How I Built This with Guy Raz - Betterment: Jon Stein

Episode Date: October 29, 2018

When Jon Stein realized he couldn't stand the sight of blood, he gave up the idea of becoming a doctor. Instead, he went into finance, but soon grew restless with "helping banks make more money." So he decided to build a business where he could help everyday investors make more money: an online service that would use a combination of algorithms and human advisers. Jon launched Betterment at a precarious time — shortly after the financial crash of 2008. But today, the company has roughly 13 billion dollars under management. PLUS in our postscript "How You Built That," how Gerry Stellenberg combined his knack for technology and his love for pinball to create the P3: a pinball machine that allows a real-life ball to interact with virtual objects. See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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through Squarespace capital. Go to Squarespace.com slash built for a free trial. And when you're ready to launch, use offer code built to save 10% off your first purchase of a website or domain. Loans issued by Celtic Bank and serviced by Stripe, all loans subject to credit approval. This show is in partnership with Airbnb. This past summer, I took my family to Vienna, and it was incredible. We spent our days wandering the old streets, stopping for coffee and pastries, visiting museums, and just soaking up the history of one of the most beautiful cities in the world. And one of the things that made the trip so special was the home we booked on Airbnb. It had tall windows, beautiful old details, and plenty of space for all of us. And being in that home on Airbnb, right in the middle of Vienna, walking distance from so much of the city,

made it feel less like a visit and more like we were actually living there. Plus, taking a trip is the perfect time to host your space on Airbnb. Your place with all of its personal touches and its amazing location could make someone else's vacation even better. Your home might be worth more than you think. Find out how much at Airbnb.ca.com. Hey, it's Guy here, and I want to let you know that we still have a few tickets left for our upcoming live show in Los Angeles on December 5th. I'll be sitting down with Michael Dubin. He's the co-founder of Dollar's Shave Club, which he turned into a billion. dollar brand in just five years. Now, if you haven't been to a live show, they're super fun, and it's a great chance to meet other listeners and builders just like you. So if you're in the

L.A. area on December 5th, please come by and say hi. Our live show is supported by American Express, and to get your tickets, go to nprpresents.org, and I hope to see you there. I've been up all night. I knew that I would have to deliver this amazing speech if I wanted betterment to be successful. And this is my baby. This is the thing that I've been working on for the last three years. And I had a BlackBerry at the time. And the BlackBerry timestamps when you leave these notes. And I woke up in the morning and I saw every 30 minutes all night long. I had been awake and like writing down edits to my presentation. It was probably the most nerve-wracking day of my life. From NPR, it's how I built this, a show about innovators, entrepreneurs, idealists, and the stories

behind the movements they built. I'm Guy Raz, and on today's show, how John Stein decided just after the 2008 financial crash to launch what else an online investment company, and how we grew it into a business that manages more than $10 billion. Okay, let's face it, retirement planning is not simple. There are 401Ks and Roth IRAs and SEP IRAs and CDs and ETFs and mutual funds and bonds and individual stocks and, well, a million different ways to save and invest and, of course, lose your money. And John Stein, he understood this problem.

And he became convinced that there was a potentially huge market out there for a service that could help people save money easily and simply, especially for people who didn't have tons of spare cash lying around. But what he inadvertently helped to create was an entirely new category in the tech sector. You may have heard the term fintech. It's just an abbreviation of financial technology. Basically, a way to use technology like big data to make finance more efficient and for consumers a little bit cheaper. Betterment basically relies on mountains of data that feeds into computers, which then make decisions based on a dynamic algorithm.

Some people call them robo-advisors, and by doing it this way, Betterment can charge a fraction of the fee that traditional brokers charge. Now, today, Betterment manages more than $13 billion, but John launched the company at what might be called the worst possible time just after the financial crash of 2008, which, as we will hear, meant he had to convince investors that this thing was going to work. And he was also pretty young and relatively inexperienced. But a lot of what John learned to get to that point started with his parents and grandparents. John grew up in Dallas, but some of his earliest memories actually come from his grandparents and their furniture company in upstate New York and the community that they built around that company. Every Christmas we'd be up there at their Red House in McConnellsville, New York, and all of the

community would come by, right? They'd have everyone over for their New Year's party, but even before that, like every day, there would be a half a dozen people coming to the door to chat with them, to bring a gift, and they'd always have a gift to give in return. And like there was always, you know, turkeys for every family at Thanksgiving and gifts for every family at Christmas. And they built this real community. And I appreciated that immensely. I also saw in them a real appreciation, like this deep investment in quality. And I just, I always learned it was there because we have the finest craftsmanship because like we, we build things the best from the finest cherry, you know, from our own land.

Like, you know, I think I draw from examples. And I draw, I draw from there. example that, hey, they were able to do this. And I think those are things that I learned from them. When you were a kid, like, what were you into? Like sports, or were you into comics or anything like that? I was never good at any sports. When I would play soccer, I would be the kid on the field watching, you know, the airplanes go by overhead as the ball world packed into the goal. And I never was big into that. But I love scouting. And looking back on those experiences, I got a lot of confidence out of leading my patrol and leading the troop and leading, you know, these two-week expeditions that we do in New Mexico and Colorado. And I became an Eagle Scout.

Wow. All the way up. Yeah. I still get called a Boy Scout sometimes. Yeah. And were you like into business or like selling stuff as a kid or was that not even part of your world? Well, when I was a freshman in high school, I started getting interested in the high school. I started enjoying writing.

And I got super into it. And by my senior year, I was the editor of the paper. And I interned the year before my senior year at one of the big Dallas papers, the Met. I wrote my college essay about that experience. And they published my college essay and it said, my internship at the Met got me into Harvard was the headline, which is great. It was in their style. style. And you actually did go to Harvard, right? So what did you study there? I studied economics was my

major, and I had a real interest in psychology as well. I was taking human behavioral biology with Irv DeVore. And he studied how people think and taught me that despite our best intentions, we're highly likely to make mistakes. We let our emotions get in the way. And in fact, we will not make rational decisions if left to our own devices. And I saw that as just a really interesting puzzle to solve. And I was so caught on this problem of if people are so irrational and yet we can make the world better if we help people make better decisions, how do I do that? How do I reconcile those worldviews? And when I graduated, I still had no idea. There wasn't a career in helping people make better decisions. That wasn't a thing one.

could do. But I liked the theory of it. And I was swayed at the time by one of my college roommates' dads, who was a doctor. And he was just talking about how in his career he got to really understand people and their problems. And he was telling their stories. And then he was making them better. And I thought, that's, that's it. Like, that's the way that I'm going to, going to help people and feel good about the impact that I'm having on their lives. And I'll be a doctor. So I said, I've got to, I've got to pursue this. And I did a post- back pre-mid year after I graduated, but I just, I couldn't stand it. What was it about it that you, that you couldn't stand?

I, well, blood for one thing. It's hard to be done, yeah. And I realized through these types of experiences that really my heart was most likely in business. It just took me a while to find my path. I mean, were you interested in finance? At that point, I mean, you knew you weren't going to go to medical school, so did you start to think about what you were going to do?

I was never interested in finance, if you can believe it, since I have a career in it. I was interested in economics. I was interested in the science of how societies work and how, you know, economics is the science of studying civilization in a sense. And I was trying to put that together with the science of people and decision making. And finance was just like, you know, it's like helping rich people get richer. That doesn't. doesn't seem that exciting to me. Yeah. So you graduate, and then what would you do next?

Well, I came to New York City. And New York was where I had the highest concentration of friends. And I thought, I've got to get a job. And I started looking around. And I talked to enough friends. I kind of got a sense for who was doing what. And my happiest friend, the one who seemed to be doing the best, was working at first Manhattan consulting group.

And he said, I think you should come by and apply. I think you'd like it here. And I did. First Manhattan does consulting for banks and financial services companies. And I never thought I'd be in that industry. But, wow, I was getting access to CEOs. And I was getting to develop new products and work on really interesting problems at a high level travel all around the country and in the world.

But when people would ask, what do you do? I'd say, my job is helping banks make more money. And, you know, of course, I was tongue in cheek about that and knew that ultimately I couldn't see myself doing that for my entire career. I had to do something more meaningful and impactful. So you're working there, and how long did you end up at working at First Manhattan? I was there for between four and five years. I mean, why you were a consultant, did you ever sort of think, you know, this is kind of like smoke and mirrors.

Like this whole industry is like kind of, you know, I don't want to say the word, but you know the word I mean. I found many times that we were working on projects and we could go six months on a product development and never talk to a customer. And I thought, that seems strange to me. I mean, we should be innovating here. We should be really thinking about what's the future of this industry, not just perfecting transfer rates and default rates and all these kinds of internal metrics. But what do customers really want? And I talked to a partner at the firm about this. And that partner said, John, you know, there's some industries that make money off of people.

And there's other industries that make money off of money. We make money off of money, which was a way of saying, you know, don't worry about that customer so much. No, of course, you know, there's a lot of well-intentioned people in banking and financial services who do care about their customers and so on. But I didn't see enough of that. And I didn't see enough real innovation coming out of the industry. When did you start to think about, I don't know, believing, doing something on your own? I thought about it from probably the first or second week in the job. You know, I didn't seriously get the itch maybe for a couple years, but I knew from day one,

I felt like I had been let in to figure out how the industry works. And I was going to someday come back and start a company and do something innovative and different. that was probably three years into my tenure at FMCG. It's like 2006 or something like that. Yeah, exactly. But you were, the kind of financial consulting you were doing was for like big companies, right? Like institutions. Correct.

Were you pretty good at picking stocks and making investments yourself? I challenge you to really find many people who are really good at that. I was not. I had seven different brokerage. accounts over the years. I had a bunch of different mutual funds that I'd bought. I had an e-trade account, a TD, a Scott trade account. Is that bad, by the way, to have all those different accounts? You know, I opened each of them because I wasn't satisfied with any of them. I found they would tell me whatever it was they wanted me to do for them, right? So all the brokerages wanted me to trade,

and were showing me the signals around what I should trade around and give me more research and pushing me to the next trade. And very few, you know, none of them really focused on. on what was right for me or how I might make the most of my money. Yeah. Did you make a lot of money? I broke even, right? I kept up with the market. I kept pretty good track of how I was doing.

And I made some great investments. I also made some terrible investments. Like what? I bought Enron on the way down. Wow, you bought Enron. I did. I bought it at $11. It had fallen from like 70.

Yeah. And I sold it at zero. Wow. And that was a great example. of just like what was I thinking? You know, in retrospect, I bought it because it seemed cheap. And I thought, well, it must be, there must be a market overreaction here. It was probably playing on something behavioral. But I learned that I was subject to the same kinds of biases that I had learned about in college, the things that my professors had told me to avoid, I was doing myself. And I realized through that experience that if it was that hard for me, someone who's had all the benefits of, you know, business school, and a degree in economics and a CFA and all of these, like, and working in the industry, wow, it must be impossible for the average person to manage their money well. When did you start to think about actually creating the business that you would eventually create?

Like, was that a fully formed idea in 2006, 2007 in your mind already? Yeah. I wanted to help build a new customer-centric financial service. I wanted to build financial services around the customer. And I wasn't sure where to start. So I looked at a number of different business models. Again, I had narrowed down from like, hey, my business could be anything to it'll be financial services. Right.

And now is it payments or is it I want to build a better savings account or I want to build a better investing account? Well, of those three, let me tell you, investing is the least sexy. And this was back in 2006 when, you know, this was a long time ago. In the savings market, online savings, I saw I and G2. And that's a company I had tremendous respect for. I thought, wow, what an amazing brand they've built. I can't do better than them. I can't beat these guys.

They've owned it. But then I looked at investing. And I had a Vanguard account and another company I have tremendous respect for. I had some great Vanguard Mutual funds. But the interface was terrible. The experience was just not keeping up. And my initial idea was, what if I just kind of combined these two things? Right. Like ease of investing, but with a better user interface.

Something like that? Yeah, like the ease of my online savings account through ING combined with the smart investing efficiency of Vanguard. And if I could just help people get the best of both of those things, I've made the world a better place. And that was the initial pitch for Betterment. All right, but before we get to the actual pitch, you, I guess around 2007, you quit your job at First Manhattan Consulting to go to business school, right? I did. I went to business school knowing that I wanted to start a business. Right. And by the time I started a business school, I had the name Betterment. I knew it was going to be consumer oriented because my passion was people. My passion was consumers. I think institutions and really wealthy people are well served. There are so many smart people out there helping them make more money. I think for the average American, there's a retirement crisis because most people don't really understand the long term. And we're not evolved to understand that long term. We don't do well with thinking about things three weeks from now,

much less 30 years from now. Right. We evolved from a time when we were more likely than not going to die before we had to worry about these long term problems. And so just focus on survival. And so we have this now retirement system in America where everyone is expected to save for their own retirement. So essentially, you were talking about people who have roughly how much to invest. We think of our target customer as being someone who's making over $100,000. That means they're a professional. I would love to help literally everyone in America save and invest. The reality is that the 50% of America that's saving, about half of them, don't have enough to really make a meaning full nest egg. And I can't solve every problem. I would love to solve that problem. But we're

focused on helping people who are saving and help them save and invest better. Sorry, you get to business school and you went to Columbia, right? Yeah. And then you start to work on this and what? You start to talk to people about it? I talk to everyone who would listen. My poor classmates, you know, I put them through a lot. So but people would say, Okay, so let's say I've got $10,000,000, like what? I just give it to you and you take care of it for me? Like, why wouldn't I just go to Vanguard? What would you say?

Well, one of the challenges when you're really inventing something new is nobody wants it, right? People say, if I said, hey, would you like a bank account or an investment account or this new thing? Well, no one's going to want the new thing because it's scary and, you know, it takes a lot of time to build trust in financial services. So it took time to get that message right. And the best way to think about it is we take all the best practices that a great investment advisor would put to work for you if you had one. And we make them smarter, faster, cheaper, better. For example, we give you personalized guidance about what you should be invested in

and what your goal should be and which accounts to open. We tax manage for you to save you more than you even pay us in fees in taxes. We give you net positive returns on your investment with us. And I'd say that the concept has become more and more sophisticated over time. And it's been how do we, what's the first slice? And the first slice is make it really easy to answer the question, what should I do with my money? Yeah. One thing I found it was common across everyone was they were, they felt

bad about the thing that they were doing. Everyone felt guilty. Everyone felt like, I know I'm not making the most of it. I know I'm not doing everything I should be doing. And I'd say, aha, there's an insight here. And this was just you. It was going to be just you building this company. Yes. Embarrassingly, I really thought I was going to build the whole thing myself. So that summer that I was in business school, I taught myself to code. You thought you were going to build the site. Everything. And I did. I built the first version of the site. My roommate at the time, Sean, was an engineer at Google. And he's one of the smartest people I've ever met. And he kind of got me set up. This is Sean Owen. That's right. And he was, I mean, what amazing luck that your roommate was a engineer at Google.

It was amazing luck. And fortunately, Sean always pushed for solve the most immediate. problem. Make it real as quickly as possible, which is a thing that I always tell people today when they ask for entrepreneurial advice. I say make it real as quick as you can. That comes from Sean. All right. So you start to build a mock up because obviously you're not going to go, you're not ready to become a business because there's a lot of regulatory challenges when you create a financial services company. It's not like just like opening up an online shop. Like, right? You can't just like hang out of shingle and say, okay, send me your money and I'll invest it for you. Believe me, I tried.

When I say I wanted to build a totally new kind of company around the customer, I mean it. I didn't want to be a bank. I didn't want to be a broker. I didn't want to be any of those things because I think they all have bad reputations for a reason. They're manufacturing product and selling product. I wanted to build around the customer. And I thought, maybe I don't have to be a regulated entity at all. But everything pointed back to we do have to be a regulated entity.

The law is well written. And it was in 2008, in my second year of business school, in the early fall, that I had a chat with Eli Braverman. And who's Eli Braverman? Eli Braverman is my co-founder, and he was a securities lawyer. And I thought, I talked to him about the problem that I was trying to solve. And he said, yeah, I can relate to that problem. I'm trying to do something smarter with my money and maybe let me help you out with this. And I thought, this is it.

You know, it's better with a team. And so the business plan started to grow. So what was Eli's job? Like, what was he meant to figure out? He was meant to figure out what entity should we be. And that evolved into him being our COO and managing all of our broker-dealer operations over time. But he initially was there to figure out what's the right, should we be an investment advisor or something else. settled on investment advisor because an investment advisor is ultimately a fiduciary in someone who's

bound to do right by the customer, which just felt right to us. It felt like the right kind of organization. So Eli Joians, by the way, how are you funding this? I mean, you're trying to build, you know, a website. You've got to pay for servers. You got to, I mean, how much money did you have in total? So remember, I mean, I had a good job as a consultant for several years. And I And I'd saved quite a bit. And I was able to live off my savings for a couple of years. And so was Eli. Eli had saved money as well as a lawyer.

And so we funded the business out of our savings. And it probably didn't cost you that much. Yeah, we were mainly paying ourselves. It started to cost more as we started to hire our first employees. But that was later. So you have this idea and you've had this plan. And then you launch this company and you, at this point, it's just you and Eli and your roommate, Sean Owen. And Sean.

And at that time, right after I graduated, we hired Anthony Strath, who'd been one of my colleagues at FMCG and had built online banks for some major national companies and had this experience with the customer journey. And so he joined as our head of product. So what was your plan in May of 2009 when you graduated from business school? Was a plan to get this thing stood up really quickly? Yeah. But I think one thing to remember is September of 2008 was the beginning of a real financial crisis. Yes, exactly. And at that time, I was talking to all my professors.

Most of them knew that I was working on this thing. And they said, John, are you sure this is the right time to start this? company. It seems like the worst time to be going into financial services. And to me, boy, that just drew me to it even more. Really? Yeah, because, wow, if people are confused and frustrated with the existing financial institutions, I can see why there's a loss of trust for good reason here and just seems like a great opportunity to me. And I'm an opportunist. And to me, there's something about a really thorny, hairy, ugly opportunity that everyone says, don't touch that, that is actually quite attractive.

Because when everyone else is running the other way, maybe something has been missed. Maybe there's an opportunity. And really, I credit us starting at that time with a lot. I think it was lucky that we got started at that time. There were a couple other competitors that started that time that still exist. Everyone who started since is either really tiny or has been a quiet. or this or that. So it was a good time to be starting this business. And so you guys are planning on launching this in the fall of 2009. So you had to get all of the

regulatory stuff done. You had to have the site stood up. You had to have money, people willing to invest their money in this. And so did you make it by the fall of 2009? We did not. That timeline kept pushing out. and I remember, wow, I was trying so hard to keep the pace up on the team. You know, I was just like, it's really important that I'd be there. I can't, I can't let any time slip. And what I realized was we needed a forcing mechanism. And I think Anthony said, hey, we could apply for TechCrunch.

And I thought, hey, that's an interesting idea, a TechCrunch. And TechCrunch essentially is like a tech startup conference where you, you like pitch and compete with other tech startups. Yeah. And TechCrunch was hosting their first ever disrupt conference in New York City the following spring, May of 2010. And I thought, that's our launch date. And one of the rules for pitching at TechCrunch was you have to launch on that day. And that's what really helped us get up and get going.

So, all right. So you hear about this TechCrunch thing and you decide, all right, we've got until May of 2010 to get this off the ground. So what do you guys do? it was hugely stressful. So let me just set the context leading up to TechCrunch. The week before, we decided to start to pull out code that had customers sharing information with other customers about what was their allocation. I had this whole idea that people would be interested in seeing how their friends were invested. What are my friends' returns? What are my friends' allocations? And as we started to user test this and show it to people, everyone said, this is terrifying.

I have no interest in seeing what my friends are doing. You said it was going to be like Facebook for investing, like, hey, just put money into this. Facebook was everything at this time, right? And this whole idea of network effects, I was like, well, clearly we're going to have some network effects. We've got to build that into our products. You thought people don't want to share all this stuff, just like with the world. Yes, I did. And I learned, you know, from user research, thank you.

that only I wanted them to do that. Yeah, right. So we were pulling that code out. In the week before we launched, we were testing the entire system. And we'd been testing it for months. And who were you testing it with? Our friends and family. And they were putting real money in.

They were putting real money in. Wow. At that time, you know, we had to actually start to test the pipes, right? And thank goodness we did, because in that week before, we'd all been been depositing, right? Everyone had been putting money in. no one had taken money out until the week before there was this flash crash and the assistant of our partner Ryan was checking her account during the moment that the crash happened and she panicked she freaked out and she withdrew her money and thank goodness she did because it showed us that

withdrawals didn't work at all so you know we they didn't work at all like she could not take her money out yeah like like it traded through but she couldn't actually get her money back oh wow so So we had to go and fix withdrawals. And so it was a crazy week. And we were working literally the entire week. And then this is on the product side, right? So we've got some major things that we're trying to get together on the product side. The regulatory stuff, we got the approval on the Friday before we were set to launch at TechCrunch on Monday.

And of course, they're closed over the weekend. So it was literally down to the way. It was the last day they could possibly have given us approval. We got the final approval on that Friday. The Friday before, and the tech rush was on Monday? The tech rush was on Monday. Wow. All of that on top of trying my best to put together a presentation and pitch this thing to the world.

And of course, I'm so excited about it. I mean, I'm running through this pitch over and over again with anyone who will listen to me. I've written and scripted the entire thing, which I would never do again and would not recommend, never script a speech like this. And I had it up until, like, the night before I had a BlackBerry at the time. and I was still like typing like ideas all night. And I woke up in the morning and the Blackberry timestamps when you leave these notes. And I saw every 30 minutes or more all night long. I had been awake and like writing down edits to my presentation.

So of course I had not slept at all. So you get up the next morning and what happened? I was so nervous. I was terrified. It was probably the most nerve-wracking day of my life. I'd been up all night. I knew that I would have to deliver this. amazing speech if I wanted Betterment to be successful.

And this is my baby. This is the thing that I've been working on for years. And I've been telling all my family is going to be successful, right? I've been telling all my friends in business school and so on. Like this is my life for the last, you know, three years. And now it's on stage. And now we get to see how have I done? Well, when we come back, we'll find out exactly how John did at TechCrunch.

Stay with us. I'm Guy Raz, and you're listening to How I Built This from NPR. Hey, welcome back to How I Built This from NPR. So it's May of 2010, and John Stein and this small team at Betterment are about to pitch at TechCrunch. Years of work will come down to this one moment. And on the panel are some pretty big names, Marissa Mayer, who was at the time a big executive at Google, and Chris Saka, a well-known venture capitalist. And Chris Sacka and I had this amazing exchange where he says, this thing is, it's just too simple.

And people like financial services to be complicated. This is way too easy. And I can't imagine anyone getting that. And Michael Arrington, who was the head of TechCrunch at the time, and was a real booster for me. I mean, he was backstage saying, like, this is great. Like, I love what you're doing. I mean, credit to him for just, you know, his support. And he comes out and he says, Chris, wait, wait, wait, let me just interrupt you.

Are you saying that if they just made the interface worse, and if they actually made it harder to use this thing, you would be more excited about it. And Chris Sacka says, yeah, that's what I'm saying. And of course, he was wrong. People do value ease of use, even in financial services. And I've talked to him about this since, and he's laughed about it and said, I've been wrong, you know, as often as I've been right. So it's not the first and won't be the last.

So let's just remind people that at that exact moment you are making this pitch, you are also launching the company. You're launching betterment, right? Exactly right. And it happened. And when I say, I really think we were unique in this. I mean, we had all of our team in the audience. I mean, the five of us, right? They were out there watching their presentation, but also had headsets on and were answering emails from live customers and monitoring the site traffic. Because they were the customer service. They were the customer service. They were everything. And we were answering emails. And we're answering emails from live customers and monitoring the site traffic. Because they were the customer service. They were everything. And we were. turned it on for the first time right like an hour before I started talking. So how did you do? 20,000 people watched that presentation at TechCrunch. These are not all in the room, right? There were 2,000 people in the room. And out of those 2,000 people in the room and 20,000 people online, 500 crazy ones signed up. Right then and there.

Within the week. So 300 that day, right? Like 350. They were just, and we were amazed we think this is incredible. And they were small deposits at first, right? Nobody put in more than, you know, 10K or so. But all of a sudden, within a few days, we had a million dollars under management. Wow.

We brought in 500 customers in that first month. So a million dollars now under management. A million dollars under management on the betterment platform. And we were just, we were thrilled. This was incredible. And then we started getting. getting fewer customers and fewer customers and fewer customers. Wait, what do you mean? What do you mean? I'm thinking, and then 20 million and

Yeah, and then it takes off. No, so for those first few months, I mean, remember, we were not yet funded. It was still bootstrap. Our bootstrap savings. But pretty quickly after TechCrunch, were you approached by actual people who, you know, who wanted to invest in your business? At TechCrunch, there's this blast of excitement. I mean, we won best startup in New York and, And there was all these investors there who wanted to talk to us and let's get meetings and yes, yes, yes. And, you know, let's go in this breakout room and talk. And I was like nervous and just so excited and telling them about all the wild things that

we wanted to do. And then at the end of the week and at the end of the month, you know, the phone stopped ringing. So after the launch, then I said, okay, now priority one is getting funded. And we don't have a lot of time to do this. We've got maybe like three months to figure this out. And by the way, in that time, we're asking our employees to reduce their salaries and even contribute capital to buy more equity to pay themselves. So we were buying time as best we could until we could raise some capital. So you were asking the people who worked for the company to pay to work for the company.

You bet. And gratefully, they believed in what we were building and they did. How many? And it was still like six or seven of you guys? It was five of us, yeah. And I realized, oh, like, we can't just, like, stand here and wait for checks to come in. So I started to build a deck and actually think about who would be the right investors for us and go out and target them. At the time, we hired an attorney, and he set up some meetings for us.

And the first meeting that he set up was with Bessemer Ventures. And we went out and we pitched Rob Stavis. And it was love at first pitch. We said, we're building this company that is going to help people make the most of their money. And Rob said, this is fascinating because for two years, I've been looking for a company that would answer the question, what should I do with my money? And this is the best one that I've seen. And he said, how about rather than investing a million dollars, you guys raise three million dollars. And we said, wow.

You were looking for a million dollars. We were looking for a million. We ended up raising three. Wow. And in terms of the kinds of customers you want to go for, the idea was if you've got money to invest and you're rich, you're fine because you can go to one of these wealth management companies and they'll like hop on the phone with you and they'll give you really good service. But you've got to give them 1% of your money and they're really only going to open the door for you if you have a million bucks. Yeah. You're saying we're going to give you a similar service type service, but you don't have to have a million bucks. That's right. And so all these people.

decided to try us out. And at that time, remember, I just couldn't believe that anyone would trust us to manage their money because there's no fintech industry to speak of. There's no online, you know, startup money manager. And who are we? So I was amazed that we got those first 500 and by the end of the year, a thousand customers. It took us a full year to get to $10 million under management. And we celebrated that. Wow, that was a big number. Like just the trust that that embodied. I mean, $10 million, that's a lot of money, right? And how are you making money off that money? Like you were charging a percentage of the returns? We were charging at that time 90 basis points. And we since lowered the fee.

90 basis points is just under 1%. Just under 1%. And what is it today? Today it's 25 basis points or 0.25%. It's a fraction of what the traditional mutual fund charges or the traditional financial advisor charges. And we provide a really incredible amount of value for that. So, okay, so in year one, you get $10 million under management. And then, like, your growth is just crazy. I think today you're managing, like, $13 billion of wealth?

Yeah, we expect to be in the ballpark of $18 to $20 billion by the end of $20. The way that I look at it is it took us a year to get to $10 million. It took us another six months to get to $20 million. It took us another three months to get to $30 million. It just kept growing faster. Then it was a billion dollars. And wow, a billion was a big number. And it took us five years to get there.

And now we add a billion, you know, every month and a half. So we just keep growing faster and faster. $10 million is a bad day for us now. That was our whole first year. And that's a slow day of net deposits today. So, I mean, obviously you're growing. And this is always a bit of a delicate question when I asked founders this question. But I mean, as you started to grow, I mean, did you start like rethinking what the split or the ownership was among the founders or what it should be? Like, was it tense? Was it complicated? It's tough. It's always tough. And there was a moment where, you know, I realized they'd done it wrong in the early days. What did you do in the early days? So one thing that we did right was in the early days, we created provisions around buyouts. And I'm so happy we did that. And when people ask for advice, I always tell them to do this because Sean, remember, was a co-founder and was involved with us from the very beginning.

And then he decided to go to business school. And he went to business school in London. And we were working with him for a long time, remotely like that. But it became very hard after a while when the three of us were in the office and we were coming to decisions during the day. And then we'd have a call scheduled with Sean. And he would disagree. And we would have to rehash the whole thing. And it just became too tough.

And ultimately, Sean decided, I just can't do this anymore. And initially, when I remember the day in my apartment, I sat down with Sean. and Eli, and we talked about how we're going to split this thing up. And I think they're just like, you know, Sean and I had had this sort of like, you know, equal partners view. We're roommates. And, you know, he's obviously got tremendous experience to bring with his technical experience. And Eli comes in and I'm thinking, oh, my God, like he's got this like legal experience is going to be so valuable.

I guess like I guess we're all just in it together. We should all 33, 33, 33, right? Yeah. And I forget if it was, you know, weeks or months. a couple months after that, I just felt like, this isn't fair. I'm clearly, I'm working so hard on this thing. It's not like these other guys aren't, but I've been thinking about this thing for years. And so I had to come back to them and say, I don't think we did this right. And I want to renegotiate our split here. And that was tough, but, you know, ultimately they agreed that

they should take smaller shares. I mean, even hearing you talk about it now, you send a little bit uncomfortable about it. And I understand, I would be too. It's an uncomfortable conversation. I don't think one of my strengths is negotiation. I think I'm okay at it, but I probably didn't negotiate the best deal for myself from the get-go there. So, but I mean, I want to sort of dive into this. I mean, this is a very hard thing. Like, we hear stories of co-founders are our best friends, co-founders who split up. It sounds like you still have a pretty strong relationship with your co-founders. But like the business figuring out like, you know, ownership and percentages, like, that sucks.

It's not fun. I feel really lucky to have a great relationship with both my co-founders. Eli is still on my board and a friend and Sean is a great friend. I just saw Sean in London a few weeks ago. when I was there and we remained very close. Yeah. So, I mean, what do you say to people who asked you for advice when they're like, I don't know, I kind of feel like, you know, we're all working hard,

but it was my idea and I've really been the engine behind this. Like, what do I do? What do you say? I said those words exactly and some others. And I just said it just doesn't feel fair to me, given all the years that I've put into thinking about this and all the time in business school that I've put into things, thinking about it. And I'm here. I'm committed. I know you guys are as well, but ultimately,

like, I'm driving this thing. Yeah. And I'm the CEO, and I feel like, I feel like we need to be fair. Did you, did you have a feeling early on that this was going to be huge? I always hoped, and I thought, if we're successful, this is going to be a massive opportunity. I said when we launched a tech crunch on stage. If we're successful, we're going to have so much competition. Everyone's going to be in this space because we're ultimately changing financial services. We're changing the way people think about it. Do you see yourself as a competitor to a Vanguard or to a fidelity or these are Schwab, these other companies that, you know, people can invest with? Yes. And I see us as partners as well. There's a little bit of this like clubbiness and financial

services. And so I never like really liked that. I thought there ought to be more competition than this. But there is this sense that even though, you know, a customer could choose between us and, uh, and Vanguard, well, you know, anyone who's invested with us is also getting some vanguard funds. So in a sense, we're partners with them. Yeah. So we work with a lot of the other, the other financial services institutions. You know, John, I'm just, I'm just curious to understand whether there were any times where you, you kind of reflected on the world you got into, which isn't a bad world. Of course, they're amazing, wonderful, kind people who are in your industry and horrible, rotten people. Same with mine, by the way.

But were there ever moments where you just kind of thought, you know, this doesn't, this world that, especially the world that created the financial crisis, it doesn't reflect my values. Like, I don't know if I really want to be part of this world. Like, you didn't want to be a doctor because you were afraid of, you were just disgusted. about blood, right? But was a part of you, like, disgusted with some of the, I don't know, the culture of the financial world? Well, I'm not attracted to finance. And I like to remind folks that in Dallas, there's not really a financial industry. There wasn't when I was growing up anyway, you know, in the 80s. And so when I was growing up, I didn't know anyone in finance. And New York always felt like this kind of distant place where, and banking felt like this thing where people were, you know, like the...

Cutthroat. Or like the wizard, you know, in the Wizard of Oz. I just really felt like, wow, like the people who do this are just masters of the universe and they must be so smart. And when I got into the industry, it demystified the whole thing for me. I thought, I can do this. I can learn this. I can figure this out. And that was really confidence building for me.

And I thought, I can do it differently because I don't have this kind of this sense of what it is and what it should be. And I'm not here motivated primarily by money. I'm motivated by something different. And that allows me to have a different perspective. I mean, you are a rich person now and your children will stand to inherit a lot of money. So it's sort of this weird kind of position that now you're in. where it sounds like you were, you didn't feel like it was fair that the ultra-rich were benefiting from all these rules and, and the requirements of financial requirements that allowed

them to enter these, but now you're, you know, kind of, you've kind of, whether or not you wanted to, you become one of them. If I become rich, I think we still have a lot of work to do. Because it's on paper. We should, I guess we should be clear about that, right? Okay, yes. That's right. That's right.

And even then, I have two daughters. I want them to have a great life. They're two and four. They'll probably someday accuse me of wrongdoing for saying this, but I don't want them to have an inheritance. I don't want to set them up where they don't have to work because I think work is part of happiness. Do you feel like you're rich, or does that just seem like a paper thing? I am living in the same apartment that I've lived in for the last 12 years. before you had kids. Before I was married, the same apartment that Sean and I moved into that apartment together 12 years ago. So you're like paying rent on an apartment? Paying rent on an apartment. The same place.

And now we've got both daughters living there. Plina's parents live three blocks away, so we've got a pretty good setup. John, how much of your success do you think is because you're really smart and you worked really hard? And how much do you think is just luck? So I love this question, and I have to credit a lot of my success to luck and timing. I have described myself as opportunistic. And I think that's a common thread throughout all of my life. I've been lucky to have amazing supportive parents.

I was lucky to go to a great high school with incredible teachers and mentors. as that got me lucky to go to a great college. I was lucky to end up in financial services, which was a thing that had some real thorny problems that needed fixing. So to me, it's not about the things that I did. I really believe it's about the opportunities that have been put ahead of me. So, of course, I work hard. But I see myself as exceptionally lucky.

And it's that feeling that I've been so fortunate in life that makes me want to help others. My grandfather said, of those to whom much has been given, much is expected. And I will be paying down the debt of luck that I've had for a long time to come. John Stein, he's the CEO and founder of Betterment, which at the time of this recording was valued at $800 million. By the way, if you go to John's Twitter page, You can see an early warning sign of his career choice.

He's posted a Boy Scout Merit badge from 1993. He was in Troop 35 out of Dallas. And the badge is in personal management. And please do stick around because in just a moment, we're going to hear from you about the things you're building. Hey, thanks so much for sticking around because it's time now for how you built that. And today's story starts more than 20 years ago when Jerry Stellenberg was a student at Virginia Tech, where he and his friends would hang out at the student center.

And there were pinball machines around the pool tables, and all my friends, while we were playing pool, they'd take a break and go over and play pinball, and I thought they were just throwing money away. But one night, one of his friends finally talked him into playing a game, just one game of pinball. Begrudgingly, I walked over, and geez, it must have been just a minute or two, but had the time of my life, and I kind of got hooked immediately. And what he loved about it was that it was kind of a physical game. manipulate the flippers to keep the ball in play.

But Jerry was a tech guy, a computer engineer, and there was something about pinball that started to bug him. While the ball's rolling around this painted piece of wood, it's not doing anything other than just rolling. Which, by the way, has been perfectly acceptable for the legions of pinball players who've loved the game for decades. But Jerry couldn't shake the feeling that the game could somehow be reimagined. And so in 2009, when touchscreen tablets started to get popular, he got an idea.

So I saw that technology, and I wanted to figure out how to implement that in a pinball machine where we could take the physical pinball and have it interacting with graphics in the same way that your finger does on a tablet computer. So Jerry set out to do just that. So I started with one friend who's a mechanical guy, and we connected with an audio engineer, a very popular audio engineer. And after three years working nights and weekends. In the weekends, Jerry and his friends built a pinball game where you could use physical buttons and flippers to launch an actual ball over an LCD display. So that the ball, while it's rolling towards the physical devices, could interact with these virtual objects. And one of the games they developed is called Rocks, which is kind of a riff on the popular video game, Asteroids.

Where you take the physical pinball and as it's rolling around the playfield surface, it's interacting. with images of asteroids on the screen. And mind you, there's still a physical component of this game, so the ball's still rolling towards physical targets, but we enhanced that experience with the virtual. As their prototype got better and better, Jerry and his team decided to show it off at a pinball festival in Friscoe, Texas.

And so many people came to us and thought it was amazing. People stayed there and played it for hours. And what's kind of surprising here is that up to this point, Jerry wasn't really thinking about selling these machines. He and his friends have been mostly doing it for fun. But I was fortunate enough to have an aunt and uncle who saw the early prototype, and they called me, actually, after the show. And they said, hey, if you want to try this,

then we're willing to give you some money to get started. And so with a very generous investment from Uncle Gary and Aunt Diane, Jerry was able to quit his day job in tech and pay a small team of engineers to build the pinball machines. And in 2016, four years after that show in Texas, their company shipped out their first machines to a handful of fans. It doesn't need to be a billion-dollar company to make me happy. I'd be happy just selling a few hundred machines a year,

making it a lifestyle business, and giving people something new and different and exciting. Jerry's pinball machine is called the P3. The company is called Multimorphic, and it's based out of Austin, Texas. And as you might imagine, Jerry's also faced some skepticism from pinball purists. And some of them see this new machine with this virtual interaction, actions and they see it as an insult to what they love. And then they play it. And most of the

time they walk away with a huge smile in their face thinking, wow, that was really a lot of fun. If you want to learn more about multimorphic or hear previous episodes, head to our podcast page, How I Built This.NPR.org. And of course, if you want to tell us your story, go to build.npr.org. And thanks so much for listening to the show this week. You can subscribe wherever you get your podcasts, and while you're there, please do give us a review. You can also write to us at hibt at npr.org. And if you want to send a tweet, it's at How I Built This. Our show was produced this week by Diba Motasham with music composed by Ramtin Arablui.

Thanks also to J.C. Howard, Nor Kudsi, Neva Grant, Sanaz Mechkampur, and Jeff Rogers. Our intern is Mia Venkat. I'm Guy Raz, and you've been listening to How I Built This from NPR. Life Kit is like your friend with really good advice. So, can I really be truthful? Yeah. It's just me and you, right? Well, sure, let's say it is.

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