Q&A: SprinkleBit Sets Out to Crowdsource Active Investing
SprinkleBit CEO Alexander Wallin says he got hooked on investing in stocks when he was 14, working at a small ice cream kiosk in Skärhamn, on the West Coast of Sweden. He invested everything he earned that summer in Metro International, a media company then trading at 3.80 Swedish Krona a share. Metro later issued additional shares at 2.80 SEK—26 percent below his purchase price. But Wallin saw the plunge as a buying opportunity, and doubled down on his investment.
He says he sold his stake in Metro two years later, at an average return of 287 percent. After that, the teenager began creating spreadsheets of data and became an ardent stock picker. By the time he began studying economics in 2007 at UC San Diego, Wallin says, he had saved enough to pay for college himself.
Wallin says his big epiphany came in 2010, when he read James Surowiecki’s The Wisdom of Crowds during a semester at Harvard University. When he returned to UC San Diego, Wallin developed the “voting power model”—an algorithm that uses recent transactions to assess what he calls investors’ “magnitude of conviction.” He founded SprinkleBit out of that research in 2010, and graduated in 2011.
The website initially offered a social stock trading simulator, adding such additional services as online education as it evolved into a comprehensive trading platform. After years of what Wallin calls Kafkaesque challenges, San Diego-based SprinkleBit began operating its online trading platform in November. I talked with Wallin, now 27 years old, by email and phone, and edited his story below.
Xconomy: What is SprinkleBit?
Alexander Wallin: The initial plan was simple—create a social investing platform where people could connect all over the world to discuss ideas and form groups known as pools to execute their trades together with both virtual and real money. We wanted to create a community where investment ideas and solutions are exchanged in an environment of transparency, accessibility, and trust.
X: Virtual money? Are these simulated trades?
AW: SprinkleBucks is our virtual currency, which users will eventually be able to turn into goods and services. For now, it’s mostly used for bragging rights. The reason we are focusing on a stock simulator is because practice makes perfect, like any other aspect in life.
X: How does it work?
AW: We have a four-step process to learn how to invest.
1) Users educate themselves through SprinkleBit University.
2) Watch other investors in the SprinkleBit community and see what they do.
3) Practice risk-free with our stock market simulator.
4) Execute real trades with our integrated brokerage platform.
As members implement their investment strategies, a proprietary algorithm generates a Voting Power Index. This VPI confirms how skilled they are with making investment decisions. This enhances the trust factor between members within the SprinkleBit community, and we can clearly see how the beginners have benefited from following the pros.
X: How does SprinkleBit make money?
AW: It’s completely free to join SprinkleBit and to start your practice portfolio. Our brokerage charges $8 per trade and regular margin rates. In coming months we will launch premium features that will dramatically simplify your investing for $9.95 a month.
X: Efficient market theory says an individual investor cannot consistently achieve returns that exceed average market returns over the long term. So SprinkleBit might be leveraging the wisdom of the crowd, but isn’t it still active investing? Isn’t the underlying premise that some investors believe they can beat the average by making prescient stock picks?
AW: I wish the market was as simple as the efficient market hypothesis. There will always be asymmetric information in any marketplace. However, with the help of SprinkleBit you can leverage the power of crowdsourced information to give you the informational advantage. For the past 14 months our community has performed better than the market. I’m even more excited to see the comparison in a bear market.
X: Why is it called SprinkleBit?
AW: Five years earlier, my brother Christoffer registered SprinkleBit.com as a domain name, intending to start a business comparable to Alibaba. The name comes from sprinkle–to distribute—and bit—as in information. SprinkleBit was a perfect fit for a platform dedicated to sharing information.
X: How did you capitalize the startup?
AW: At the age of 23, there are not a lot of folks lining up to invest in an idea based on a PowerPoint presentation. With the help of my brother and father we received the startup capital needed from friends and family. We hired two Swedish developers to get a small beta platform out there. Through a former colleague we found a guy who used to work for the Financial Industry Regulatory Authority, the securities regulatory body, to help us get started on our FINRA membership. This limited platform was enough to spark the confidence that we were really on to something.
X: What kind of difficulties have you experienced?
AW: I met Zecco co-founder Stephen Oliveira in early 2012, and he decided to join us. We also hired a bigger team with developers in Cyprus, marketing in San Diego, and brokers in Los Angeles. Everything was looking gravy with a small round of capital raised from friends and family to take us to live trading. I couldn’t have been more wrong. Two months later our clearing firm was acquired and we got tossed after they changed their business model. Four months later, I lost my U.S. visa status, and had to move back to Sweden for half a year to update it.
We continued to work with FINRA to get regulatory approval, to engage a new clearing firm, and to raise a $1 million investment. But the deal got delayed and we ran out of cash in November 2012. We had to lay off the brokers and FINRA said we had until February 2013 to come up with the money.
We met with another investor and signed an agreement to get $1 million, but the investor’s funds were frozen due to a real estate dispute. In July 2013, some of our early backers invested a small amount of capital to keep the lights on at SprinkleBit. In October 2013, a Canadian angel investor put SprinkleBit back on its feet.
Meanwhile, there were more complications, including problems with the new clearing firm, which required a lot more software development from our side. It took us six months to receive the documentation we needed for their system and another year before they opened their connection to us. The whole experience was Kafkaesque, as taken from the The Trial.[[itals]] But finally, exactly two years after signing our letter of intent, we got a green light to begin trading.
Investors began trading on the SprinkleBit website in November, and we are planning to launch globally in March.
X: So how’s your visa status now?
AW: Good question! I’m actually flying back to Sweden in two weeks to renew it, but this time it’s just a formality.