Fellow user and blog sparring partner Vlad posed yet another insightful challenge. With his permission, I’m (this is Juan 🙂 replying with an open letter – hoping to get more of you engaged on the subject. Here we go!
How is Darwinex different from Zulu / eToro for an investor?
I watched this presentation where you answered this question from the trader’s perspective.
I’m just amazed by the amount of dumb money that Zulu attracts ($6.6M from some 8.7k followers on the top 3 ‘traders’ who don’t even operate on a live account). You mentioned previously in our conversations tens of millions in AuM at Darwinex in the future…but what will be the source of that and how is that audience targeted ? I’ve seen already Darwins that should have much more investor attention (TSB for instance).
I think the most logical target would be the mutual funds clients – but if Darwinex is not clearly positioned that way it would be shunned by them (ah, just another social trading platform) and by the typical Zulu/Etoro client (because they’re after huge returns in a short amount of time).
What are your thoughts on this ?
Darwinex competitor overview – and Challenge assessment
First, our take on the competitors you mention.
Zulutrade is closer to the gaming / gambling than the asset management business. They clearly have found a sustainable (?) niche for their offer, or else they wouldn’t have been around for close to 10 years. We have no insider knowledge of their investor acquisition channels, but I presume it’s a combination of outbound online marketing and inbound affiliate networks. It all works because b-booking brokers pay handsomely for such leads.
On the plus side, they must make money from investors. They make money for some strategy providers (else why are they there?).
On the negative side, I doubt they make money for investors on average – which makes me think the kind of investors we’re after would not consider them.
eToro adds different nuances.
They’re agency-only (no b-booking), which is a start. They are (or can afford) gifted marketers and communicators, so attracting investors doesn’t seem to be an issue for them.
What about attracting and or keeping good traders?
- When you’re charging 3 pip EURUSD spreads whether you’re A-Book or B-Book doesn’t really matter – who can beat those transaction costs? Why even try if there’s more competitive, non Cyprus regulated brokers out there?
- Regulation – copy trading is deemed investment advice by ESMA and many national regulators. Traders not carrying license for investment advice and allowing copy-traders could be breaching regulation in multiple jurisdictions. Is that a sustainable business model for George Soros?
- eToro doesn’t pay traders on investor success – which opens the incentive can of worms.
- eToro have no way to charge investors for success because copy-trading is a free-for all. Which means they don’t have a way to pay traders on success. Which means traders either don’t stay or leave.
This, in turn, creates a challenge in keeping the investors they claim to attract, because of:
- Regulation – see above
- Transaction costs – see above
- Trader offering – would George Soros consider publishing his trades on eToro?
- Risk management – it’s really hard for an investor not understanding leverage to make money even copying good traders
- Homogeneity in risk – few people understand how risk and reward interact with each other. Which means strategies on offer are not on a level-playing field
eToro clearly has made inroads in creating a brand, by framing the “investing with the crowd” concept. But if the millions of customers they claim to have attracted are still with them, why raise 30 million in 2014? You’d think that USD 73 MM from VCs should be enough to trigger a sustainable business? If their traders are so good, why not invest any of those 73 MM themselves?
Darwinex – self-Assessment
And now on to your questions – our own set of tough challenges:
- How does Darwinex plan to differentiate itself from “social trading” outfits?
- How does Darwinex plan to attract (the first) tens of millions of investment into DARWINs?
- Why haven’t investors noticed TSB and others (yet?)
Our goal from the get-go was to package independent traders into an investable asset class. Thus the DARWIN Exchange concept, and investments into proper regulation, neutral, agency-only (non-dealing desk) positioning, diagnostic and risk management technology and apples-to-apples comparable DARWIN risk. In our opinion, these are all pre-requisites – must have foundations – to create the “independent trader” asset class.
We’re no fools and know foundations are a necessary but not sufficient condition to get there. Even if some differentiation is visible to you (if you didn’t think we’re different you wouldn’t invest time into challenging us? :-), to get more mainstream investors to notice TSB we’ll need to overcome our own set of (HUGE) challenges:
- Communication: you (fellow Darwinex readers/early adopters) feel that we’re different, but we’re not good enough yet at explaining why. Every time you try to explain to someone what makes us different from eToro / Zulu and the point doesn’t come across in 10 seconds, we lose an opportunity for growth. Improved positioning is on its way – hope we get closer 🙂
- Credibility / trust by (good) traders : we’re doing at least some things right – else DARWINs like TSB (your pick, not mine, even if I agree more people should notice) wouldn’t list with us. BUT: AuM are still low to attract all good traders on board. We’ll shortly release technology to grow AuM faster.
- Investor credibility: we’re all (independent traders and Darwinex) sailing upwind. Every time a Zulu / eToro investor loses money, another bit of trader credibility dies. Given others (Currensee, Covestor, eToro, etc.) have failed where we’re trying, it won’t be easy – but we’re convinced it’s doable if TSB and others continue to join and stay.
- Investor exposure: Darwinex is little known in a small niche (social trading, etc.) that hasn’t yet reached mainstream. Both our general awareness and the concept of social investing (thank you, VC investors in eToro 🙂 are improving. Yet going mainstream will be expensive – and may well require our raising a series A from a VC.
I hate to admit it, but neither of the above will happen until we all catalyse an independent trader movement.
WATCH THE VIDEO IN THE LINK NOW – I SWEAR IT INSPIRED DARWINEX, I HOPE IT INSPIRES YOU + YOU WON’T UNDERSTAND WHAT FOLLOWS IF YOU DON’T 🙂
So here’s how TSB gets (the first) 50 millions of AuM.
Now Darwinex, then Tradeslide started doing weird things. This helped TSB & others understand that this time it was different. They joined. So did clean guys like 50 – who actually stuck out his neck for us when it was VERY risky. Then the DARWIN investor platform was finally ready, by which point TSB and others used their DARWINs to actively market to new potential investors. All along, they were credible because Darwinex was independent from all, made more money when investors won, and publicly listed everyone, including failed DARWINs, on a level playing field. The first investors tried with pea-nuts, and some picked the wrong guys until Vlad wrote a good blog post on how to screen DARWINs. Some investors noticed TSB, made some money & boasted about their own little secret profit source during a golf match. Darwinex launched something (r)evolutionary. More and more investors gave TSB & others a demo try. They had more fun than with stocks, so they tried with a couple of thousand Euros. They told other investors. Vlad told his own investors to diversify by investing both in his DARWIN and TSB. Eventually, the first 10 MM AuM joined. This was pea-nuts in the bigger scheme of the asset management business, but more than any of the independent managers on the Barclays CTA index was managing, so Darwinex started a PR campaign to get the fact out there. Traders who never knew Darwinex to begin with, and others who initially looked down on “another Zulu” joined. Aspiring traders realised TSB was making a killing without gambling his account, so they stopped trying to make 50% per month. This stopped their crashing – the first step in the evolution towards winning. Investors noticed. Darwinex raised 10 MM Series A to accelerate development and hired the creatives behind eToro’s video. They blew the ball out of the park with a video that went viral – because enough investors went public saying that they actually exchanged profits with independent traders etc.
You see what I mean. That’s our evolutionary dream come true. It might seem utopian now – but I tell you it’s a lot closer now than 2 years ago.
And the best part is, if we all work together, we’ll soon stop waking up at 4 AM with our favourite nightmare:
(In our – Vlad and mine – case it’s: which comes first, the investable traders or the investor assets under management).
So that’s how you get to (the first) 50 MM AuM:
- You risk your neck on a utopia worth trying
- You get a bunch of guys like TSB & 50 to join
- They do their very best to get a few investors to notice them
- Everybody pulls their weight sticking their neck out to contribute for everyone’s profit exchange
- Compound investor leverage kicks in
- Independent traders gradually, and then suddenly are “the secret asset class everyone should invest in”
- We all cross the chasm together
PS: A huge thanks to our first 1000 trading customers, the 300 beta investors and (currently) 28 guys working with Darwinex. Even more so to folks like 50 who not only joined, but actively stuck their neck / credibility out back when this was just a bunch of “losers” trading, writing & reading “loonie” blog-posts like this 🙂
So – on to our next blog post Vlad? Anyone else out there?