BullionVault’s Paul Tustain on turning over £500m with only 35 staff

The story behind the world’s largest online bullion market

The Bank of England only has around 10 times more gold than Paul Tustain’s business looks after. But he doesn’t think that’s remotely surprising, and finds my incredulity at the fact quite funny, actually. Maybe it’s not that surprising – after all, his company BullionVault is the world’s biggest online bullion market. It’s grown to 45,000 users since launching in 2003, and looks after around $2.2bn-worth of gold, or somewhere in the region of 33 tonnes. That’s approximately the weight of a 64-foot yacht.

As you might expect, it turns over hundreds of millions of pounds. In 2011, sales exceeded £500m, though Tustain’s rather blasé (giggling, actually) as he tells me: “We’re now below that! That’s what happens!”

Such is the world of gold. BullionVault allows users to trade both silver and gold directly with one another (peer-to-peer accounts for around 65% of trades), or with the company’s own robots if they can offer a cheaper price (the remaining 35% of trades). This means they have cut out the middle-man broker. (The company’s own bullion inventory tots up to about $40m-worth, giving it a pretty tasty balance sheet.) The model offers retail investors the competitive prices that previously only institutional investors could access, and enables them to trade small amounts of gold or silver. BullionVault takes a maximum of 0.5% commission on each trade.

Think Betfair, but with gold and silver. As it happens, it’s a particularly fitting analogy, because Tustain was one of Betfair’s first investors, and is frank about the fact he wanted to replicate its model in another market. Both Betfair co-founders are investors in BullionVault too, as it just so happens that Andrew Black is Tustain’s bridge partner and Ed Wray his cousin.

Tustain claims that because so much of his business is automated, “we could grow in terms of turnover 10-fold with only doubling the staff count”. The team currently numbers 35. Little wonder, then, that’s BullionVault has previously made the Sunday Times FastTrack and TopTrack 250 (indexing the UK’s fastest-growing private companies and largest private companies respectively), and won two Queen’s Awards for Enterprise (for Innovation and International Trade). In 2010, it was endorsed by and became partners with the World Gold Council.

As you might have guessed, Tustain’s background is in that oh-so-lucrative hybrid of finance and tech. The computer science graduate went on to become an analyst, before founding SAM Business Systems in 1990, which provided the technological framework for specialist banking and stockbroking functions (such as CREST and SWIFT, for those in the know).

I catch up with him to find out more about his extraordinary business model.

How did you conceive of BullionVault?

I understand the back end of how to control trading environments very well, as that was what [SAM Business Systems] was all about.

I watched Betfair and invested in it. I thought it was such a brilliant business model that it must be easy to copy in some environment. The key thing was that [Betfair] was a well-established business in an industry that was very, very efficient at wholesale distribution, but very inefficient at retail distribution – as you need a bookie in every town, so all costs come from retail.

But it’s surprising how few industries you can replicated this in.

I happened to buy some gold when Gordon Brown was trying to sell it, and it turns out that was very similar [in terms of the inefficiencies on the retail side]. You can trade a big bar very cheaply, but when you try to buy [gold] coins from a coin shop, it’s incredibly inefficient for all sorts of reasons. One day you’ll be selling 200 gold coins, two days later have to buy 150 back again. You have an extremely volatile product, the most expensive product in the world to finance.

Also with gold, the only efficient one is “good delivery” bars. They weigh 400 ounces, which puts them out of range for most people, because that’s around £400,000. If you want to deal with the bullion markets where the prices are efficient, you have to deal with [good delivery bars]. And they’re only good delivery if you keep them in accredited vaults.

So from a business model point of view that’s fantastic, because it means you sell a product and you’ve got your resale, which is the storage costs, built into the product itself. [BullionVault stores and insures the gold traded by its users in secure vaults across the world.]

How did you know you the idea would work, and how did it come together?

I didn’t consult people – the people I did said: it won’t work and it can’t be done! That’s what usually happens on the more interesting things, and that’s why they’re more interesting!

Spoken like a true entrepreneur! People tell you it can’t be done and you become determined to do it…

That’s how you know there’s value there. You can see there’s a route to market and a genuine problem to be solved. The competitive landscape is actually very attractive. If I said to you: ‘buy gold’, seven or eight years ago you wouldn’t have known how to do it.

So you would have googled – so that’s your route to market. So job number one is get to the top of Google’s natural search, which is what we did.

How?

A lot of people concentrate on building a product before they know what their route to market is, but before we built the software application, we built the marketing route.

That was the gold trading advisory website that only offered editorial that you set up before building BullionVault, which was then used to refer people on to BullionVault?

Yes. We built a lot of trust by telling people how the gold market works and how you interact with it. And that site is still generating leads for us, although it looks about 100 years old!

What critical mass did you need on BullionVault, in terms of users, before you could let people trade with each other?

That’s a difficult problem to resolve. Actually, the answer is: you don’t need any. On day one it wasn’t 35% [of trades] going to our own robots, it was 100%. So a customer would see a marketplace, which is just prices, but as it happens all those prices where ours. But it was open access for anyone else to make a price if they could settle it. And that’s how you build – creating robot liquidity was a critical part of the strategy.

[…]

People only know [they’ve dealt with a robot] once they’ve dealt. The condition is that [the robots] have to be making the best price, which the customer has to have accepted.

How did you finance and grow the business in the first few years?

For the first three years it was my investment money, and I employed two techies. There were some angels involved, but basically it was friends and family right at the beginning, in a modest way. Then it gets a bit more serious when you have to buy the gold inventory – that was still angels – friends and family [because] VCs are awful people to deal with.

Once we were properly established we had some private equity involvement – on the third
round, once we were profitable. I think if you raise any money, you should consider it your own – don’t go slinging it around, keep it small.

Do price drops in gold hurt the business?

Gold is very much more steady than people realise. […]

Gold had a big fall out at the beginning of April this year when it very rapidly lost a lot of value. We followed that up with our two best days of the year, by a mile. Normally we’d receive about 210 to 220 deposits. Following the big price crash, when everyone thinks there’ll be a big panic, we had over 700 deposits on each of the next days.

How’s the gold market been recently?

The reality is every single day in this country, the government is printing £16 for every single worker [through quantitative easing]. It’s a truly staggering degree of money-printing. At the moment that money is all held up in bonds [that are] mandatorily bought by the Bank of England, which is hollowing out its own balance sheet in the process.

So the Bank is sitting on, I don’t know, some colossal figure of British government IOUs, and it’s the only thing that’s buying them. The rest of the investment professionals are all saying, ‘Oh I don’t like this’. So instead of buying long bonds, they’re buying short bonds, keeping close to the exit door.

And if you exit sterling, you’re pretty pushed for choices these days. So the economic situation is still very encouraging for us.

But markets that go up 12 years on the trot are always likely to have a little bit of a dip, which we’ve just had – but there are thousands and thousands of people waiting for that opportunity, because they want to buy in a dip.

Gold is just thought of as an alternative to currencies – it’s a monetary medium really. There are some people who think that western currencies are in dire straits and […] that’s the underlying current of our customer base.

How will you continue to reach those customers?

People say, ‘Shouldn’t you be out there building a brand, spending loads of money?’ I say: no we shouldn’t. People that do that in a market like this tend to go bust. I wait for people to go looking and to choose for themselves. […]

Our average customer is about $45-50,000. They’re all cautious, all economically astute, worried enough to think about what might happen to their money or savings, and when people are like that they’re going to look properly. They can all find me using the internet, and then they can make up their own mind, and they use us on the basis of trust and value and convenience. If you’ve made up your mind to buy gold, I want to be the absolute best way to do.

How scalable is the model?

We could grow in terms of turnover 10-fold with only doubling the staff count. We go home at the weekends and everything’s still running except money-in-money-out. The gold is still trading at weekends and overnight, it’s all done automatically by software. The only real cost is operational – and knowing your client, but that’s a one-off effort.

Do you hope to exit and launch another company?

I’m getting on a bit! I don’t know! I’m extraordinarily lucky. I like the world of politics and economics and monetary stuff and all that, and there aren’t many businesses you can dream up which would involve you in all of those, and make you money. I live at home in London, which is city I’ve known all my life, and [the business can] be on a sort of global scale – it’s a huge business.

I can’t imagine any business that I would start up in a year or five that would possibly be as interesting!

Thanks for your time Paul.