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Kristo Käärmann is the co-founder and CEO of TransferWise which is a money transfer service allowing private individuals and businesses to send money abroad without hidden charges. The company has raised so far $689 million with a $3.5 billion valuation. Investors include SV Angel, Index Ventures, Andreessen Horowitz, Kima Ventures, IVP, Sapphire Ventures, IA Ventures, Valar Ventures, or Mosaic Ventures to name a few. Other individual investors include Richard Branson or Max Levchin.

In this episode you will learn:

  • Turning frustrations into billion dollar companies
  • Raising capital from the best
  • How to think about building teams for startups
  • Digital currencies

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About Kristo Käärmann:

 
Kristo Kaarmann is the co-founder and CEO of TransferWise.

Prior to starting TransferWise, Kristo was a management consultant with Deloitte Consulting and PricewaterhouseCoopers.

He worked with European banks and insurers to modernize their processes and systems. Stunned by their inefficiency, he teamed up with Taavet Hinrikus, then Skype’s director of strategy, to develop an entirely new system for moving money across borders.

Kristo was selected as one of the World Economic Forum’s Technology Pioneers 2015.

 

 

Connect with Kristo Käärmann:

 

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FULL TRANSCRIPTION OF THE INTERVIEW:

Alejandro: Alrighty. Hello everyone and welcome to the DealMakers show. Today, we’re going to learn a lot about fintech. We’re going to learn about transferring money. The guest we have today is someone that knows a lot about building, scaling, and financing companies. Without further ado, I’d like to welcome to the show, Kristo Käärmann, the CEO and Cofounder of TransferWise. Welcome to the show today.

Kristo Käärmann: Good to be here.

Alejandro: Kristo, another fellow European. The way that things work in Europe are obviously a little bit different to the way they work here in the U.S. where I’m right now based for the past 12 years. I want to ask you what was life for you being born and raised in Estonia?

Kristo Käärmann: I was born in Estonia that was then occupied by Soviet Union in 1980. For the first ten years, I was growing up like all the Soviet kids did at the time. It wasn’t until 1991 when the country became independent again that it went to a pretty incredible growth story from nothing to then becoming part of the European Union, joined the NATO, and now, generally, doing pretty well.

Alejandro: Got it. Yeah, I remember that. I remember, and especially when I watched Eurovision TV shows with you guys singing and always doing a good job. That was fun. But how did you get into mathematics and computers?

Kristo Käärmann: When I grew up, I think that was pretty exciting. The personal computers were perhaps a little more widely available in the west, but in the Soviet times, the late ’80s, early ’90s were the times when we saw the first personal computers. As a kid, I had access to a few of those as well. The first one was Spectrum – Zedd X. It was a little keyboard that you could attach behind a color TV. I don’t know how my dad got his hands on one of those. Later, I had a Commodore 2001. I think that was built in the late ’70s. That’s where I wrote my first pieces of code.

Alejandro: Very nice. I see you went to Tartu Ülikool where you did your college degree, mathematics and computer science. Why did you end up as a consultant? What was the transition? I believe you were at PwC. Is that right, Kristo?

Kristo Käärmann: That’s right. When I finished my studies in mathematics, I was actually quite interested in data and dealing with large amounts of data. I went to do a masters later on in microbiology and the computation methods around microbiology. At the same time, I did get a job in PwC. The job was to help some of the banks in Estonia, Telcos, to get a better handle on their data so that they can run the banks on Telcos a little bit better. I was working as management consultant at the time.

Alejandro: What kind of stuff were you doing there?

Kristo Käärmann: In the first cases, it’s very interesting. As we were such a young country, the newly independent Estonia was only 15 years old. That means the oldest business in the country was 15 years old. That means there’s really not a lot of legacy. If you look at what consultants usually do in the old world, in Europe or in the U.S., they usually go to really old companies and help them deal with legacy and help them with change, either new processes or new better ways to run the company. Back in the day in Estonia, all the companies were very young, and I think we just started to get to the plate.

Alejandro: Got it. Then, Kristo, how did you end up being in London?

Kristo Käärmann: At the time, as I explained, the companies in Estonia were really young, and the problems that they just started to face were tricky process challenges and data challenges. They were still young and early. As I looked into those, I realized that actually elsewhere in the world, these problems are much deeper and much more interesting. That’s why in 2007, 12 years ago, I moved to London to work with Deloitte and do a pretty similar job, but now with companies that are about 100 years older.

Alejandro: One of the things that I see here, Kristo, is that most of the incredibly successful founders that I get the chance to interview, they either do investment banking, or they do VC, or private equity, or consulting. As a consultant, why would you say there are so many successful founders that have that background of being a consultant in the past?

Kristo Käärmann: This is a very good question. I’m, personally, not very proud of my consulting background. I think the work that we did at the time wasn’t particularly useful. It didn’t have a lot of impact on the companies that we tried to help. We were enormously well paid, and I never really understood why. I didn’t see that the impact that we were having was that great at the time. But to answer your question, I think it probably does give you a few skills. When you’re starting up a new business, you have to be organized. Consultants usually are good at organizing and structuring the work to get things done fast.

Alejandro: So, when you’re thinking about structuring and organizing, what does that look like? What kind of skill sets are those so that the listeners get a better idea of what being organized looks like?

Kristo Käärmann: I think I have a good explanation. If you think about TransferWise, we started in 2011 making payments between the UK and eurozone. So, people in the UK could send money to Europe, and people in the eurozone could send money to the UK. That was it. In the first year, six months in, I just remember a stat. We were doing about 800 transactions a week. That was the level of organization then. Today, to put it into context, we’re moving about 4 billion pounds across the border, and we do that across about 2,000 different currency routes. So, from these two routes from euro, euro to pound, we moved to 2,000. Rather than doing 800 transactions a week, this is now 10,000 times more. The scales of being organized, I think have been very useful in that journey, especially in transfers where pretty much everything has to run as clockwork and do that in 70 different jurisdictions where we operate following the local regulations, having linked into the local banking systems, and servicing 5 million customers around the world. That’s the level of organization.

Alejandro: So, you must be a masterful Rockstar at spreadsheets, I would assume. 

Kristo Käärmann: I do know how to use spreadsheets. Yes.

[Laughter]

Alejandro: Okay.

Kristo Käärmann: But as you can imagine, after the first year, the volumes that we were processing very quickly outrun what spreadsheets can handle, so the work here is more databases, code, and industrializing similar things that, you’re right, can be done with a spreadsheet.

Alejandro: I hear you. Then let’s rewind just a little bit. It’s, obviously, impressive numbers and what you guys have done with TransferWise, but before we get there, let’s talk about the way things started. How did you and your co-founder meet, and what was the process of incubating the idea of TransferWise?

Kristo Käärmann: Both me and Taavet ended up for different reasons in London around 2007 and ’08. We had a similar problem. My challenge was that I had a great salary in the UK at my new job, but my savings account was still back in Estonia. I was moving regularly pounds into my savings account that was in euros. When I did a larger transaction, I found out that a lot less money arrives. When I say a lot less, it was like 500 euros less. 

Alejandro: Wow.

Kristo Käärmann: Then I started looking into this, and I found out that it was because – HSBC was my bank in the UK. When I go to HSBC and instruct the transfer to Estonia, they say it cost 12 pounds at the time, but they didn’t tell me that they use an exchange rate that is 5% less than what I see in Reuters, Bloomberg, or any other website. What happens is these 12 pounds aren’t really how banks make their money. It’s about the fees that are hidden in the exchange rate. So, when I was first hit by the loss of 500 euros, I was pretty angry and sad even. I found a solution, which came through who is now my co-founder, Taavet. He had the exact opposite problem. He was moving money from Estonia to London. He was still paid in euros into his Estonia bank account, but his living expenses were all in pounds. 

Alejandro: Got it. How did you guys meet? How did you and Taavet meet?

Kristo Käärmann: To answer your question, I have to go back a little bit to we’re both Estonians. Estonia is a nation of about 900,000 Estonians. That means every year, about 200 boys are born, and I think about 200 girls. Me and Taavet are roughly the same year, so we’re one of the 200. We both moved to London, so it’s almost impossible not to meet. Just to give you an idea of how small of a nation we are if there are people your age, and they end up in London, roughly both interested in the same things, you’ve got to meet through friends. That’s what happened to us.

Alejandro: Of course. Obviously, Taavet had a very interesting background as well. He was one of the first employees of Skype, so he had experience with hypergrowth companies. You were, obviously, coming a little bit more from corporate. What I want to ask you here is how do you go from starting to share some of the issues that you’re experiencing with doing the exchanges and transferring money, and Taavet having that same issue, from those casual conversations perhaps over dinner, drinks to the point where you guys give your notice, and you say, “We’re going to go at this 100%?”

Kristo Käärmann: You go bit by bit. Of course, we started on a hypothesis. Not just Estonians in London problem, but would probably apply to the Spanish in London, maybe to the Romanians in London, maybe to the Americans in London, and maybe also to Australians in Brazil after a while. It was really a hypothesis. A lot of startups start on hypotheses, both that it’s something that is needed. Secondly, especially when we’re dealing with other people’s money, and this was 2011, the term fintech didn’t really exist. It was also the question whether people are going to trust your service that you’re building. Lastly, are we going to make it work? It works between a couple of people, but can we make it work for hundreds, thousands, and after that millions of people.

Alejandro: Right. So, basically, you got the answer to all of these questions, or to all of these different points. Then Taavet and you said, “This is the day when we give the notice.” How were those early days with you and Taavet building and creating TransferWise? What did those days look like?

Kristo Käärmann: From the very beginning, it was clear that this challenge is bigger than just the two of us. So, the day we launched, it was 24th of January, 2011 with a simple blog post in TechCrunch. Actually, on the same day, I got so much email at the back of the launch from people around the world who reached out to me and said, “Hey, we had exactly a similar scheme with my friends back in the university, but we never did anything with it. We never really built it into a product.” So, it was pretty cool to see that it’s not just us that had the problem. There are lots of others out there with a similar challenge. A lot of them had actually come to a similar solution informally between themselves. So, it was on that first day that I went through my phonebook and found someone we could hire. After that, I think in the same month we brought on a few more people. We started hiring quickly realizing that this is something that people need, and seeing after the launch that people are trusting us with their money. The real transactions were happening on the first day, and we started building the team.

Alejandro: Got it. What were some of those early hires? What kind of profiles were you guys looking for?

Kristo Käärmann: We’re a tech product. We needed engineers, in the beginning, to help us build. We hired operations as well because we were dealing with money and increasingly large amounts of money. We needed people who would help us run the shop. So, we had someone join as an operations lead and start building out a team of operators, payment operators, and treasurers. We also were convinced from day one that we need to support our customers. It was the time where it was quite common for tech companies to not have any support at all. We chose to go the other way. We had a phone number on our front page from the very beginning. We also needed people to handle the queries and help folks get used to this new way of moving money between countries.

Alejandro: What were some of the big challenges that you were dealing with during the first couple of years where you were at a Series A-type of stage? What were some of the biggest challenges?

Kristo Käärmann: Almost everything is a challenge if you’re at this stage. So, you can imagine that the code you build for tomorrow, or the systems that you set up are not going to be relevant six months later because you have 50 times the volume that you had when you first designed them. Then in another six months, you have, again, crazy amounts of more volume coming in. So, it was definitely, from the operational side, handling the growth. Then on the other side, it was still the challenge of how do you – there were definitely people that were looking for a solution and found TranferWise. But until today, we see that most people, the majority of people, business owners, and CFOs don’t really know about those hidden fees. They believe that the bank’s charge 25 bucks for a wire and they’re quite oblivious.

Alejandro: Absolutely. The problem is real. I’ve experienced it myself many, many times like when I had to transfer money overseas to Spain from the U.S. and so forth. I hear you. So, for the listeners, so they really get it, what ended up being the business model of TransferWise? 

Kristo Käärmann: We help people and businesses to move money across borders. The traditional way of doing this is going to your bank and making an international wire. In Europe, we call them international transfers. In the U.S., they’re called wires. That usually means typing in the destination account number in a different country. Then the bank makes the currency conversion. They usually do two things. They charge you for a wire, and that costs $25, $35, $50. Where they really make money is, they use a terrible exchange rate, which includes their margin for converting the currency. Whenever you use your bank to convert currency, you usually lose something between 3% to 5%, or in some cases, even more. 

Alejandro: Yeah.

Kristo Käärmann: What TransferWise started with was the idea that when we send dollars to Europe in euros, then there are going to be lots of people who also send money from Europe to the U.S. So, rather than, if you imagine, sailing with bags of cash across the ocean, we could use the euros that are being send from Europe to pay out the recipients in Europe and use the dollars that were collecting in the U.S. to pay out to the recipients of those Europeans who are sending money to the U.S. Thereby, we can almost remove the need for moving the money and just rerouting the money locally. That’s how we really started operating in Europe. We collected money in the eurozone when we collected money in the UK, and we used the funds that we collected then to pay out in the right currency.

Alejandro: Very cool. For something like this, Kristo, you can tell me, but it seems that to really engineer this entire operation, the need for capital is like a big-time type of thing. In your case, how much capital have you guys raised to date?

Kristo Käärmann: As our seed round, we raised 1.3 million dollars. We’ve been raising more rounds as we go on. Now, we’ve raised close to 400 million altogether. That’s, actually, not that much money if you look at what we’ve achieved.

Alejandro: I hear you. When you say, “not that much money,” I’m getting vertigo when I think about 400 million, all those euros. I saw as well, that the last evaluation – and you don’t have to comment on this – was 3.5 billion, which is remarkable. What I want to ask you here is, in terms of the expectations, how did you see the expectations change from one financing milestone to another one in that journey that you guys have come through the 400 million?

Kristo Käärmann: The milestones for us weren’t really so much tied to the financings. The financings were more tracking on “Let’s not run out of money. Let’s make sure that we have plenty of cash to operate and to keep growing so that we don’t run out of money.” That’s worked well. That’s the approach that we’ve taken. As we started and as we got going, we realized the size of the problem, the size of growth international transfers in the first place, and then the hidden fees in those transfers is really enormous. I think over time, we started to realize how much we were really in the beginning of solving this. At the moment, we estimate that we put about 1 billion pounds a year back into our customers’ pockets because when they use TransferWise, they avoid those bad exchange rates with banks, and they avoid the wire fees. So, they save roughly 1 billion pounds a year compared to their bank. When we look at what banks still make globally from our people in businesses making cross-world transfers, it’s around 200 billion. If you put that into the context, we’ve really only come about 0.5% of the way. We haven’t really gotten anywhere by that metric.

Alejandro: Then in terms of size, you were talking about the type of volume that you guys do, but for everyone that is listening, to get a better sense of the size of TransferWise today, how big are you guys?

Kristo Käärmann: You can look at it in multiple different ways. One that we watch closely is what’s our impact? The easiest way to look at it is the number of dollars or pounds that we put back into our customers’ pockets compared to if they had to use their bank. There we stand at about 1 billion pounds a year. You can also look at it by people. We’re now 1,500 people. We’re working from nine offices around the world. Due to the nature of the business, we’re really quite international; we have to be. There are 71 nationalities now working in TransferWise. We have to support everyone who is using TransferWise, and we try to do that in their own language. There are a lot of transfers and a lot of currencies to underpin all of that volume.

Alejandro: Talking about currency and everything that is happening with digital currencies, where do you think the world of currencies is heading to?

Kristo Käärmann: This is a very good question. I don’t know if the governments would anytime soon be willing to give up their right to international currencies and have legal tender as the currency as they’re issued. The most interesting thing that’s happening with currencies is actually eurozone. It is very incredible how a group of countries have decided to give up their national currencies and unite under a common euro. This, as we’ve seen, hasn’t been easy. It has brought problems that the European countries and central bankers have to work through, but it is very incredible. We’ve seen that in recent years as well. I think Latvia and Lithuania joined quite recently. At the time, their financial ministers went through a calculation of how much the country will save from not having the national currency, how much efficiency they get by joining the eurozone. I actually can’t think of any other examples other than euro where a group of countries have optimized for a common currency. There aren’t a lot of other currency unions out there, and it’s very hard to see where that would be going in the short term.

Alejandro: Now, obviously, the size of the company that you guys have built is unbelievable, but I’m sure that you look back and probably there are times you can’t even believe it yourself of where you guys are today, obviously, since 2011 you started this. The journey of building a company and being an entrepreneur is really not that easy, and it’s full of the ups and downs. In yours and Taavet’s case, what was a dark period for you, a breakdown moment where you didn’t know if there was going to be a tomorrow kind of thing? What was the breakthrough that came out of that?

Kristo Käärmann: This is a good question. We’re probably quite lucky that we haven’t run that close to the ground. These moments really come when you run out of money, and you’re really close to running out of money. For us, maybe the closest we got to was actually before we first raised any. That was in late 2011 where we had bootstrapped the company together with Taavet. We were paying the salaries for our early employees and doing it from our own salaries and savings. We did get to the point where in order to keep growing this, we did have to raise money. In 2011, raising money in Europe was possible in theory, but not a lot of people were doing that, especially to a new sector that didn’t exist. So, raising money in Europe in late 2011 was really hard. We wasted more time on this than we wanted. Eventually, we flew to New York, and we raised from a small fund called IA Ventures in New York. They gave us the seed round and helped us put it together. That was probably the closest. It wouldn’t probably be the end of us, but we would have had to drastically rethink how we’re going to build this company if we hadn’t fundraised around that.

Alejandro: Absolutely. Definitely, those moments are tough. Especially for the people that are listening, what I see is that people ultimately don’t shut down their business because they run out of cash. It’s because they run out of energy. Definitely, those moments really take a lot out of you. So, I hear you. Kristo, let’s say if you had the opportunity to speak with your younger self, that person that was still at Deloitte having those conversations with Taavet about how the world would look like when you guys could perhaps change the world by addressing this problem. Knowing what you know now if you had the chance to give your younger self one piece of business advice, what would that advice be and why?

Kristo Käärmann: This is a very good question. It’s pretty hard to think of advice that would give you a shortcut. Even with what we went through, it’s quite hard to imagine that there would have been a magical shortcut to even avoid the mistakes that we made on the way. In the early days during the Deloitte times, I probably spent six months deliberating on the idea whether to launch this thing that we had devised and the time that we spent on polishing version one probably was about six months too long. Especially, someone that’s never done this before, and putting together startups at the time was quite new, so we definitely did overthink this in the beginning.

Alejandro: I hear you. Many times, you just want to have the perfect product, but at the end of the day, it’s nothing like having it on the market and being able to listen to your customers and optimize as you go. As a fun fact here, Kristo, the other day I asked a friend what he would have done if he had the chance to speak with his younger self, and his response was “nothing because that younger self would not have listened.” So, I’m glad you would have had that opportunity to listen. For the people who are listening, Kristo what is the best way for them to reach out and say hi?

Kristo Käärmann: I’m pretty active on Twitter, and I find that when folks reach out to Twitter with something, it’s perhaps a conversation starter that’s pretty good. I’m not a big fan of cold emails, and so, I’d rather hear from people at Twitter. The other way to get in touch is our site. We’re always hiring. I think we have about 160 roles open at this point. So, that definitely gets you a conversation.

Alejandro: Really cool. Obviously, there are a lot of entrepreneurs right now that are listening, and probably like myself very much admire you, the type of entrepreneur that you are, and what you have been able to accomplish. For everyone that is listening, Kristo, what would be that piece of advice maybe like a recommendation or a takeaway that is actionable that they can get out of this time?

Kristo Käärmann: That’s very hard to give generic advice. When young entrepreneurs reach out to me, at least it used to be the case. Most of the time, they ask me about fundraising. I find that really awkward. From my perspective, it looks like they really seem to be thinking about the next funding where, especially in the early days, you should be thinking about how to build a product that customers want and that the customers are willing to pay for. Once you have that, then investors are going to come running to you. It’s getting a little better in the last years, but I still see perhaps a little too much focus on fundraising from early founders, and I’d love to see more focus on building a product, putting it out there, and getting customers.

Alejandro: 100%. I think there’s nothing like product/market fit. Everything will fall into place. So, Kristo, it has been such a pleasure to have you on the show, and thank you so, so much for being on the Dealmakers show today.

Kristo Käärmann: It has been my pleasure. Thanks, Alejandro.

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