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Hedge
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== Business model == === A multi-phase business model designed to grow Hedge with our users. === Hedge’s business model is designed in three main phases and with a 10-15 year expansion plan in mind. This is detailed below, but a key differentiator to understand is that Hedge has been designed from the beginning – both in regards to its product as well as its business model – to grow with its users. Hedge is not designed to incentivize high trading volume like its competitors, but rather provides the learning resources and community diversity to support an inclusive user base, and to help its users become better investors. # '''Acquire Early Investors''' – In Phase 1 of its expansion model, Hedge will initially generate revenue from its investing, social, and early blockchain features. # '''Expand Product & Grow User AUM''' – Phase 2 includes a broad expansion of Hedge’s social and blockchain lines of business to improve content, introduce new mediums, and give both our creators and our users more ways to be rewarded for their contributions to their communities. We will also incentivize users to learn and collaborate to help them become better, more proactive investors. This phase will be strategically deployed to grow each user’s AUM so we can monetize off of it by management in Phase 3. # '''Manage User Capital''' – Hedge intends Phase 3 to be a massive expansion of investing product lines to become a full-service investment platform – with services and strategies for any user, at any stage of their lives. This will consist of professionally-managed investments (hedge funds for everyone), a wide variety of account types (retirement, 529, etc.), and the introduction of a variety of new asset types to democratize access to investment classes & strategies historically reserved for the ultra-wealthy. This will open Hedge up to hundreds of billions of dollars in additional potential annual revenue and will expand its TAM to over 200M Americans and to $50T in market size. This is assuredly no small task to take on and becomes largely dependent on ensuring our incentives align with those of our customers. We’ve been very cognizant of this while designing our business model for Hedge. While we can be a very successful company by anyone’s standards even with just our initial product & revenue streams, by building an inclusive community and growing with our users, we increase our revenue generation potential – at scale – by tens of billions of dollars. === How will the company make money initially? === Hedge phase 1 has three main sources of revenue: investing, subscription, and social. Together, they are capable of generating a very high ARPU from Hedge's MVP alone. [[File:PxlXymduDirmiEhph111YDL9hJ-Qk jPehvCpHv3.png]] # '''Investing''' – When users invest, Hedge makes money off of each transaction through its partnerships with Alpaca and high-frequency traders (details below). Hedge also makes revenue by engaging in securities lending and through interest on un-invested user capital. # '''Subscription''' – Hedge charges a premium subscription fee for access to margin & level 2 data. Users will also get access to a slew of other features (to be added at a later date), including robo-advisory tools, faster customer support, and a quicker earning rate for Hedge's social governance token. # '''Social''' – The social aspects of its platform will allow Hedge to keep earning money while the markets are closed. User safety, trust, and data privacy will be a top concern, so advertising will be extremely limited and only in very well embedded forms if offered at all. Social media revenue will instead come from referrals, promotions, exclusive content, and more. Later expansions will introduce social governance tokens and will allow creators to monetize their following through a variety of revenue streams (ie. NFT sales of posts/content, premium content, promotional posts, & more) that Hedge will take a small commission on. This gives us a clear path towards scaling to $1B+ in annual revenue within a few years of launch, just from the revenue sources we’ve incorporated into our initial product. Our later expansions will vastly expand this model and will allow Hedge to engage in the web3 space and to expand its market share while limiting any future risk of drop-offs in volume or of precedent-setting changes to governance in retail investing. === Expansion Plans & Other Key Differentiators === Designing a large-scale, full-service investing business also eliminates many of the common challenges that retail brokerage platforms face, bolsters retention, and dramatically reduces the risk of natural churn. By reducing the risk of natural churn we mean the following: Right now, retail brokerage platforms that cater to self-directed retail traders have a natural churn (the age at which they typically lose a user) at around 31 or 32, when their average user transitions into managed investments, either as a result of their lives becoming busier, or as any number of factors (ie. age, responsibility, financial stability) lead to a lower tolerance for risk in their investments. While it may vary as to exactly when a user makes this shift from self-directed to managed or passive investments, it is a near inevitability in the lifecycle of an investor that causes retail brokerage platforms to bleed customers and have a constant need to acquire new users. By forfeiting their hold on investors just as many of them first start to have enough assets to charge investing service fees for, retail brokerage platforms have cornered themselves into a vicious cycle that confines them, for the most part, to the period of an investor’s life when they have the least amount of capital. This makes each user much less monetizable through traditional channels and creates a significant need for platforms to prioritize volume in order to generate revenue, without much of an incentive to help the traders that they will ultimately lose. The longer they can keep them gambling, the more revenue they can squeeze out of them. Hedge is entirely different in that we make an investment in our users and target a monetization route that is much longer term, has significantly more upside, and aligns our incentives with our customer base. This is not to say that we can’t generate significant revenue without expansion – but rather that our ideal customer is not one that will trade 50x a day no matter whether they win or lose. Our ideal customer is someone who we can grow with. Learning resources, group investing, risk assessments, and countless resources & features of Hedge exist to support users and are more likely to cut volume, than to increase it; but they’ll also help investors make better decisions, improve their financial literacy, and grow their portfolios – and with that, our AUM. We look forward to continuing to be transparent on our business model as we move forward, and to our users keeping us honest and on track so we can all grow together. Hedge’s expansion plans and its route to additional monetization routes along with them will open it up to tens, if not hundreds, of billions of dollars in added potential ARR. === Payment For Order Flow === ==== How does payment for order flow (PFOF) work? ==== [[File:B602fbe220078826478935ca2c6546edaf795ce.png]] # A customer places an order on Hedge, who routes it through its brokerage for execution. # Hedge then sends the order through its brokerage to a high-frequency trader (HFT) who will look for a better price off-exchange. If the HFT sees another order that is better than the on-exchange price, they'll purchase it and sell the asset back to the user for the difference. # The wholesaler is required by law to find the best execution but pays Hedge regardless of whether they’re able to find one off-exchange. This allows Hedge to rebate a portion of the PFOF revenue back to their users, either way, thus improving their overall order execution. ==== Will payment-for-order-flow be a significant part of your monetization plans at scale? ==== No. At scale, this will be a fraction of our revenue. See “How do Hedge’s expansion plans and unique monetization strategies differentiate the company from other platforms?” for more information. ==== Why include PFOF at all? ==== PFOF is generally beneficial for the consumer (better execution – see above) and we’re not going to turn the spigot off while it exists. Overall, it’s highly unlikely that PFOF is going away any time soon – the CEO of NASDAQ is on record saying that commission-free trading likely wouldn’t exist without it. It makes little sense to cut off a key source of early revenue that can support our growth over time. So as long as it exists, we’ll continue to collect PFOF. ==== That being said, we’re not basing our business off of PFOF, period. ==== At best, by encouraging increased trading volume and exploiting your customers, you stand to make roughly $3-5B per year max. During Q1 & Q2 of 2021, periods that experienced some of the highest volume ever recorded in the retail markets, Robinhood was on pace to make ~$2.5B from transaction-related revenue. We’re not looking to max out at $3B in ARR at scale – '''we’re looking to see how we can build Hedge’s product up to reach $10B, $50B, and maybe even $100B in ARR'''. We’re starting by competing with the Robinhood’s & WeBull’s of the space and building to take on Charles Schwab, Fidelity, and other incumbents of institutional finance – most of which haven’t been properly challenged in over a century.
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