The following Q&A is a feature by Chris Abbott of Rhodes College, one of The Venture Center's 2017 summer interns. Spencer Crane is a member of the 2017 VC FinTech Accelerator cohort.
Q: Where and how did the idea of Hedgehog originate?
A: My co-founder and I were investigating ways that we could use blockchain and smart contracts to make it easier to use cryptocurrency for transactions, particularly international transfers. We realized that the biggest problem for people using cryptocurrency was all the risk associated with the volatility in its price and that if we could solve for that, we could speed up the rate of adoption, the growth of the ecosystem and enable more innovation to occur.
Neither of us had a traditional background in finance or trading, but we understood the idea of using financial derivatives to hedge against risk. We built a peer-to-peer financial derivative system, which essentially meant that rather than having to go to a central brokerage to enter into a futures contract and hedge against the risks of your cryptocurrency’s value changing, we could match you directly with others who wanted to take on additional risk for the purposes of trading and other types of speculation.
The challenge we faced was that because this cryptocurrency had to be escrowed inside these financial derivatives smart contracts, they couldn’t be used in transactions, so we developed a token system that treated those financial derivatives as the underlier, similar to how cash used to be backed by gold.
It was an incredibly fascinating project, and we were in the process of building out this system when we ran into what would become the other half of the Hedgehog team: Francois [Nabwangu] and Ijeoma [Onuosa] were building a crowdfunded equity platform, specific to investing in franchises. We explained to them what we were doing; this whole time we had treated these financial derivatives contracts as a means to the end for the problem that we were solving, but after they pointed out the numerous ways our technology could be applied towards regular investment contracts, we realized the huge opportunity there was to use our work to create a better way for investors to collaborate, by lowering the barriers of entry and lowering the costs for businesses trying to raise money from their stakeholders. We pivoted and began working towards enabling people to invest in alternative investments.
Combining everyone’s backgrounds provided us with a really unique lens to see things through: we looked at all these platforms that were offering a specific type of alternative investments to retail investors and noticed two huge problems we could solve. First, a $5,000 minimum investment isn’t realistic for most people, but when we break down those minimums into something like $50, people can finally afford to get involved. We’re making that possible by making the process of taking on investors of all shapes and sizes easier and more efficient using those same smart contracts. Even more importantly, we realized that all of these alternative investment platforms weren’t really considering what people were already invested in, what their financial priorities were, and what risks they were exposed to, which is one of the main goals of alternative investments: to diversify and hedge against risk!
So that’s our mission: let’s use technology to enable people to discover awesome alternative investments, but in a much smarter and faster way.
Q: The goal of Hedgehog is to enable investors to discover the alternative investments that are right for them. How is it designed to do so?
A: Diversifying an investment portfolio and managing risk is hard for professionals, let alone for retail investors who are managing their own money. There’s been a lot of regulatory change and innovation to provide these investors with access and tools, but the process of investing in alternatives just still isn’t designed for the average joe.
We’ve built Hedgehog around an important reality: people don’t come to invest in alternatives with just a bunch of money and an idea. They come to an alternative investment platform with existing investments, debts, accounts, assets, concerns, etc. and most of them are arriving with suggestions or recommendations they’ve gotten from their friends or other successful investors.
We’ve built a layer on top of the traditional model that enables an investor to create a profile, link their investment accounts and bank accounts, and add in anything else they want to tell us (using natural language processing), a goal they have or a rental property they own. We crunch all of that and figure out what their portfolio looks like and what it should look like. Then we recommend alternative investments that are available to them on the platform, that they can afford and make sense for them to invest in, which we aggregate from numerous other high-quality deal sources.
Additionally, we put an emphasis on making investing social. It’s easy to discover what others in your network are invested in and invest alongside them.
Q: You’re one of the youngest figures in the FinTech space, at age 21. How has that impacted the way you network and promote Hedgehog?
A: There are absolutely pros and cons to my age. The biggest con is that when it comes to financial services, this industry relies a lot on legacy. Your worth is largely based on your reputation, so coming in as someone young and with limited experience doesn’t make things easier in terms of how people see me, and of course just in terms of some of the important lessons learned that come with the years.
One of the biggest challenges I face is convincing people that I’m not crazy; before Hedgehog, I focused on mathematics, marketing, and economics, so I have to make sure I translate a lot of my ideas into the right lingo so that my full point makes it across because the details matter here. That said, this isn’t my first rodeo, and in the words of Scott Ford: “same sh*t, different verbs.”
I think coming into this space with a lack of any preconceptions about how financial services “work” has provided me with an incredible advantage in terms of identifying what just doesn’t make sense and I know we can make objectively better. Additionally, I naturally have a strong grasp on a big piece of the market segment we’re going after, namely millennial investors who are starting to invest, or who desperately want to but feel that doing so is out of reach. I can really empathize with a lot of the challenges our users are dealing with, because I’m one of them. I don’t see my age as a disadvantage; I see it as an important perspective that’s been missing from this space for far too long.
Q: Hedgehog was started in Detroit, and you’re currently in Little Rock taking part in the Venture Center’s FinTech Accelerator Program. How have these two locations influenced your company?
A: Tremendously, is the short answer. Both are similar in the sense that they are cities that still have a small-town feel, where everyone knows everyone. These are very tight-knit communities full of people who I think pride themselves on lifting people up and helping however they can. Little Rock has that southern hospitality, but Detroit’s been the underdog for so long that it’s developed something of a Midwestern hospitality.
Building Hedgehog in New York would have probably been totally different. When you’re in an environment surrounded by people who have the financial means and knowledge to get involved in exceptional alternative investment opportunities, who understand what these investments really are, it’s hard to recognize the pain. We would’ve probably been guided towards adding another layer of complexity.
“In Detroit, and in Little Rock, I’m surrounded by people who value simplicity, who want to invest in their own communities and invest in financial inclusion.”
Q: What would you consider the most unique traits of your company?
A: We put a much greater emphasis on educating our investors compared to other platforms. Rather than have HedgeHog just be another “blackbox” solution that no one understands, we focus on explaining to our users not just what they should invest in, but why they should. If someone’s managing their own money, they want to be empowered; that’s often why they choose to take the reins in the first place.
Numerous platforms try to get away with commoditizing people and their situations, but when you provide everyone the same solution based on a five-box survey about age and risk tolerance, you’re not capturing who that individual is or what they’re in pursuit of.
Our technology enables us to build a unique profile around each individual investor. That’s the difference between selling someone a one-size-fits-all versus a tailored suit. We are responsible for helping to guide someone’s financial future; good enough just isn’t good enough in our opinion.
Q: Following the VC FinTech Accelerator Program, what are some of the major plans for Hedgehog?
A: We’ll begin with the risk management aspect, because that’s the biggest pain point we’re seeing right now for retail investors pursuing alternative investments. In the very near future, we’ll be focusing on lowering the barriers of entry for businesses and asset managers raising money. What that means for us is to create tools on our platform that enable strong businesses to easily find relevant investors and offer them the chance to invest.
To give you an idea of what we’re working on, let’s look at Regulation A+, which enables a company to raise up to $50 million. In terms of accessing capital from non-accredited investors, Regulation A+ makes it possible for businesses looking to raise a large amount of capital to do that. The other alternatives are to use JOBS Act, Title III which enables you to raise up to $1 million through crowdfunded equity or an Initial Public Offering, both of which enable investment in your company by almost anyone. It goes without saying that there’s a ton of space between a company raising a million dollars and going public, and that’s what things like Regulation A+ offers are supposed to take care of.
Unfortunately, just to cite some recent numbers from the Securities and Exchange Commission (SEC), the cost of putting together a Regulation A+ offer generally averages at least $50,000 to $250,000 on the front-end, plus an additional $900,000 or so in fees paid to intermediaries, not even including the 4% to 12% that intermediary might take on the back-end. After all that, only about 53% of those deals even make it through to the market, and after digging into those numbers, there isn’t much of a difference between the ones that make it and the ones that don’t, financially speaking. That means that businesses who would have used Regulation A+ end up just using traditional means, like going to large funds and banks, and regular investors are missing out on some really awesome investment opportunities! I can’t say too much yet, but we’ve got things in the works to fix that problem once and for all.
For now, watch for the launch of Hedgehog’s beta this September! You can sign up for updates at www.hedgehog.fund.
About Hedgehog: Hedgehog enables investors to discover the right alternative investments for their portfolio and invest alongside their network.