Big thanks to Will Kim for his help analyzing the data and writing this post.
In the past few months we’ve been listening to our users a lot. It’s especially critical for us at Neighborly right now, because we’re bringing a new product to the market – the ability to invest in your community – and a lot of people don’t yet understand how it works.
Why not? Because most of our users have not had the opportunity to invest in their community in this way before. We’re taking a two hundred year-old, $1 billion-a-day market for financing public projects, municipal bonds, and bringing it to a new generation of people who are excited to make change in the places they live work and play.
If you’re someone who thinks you know what the process of buying a municipal bond looks and feels like, you probably won’t recognize much about the Neighborly experience, because we believe the current product needs to change in order to meet the needs of our community of users. Thousands of Neighborly users who tell us every day that they’re excited to invest in better places.
Hold on for a second though: if there are thousands of folks coming to Neighborly who are already excited about investing in their community and billions of bonds being sold every day, how come these people aren’t in the bond market already?
The short answer: because almost none of the existing players are interested in the users we care most about. The big players in the market are interested in a different kind of user. To large financial firms, municipal bonds are a product you sell to older folks, folks with a lot of money. It’s not a process of choosing what you’re interested in, it’s a process of being sold a single opportunity, probably on the phone, for a lot of money.
I know this firsthand, because since joining Neighborly and signing up for a lot of bond firms’ email lists, I get these calls a lot. I haven’t yet had a call that made me feel comfortable investing, or that gave me the impression the person on the other end of the phone was interested in my business (I usually say that I’d like to invest between $500 and $10,000 when asked). I’ve asked if I can hear about investment opportunities in the city I live, San Francisco, related to issues I care about, such as education and transportation. I’m yet to receive suggestions that match my interests.
We think it can be different. We think you should be able to find the places and issues you care about, and contribute to them. That’s why everyone on our team joined Neighborly. But what use are our hopes and dreams unless there are thousands of users out there who want to do the same?
What We Learned
So we’ve been asking thousands of you about what motivated you to join the Neighborly community, and what kind of investments you’d like to make in your favorite places. Thanks for taking the time to share with us and give us the opportunity to listen. We’re really excited to share some of what we’ve learned so far. Do you see yourself in these numbers? Did we miss you? Tell us about what motivated you to join Neighborly and what you’re looking for by taking our survey.
First: there is a new generation of community investors out there ready and excited to take action. It’s a new generation that many of the well-established players aren’t interested in. That’s why we’ve seen the growth of so-called “robo advisors” allowing individuals to invest in mutual funds. Robinhood is doing great work trying to build a new generation of stock market investors. But no one is trying to help this generation invest in their city. The municipal bond market players are hoping you’ll know their brand 20 years from now when you can add a few zeroes to the amount you’re willing to invest.
Second: the new generation of investors want to invest smaller amounts than the market currently supports. We’ve got work to do here. But there are some great precedents for how it can work incredibly well when done right.
Third: the new generation of community investors want to support projects where they can see impact, such as education and transportation. This is where it gets really exciting. It just so happens that the areas of life people care about most are among those getting the worst deal from the current system. Both the institutions most needing finance and the people who want to support them have a lot to gain.
How We Learned It
Here’s how we got to these insights. Around a month ago, we added an optional survey to our onboarding process. After a new user signs up to Neighborly, they are prompted to answer these questions, and in exchange we move them up our waitlist to get full access to the platform.
We didn’t take the decision to include this survey lightly. No one loves surveys. Nevertheless, we felt that if we are really trying to tap a previously ignored market, we needed to ask some questions that hadn’t been asked to this audience much (if ever) before.
The risk of irritating some users with a series of questions seemed to have paid off. More than two-thirds of our new sign-ups filled out this survey. So far, so awesome. Let’s dive in. Above I made the bold claim that we’re working with a new generation of investors. How do we know? Take a look at the age distribution of our respondents.
I’m a big believer in Herb Gans’ (now classic) idea that you can make some fairly good guesses about how a person might relate to the places they spend their time based on the stage of life they’re at. Have they just left formal education? Do they have a family? Are they close to retirement?
The median age of our respondents is between 32 and 33. Is there anything special about being in your early thirties? You could argue that that’s a very typical age for early adopters of new technology products, which is true. But we’re not talking about adoption of a new dating or social app here.
So how might we expect this group of people to behave towards their community? Gans would say they’re at a stage when they’re ready to contribute to the place that they live. They’re planning for the future. They’re great potential community investors, given the right opportunity.
They’re also a generation or two younger what most bond salespeople will tell you is the typical age of a muni bond buyer today.
Next, what type of product we should offer this new generation of potential muni bond investors? By convention, most municipal bonds have a minimum investment of $5,000.
When we asked our users how much they wanted to invest, we gave them a blank number field to fill out. We really wanted to get a sense of our users’ comfort level in investing in their community, without prompting them with existing products. Here’s what they told us.
The median Neighbor would like to invest $1,000 per transaction. But the range is massive. 30% of folks would like to invest $5,000 or more, so could participate in the market as it currently operates quite easily.
So are munis the wrong product for the median Neighbor? Well not exactly. We have a long history of lower-denomination bonds, with investment amounts as low as $25. Meanwhile last year Denver offered $12 million of $500 mini-bonds and sold out in half an hour.
Where did the $5,000 number come from, anyway? The $5,000 denomination that most muni bond deals have is simply a function of tradition, and unit economics. If you’re selling bonds over the phone and have high costs, the higher your price point, the better the margins look. Neighborly takes the opposite approach. If we can automate and dramatically reduce the transaction cost of making muni bonds available to people, the pressure to push up price points disappears. There’s nothing wrong with larger investments of $5,000 for more, but our users’ preferences affirm the idea that there should be a wider range of options.
This is hardly a stunning insight, given how e-commerce has collapsed transaction costs in so many other industries. It’s more like a long overdue update that will help us to provide products that meet people’s needs.
So that’s what we’re working towards. In the next year we are aiming to offer bonds at a range of investment levels, to give our users the opportunity to find the right investment for them. To do that, we will be working with public agencies who also believe in the value of attracting investment from the widest possible range of people, especially those who have strong ties to the place receiving that investment.
And finding the right fit of investor and recipient public project or organization is the key for us. It’s not just a financial product for the sake of a financial product. Our users want to see impact in the places they live, work and play. That’s why we asked them what kinds of projects matter to them. Here’s what they told us.
Education is an area we all care about. It’s easy to see why people empathize with it. Schools also happens to be the biggest issuers of muni bonds – almost one in every three dollars raised through a muni bond went to a school between 2003 and 2012, more than hospitals, roads and utilities combined. There’s just one problem: the muni bond market isn’t working as well for schools as it should be. Here’s why.
We analyzed the bills that 332 California schools paid to issue bonds in 2014. We broke down the costs by the recipients of those fees, such as underwriters, lawyers and financial advisors. This kind of fee structure is common in bond sales.
The graph shows that, generally speaking, as the amount the issuer is raising increases, costs increase somewhat but not proportionally (nothing out of the ordinary). However, there are still opportunities for various participants to take larger cuts of the pie – resulting in the jagged edges. What’s going on? One theory is that most schools don’t have the dedicated resources and expertise to get the best deal possible in muniland. This might also go some way to explain why – according to an analysis we made of 7,000 bond deals between 2012 and 2015 – schools pay on average 1.3% of the face value of their bonds to issue those bonds, compared with 0.8% for other types of bonds.
That’s a topic we’re going to return to in another post. For now we’ve got a clear signal from the Neighborly community that education investment is an area that is critically important, and we’re excited to be serving users who want to make an impact in that space.
We’ve got even more learning to do. Every day we’re receiving more responses and inputs from our users, as we prepare to offer our first public investment opportunities. So these charts above will change.
We’re also big believers in qualitative research as well as quantitative. Right now every team member at Neighborly is participating in a project we called #100Users – a goal to talk 1:1 with 100 of our users in the next month, to find out more about them. We look forward to sharing what we learn from that exercise soon.
And of course, we’re building new parts of our product that we can’t wait to share with you. In the next couple of months, you’ll be able to join the next generation of community investors by participating in our first public muni bond opportunities. In the meantime, keep talking to us and feel free to email me if I can help.