Investing can be a complicated and difficult process. Finding optimal investments is challenging enough. Add in the legal hoops one must go through for niche products like retirement accounts, and it can be overwhelming and costly. Even so, cash inevitably finds its way to the industry. Total retirement assets in the US alone totaled $29.8 trillion as of the third quarter of the 2019 fiscal year, and this should only grow over time. But with 48% of older Americans (aged 55 or older) having not set aside anything for retirement, there is still a large swathe of the population that is underserved.

To address the shortcomings and ease the difficulties associated with the retirement industry, founders Henry Yoshida, Thomas Young, and Rick Dude set up Rocket Dollar. The company’s app allows users to create an account, transfer money into it, and begin investing through an IRA or 401(k). Both account types permit a user to invest with either pre-tax dollars or with post-tax contributions.

At first glance, this may look like a cookie-cutter investment app. But it’s not. The company allows its users to invest in traditional investments like stocks, bonds, ETFs, mutual funds, etc…. It doesn’t stop there, though. The platform sees itself as an open door to alternative investments. These include crowdfunding deals, real estate, cryptocurrencies, private equity, and venture transactions. Management is correct in its advertising materials when it states that returns associated with these asset classes can, over time, perform remarkably well.

Today, the company does not share any revenue with its partners. This includes through profit-sharing or asset management arrangements with its clients. The company is, however, exploring getting a non-bank custodian designation. If successful, that would allow these activities. Instead, the firm generates revenue by charging users subscription and setup fees for its service. The company’s core offering starts at $15 per month, plus a $360 one-time setup fee. In October of 2019, the company launched a premium version of this plan, priced at $30 per month, plus a $600 one-time setup fee.

In addition to receiving the features included in the cheaper plan, the premium members get access to all sorts of goodies. These include checks, a Rocket Dollar logo checkbook wallet, and a debit card. The company also plans to roll out this year, a new type of IRA/401(k) account. It would permit users to hold alternative and traditional investments simultaneously. If this comes to fruition, the company would be able to monetize its users’ assets. Specifics on how that would look, however, have not been revealed.

Since its launch in March of 2018, Rocket Dollar has done well to grow its platform. Its last statement on the matter revealed about 800 users, with aggregate assets of $80 million. The make-up of this user base has not been offered, but given the firm’s pricing, this translates to a monthly revenue of at least $12,000. This excludes revenue generated by the one-time setup fees it charges its clients. Since its premium feature’s release in October of 2019, 23% of all new subscribers have opted for that option over the cheaper alternative. This likely means that revenue is substantially higher than the $12,000 per month. By this month (January of 2020), the company believed last year that its user base would have grown to 1,000. If this growth continues, 2020 could be a breakout year for the firm.

Although 2019 is now over for Rocket Dollar, financials have not been provided for the year. The latest financials provided by management are from 2018. In that year, the firm generated revenue of just $50.895, and incurred a net loss of $1.41 million. Its operating cash flow wasn’t much better, coming in at a negative $1.30 million. This is to be expected of a startup, but another big question is how long until the company does generate a return. This is something that nobody knows the answer to today. Management did, however, indicate in a post published January 5th, that its monthly cash burn rate is about $180,000. This implies significant net losses for 2019 and, absent strong growth, continued losses for 2020.

In addition to dealing with net losses, the company does have some debt on its books. As of the end of its 2018 fiscal year, it carried $1.65 million worth of convertible notes. Fortunately, these carry a low 6% annual interest rate. Because of their convertible nature, they are also likely to turn into equity, so the risk for shareholders is minimal. That said, the difference between minimum and non-existent can make for all the difference in the world. 

The market for retirement accounts is large and offers a tremendous amount of opportunity. In all, the US retirement industry represents $29.8 trillion worth of assets. Even for all of this size, it’s highly concentrated amongst the wealthiest Americans. Only 36% of households in the US, for instance, owned IRAs. A full 72% of households that make $200,000 per year or more have IRAs. This compares to 49% of households with income of $50,000 per year or more, and just 16% that have an income of less than $50,000 per year. Another way to look at this is through the lens of median income. The median income for all households that own IRAs stands at about $99,100. This compares to the $62,500 reported for all households in the same year.

Of course, IRAs represent only a small portion of the retirement industry. 33% of assets in the space, representing $9.8 trillion, are attributable to these securities. This is up from just $2.6 trillion back in 2000. Another big category that’s relevant to Rocket Dollar is the 401(k) space. 401(k)s are part of the broader defined contribution market segment, which at 28% of all retirement assets, totals $8.3 trillion. With 55 million active participants, 401(k)s are a significant source of focus. Collectively, they account for $5.9 trillion of the defined contribution space.

The special sauce for the firm appears to be its emphasis on allowing alternative investments into users’ portfolios. This does open the door to potentially higher returns, but it also welcomes in added risk. Real estate, for instance, is a highly illiquid investment. The same can be said of private equity and venture-funded deals, as well as crowd raised companies. While real estate is generally considered safe, these other options have a higher degree of risk to them. This is especially true when stacked up against most traditional investment options. Perhaps the riskiest asset class proposed for its platform is cryptocurrency.

This is not to say that the company’s offerings are bad or inappropriate. It all depends on the risk preference of its users. As the image above illustrates, risk preference among IRA investors and all US households changes over time. Risk tolerance appears to peak in the 35 to 44 age range. This group, between the assets they have to set aside and their risk preferences, will be the company’s primary target most likely. Interestingly enough, the image below, provided by Rocket Dollar, seems to support this view.

In its raise, the management team at Rocket Dollar is taking a simple approach. The firm is offering investors a SAFE. This is a note that will convert into equity upon different trigger events (particularly the next equity raise). It will convert at a 10% discount to whatever valuation the company receives, subject to a valuation cap of $20 million. In all, the company is hoping to raise up to $1.07 million, but it will close the round with as little as $25,000 committed to the deal. The minimum investment required per participant is set at $100, and as of this writing, the firm has $11,800 committed to its raise.

At the helm of Rocket Dollar are three co-founders: CEO Henry Yoshida, VP of Marketing Thomas Young, and CTO Rick Dude. Henry is a Certified Financial Planner™ professional, licensed Realtor®, and has 17 years of experience in finance. Prior to his time at Rocket Dollar, he was the founder of venture capital-backed robo-advisor retirement plan platform Honest Dollar. Goldman Sachs later acquired it for an undisclosed sum. He was also the founder of MY Group LLC and spent ten years as a Merrill Lynch Vice President. Thomas is a marketing professional with experience among startups. He started his career at AngelSpan. After that, he founded a marketing agency that catered to financial professionals. Rick is a technologist, financial professional, and serial entrepreneur. He holds a Series 65 and founded QuantAdvisor, an Internet Registered Investment Advisor, in 2011. He has also served as a technology consultant working on large data infrastructure projects for the banking, pharmaceutical, government, retail, and manufacturing industries. His best-known clients included Bank of America, the TSA, the State of Texas, and Bristol-Myers Squibb. He has founded or been a crucial early employee at five different startups.

After careful evaluation and consideration, we have rated Rocket Dollar a “Deal to Watch.” The company operates in a fascinating space with strong prospects just from the industry’s size alone. The executives running it have significant domain experience. They have also been battle-tested through their own startups and other professional positions. The company has also done well to raise capital (over $3.7 million), and its initial progress is impressive. Its decision to allow investors to participate in the alternative investing world is also appealing. What’s more, the company is already finding its right audience. For all of this good, though, there are certain risks investors need to keep in mind.

For starters, the company’s significant net losses and cash outflows from 2018. Add to this management’s disclosure of a $180,000 per month cash burn rate, and that’s a lot of pain to deal with. In time, as more users come to its platform, the service will have the ability to move closer to breakeven. If this were its only issue, the company might still be rated higher, but there’s another concern: the terms of the capital raise. For where the business is, a $20 million valuation cap looks probably two times too high. Add to this, the paltry 10% discount on conversion when most companies offer 20%, and the price paid for incoming investors is lofty. If management can grow the firm rapidly this year, this valuation may not look too bad. But betting on an uncertain future without any guidance or reassurance is not confidence-inspiring.