Harvard Case - OpenInvest
"OpenInvest" Harvard business case study is written by wn Cole, Boris Vallee, Nicole Tempest Keller. It deals with the challenges in the field of Finance. The case study is 16 page(s) long and it was first published on : Feb 13, 2018
At Fern Fort University, we recommend that OpenInvest pursue a strategic partnership with a well-established financial institution, leveraging their existing infrastructure and expertise in investment management, risk management, and financial regulations compliance. This partnership will enable OpenInvest to scale its operations, access a wider customer base, and expedite its growth trajectory while mitigating the risks associated with a solo IPO.
2. Background
OpenInvest is a start-up focused on providing accessible and transparent investment management services through a digital platform. The company aims to disrupt the traditional asset management industry by offering low-cost, automated investment solutions tailored to individual investor needs. The case study focuses on OpenInvest's founder, Paul, who is grappling with the decision of whether to pursue an IPO or seek a strategic partnership to achieve the company's growth goals.
3. Analysis of the Case Study
OpenInvest faces several challenges:
- Limited Resources: As a start-up, OpenInvest lacks the resources and infrastructure to scale its operations independently.
- Regulatory Compliance: Navigating the complex and ever-evolving regulatory landscape of the financial markets is a significant hurdle for a young company.
- Brand Recognition: Building brand awareness and establishing trust within the competitive asset management industry requires substantial investment and time.
To address these challenges, OpenInvest can consider two primary strategic options:
- IPO: An IPO would provide OpenInvest with significant capital to fuel its growth and expand its product offerings. However, it also comes with significant risks, including increased regulatory scrutiny, potential dilution of ownership, and the pressure to meet market expectations.
- Strategic Partnership: Partnering with a well-established financial institution would provide OpenInvest with access to resources, expertise, and a larger customer base. This approach would mitigate some of the risks associated with an IPO while allowing OpenInvest to leverage its innovative technology and business model.
Applying the Financial Analysis framework, we can assess the financial implications of both options:
- IPO: An IPO would involve significant costs associated with underwriting, legal fees, and marketing. OpenInvest would need to demonstrate strong financial performance and a clear growth strategy to attract investors.
- Strategic Partnership: A partnership would likely involve a valuation process, potentially resulting in a lower valuation than an IPO. However, the partnership would provide access to existing infrastructure, customer base, and expertise, potentially leading to faster growth and profitability.
4. Recommendations
OpenInvest should pursue a strategic partnership with a well-established financial institution. This partnership should be structured to:
- Leverage Existing Infrastructure: The partner should provide access to existing technology, compliance infrastructure, and customer base, enabling OpenInvest to scale its operations quickly.
- Maintain Control: OpenInvest should retain a significant ownership stake in the partnership to ensure control over its core technology and business model.
- Align Incentives: The partnership agreement should clearly define the roles and responsibilities of both parties, aligning incentives for long-term success.
5. Basis of Recommendations
This recommendation considers the following factors:
- Core Competencies: OpenInvest's core competency lies in its innovative technology and investment management platform. Partnering with a financial institution allows OpenInvest to focus on its core strengths while leveraging the partner's expertise in areas like risk management, regulatory compliance, and customer acquisition.
- External Customers: The partnership would provide OpenInvest with access to a larger customer base and enhance its brand recognition within the financial markets.
- Competitors: Partnering with a well-established financial institution would position OpenInvest as a credible competitor in the asset management industry, enabling it to compete more effectively against established players.
- Attractiveness: The partnership would provide OpenInvest with a faster path to profitability and growth compared to pursuing an IPO alone. The partnership would also mitigate the risks associated with an IPO, such as regulatory scrutiny and market volatility.
6. Conclusion
A strategic partnership with a well-established financial institution offers OpenInvest the best path to achieve its growth goals while mitigating the risks associated with an IPO. This approach allows OpenInvest to leverage its core competencies, access a wider customer base, and accelerate its growth trajectory.
7. Discussion
While an IPO could provide OpenInvest with significant capital, it also carries significant risks and requires a strong track record of financial performance. Furthermore, the regulatory landscape for fintech companies is constantly evolving, making an IPO a challenging and potentially risky undertaking for a start-up.
The key assumption underlying this recommendation is that OpenInvest can find a suitable partner that aligns with its values and vision. OpenInvest needs to carefully evaluate potential partners based on their reputation, expertise, and commitment to innovation.
8. Next Steps
OpenInvest should:
- Identify Potential Partners: Begin identifying potential partners within the financial services industry, focusing on institutions with a strong track record in investment management, risk management, and regulatory compliance.
- Develop a Partnership Strategy: Define the key objectives and terms of the partnership, including ownership structure, governance, and financial arrangements.
- Negotiate a Partnership Agreement: Engage in negotiations with potential partners, focusing on aligning incentives and ensuring a mutually beneficial relationship.
By following these steps, OpenInvest can successfully execute a strategic partnership that will propel its growth and solidify its position within the asset management industry.
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Case Description
Founded by a team of hedge fund and NGO alumni, OpenInvest launched its platform in 2015 to enable retail investors to tailor their portfolio to their personal values in an automated way, for instance by screening out weapon manufacturers stocks or overweighting LGBTQ friendly companies, while still closely tracking the overall stock market performance. Bolstered by $3.25M in seed funding from Andreessen Horowitz, in 2017 OpenInvest was also preparing to launch an app targeted at millennials customers that would include a novel proxy voting feature that allowed clients to vote on shareholder resolutions with a simple swipe. With this technological addition OpenInvest was well on its way towards realizing its mission of democratizing SRI investing, bringing transparency to the financial services market, and enabling retail investors to invest their capital in a way that aligned with their values. However, getting to scale and profitability in the crowded robo-advisors space was a critical challenge. The case closes with the founders contemplating expanding or migrating their model from B2C to B2B in order to achieve scale and profitability faster. The case is an opportunity to discuss the theoretical underpinning of creating impact in public markets, to explore how portfolio performance may be affected by Socially Responsible Investment (SRI) screens; and to understand drivers of demand for impacting investing more broadly. The case also explores the challenges the founders face when aiming to design a new product to meet an emerging need, and which distribution channel to choose for doing so.
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