Hedge is raising capital via a Crowd SAFE at a $19.5 million valuation with no discount. This valuation is inflated for a company with no live product, no revenue, and little other concrete traction. Hedge is likely raising at this high price because it has already raised $1.2 million in capital from angels and other venture capital firms, who have driven up the price. This high valuation is very speculative and increases the risk that investors won’t see a return.

There’s a huge market for retail trading in the US. The US hedge fund market is worth $111.3 billion in 2022, and it’s expected to grow a decent 8% this year. Retail trading has increased in popularity over the last two years, with trading volumes consistently topping 10 billion shares per day. Retail investors’ share of total trading volume approached 25% in 2021, compared to just 10% to 15% in the 2010s. Robinhood alone brought in $1.8 billion in net revenue in 2021, which is just a tiny fraction of the actual transaction volume being executed by its users. 

Hedge has no problem with total addressable market size because every American adult theoretically could become an investor. In fact, Hedge’s specific goal is to make trading more accessible for segments of the population typically left behind by legacy investment services: younger adults, low-income adults, people of color, and other groups not typically associated with investing. 

However, in practice the company will likely vie for a much smaller user segment for several reasons. First, there’s already a great deal of competition in the retail trading landscape. Robinhood is already a household name. Most legacy banks – including Charles Schwab and TD Ameritrade – also offer commission-free trading. In addition, Hedge’s offering for community trading simply won’t appeal to every retail trader. While many investors might want to invest alongside their friends, many others simply want to manage their money independently. These factors significantly limit the number of users that Hedge can reasonably reach, at least within the next several years. 

While Hedge isn’t likely to acquire its entire obtainable market, the market opportunity is huge and growing at a decent rate. If interest in retail trading continues to grow, Hedge could establish a decent niche for itself.

Hedge was co-founded by two recent graduates, Kyle Al-Rawi (CEO) and Yash Khandelwal (CFO). Both co-founders identify with the target market that Hedge seeks to serve: Gen Z traders passionate about investing, community, and Web3. Both are members of the Launch House and On Deck ODX accelerator programs.

Al-Rawi has a bachelor’s degree in health and human sciences from the University of South California. He briefly acted as co-founder, COO, and CTO at Blend Technologies Corporation, a credit card aggregation platform. He is now dedicated solely to Hedge.

Khandelwal has a bachelor’s in finance from the University of South California. His LinkedIn is sparse on details, but according to the raise page, he has experience in investment banking. He was previously part of a startup that handled blockchain and non-fungible tokens, where he headed finance and business operations. Overall, it seems both Al-Rawi and Khandelwal have very little professional experience.

The larger Hedge team supposedly includes an “all-star” roster of alumni from Robinhood, Google, Uber, and other top tech companies. However, it’s not clear who these team members actually are. While Hedge lists several other team members by name on its raise page, they are mostly financial services professionals, not highly-credentialed developers or operational specialists. It is clear that Hedge is supported by several seasoned financial regulations experts, several with Financial Industry Regulatory Authority (FINRA) experience. But otherwise, the Hedge team seems to be light on experience. It’s unclear if Hedge’s founders have the skills necessary to lead this company to success. 

Hedge offers several differentiators that distinguish it from its competitor Robinhood. First and most importantly, traders can form groups to pool their capital and invest together. These groups can be formed with friends and family members or organized similarly to other online stock-trading communities, like WallStreetBets on Reddit. With flexible options for creating groups and voting structures, Hedge offers a much wider variety of trading methods and community opportunities than Robinhood does. 

In addition, Hedge is prioritizing different incentives than Robinhood. Robinhood makes money through high-volume trading (specifically payment for order flow), meaning that it’s in the company’s best interest for investors to trade frequently. Hedge is attempting to better align its incentives with users by deemphasizing high-volume trading. Instead, it focuses on building long-term investment portfolios with education and engagement. Over time, Hedge hopes to offer additional investment mechanisms for retirement and other longer-term horizons, steadily growing average assets under management per user. If successful, this approach could exempt Hedge from the struggle that commission-free trading platforms are facing. Many experts point out that payment for order flow was a strategy that Bernie Madoff relied on and even allege that it’s borderline illegal. 

Hedge’s product hasn’t actually launched yet, and it’s far too early to tell whether the company’s long-term differentiation strategy will play out in its favor. However, it’s obvious that Hedge is approaching the retail trading market differently, which could pay off. If Hedge can deliver on its vision, it will be bringing a well-differentiated product to the stock investing market.

Hedge is an extremely early-stage company. It hasn’t yet launched its app and hasn’t yet generated any revenue. Encouragingly, Hedge hasn’t spent much yet, either, with just $31,302 in expenses on last year’s income statement. 

So far, Hedge has successfully achieved several validating milestones for early-stage startups. The company has already raised $1.2 million in venture capital investment from funds including Firstminute Capital, Starting Line VC, OrangeDAO (an angel network of more than 1,000 Y Combinator founders), Bain Capital Ventures Scout Fund, and more. Hedge’s founders have also participated in prestigious accelerators, like Launch House and the On Deck Accelerator. Finally, Hedge has secured strategic partnerships, including Nasdaq, Liquidity Capital, and Alpaca Markets. But beyond these positive signals, Hedge hasn’t achieved much traction yet.

Hedge is an extremely risky investment in many ways. First, the company is led by two recent college graduates with minimal professional experience. While Hedge boasts about an all-star team, it’s difficult to find evidence that those team members actually exist. 

Second, Hedge is operating in an area that is highly regulated. The US Securities and Exchange Commission is exploring a ban on payment for order flow, which is one of Hedge’s first intended revenue streams. Community trading is a complex endeavor with significant tax implications and other regulatory difficulties, which could slow Hedge down. 

At a pre-launch stage with no revenue or proof of product-market fit, Hedge’s $19.5 million valuation is unjustified and may not earn investors favorable returns. And last but certainly not least, there’s a strong chance that the US enters a recession in the near future. A recession would most likely slow down retail trading, as average Americans pinch pennies rather than invest in an unpredictable market. This could be a very bad time to launch an investment app. 

Hedge looks to capitalize on many of the trends that have driven unprecedented interest in retail investment lately, such as Web3, community-driven trading, and financial education for underrepresented investors. However, Hedge is still in concept stage without a live product. Investors don’t have any data with which to evaluate operational performance, which is a concern given red flags like founder inexperience. 

Investors also don’t have any data to refute the significant risks that Hedge is facing. If the US enters a recession, which is seeming more likely by the day, retail trading will likely slow dramatically. Recent cryptocurrency crashes are throwing the value of Web3 into question. Regulatory changes could suddenly choke Hedge’s revenue from payment for order flow. Without more confidence about Hedge’s product-market fit and revenue potential, investors might struggle to see past these risks.

Hedge seeks to pioneer a new concept in retail trading: investing alongside friends, family, and online communities with simple hedge fund groups. This premise feels like a natural extension of the last several years’ of progress in public trading. A new generation of investors, more passionate than ever about trading thanks to commission-free options like Robinhood, can combine stock trading with community. Hedge’s intersection with decentralized autonomous organizations and non-fungible token sales only aligns it further with current trends. 

While Hedge is still a very early-stage company without proof of concept, investors can take heart that several institutional venture funds, angels, and accelerators see promise in Hedge. The company has raised $1.2 million so far, has built a network within prestigious accelerators, and likely has a strong base of investors and supporters to fall back on for future funding and guidance. 

In addition, it’s a good sign that Hedge is planning to align its incentives with users’ to benefit long-term growth. Hedge’s goal is to educate and engage its users to build long-term investment funds. These would allow the company to generate revenue in a model more reminiscent of Fidelity Investments than Robinhood, so both Hedge and its users can grow their fortunes in harmony.

Hedge is a new community trading concept combining elements of retail trading from Robinhood with Web3-esque principles of community and ownership. Traders can use Hedge to form investing groups that pool their money together and invest, which stands out against more generic alternatives. Additionally, Hedge hopes to educate and engage its users over time to form long-term investment relationships, reducing Hedge’s reliance on risky and arguably predatory revenue models like payment for order flow (PFOF). Hedge also operates in a large, steadily growing $111.3 billion market in which any American adult could theoretically be a potential user.

On the other hand, Hedge is a very early-stage company with no revenue and no proof of concept. The founding team is young and inexperienced. Plus, Hedge could struggle mightily in a recession or if the US Securities and Exchange Commission cracks down on PFOF (which is not Hedge’s long-term strategy, but is meant to generate some of the company’s early revenue). All of these risks, combined with Hedge’s overinflated valuation, might concern investors. Therefore, Hedge has been rated a Neutral Deal. 

For questions regarding the KingsCrowd analyst report or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written on May 23, 2022.