Jon Stein is the cofounder of online investment advisor Betterment. One of the first FinTech companies, and a startup that launched in the pit of the 2008 financial crisis. Betterment has landed $275 million in funding. Investors include Fabrice Grinda, FJ Labs, Andy Dunn, Menlo Ventures, and Bessemer, as well as large family offices with patient capital.
In this episode you will learn:
- Buyout provisions for founders and why they matter
- The incubation process of a unicorn
- Dealing with execution in a regulated industry
- Using events as a launch strategy
- Starting a company in an economic downturn
About Jon Stein:
Jon Stein is the cofounder and chief executive of Betterment, the largest independent online financial advisor in the U.S., with over 18 billion in assets under management.
Under the umbrella of Betterment Holdings Inc., Stein manages Betterment’s core retail platform, often referred to as a “robo-advisor”; a 401(k) platform called Betterment for Business, and a digital advisory platform called Betterment for Advisors.
Stein launched Betterment in 2008 at TechCrunch Disrupt and made it to the final five in the Startup Battlefield competition the same year.
An outspoken critic of some traditional financial practices, Stein has become a recognized industry advocate for more transparency in investing and more customer-centric financial solutions, as well as public policy issues, such as the U.S. Department of Labor’s fiduciary rule for retirement plans.
In 2016, Stein was awarded the 27th spot on Fortune’s 40 Under 40 list.
Connect with Jon Stein:
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FULL TRANSCRIPTION OF THE INTERVIEW:
Alejandro: Alrighty. Hello, everyone, and welcome to the Dealmakers Show. Today, we have a founder here from New York City, so not far away from where I’m at which is also New York City. But, anyhow, I think we’re going to be learning a lot from him, and I’m very excited to have him on the show. Without further ado, Jon Stein from Betterment. Welcome aboard.
Jon Stein: Hi, Alejandro. Nice to be here with you. Thank you.
Alejandro: So, doing here a little walk through memory lane, I understand that you did a little bit of consulting, and this is something that I hear a lot of founders—a lot of successful founders especially, and you did this with First Manhattan. What were some of the learnings that you got from this experience?
Jon Stein: At that time, and this was 2003 to 2007 or so that I was working for First Manhattan, the banks were in a great growth boom. We were consulting them on where to open branches, and retail product strategy, product design, and then corporate investment management, and things like that. I learned so much from those experiences about how banks work and how the industry was operating. One of the things that I found was that while they were always thinking about how to make the most money for themselves, they were very rarely thinking about how to make the most money for their customers. I found that the banks weren’t customer-centric. All like good people, like well-intentioned folks working there, but just struggled to really innovate around the customer. The same old products were being sold. The pricing might be dusted off, but effectively selling the same old thing. I wanted to build something really different and new. One of my clients was in Australia, and I found it so interesting to see how some of the financial products there in Australia were different from the ones here. They had a mortgage offset product, for instance. I thought that was such a cool combination of a mortgage and a deposit product. I thought why are products set in stone, and why can’t we innovate around what customers want today. One of the areas where I thought we needed the most innovation was around investing. I invested a little bit of money that I’d earned in my consulting job into seven different brokerage accounts that I opened over the years. Each one, I found was trying to direct me to do the things that might be best for them, but not the things that would be best for my long-term wealth. They were trying to get me to trade. They were trying to get me to buy certain products. I thought there really ought to be financial advice that was aligned with me, the customer, and it should be accessible to everyone. I realized that that kind of innovation wasn’t going to come from the industry. That they had too much of an interest in the status quo keeping things the way they were. So, I undertook to build Betterment to change the industry, to make it truly customer-centric.
Alejandro: Got it. And the journey—the incubation process of Betterment because I understand that the co-founders of Betterment, it’s like they came together at some point, so how did you meet your co-founders?
Jon Stein: I initially was foolish enough to think that I was just going to do everything myself. I thought I can code, I’m going to do the coding. I can read legal books, and I’ll figure out the legal and regulatory structure. It was a lot to take on, but I relished the challenge of it. Over time, I realized there was more than I could possibly do. Luckily, I had a friend who was an engineer at Google at the time. He took on helping to stand up the site and build some of the backend. I had another friend who I met through a mutual friend who was a lawyer, and it turned out he was a securities lawyer. He was really interested in the kinds of problems that I was thinking about with Betterment and how we should file and be regulated. He took all the legal books, and I was so happy to hand that work off. As we grew, we just kept finding more and more people. I kept kind of like getting rid of another part of my job as I brought on more talented people who could do it better than I could do it. To me, that was the best way to grow was to find things that were just keeping me super busy, and I would identify a need of a new hire. To some extent, it feels like a failure every time you have to hire someone when you’re small. You don’t want to have to hire everybody, but as we’ve grown, I continue to appreciate the importance of delegation and getting myself out of the way.
Alejandro: Got it. I understand as well that doing things the right way early-on is the way to go. And unfortunately, as founders, sometimes we make the good calls. Sometimes, we don’t, but at least we learn from them. I’ve heard you talk about buy-out provisions for cofounders. There’s a bunch of founders that are listening to us. What are your thoughts around this?
Jon Stein: You should do a lot of thinking when you’re first getting together with partners about what you want to do, and make sure everyone’s excited about all the good things. It’s also important to spend a little bit of time thinking about the downside and making sure that everyone’s protected if things don’t work out. That takes many forms. One of the ways that I think is good to deal with that is have investing of your initial stuff. Even if you are cofounding together, it can be good to put some investing in place, so people have to stick around and earn the equity at the company. Another way to do something similar is to structure buy-out provisions. So, if someone is no longer contributing or participating in the company, and you need to use that equity for people who are participating and contributing, you have the right to buy those folks out. A number of ways to structure that, it’s just important to have an understanding of how you might add new folks and break up if that’s needed.
Alejandro: Got it. The incubation process for Betterment, how much time do you think from like, “Hey, maybe this is a cool idea,” to “Hey, this is going to be a business that I’m going to build.”?
Jon Stein: It took longer than I could have imagined. I went to business school knowing that I wanted to start a business. I might have even had the name Betterment at that point in 2007. I started talking to my friends about it almost immediately when I got there. My poor business school of classmates, like anyone who had to suffer through a class with me heard a lot about Betterment and this idea. It just kept getting refined and focused. I wanted to do so much to improve the customer centricity of financial services, and tackle the investment management space first, and tackle the very simple, basic approach, the classic approach to investing first. I made it simple enough that it was something that we could actually launch and make real. Then improve and build and make more sophisticated over the following years as we’ve done. Now, I’m so excited that we continue to expand the product. We’ve grown beyond just basic investing to tax optimized, personalized, guided investing, and we’re expanding even more into cash management, and building out our vision for a self-driving wallet.
Alejandro: Really cool. Really cool. And building a company in the financial service base, and this comes, obviously, from being a recovering lawyer, and “Thank God I’m not pushing paper any longer, but I did learn a lot.” One of the things that I learned is that definitely, the financial service base involves a ton of regulations. My question to you is how did you navigate early-on all of these regulatory hurdles to really figure out how you would serve your customers?
Jon Stein: I wasn’t sure when I first had the idea for a service that would help customers make the most of their money whether the best structure would be a bank, or a mutual fund, or a broker, or an investment advisor. So, we considered all of them and others. Ultimately, settled on the idea of an investment advisor because it’s the structure that’s most aligned with customers’ best interests. We are independent at Betterment. We don’t manufacture our own mutual funds or ETFs or products that we’re selling. So, we can provide truly independent, unbiased advice to our customers. Now, once we knew that, and we started to register, we took a long time working with the regulators helping to really get them to understand our business, know how we wanted to help customers because what we were proposing was really a radical and new idea at the time. It was investment advice for everyone, and no one had ever really proposed that or delivered that before. We got their final approval on the day before we launched. We had this launch scheduled months in advance. We were launching at TechCrunch Disrupt in 2010 in New York. We literally got the approval on the day before we launched. As we’ve grown, we’ve continued to place regulatory issue and compliance at the forefront of what we do. We think you have to set the standard for the industry, and that regulation is our friend. Because we’re a fiduciary, because we act in the best interest of our customers, we’re very pro-regulation; it’s pro-customer because we’re already doing more than the law requires in all these regards. We want to make sure that every customer has access to the best kinds of financial advice. So, we work closely with regulators to make sure that all those rules are evolving in a customer-focused direction.
Alejandro: Got it. We’ve been touching a little bit here on some of the different offerings that you guys have, but in terms of the business model, how would you say that it has evolved or matured over time from the time you were coming out of Columbia and launching this to what Betterment is today?
Jon Stein: Well, a couple of things. One, we started out as really just a retail investment manager, accepting retail finance to manage their investments. As I mentioned before, that service has become ever more sophisticated. We’ve also branched out, and now we’re building in the fall, in October, we launched Smart Saver which is basically, a high-yield savings account replacement. It’s a high-yield ETF with low risk. It’s currently yielding 2.25%. So, it’s a great investment vehicle. We launched, then in the success of that, Cash Analysis, which looks at your length checking account and tells you whether your balance is going to cover your next three to five weeks’ worth of expenses. We think it’s reasonable to keep cash on hand for three to five weeks of expenses, but any more than that sitting in your checking account is just wasting away and costing you money. So, you ought to save it in a savings account or invest it. So, we have that Cash Analysis. Then now in beta and rolling out shortly to more of our customers, we introduced Two-Way Sweep to help move that ideal cash either into a savings account or sweep it back to your checking account if you need it to pay upcoming bills or to cover the next few weeks of expenses. So, we continue to innovate, and you’ll see us doing more and more around banking. Finally, we’ve launched B2B initiatives. We partner with a number of investment advisors, and banks, and other firms on a white label product that helps advisors better serve and grow their client’s assets. I think our newest line of business is Betterment for Business which is a 401K platform where we’re using the same great Betterment Advisory platform to serve plan sponsors who want to provide the very best 401K experience for their employees.
Alejandro: Got it. Really cool. Your growth has been remarkable. How much capital do you have under management today, and how has that been growing over time?
Jon Stein: Today, we manage 15 billion dollars for 400,000 customers.
Jon Stein: I like to tell the story of when we first started out. We saw about 10 million dollars we brought in in deposits from customers over the first year. Then it was another six months to get to 20, and another three months to get 30, and we just kept growing faster and faster. That pace hasn’t slowed down. Today, what took us a year to earn initially 10 million, is just kind of an average day for us. We’ll bring in 10 million dollars. So, we continue to accelerate growth as we extend the business to more and more customers.
Alejandro: Really cool. I see in many founders when they initially launch their company, especially the ones that really kick the growth into high gear, they have some type of event that really got them in that direction. You’ve alluded to that which was TechCrunch. I understand that you guys were pitching in front of judges at the time like Marissa Mayer or Chris Sacca, the VC that is behind Twitter, and Uber, and all these other companies. How was that experience for you guys?
Jon Stein: It was one of the most exciting and terrifying days of my life. I remember staying up, basically all night preparing my speech to give onstage, and I had like timestamps every time I edited my speech that night. It was like every 15 minutes all night long I was up making some edit to it or whatever. I really obsessed over it. I was pacing around all day before delivering it. Then we gave this presentation, and the crowd applauded, and all the sudden, we had customers. Right? We signed up our first 300 customers in that first week. I was so excited, but immediately thrown into the work of now serving these customers and making sure that they got their money in and invested, and they got their money back when they needed to, and all that. It was so hectic and wonderful. It was like the classic early days of a startup where everything’s on fire, but it’s super exciting.
Alejandro: Got it. At what time do you realize maybe it’s time now to get some capital in and to start speaking with some of the guys in the space?
Jon Stein: At that conference, we had an idea that we might like to raise some money. It wasn’t the reason for doing the conference. We went there to really give ourselves a date that we had to launch. It was a forcing mechanism more than anything. But we knew that the exposure would attract some attention obviously from customers, but also from VCs. We used that attention to start talking about how we might want to raise money. We’d say “Well, maybe we want to raise a million dollars.” But we didn’t have much of a plan for what we would do with that money other than grow. We didn’t have a lot of specifics written down about that growth strategy or what was next on the roadmap. As we started to hear questions from investors, we got more and more of a sense of the kinds of things that they would want to see. So, we put together a presentation and then ultimately got serious about “Now, we’ve got to raise some money. Let’s use this and go out and pitch the right kinds of firms.”
Alejandro: During those pitches did you see that perhaps the concerns or the questions were kind of like repeating and that helped you to really understand the type of pitch that you needed to put together?
Jon Stein: Absolutely. Almost every conversation followed a similar flow. So, you just had to put your best foot forward and answer those questions that you could, and admit up front if you didn’t have a good answer to a question, but give a plan for how you were going to go and figure out an answer with the funding. So, different investors are willing to accept different amounts of risk, but as long as they know you have a plan to figure it out, I think that’s often good enough.
Alejandro: Got it. In your guys’ case, I see that you’ve done six rounds of financing if you were to count with your seed, or perhaps your friends or family, or money that you put together initially. But how much capital has been raised today that is public?
Jon Stein: 275 million dollars we’ve raised to date across all of those rounds.
Alejandro: Got it. With early investors too. So, I see people like Fabrice Grinda which we finally had on the show a couple of episodes ago from OLX, and now he’s doing angel investing actively with FJ Labs. I see Andy Dunn from Bonobos. Then on the VCs I see folks like Bessemer Venture Partners, Anthemis Group, Menlo Ventures, or Citi Ventures just to name a few. Those are really impressive names. So, how did you manage to meet these investors, Jon?
Jon Stein: Over time, we just kept showing up at industry events. Investors are looking for companies to invest in too. Right? So, they’re out there networking. We’d ask for introductions and continued to meet people. We were opportunistic. We were so lucky to meet the folks from Bessemer. One of our early attorneys actually introduced us to them. I remember going up to their offices in Larchmont. I remember it being love at first pitch. We explained what we wanted to do, and the partner from Bessemer said, “Wow! That’s great! We’ve been looking for a company helping to answer this question of ‘What should I do with my money?’ for a couple of years. We think you guys are the best we’ve seen. We’d like to give you some money.” It wasn’t all that quite straight forward, and we still had to negotiate and get it done, but it was a great initial alignment with our vision and mission that we felt. We’ve looked for that, subsequently, in every round we’ve looked for that same kind of alignment.
Alejandro: Got it. Obviously, there are different trades that you are looking after in any investor depending on the financing cycle because the same traits are not going to be the ones that you look for someone on a Series A compared to let’s say the trades you see on a Series E-type of a financing round. But, for example for you guys, did you have any type of a specific trade that regardless of the financing cycle, for you it was an absolute must?
Jon Stein: Yeah, for us having a long-term focus was really important. I think that all of our investors understand that we’re pursuing a generational kind of opportunity that investment management, financial services businesses are ones that take time to build and scale correctly. You have to get everything right. You can’t just wipe the system and reboot when you’re dealing with people’s money. So, you have to be very intentional, deliberate, and careful, and it’s regulated. So, they’re capital intensive, highly competitive, and all of those kinds of dynamics. They were well aware of and had a long-term focus and said, “You know what? We’re the kinds of firms that are going to be around and stick with you.” And convinced us of that both through their history of supporting companies and the references that we checked on them, as well as the other types of money that they raised. Our most recent investor, Kinnevik is in many ways like a large republic, but they’re a large family office too. I mean, they’re sort of like—they’re almost permanent capital. So, they’re able to take a very long-term view.
Alejandro: Yeah. And for example, in your case, doing all those different rounds, what was the experience and how did you see the expectations that you were seeing from investors change from financing cycle to financing cycle?
Jon Stein: Well, as we grew, obviously, investors wanted to see more and more traction. Like when you’re first starting out, they’re really solely investing in the team because it was super-early days. Then by the Series B, [22:53] you could understand what’s your cost to acquire a customer. By the Series C, it would be really nice if you could understand what’s the lifetime value of a customer. Like you’ve got a little more data. You can start to actually have data to back it up rather than projections. To that traction and continuing to clarify the business model is a process that every growing company goes through.
Alejandro: Yeah. Makes sense. I also see that you guys started in 2008, so probably not the best year I would say from an economy perspective. So, in this case, what did you learn as an entrepreneur, and especially let’s say with fundraising that perhaps others that may be listening may apply, let’s say if we hit another crisis?
Jon Stein: Well, I’ll first say that starting in 2008 was interesting for us because it was that crisis that, in me, some of the energy to hurry up and launch Betterment because I saw that things weren’t servings customers as well as they could, and customers were losing faith in the financial institutions. While everyone else was talking about this is a terrible time to get into financial services, I was thinking, now’s when we really need new financial services, and there’s a moment to make an entrance here. I think it was actually fortunate that we launched at that time. I know it would be harder to do what we’re doing today. I think companies that are starting out now face a lot more competition, mostly because like we sort of set out, “Here’s what you can do.” But at that time, absolutely there was not a Fintech category. There were not a lot of investors who were excited about Fintech, and so it was challenging going into a downturn. We had to talk about the long-term nature of the company and that in rising markets, people will invest. In down markets, they’ll continue to contribute to their 401Ks, and IRAs, and things like that. That’s what we’ve seen even as we’ve experienced volatility over the years is that people continue to contribute to those retirement accounts because it’s just part of the annual routine.
Alejandro: Got it. Now, looking back, Jon, was there like a tipping point where you realized, “Wow! This is actually working out.” and things start taking off?
Jon Stein: Yeah. I have always been long-term focused. But I think we just hit such an inflection point around the time that we launched IRAs in 2012 that I realized that this thing was going to make it; that we were going to be there for the long haul. Feels like a long time ago now. We’ve obviously made a ton of launches and progress since then, but I remember that moment when growth really accelerated, and we made our second successful product launch thinking, “Okay, we’ve got a model that works.”
Alejandro: Right. Were there any strategies, or growth hacks, or anything around marketing that you guys did? I remember the ads that you guys were placing on tactics. I mean, if you’re a New Yorker, you probably see them. So, I’m just wondering if there was anything that looking back, you’re like, “Well, that definitely contributed early-on to give us a nice push.”
Jon Stein: Yeah. We’ve done so many different marketing strategies. We’ve been on TV. We’ve done outdoor. We’ve done taxes, you said. We’ve done podcasts. We’ve done social, mobile, search; you name it. Everything works for a while, and you can optimize for a while, and then it doesn’t. I do not believe there’s a silver-bullet channel out there for most people. I think you have to constantly optimize, constantly innovate. You know, only the really large companies with immense marketing budgets can sustain ongoing brand campaign and be live on every channel all the time. A company like ours has to be more nimble, and more creative, and rely frankly more on referrals, which is our biggest channel for acquiring customers, and word of mouth.
Alejandro: Got it. Makes sense. Your growth has been really incredible; really impressive. How many employees do you have now?
Jon Stein: 250.
Alejandro: Wow! So, if you could go back to the past and give yourself one piece of advice before launching Betterment or let’s say any business, what would you tell your younger self?
Jon Stein: My favorite advice that I’ve been given over the years is just to make it real, and do that as quickly as possible, whatever it takes. If it’s just setting up your email accounts, if it’s designing the beta for the thing that you want to launch so you can put it in people’s hands and they can start to touch it, make it real. Make it usable. Make it something that investors, customers, etc. can start to interact with and give you feedback on as quick as possible.
Alejandro: So, what is the best way for folks that are listening to reach out and say hi to you, Jon?
Jon Stein: You can find me on Twitter: jonstein. You can find us at Betterment.com. Those are the places to learn more.
Alejandro: Amazing. Thank you so much for being on the show, Jon.
Jon Stein: Thank you, so much, Alejandro. My pleasure.