The Transcript

How to Find Your High-Leverage Outputs, Build Products, and Choose Your Own Path

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Voiceover: Welcome to Hack the Entrepreneur, the show which reveals the fears, habits, and inner battles behind big-name entrepreneurs and those on their way to joining them. Now here is your host, Jon Nastor.

Jonny Nastor: Hey, hey. Welcome back to another episode of Hack the Entrepreneur. It’s so cool that you decided to join me again today. I’m your host, Jon Nastor, but you can call me Jonny.

My guest today founded Betterment in 2008 after working as an advisor to Wall Street’s biggest financial institutions. Wanting to create a more convenient way to invest, he started Betterment to reinvent the investment industry. It wasn’t long before his vision became a reality as the company won TechCrunch’s Best Startup in New York Award in 2010. My guest is an economics graduate of Harvard University and a finance graduate of Columbia Business School. He says his interests lie at the intersection of behavior, psychology, and economics, and he gets excited about making everyday products accessible and efficient.

Now, let’s hack Jon Stein.

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Welcome back to Hack the Entrepreneur. We have a brilliant guest today. Jon, welcome to the show.

Jon Stein: Hi, Jon, thanks for having me. It’s great to be here with you.

Jonny Nastor: It’s absolutely my pleasure. All right, Jon, let’s jump straight into this, shall we?

Jon Stein: Great.

Knowing and Understanding Your Business on a Different Level

Jonny Nastor: Jon, can you tell me as an entrepreneur, what is the one thing that you do that you feel has been the biggest contributor to your successes so far?

Jon Stein: Should I start with a little bit of what we do at Betterment, and then that ll be a nice transition in?

Jonny Nastor: Sure. Let’s do it.

Jon Stein: Betterment is an online financial advisor. We manage your money for you. Most customers come to us at the recommendation of a friend or a family member, and then they tell us about their goals. That is what they’re saving for, whether it be retirement or something else. Based on those goals and the time horizon to those goals, we create portfolios for them and then manage those portfolios over time for the best expected returns, net of risk, net of taxes, net of behavior, all the kinds of typical drags and costs that one incurs when investing. We really try to optimize for the lowest of all those.

This is a hard thing to do. There’s a lot of really smart technology involved that we’ve been working on for years and years. I started this company over six years ago, and you asked what is the most important thing that I do that’s contributed to my success. And I have to say, looking back over the last six years, it’s been really understanding what we do at a deep level, from talking to customers first-hand to understand their needs.

Even today, I respond to customer emails myself. I was just going through and doing that when we got started. And doing the coding myself — I taught myself to code so I could build the site, so I really understand that. I have a CFA, so I understand deeply the investment side of things.

The Pros and Cons of Having an Engineer s Mindset

Jon Stein: All the pieces that one needs to build this kind of product, as complex as it is, I’ve at least gotten into myself. I call that having an engineering mindset, really wanting to get in and try and solve a problem and understand the question from a first-person perspective. To me, in all these different areas, that’s been incredibly helpful, having that engineering mindset.

Jonny Nastor: That’s excellent. As a founder and CEO of Betterment, which is a large company at this point, you want to be answering customer emails, and you want to be looking at product and stuff, but at some point, you have to be the CEO, too, right? How do you decide, I can’t do this anymore. I really just have to do CEO things and help this business propel forward?

Jon Stein: Time management is a never-ending challenge for me. There are many very smart people who write books about management, people like Andy Grove and High Output Management, for example, who will say that time management is perhaps the most important skill for an executive to have.

In Andy’s case, he talks all about how you want to get the highest return on your time, and that means doing high-leverage activities, doing the things that will affect a lot of people and improve a lot of people’s behavior in the organization, or rather affect one person for a long period of time — so really making sure that you’re doing those high-leverage things.

I do this, too. I think a lot about my own priorities all the time. I d say the things that I’m focused on are hiring, making sure we have the right people in here. Telling the story — that is, talking about the company’s vision, talking about the company’s priorities, the roadmap, setting all of those things. And then I make sure that we have the right organization here, and that once we have the vision in place, once we have the right people in place, that we have the right process and organization to be able to support them, empower them to make good decisions and to execute in an aligned way according to our vision and on behalf of our customers.

I think about those things, those three areas of the organization, the hiring, and storytelling. If I’m not doing something that helps those things, then that helps me set the vision, or helps me understand, I could probably find a higher leverage task to do, a more valuable thing to be doing with my time.

Jonny Nastor: I’m fascinated by your storytelling as a company, especially in finance. You come from some markets, and storytelling is all everybody talks about. You have to do it. And people really embrace it, but in finance, I don’t see it. One of the first things I noticed on your website was the story of the company, and everything is kind of interwoven into it. It s amazing, and it’s powerful for you, obviously.

How did that come about? Was this something that you knew you needed to do or wanted to bring from a business you saw in another market, or how did you come up with this?

Jon Stein: I saw everyone asking me, Why did you start this company? What made you want to go into finance, which is not the sexiest industry, oftentimes, and Why now? Why investing? To me, telling that story is something that everyone wants to hear, and it feels important to them to know what our motivations are.

I think the reason is that there have been a lot of companies in finance that are not very well-aligned with their customers, and as a result, they have conflicts and often will try to push more complexity just to charge more fees, for instance, or they’ll encourage customers to do the wrong types of behaviors because it’s more profitable for the company, even if it’s marginally less profitable for the customer.

I saw a lot of this in my career working in consulting for some of the country’s largest banks and brokers, and I knew that I wanted to start a company, and I wanted to start it in a way that was aligned with customers. I think hearing that story and understanding those motivations is important for people, and it’s important for people here on the team, too. It’s not just for our customers externally.

When we’re hiring, a lot of the team members that we bring on share our passions, share our interests in being aligned with customers, and want to know that that’s absolute bedrock for us, because if they’re going to be spending their careers here — years of their life — they want to know that they’re doing something that’s actually making the world a better place.

That helps us be more satisfied with the way that we’re spending our time, so we have principles that we are constantly adding to and refining here, but they’re the bedrock of our company, things like efficiency and transparency, and being data-driven and evidence-based and several more. These kinds of principles are the internal equivalent of the storytelling that we do for our customers externally.

Jonny Nastor: Excellent. I love it. I love that you want to storytell for your customers and also internally for yourself, and it’s helping you guys grow, obviously.

I’m fascinated by you and your business, the fact that you went to Harvard for economics — or previously, I guess, a finance degree at Columbia Business School. And you started consulting for some amazing Wall Street companies, which is a career path that so many people would just die for and would put everything into like you did in school to getting to that. And then you decided to go and start your own business, which obviously might not be as lucrative, which obviously, it turns out to be, but you don’t know that, right?

You were on a career path that was highly sought-after and respected. It’s a bold move to just say, I’m going to go start this company, because I feel that this needs to be done in the market, or I feel like something is lacking there. It’s a brilliant foresight and kind of a lot of guts, I would think.

How to Stay Positive (While Taking Risks)

Jon Stein: It was a hard decision, and it probably took me longer than I would have liked to make it. I knew I wanted to start a company for a while, but it’s hard to walk away from a paycheck. I used to say that my job was helping banks make more money, and that wasn’t a very fulfilling thing to be doing, at least for me. Certainly, lots of smart people and good people do that, but it just wasn’t what I wanted to be doing with my life. That made it easy in the end to ultimately walk away from that.

I guess I can’t imagine doing it another way now. When I was doing that analysis back then of career paths, I would agree with you that probably the career I walked away from was more lucrative. Even today, it’s easy to see how I could be making more money working for bigger, more established institutions, but I modeled this out myself.

I drew two lines. I drew a line of stability and predictability at a high level of income, where I would be if I stayed in the path I was in. And I drew a second line lower that would be what I could expect as an entrepreneur: bootstrapping a company, not paying myself a salary for a few years trying to make ends meet, and yet with more uncertainty in the long term.

I realized I was comfortable with that lower line. Even if the uncertainty ended up badly and things didn’t work out, I’ve always had a pretty modest standard of living. I don’t spend a lot of money on things. Even in New York City, it’s possible to do that. I was comfortable with that, and I was comfortable taking on the risk, and also, the opportunity that if things did work out really well, there might be a great outcome there, and I was happy with that.

Jonny Nastor: Now you’re getting to experience that really great outcome, aren’t you?

Jon Stein: I think we still have a lot of work ahead of us. We’ve reached some important milestones. We’ve got the largest automated investing service in the country. We’ve got 70,000 customers today and growing. We’re managing over $1.5 billion in assets for those customers and growing. We’re seeing a lot of great trends.

We’re got some traction, but I think we’re just getting started. It’s really day one. There’s so much more that we want to do. We’ve just recently raised another round of funding, and we’re excited about how that poises us to be a really transformative force in the investing, saving, wealth management industry.

Jonny Nastor: Wow, 70,000 customers. And the online portion of your business, is that, do you think, a big factor in your growth and the fact that you’re dealing with some companies that are very, very slow moving, especially to take things online for their customers?

Jon Stein: I think that the last major bout of innovation in this industry was in the nineties. We saw a lot of transaction costs coming down. We saw online brokerages starting, real-time trading, all these kinds of things that weren’t available before. Before that, you had to call up your broker in order to place a trade. There’s a lot of investment in these types of platforms, and eTrade and TD Ameritrade and even the newer versions of Schwab came out of that era. They all adapted to that era.

Today, everything is changed. Transaction costs have gone from $10 a trade to basically zero. The cost to build a diversified portfolio has gone from 1.4 percent you’d pay on an average mutual fund to you can get a totally globally diversified portfolio at Betterment for 15 basis points of ETF costs.

The requirements of our investing tools have changed as a result. It’s no longer about trading. It’s no longer about buying and holding, but it’s about intelligently managing that portfolio. Reducing taxes becomes a major goal. Helping people make better decisions and looking at all the data on behavior and the loss of returns that we have from bad behavior and the gains that we can get by being consistent and being evidence-based, all of those things become much more important in this world.

I saw that although those companies may be web-savvy, they’re not the ones leading change. They’re not the ones going out and aligning with customers in light of the new realities of low transaction costs and GPTFs, and I didn’t see the product that I wanted on the market. So I saw an opportunity to go and build it.

Jonny Nastor: Scratch your own itch, in the most basic sense, always works. I do admire that you love the actual product side of it and making, as you say, everyday life just easier for people to use. That’s great.

Can we move on to work? You went through another round of funding, didn’t you, in the last couple months?

Jon Stein: Yeah. Last week we closed and announced a $60 million round of funding that quadrupled the cash that we had on hand. That means that today, we’ve raised over $105 million to support the company and the vision that we’re building.