. They try with £20. That’s fairly different from the person who transfers their £100,000 portfolio, and they exactly know what they are doing. These are different customers, and we want to understand them better going forward and create different experiences for them. So, yeah, that’s definitely something we learned.

Meb: A lot of my early days beliefs about investing have changed over the years, one of the which is, sort of, this concept of illiquidity or nudges to keep you from yourself, the challenge of whether it’s overtrading or mucking around with an investing plan based on emotions and what the markets are doing. Let’s talk a little bit about the future. You guys have been at it for half a decade. You got another long runway to go as we look out on the horizon of the 2020s. What’s on the to-do list?

Viktor: A lot is on the to-do list. The main thing is making Freetrade truly global. So it’s like great to be in the UK. It’s a great business. We definitely see ourselves on a trajectory to achieve great outcomes as a company, but really the mission is to get everyone investing, and that means everyone. So, what will define the next half a decade or entire decade is going into these different countries and going the right way.

So we use Sweden as sort of a learning ground to learn internationalizations the right way. We want to make the app fairly local. We already see that making it like fully, absolutely local is very, very difficult and challenging, so we have to do trade-offs. But that’s what’s going to define the future. It’s not just Sweden, but using those learnings, going into the other EU countries as well, and then eventually going to countries like Australia where we already established a small engineering team, and they are working on a secret project, a feature that hopefully we’ll be able to announce soon.

And we want to go to Asia, and we want to go to North America as well. So that’s what’s going to define the next decade. And that’s not way bigger than any individual feature. The most important thing is that we remain structured the same way, which is our incentives are aligned with our customers’ outcome. That’s the most important thing. And getting to scalability globally, that’s the future for us.

Meb: As we look at sort of the future of retail investing, and, by the way, I was trying to see if you guys had freetrade.com. You guys own that domain or somebody else got it?

Viktor: Oh, somebody else got it, an American brokerage, actually, but they don’t use it.

Meb: Wow. If you’re listening and you own freetrade.com, reach out. Viktor may have an offer for you of a six-pack of pints of British beer and some…

Viktor: Lager.

Meb: Yeah. Some lagers. So, what other trends are taking shape on the…like, do you think the culture of traditionally opaque, higher fees, like, is there a groundswell of support? Because often I’ll travel to other countries, and I’m consistently surprised at the lack of disruption that’s happening still. Is it something that you think is…are you seeing other fractures and changes in the entire ecosystem, or is it sort of early days? Because in the U.S. it’s like, I feel like it’s extremely competitive, but what else?

Viktor: So, we think it’s going to be very competitive everywhere else as well. We are already seeing disruption happening in Europe, and you are one of the leaders of that, but it’s still somewhat early days. There are markets that are huge, and still there is not a lot of disruption. If you consider Spain, for example, that’s a really large European market, or even Italy, and there is nothing there.

So we are hoping, and what we are planning for is that we are going to be the company that leads the disruption there. But it’s early days and it’s so competitive and advanced in the U.S. We are probably maybe a decade behind that, and we are definitely planning to be the company that leads that disruption from, like, Norway to Italy, to Russia, to Ireland, and eventually outside of Europe as well.

Meb: I’d love to hear now, coming full circle, you talked in the beginning about being an investor and then joining the company. Talk to us a little bit about the actual crowdfund experience. Are there rules where there’s like a minimum accreditation there, or can you invest, like, £100? How much did you raise? How many people? All that good stuff.

Viktor: Yeah. Absolutely. It’s actually one of those fantastic things I discovered when I moved here to the UK, to London. I actually did not realize there was a sophisticated equity crowdfunding market, because when you say crowdfunding in most other markets, particularly in the U.S., I think you might associate that with, like, Kickstarter, and that’s a completely different thing. Crowdfunding for equity is definitely advanced in the UK. And there are two main platforms. One is Crowdcube. The other one is Seedrs.

In fact, they recently tried to merge. They tried to become one and same company, and I think the competition authority in the UK did not approve that. But it’s two very meaningful players in the market who are doing amazing things. As a customer, as an investor, you sign up on the platform. You actually have to go through some level of certification. You have to go through the risk disclaimers, you have to acknowledge that you know what you are doing.

It’s basically sort of a suitability test where you can, like, have to indicate that, yeah, you understand that you might lose all of your money, and most startups don’t work out, and all that sort of stuff. So these platforms, make sure you don’t go in there blindly. And, typically what you can do is invest like as little as £10, which is like maybe 14 USD. So that’s a very low amount and we see very various, kind of, like, levels of investment. We did six crowdfunding to date. We are going to do a seven, by the way, in September.

Meb: Wow.

Viktor: Yeah. It’s crazy. This time we are going to make it Europe-wide. So it’s been very UK-focused, but this time around when we do it, we are going to make sure that people in Sweden, Germany, France, all these people have access to it and know about it, and all that. But, yeah, the entry barrier is not very high. The £10 is not particularly high amount.

And there have been various outcomes for investors. These are startups, so there have been busts. There have been companies that did not work out. And the media, of course, as it usually does, it picks up those stories and wrangles every drop of horrifying stories out of it as much as possible. And there have been great outcomes.

So, my original investment in Monzo and Revolut, they went incredibly well. My original investment in Freetrade went incredibly well. And we actually minted literal millionaires, people who invested in the first crowdfunding round. I think there were maybe five of them whose shareholding, because they invested a big-enough amount, it became a million pound or more.

Meb: Well, how much did you guys raise in aggregate?

Viktor: In aggregate, in the most decent crowdfunding, we raised £35 million, and before that, £24 million.

Meb: Wow.

Viktor: So around £55 million, £60 million all together.

Meb: That’s awesome. And I may have slightly missed a bit. You said that you don’t have to have a minimum net worth, you just got to kind of go through like a online or educational process?

Viktor: Exactly. You don’t have to have a minimum net worth. You have to…platforms, make sure that you understand what you are getting into. Something I neglected to say, Meb, though, is the tax really here in the UK. So, there are two schemes, the Seed Enterprise Investment Scheme, and the Enterprise Investment Scheme. This is basically a, I believe, 60% and 30% tax relief that you receive once you invest. So let’s say you invest, like, £100 in a EIS company. Thirty pounds, you can claim back once you do your self-assessment. These are government schemes that help startups.

Meb: There are some similarities in the U.S., and we talk a lot about the QSBS rules here. Listeners, if you don’t know it, google it, investing in startups. And I think everything is trending in the right direction. For a long time it was accredited only, but now you’re starting to see a lot more of the crowdfunding rules go into place where people can invest the lower amounts. We’ve actually considered it. The max I think you can raise here is $5 million.

But what was the main motivation for you guys? Was it more just you wanted to raise the money so you could build a business, or how much of a role did having motivated stakeholders play in this? Because I love this concept of the customers becoming equity holders, too. I think that’s a really cool…because we have, I think, almost 100,000 investors now, and I think it’s, what a great way to let people, kind of, play along in the whole ride.

Viktor: Yeah. What motivated us majorly, and that was what I think is a very good original decision from Adam Dodds, our CEO and founder, is, kind of, like the high-quality investor base you can get. I mean, you can take money from VCs and they have certain terms, and you are, kind of, stuck with those people. And there are great reasons. And we have them in our investor base now, and we are really happy with them. It’s just, having the crowds, it, sort of, scales the impact you can make.

It’s partially marketing. Suddenly you gain a lot of people, that’s if you’re very passionate about your success. Sometimes, in a way, that’s almost like unfair to other companies. They will favor you. Even if other companies have, like, a marginal better product, they place their belief, and they put money in the company. And that brand advocacy is extremely valuable and very helpful. And we are so thankful to have these people in our investor base.

Also, very often they are very interesting people with interesting skill sets. So what we did, we actually very often hired people who invested in Freetrade, and they have various skills. It just really connects you with a large number of people, and that has lots of various benefits. So that was the original thinking behind that decision to start creating that community you can really rely on.

And I think a lot of companies talk about community these days. They talk a good game, but really, like, the best way to create it is to make them co-owners of your company. That’s the most powerful way, and then they are ridiculously incentivized to spread the word, advocate the product, and give you feedback and advice as well.

What we see as well are our toughest reviewers, or our investors and community members, they are definitely upset if they don’t like a feature. It’s sometimes really tough conversations we have to manage in our community forum, but we are thankful for it. The only way to become a really first-class company is having those sort of high expectations that somebody who is, like, really incentivized and really motivated for Freetrade can give you. So there are lots of benefits of it.

Meb: I’d like to see more of that, this sort of stakeholder capitalism to get people invested in the right way. Obviously, not every investment will work out, and in the startup world, probably most won’t work out, but I think the concept of the framing which is investing in businesses is a nice complement to the crazy day-to-day, hour-to-hour, minute-to-minute goings on in the stock market. It lets you, kind of, sock away and have a long-term perspective, which is hard to do in this day and age. As you look back on your own personal career, what’s been your most memorable investment?

Viktor: My most memorable investment, I mean, Freetrade, definitely. I mean, we spent an episode on it, so I’m going to nominate another one. I invested quite early on, I mean, as early as I could in Tesla. And I invested what seemed like an unreasonable amount at the time. And the reason I did that was I just really hated the media sort of response around Elon Musk’s, whatever he’s doing type of stuff, that they’re just like smoking a joint on “The Joe Rogan Experience,” or all that.

I literally remember listening to that episode of Joe Rogan. They get to that part, and I busted out my smartphone, and I put more money into my Tesla because I knew there was going to be outcry. I, kind of, before I listened to the podcast, I saw the news site and all that. It’s the vision. It’s the electrification of the vision, having this really radical sort of mindset that you are not manufacturing hybrid vehicles, all in on electrified vehicles.

I just really like those radical companies that don’t do trade-offs quite a lot, and visionary CEOs. So, yeah, I invested maybe to the tune of, like, $10,000, which is really a huge amount…seemed like a huge amount based on the volatility of the stock price. But it was almost like an angry investment. I was like, “I’m going to support this guy with as much money as I can,” and it turned out to be an amazing investment.

Meb: Yeah. He’s been a world-class entrepreneur, that’s for sure. You know, it’s funny the Joe Rogan podcast, I used to be a heavy listener, but as soon as he moved to Spotify, because I use a different app, I just have totally forgotten to keep track with his episodes. And I don’t know if that’ll be a long-term situation or not, but it goes to show, kind of, the importance of platform, too. Some of these content creators that put up the gates, or wall goes down, be curious to know in retrospect if he would think that’s a good idea or not. I don’t know. Spotify app, for me, is not quite there yet.

Viktor: Yeah. I have my own. Pocket Casts is what I use for that. And since he moved to Spotify, I haven’t listened one episode.

Meb: See?

Viktor: And then I always, like, remember, oh, these are really great episodes, a really great show. I should listen, but somehow I always get lost in the process. I never finish. Like, I think I should pay for it, also. And platform, like you said. But, yeah, who knows what happens in the future?

Meb: Yeah. Viktor, people want to find out more what you’re up to, what you guys are doing. Where do they go?

Viktor: Freetrade.io. That’s the website. And community.freetrade.io. That’s the online discussion board that we’re on, basically the home of the community. And we actually created a link for you, Meb, as well. I know most of your listeners are in the U.S., but freetrade.io/meb, So, if anyone in the UK signs up through that name, they are going to get a free share, a little gift from you and I basically.

Meb: Awesome. Viktor, thanks so much. I’ve had a blast chatting with you today, and hopefully, knock on wood, get to share a pint in person soon.

Viktor: That will be awesome. Definitely let me know when you are around in London.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes. Subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.