E*Trade alumni launch their next big thing

A generation ago, an upstart brokerage firm called E*Trade shook up Wall Street by offering cheap online trades and sassy advertisements that asked investors, “If your broker’s so great, how come he still has to work?” Today, that band of renegades is back at it with a fledgling outfit called Kapitall.
Kapitall is a stock-trading site that lures investors using techniques borrowed from the world of video games. The firm’s goal is to make investing seem approachable and rewarding so the young, and young at heart, will open accounts and make Kapitall a viable competitor against such giants as The Charles Schwab Corp. and TD Ameritrade Inc.
“We represent the next revolution,” said Kapitall chief executive Jarrett Lilien, a former E*Trade president. “We’re going to reach an audience that no one else does.”
(See also: E*Trade alum raise $13M for Kapitall)
For now, though, Kapitall is barely a blip on the screen. Although 175,000 people have registered on the website, only 6,000 have signed up for brokerage accounts, and Mr. Lilien won’t say how much money they’ve put in or how often they trade.
The firm employs about 15 people, squeezed into an office in a New York apartment building.
Another challenge is that for many in Kapitall’s target audience of 20- and 30-somethings, the stock market is the last place they would put whatever money they have. Data from the Investment Company Institute show that the percentage of people 35 and younger who refuse to take any risk with their investments is more than double the rate in 1999, while the amount willing to take substantial or above-average risk has declined to 37% from 52% in that time.
“Millennials have seen what happened in 2008 and the technology bust in 2000, so the idea that the stock market is the best place to build long-term wealth doesn’t make sense to a lot of them,” said Karen Wimbish, head of retail retirement at Wells Fargo & Co.
(Related:Millennial investors shun stocks, survey says)
Of course, last year’s 29.6% rally in the stock market could change the mood quickly — and just in case that happens, Mr. Lilien is ready, along with his crew. They include co-founders Gaspard de Dreuzy, who designed a boxing game popular among PlayStation and Game Boy aficionados called Ready 2 Rumble, and Serge Kreiker, formerly in research and development at Bloomberg. The ranks also include some E*Trade alumni and a former Apple executive who designed Macintosh operating systems.
Mr. Lilien, a native New Yorker with about 30 years of Wall Street experience, joined in 2012 when his private-equity firm, Bendigo Partners, invested about $5 million. (Kapitall has raised $25 million since its inception in 2008.)
Kapitall’s website looks quite different from those of most brokers. The home page isn’t dense with market data or news. Newcomers are given play money so they can experiment with researching and buying stocks until they’re ready to do the real thing. There are monthly tournaments with real cash prizes. Customers who stick with the site are awarded points that can be converted into “koins” and exchanged for free trades or services.
There are even diversions like a “happy hour” (two-for-one trades) and a campy game called Space Investors that involves shooting at rocket ships bearing the logos of corporate giants like Citigroup Inc., Wal-Mart Stores Inc. and Pfizer Inc..
“Play the market,” urges the site’s home page, called a “playground.”
It’s not far from E*Trade’s message during the giddiest days of the Nasdaq bubble, when Mr. Lilien joined the company after it acquired his institutional brokerage firm. But pitching the stock market as some sort of game got E*Trade and other online brokers into hot water with the Securities and Exchange Commission at the time. Mr. Lilien, at 51 the only person at Kapitall with gray hair, said he has spoken to regulators about his firm’s approach, and the site avoids describing investing as “fun.”
“But there’s no reason it can’t be enjoyable,” he added.
Certainly, Mr. Lilien’s firm isn’t the only new kid on the block trying to cater to younger investors with the latest technology and innovative promotions. Motif Investing, for instance, encourages customers to create baskets of stocks focused on different strategies or themes and pays them royalties when others buy in. Betterment offers to manage customers’ money using computers to make investment decisions.
Breaking out in this crowded field could come down to marketing, and Kapitall might have an edge with Mr. Lilien, who was at E*Trade when it came up with its clever baby commercials. Although he has nothing like the budget he enjoyed there, he promises Kapitall will soon unveil cutting-edge marketing campaigns using social media, YouTube and street ads. Rather than sponsor a golf tournament, as big Wall Street institutions often do, Kapitall recently sponsored online golf matches.
He thinks that his firm’s name also will help it stick out in people’s minds, even though some partners were initially spooked by the Marxist reference.
“It is a little irreverent,” he said. “I think it’s the perfect name.”
Aaron Elstein is a reporter at Crain’s New York Business

Related Topics: Wealth Management