Building A $30B AUM Unicorn with Jon Stein Founder of Betterment


This post is by MPD from @MPD - Medium


On today’s show I chat with Jon Stein, the Founder and Chairman of Betterment. Betterment is an investing platform that helps people manage their money. Jon and I met at Columbia Business School way back in 2007, which is when he first told me about his idea for Betterment. I didn’t get it at the time, but Jon had a vision.

After navigating the murky waters of a HIGHLY regulated sector, Jon launched Betterment in 2010, which was revolutionary at the time for being the first no-fee trading platform. Now they have $30b in AUM serving 600,000 customers. It’s officially a unicorn.

After 13 years at the helm, Jon recently stepped down from being CEO and is now the Chairman of the Board. Here in the States it’s become strangely taboo for a CEO to step down, while in other countries it’s an obvious sign of growth and development. I view Jon’s move as a promotion. During our chat Jon was very candid about the transition which I think will be helpful to a lot of other founders.

We also discuss Betterment’s founding story, how to navigate regulatory challenges as an entrepreneur, and much more.

Listen via your preferred platform or watch/read below.

Follow us on Twitter: @jonstein / @betterment@mpd

Transcript:

MPD: [00:00:28] Welcome everybody. I’m Mark Peter Davis, managing partner of interplay ventures on this podcast to interview innovators about their strategies, industries, and decisions on today’s show. I chat with John Stein, the founder and chairman of betterment there. Mint is an investing platform that helps manage people’s money.

Now I’ve been aware of this company for a long time. John and I actually went to business school at Columbia back together in 2007, where he first told me about his vision. I didn’t fully get it at the time, but like a true entrepreneur, John saw a path and was relentless. He never gave up. Betterment was the first no fee trading platform, which was revolutionary when they launched in 2010, since then they’ve officially become a unicorn and they currently manage over $30 billion of assets for over 600,000 customers.

After 13 years at the helm, John recently stepped down from being the CEO and is now the chairman of the board here in the states. It’s become strangely taboo for CEOs to step down on other countries. It’s a sign of growth and development. Have you in John’s move as a promotion. So this is something we’re going to talk about today, and he’s very candid about the transition and how he felt about it.

He shares Betterman’s founding story. How to navigate regulatory challenges and a ton of other wisdom help you enjoy

this episode is brought to you by Bowery legal, barely legal provides a complete range of legal services to high growth companies that do everything from formation employment, partnership agreements, stock grants, corporate matters, and venture capital and debt financings. If you’re interested in learning more, visit Bowery legal.com.

I’m going to start off today by giving John’s background for him just a little bit, not as whole bio, and then we’ll jump into some, hopefully deeper marketing questions. So first, if you don’t know who John is, you should, uh, John is the co-founder and chairman of betterment. He served as the company CEO for 13 years.

That’s a long time. Uh, and if you don’t aware of betterment, you haven’t been paying attention. The company has raised $275 million has over 500,000 customers. And according to their website manages $21 billion in assets. At this point, it’s very clearly a unicorn. John. And I met early a long time ago at Columbia business school too many years ago at this point.

And we stayed in touch. He’s brilliant. He’s thoughtful. And I think we’re going to learn something today. John, what did I miss?

Jon Stein: [00:03:10] Well, we manage 30 billion today. So we’re growing 50 50 for sets. Is that what you’re reading? This might be the website that maybe you got to update your website. Good Q1. Um, yeah, no, it’s been, uh, things have been good, but otherwise thank you for that intro.

That was awesome. And thank you. Thanks to you for setting this up and well for helping us on the tech side. Cool.

MPD: [00:03:33] So I want to jump in today, but I think it’s important for everyone listening to start off with more context about you. Can you give everyone the, kind of the overview on betterment, what it does and where it is today,

Jon Stein: [00:03:45] today?

Um, betterment manages $30 billion for 600,000 customers all across the U S and we describe betterment as. All the things a great advisor would do for you if you had one, but smarter, faster, cheaper, better than the typical advisor would be. So we manage, we manage a lot of people’s money. When we set out back in 2010, when we first launched the product was super simple.

It was just a portfolio of stocks and bonds designed to be appropriate for your age. And a couple of other inputs that you told us. And over the years, it’s become so much more sophisticated, uh, in terms of the different goals that we help you save for, be it retirement or college or house down payment, and how we think about, uh, correctly matching assets to those goals or the tax management that we do.

We earn the average customer 1.38% per year. More than if they were to invest on their own for free, with no fees, uh, because of the tax output that we generate. So that adds up to 38% more cash in retirement for a betterment customer versus somebody paying no fee somewhere else. So it’s just. Um, it’s an incredible value, uh, and the sophisticated advisory tax management guidance platform for, and I think the growth, um, uh, is a Testament to that.

Nope. We also were lucky because we were early, you know, we kinda got into FinTech before FinTech was a thing.

MPD: [00:05:23] So, uh, just to make sure I, that, so it’s mainly for retirement assets for folks listening, right. You’re managing a lot of money, but is it mainly retirement or is it brokerage? Who who’s the profile, a target customer and when are they engaging betterment?

Um, to manage their money.

Jon Stein: [00:05:39] Customers come to betterment when they have real money and they’re starting to think about, you know, okay, I need to make this. You know, this matters to me now, this is not just gambling. This is not just playing around. This is an investment and it tends you’re right. Retirement is our number one goal.

College savings is a big one. Uh, and, uh, and people, the average customer at betterment has invested about $50,000 with betterment. Now there’s no minimum, right? So people can come with literally a dollar and you can set up an account. There’s no minimum fees. And so it’s very easy to get started. But it’s also for people who’ve have like real assets and are really trying to, um, you know, are well on in their, um, their financial journeys.

The typical customer average age is 37 of our customers. It’s sort of older millennials would be, it would be an average. But, uh, but we have customers who are 22 and like fresh freshly graduated and just got to, you know, a fancy new job. Uh, and we have customers who are 99 and you know, well into retirement and are living, uh, you know, uh, drawing income off of their betterment assets through our retirement income product.

So we’ll support you throughout that entire. By cycle of investing and, you know, the, the peop the reason that we’ve grown so much is, uh, is that we give great customer aligned advice and guidance. We’ve grown through word of mouth. We’ve grown through press, you know, we’ve grown through, um, the fact that we’re good for people.

Uh, and, uh, and, and I think that’s our reputation, right? Like if you talk to people like, you know, I bet a lot of listeners are better. My customers were, we’re known for being good. Not that we’ve done everything right. You know, not that we haven’t made mistakes or, you know, people haven’t had bad customer service experiences, but like by and large, and on average, like we do right by people.

And, uh, and I think, you know, that’s, that’s been key to our success. So you’re not the evil

MPD: [00:07:32] empire.

Jon Stein: [00:07:33] No. No. Well, the challengers were, they were the good guys mark for the people’s champion.

MPD: [00:07:40] So, uh, is there an index that you guys benchmark against when people are thinking about return profile? If they’re looking at benchmark or to a betterment, what should be, you know, for money, they want to kick X yield on how do they think about what to allocate?

Jon Stein: [00:07:56] So the way I think about it is, um, We invest in the entire universe of liquid investible assets now because of the efforts of, you know, folks in FinTech, that universe is perhaps expanding, you know, maybe you would start to include things like art or collectibles or, you know, other things, um, crypto, you know, in that sort of investible universe, whether those things which are kind of like categories of.

Um, fancy commodities is kind of a way that I think about them. Uh they’re they’re not that dissimilar from like gold or, or real estate, you know, um, uh, but kind of newer niche, uh, versions of those things. Um, uh, those are growing the vast majority of Americans, um, assets of consumer retail assets are in stocks, equities, and bots, um, government and in corporate debt.

Uh, and those why those two things, because the markets for those things are vast and incredibly liquid and incredibly efficient and well-regulated, and so they are the best, most efficient investments for most people, you pay less fees on them because they’re so, they’re so liquid. So it doesn’t cost a lot to trade them.

Um, you can trust them more. They’re, they’re less risky because they’re highly regulated and scrutinized by the government. And so investors in those things have a lot of recourse in protection relative to other assets. So they’re relatively safe investments, the yield on them. It’s not going to be, it’s going to be what the stocks and bonds markets return in an average year, which, you know, a long body of literature over many, many years would suggest.

Something like 7% per year for like a 60, 40 allocation of stocks and bonds. You know, you’re going to get a higher return with slightly more volatility. If you’re heavier in stocks, a lower return with less volatility, if you’re heavier in bonds, but it’s pretty like boring, plain vanilla stuff, but it’s also like, it’s the sort of like, you know, vegetables that, you know, that sort of make should make up most of any portfolio.

Um, and, uh, and so I think of this as sort of like the 90% of what you should do with your money is put it in betterment. Uh, and then if you want to have, like, if you want to go buy Tesla, if that’s your, if that’s your jam or game stop or whatever, or crypto, you know, do those kinds of things with that kind of like 10% money.

Uh, and that’s, those are not things that we support on the betterment platform were for like your, your decor of your assets, the core of your portfolio. Now you

MPD: [00:10:27] mentioned the algorithm and the service has become very sophisticated. And you mentioned the tax trading strategy. Can you go through a couple of the things that are unique beyond, uh, buying stocks and bonds that kind of give a secret sauce and extra yield to folks?

Jon Stein: [00:10:44] Sure. So one that’s very widely known when you ask betterment customers, why are you with betterment? One thing that they often talk about is tax loss, harvesting that when, uh, when markets are down, um, will automatically sell off an asset generate if we can a text loss. And then buy a similar asset. It’s just slightly different.

Maybe attracts it’s not the S and P 500, but it’s the Russell 1000 or whatever. It’s just a similar enough asset that it’s going to be highly correlated, but it counts as different for taxes. So you get, uh, some money that you can, can immediately offset against your current income on your taxes and roll forward if you can’t use it all in that year.

Uh, and so you get. Cash in your pocket, you’re paying less tax and you can invest that you can, you can spend it like it’s, it’s just, and so we’re generating alpha there. Um, through that, uh, another great one is, uh, that I think fewer people know about, but is actually possibly more powerful. Um, is asset location.

So, uh, what is asset location? We’ll take your text sensitive assets, like high dividend paying stocks that, um, throw off a lot of cash and therefore, you know, you pay tax when you, when you make money. Uh, and we’ll put those into your retirement accounts, like your IRAs, um, even better, your Roth IRA, that you’ll never pay tax Exxon or your Roth 401k.

Um, very best to count as the HSA, which you can now get through betterment as well. That’s triple, triple tax advantage. I will automatically push money into the right buckets. And we’ll put the, you know, maybe the, the domestic stocks that have like less, that are less tax sensitive that have less dividend yield into your taxable portfolio.

That, that alone is probably worth a 0.7% per year. On average, over the longterm. I love

MPD: [00:12:31] that. And, and just for the folks listening, I’ve been at betterment customer. It’s just simple. You don’t have to figure any of this stuff out. You kind of just click some buttons and it starts doing its magic. Why did you start betterment?

And I’m going to ask this question, even though it’s a little loaded, uh, if you’ll recall, we were in an entrepreneurship class together, a VC class,

Jon Stein: [00:12:53] you inspired me to start better. It is cool.

MPD: [00:12:55] And so I remember I was telling you an idea about a investing site that was really easy. No, I’m just kidding. Uh, I remember you were pitching me.

You were telling me about this idea you had, and I don’t think I got it. Uh, and now here you are. So why don’t you tell everyone a little bit about kind of the problem you set out to solve and,

Jon Stein: [00:13:13] yeah, I was lucky enough. In my first year at Columbia business school to take what was, I think I was maybe not only first set first year student in that class.

Right. Um, and mark was a year ahead of me and I was super or lucky to be sitting next to you on the day that we were finding partners. And I was like, Hey, will you be my partner? And you’re like, who’s this guy. Um, anyway, I, and so I felt, uh, and, and I, I knew enough. Um, I don’t know if I knew you already, when I asked to be partners or what, but I quickly figured out that you were like one of the savviest guys in the class, like, like mark, um, for listeners who don’t know.

I remember like during, during like breaks between classes, like he would be just like chatting VC over coffee at like the little coffee shop, like near campus with like the other, like one or two kids who were like already like, you know, had their VC jobs lined up. He was just like on that track. And it was like, Uh, it was very clear that that you’re well networked in a, in a person to know.

So I felt lucky to be, to be partnered with you. Um, and, uh, and I, um, you know, I did have, I have this idea for betterment when I came to Columbia, which, which was also weird and unique, but like, you know, I didn’t, I should take maybe a step back and then I’ll come back to Columbia and like that, that class.

But when I graduated, I guess, um, High school. I was like, oh, I’ll be a journalist. And so I went into college thinking I’d be a journalist. And I started working in the paper and I realized they didn’t like the writing as much as I liked. I’d been the editor of the paper in high school. What I really liked was building the team and putting people together.

And I was like, yeah, that was fun. And so I ran the student grill in college and they organized a bunch of house activities. And I like had this, like I liked putting teams together, but I didn’t know that I wanted to start a business. I was, I had no idea. Um, when I graduated, I took a post-bacc pre-med year.

Cause I thought, well, maybe I’ll be a doctor. And that that will be fun. And eventually, you know, after working in the hospital and realizing I didn’t like blood and working in the labs, you realize I didn’t like pipetting. I was thinking I should, I should start a business. I like bringing people together.

But like what, but what. And I thought back to my freshman year of college when I’d taken, um, when I’d taken, uh, economics. And I learned a lot about how, um, uh, I took from Marty Feldstein, who was an advisor to presidents, Reagan, and Obama. It’s sort of like, you know, diff different ends of the spectrum, but I learned that through really smart analysis and great policy, we can make the world a better place.

We can help people be better off. And at the same time, I took a psychology class from this guy, herbivore behavioral psychology, who taught me that despite all our best intentions and all the right incentives, people do really stupid stuff. You know, people have no idea. We get in our own way. And those two ideas have always been in my mind ever since.

And I thought, you know, it’s. It’s obvious what people should do with their money. Like I learned what I should do with my money. I should invest it in the boring, you know, stocks and bonds and like, you know, rebalance it every once in a while it’d be tax efficient with it. But then, um, you know, along comes game stuff and everyone wants it on that.

And in my personal life, when I graduated, I was like, I was investing in stupid stuff. You know, I was like buying, um, airline stocks after like nine 11. And I also bought Enron on the way down. And I was just like, you know, buying and trading stupid things. And I made some money on things. Something goes gambling.

Um, and I lost some money on some things and I knew better, um, or I should have known better given the things I knew, but it just, all of these thoughts were swirling in my head and I thought I can help make. What is this hard problem with what should I do with my money? Really easy for people. I can build an answer to that.

I can do that. I know Vanguard’s out there, but they’re terrible at tech ING direct is out there that they’re, you know, they’re giving a palsy savings yield, and they have terrible investments, but like a decent experience. What do I just combine those concepts? And so. I, you know, started talking about that idea and I see, you know, it selling, you know, people on it and people are like, yeah, like, you know, they kind of like your, your reaction of like, I don’t know.

It seems like not sure I see a market there. And my parents kind of reacted the same way with the tool that Mike’s going to start this company. And they were like, wait, you know, like, why don’t you just keep, keep, keep going with your applications to the business school. And so I walked into Columbia coming back to that point in the story being like the one weird guy who like wasn’t interested in doing any sort of recruiting or anything, I was just like, I’m gonna start this company.

And so I walked into that class, you know, first year at business school with you. And that’s awesome. I was like, I want to do this. Um, and you got to help me build out, build out, you know, one of the first, um, business cases. And that was really helpful to me. So thank you.

MPD: [00:18:03] Yeah. No, but you, you, so first of all, I didn’t realize I was hopefully at all.

So I’m glad to hear that. Um, but Y you came at this seeing a problem, right? Just the need for extreme simplicity. Is that the right way to think about it? Cause I remember you pitching this business distilling down to a slider, it was like more risk, less risk. And that was it. Yeah.

Jon Stein: [00:18:29] When, uh, when I was first.

Concepting betterment. I was building the entire thing in Excel. Yeah. I was a consultant back then. I was a consultant to banks and brokers. So I was like for, for five years after college, that’s how I learned a lot about financial services. That’s how I learned enough to have the confidence, to be able to start a business in financial services.

Uh, when you’re a consultant, everything you do is in Excel. At least it was back then. Um, and, um, and I learned a little bit of visual basic, you know, enough to kind of build a model. And I learned enough, uh, then that I could start coding and slash very simple stuff. And so I was building the site myself, you know, I was, I was the engineer.

I was, there was every, you know, And, uh, and so it had to be simple because that’s all, that’s all I know. And also like web tech was so simple back then. I mean, we were still using flash for one thing. So that, that was a different era. Um, you know, it was before mobile, right? You didn’t have to worry about mobile.

You could just design, uh, for this one, you know, screen size use case. And the classmate made it really easy. The, um, the ex the, there were terrible. Like a lot of people don’t remember this, but betterment was. The for one and maybe pupil on the, on the, in the clubhouse. Well, correct me if I’m wrong, but I haven’t been caught on it yet.

As far as I know, we were the first brokerage to be, um, no minimum, no fee, no. Uh, no. And, and, and, and so anyone could come.

we’re investing even, even a dollar, you could build a diversified portfolio, all these things. And, uh, and so there was a ton of backend, heavy lifting, um, and innovation there to make that happen. We didn’t have all this sort of like, you know, picks and shovels things that are available now to sort of like make these things easy.

And, uh, and then on the front end we were the first. Service to show you a projection of how your money they might grow over time and like a range of outcomes that now there was, I should, you know, there was financial engines for those who are like, you know, um, uh, who, who are gonna keep me honest. I remember looking at them and thinking, well, that’s a cool thing, but they did sort of like this.

I dunno, Monte Carlo is like, you know, slow simulation and betterment. You’d move that slider. And that you’re talking about mark and like this like animation or just pop and you could like wag the tail. I spent like more. Days, possibly weeks than I’d care to admit I’m working on perfecting that animation.

Cause they really wanted like the interface to say, I wanted it to feel, um, like a different thing. Like this is like very like fun user experience. So like kind of play with your allocation and see what the future might look like because people hate thinking about the future. Gosh, you know, like we’re, we’re sort of evolve in an environment where we think about what are we going to have for dinner tonight?

Not, you know, am I going to retire? Okay. Hmm.

MPD: [00:21:26] I love that point. So it sounds like you were in a little bit of a bootstrap and you had been thinking about this for a long time. For those who don’t know that people in entrepreneurship will often refer to the first stage of the business has the zero to one.

That’s a stage where you’re kind of building, getting things on the rails. And I think one is probably when you’ve got revenue, the machines working, and you’re just, now you’re focusing more on doing more of it that the, you have a single unit economic functioning it’s working an engine complete. What was the hardest part about zero to one?

A betterment

Jon Stein: [00:22:03] regulatory approvals was that was, uh, You know, building this service was hard, but once you know, it was linear, you know, it was this something that we knew we could do, we could, we could launch the thing all kinds of, but like everyone kind of understand everyone who’s starting a business, understands these arguments.

Like, yeah, it, should we work on a signup or should we work on the, you know, that like this part of the service or that the regulatory thing was just a huge unknown. So when we, I didn’t know when, when I started out, if we would be it. A bank or a mutual fund or, uh, you know, there’s, there’s a few, a broker and investment advisor.

Yeah. I ideally it would have been none of the above. We would have just been like this unregulated entity. That’s helping people do the right thing with their money. Like, you know, I was like, trust us. And I bought all these legal books. I have a whole shelf of them. And, uh, and I was reading and derivatives law and all these things, and there’s no way around like us securities regulation now, maybe, maybe, you know, Bitcoin got through, you know, before, before anyone caught them, they sort of snuck in there, but it’s kind of crazy, um, uh, that they, that they did because it’s really hard to kind of get away from, from securities regulation.

And that’s a good thing. Like this is it. This is generally like, we want these markets to be well regulated. Um, it protects investors. So we had to be something we had to kind of choose. And I, I found the investment advisors a great way to go, but because when you’re an investment advisor, you have to have a clearing firm.

We couldn’t. And we went to all these people firms and they’d say, yeah, we’d love to do your business. It’s going to be a hundred dollars to open every account and it’s going to be $10 for trade. And if you want to have no minimums, and that was a sticking point model. It just doesn’t, you know, like, you know, you can’t, you can’t possibly, you know, I was like, how about, how about nothing?

How about we paid nothing for that service because it’s just data. It’s like, you’re, you’re not doing anything. I’m not asking you to pick up the phone and just wants you to create an account. Like, why does that cost a hundred dollars? So we had to build that we had to build our own custody record keeping system.

Like that was a lot of code, but, you know, that was linear getting approval from the regulators to operate. That system was tricky. And we had, you know, we were two, two or three people and we had to go and present to FINRA and say, yes, trust us. We have all of the money is here. And we know it’s all here.

And like, you know, to their great credit, to the credit of America and to the, you know, system of government and system of corporate regulation that we have. It happened, like, you know, people talk about how hard it is and, you know, and it was really hard, but it’s not like this is, this is not a third world country where the only way to get there is through connections.

I didn’t, I mean, listen, I’ve had all kinds of privileges and, you know, um, I am a very fortunate person. Um, and, uh, so don’t get me wrong when I say this, but like, I didn’t have connections or like some kind of in to, to, you know, to the regulators, we were just. You know, independent citizens trying to start a company and like to get through that process took a long, long time.

It took over a year, it was uncertain that we would get approval to do it. And when we finally got approval, it was only because we were going on tech crunch like the next day. And we had this forcing mechanism, like we have to launch this product and I’ve been telling them for weeks that this was coming and it was like, we need approval.

We need approval. And you know, to their great credit, they gave us approval on the Friday before we launched on Monday, French disrupt. It works because I imagine bureaucratic

MPD: [00:25:42] processes where, you know, the paperwork is stuck on somebody’s desk and they can’t do anything. Their hands are tied for some reason, but it sounds like if you give them a deadline, they walked down the hall, they got the paperwork done and you gotta, you gotta stamp on something.

It means they can’t actually move it forward when they want to there’s control.

Jon Stein: [00:26:04] That’s right. And there’s a lot of discretion. And like, you know, this is, this is where, you know, I do have to record, you know, I do have to like recognize that like, um, uh, I’ve, I’ve had a lot of privilege and for, you know, I’m fortunate in life because there is always a human element to these things.

Um, and, uh, in betterment, in that, in our team, in our backgrounds, in our bio’s, they sort of saw it enough to like credible to be like, yeah. Okay. We can write, we can trust this and we can keep an eye on right

MPD: [00:26:36] now. There’s a debate that people have when they have to go through regulatory approvals of whether to launch preemptively.

Hey, this thing’s kind of stood up. We’ll start operating as we’re getting licensed. Or it’ll wait until you’re fully licensed. Sounds like you waited, why

Jon Stein: [00:26:55] we have this, um, philosophy of just doing things the right way. And I think particularly when you want to earn people’s trust and manage their money, it’s important that you establish a track record and a culture and a, um, You know, a mission of like doing right by the customer doing, doing right by, by all parties.

And, um, I think in financial services, there’s just not a lot of rooms for, you know, in, in my view, like kind of like the cowboy, you know, bad actors, I think sure that you can build a business, but you very quickly get regulated away. And even some of the current, you know, kinds of. Things that, you know, are maybe glowing, hot.

Um, it, you know, I, I, I don’t, I don’t get excited about it. I, again, I, I take a long view and in the longterm. You know, the, the things that tend to be, um, you know, the best businesses are kind of the most boring businesses. Like they’re, they’re the ones that, you know, follow the rules and like grow and like, you know, do right by their customers and like constantly invest in creating more value.

It’s just like, it’s just work. Um, and it may not be the flashiest thing, but I think it creates like real long-term value. What was the worst

MPD: [00:28:22] part about the process company building and the zero to one phase for you?

Jon Stein: [00:28:27] Um, the worst part, uh, you know, like it was pretty fun to be honest, I had a great, great time back then.

We, we had this little office on union square. We were. We were like doing this thing that nobody in New York was doing. I mean, it’s, it’s kind of hard to, to, I mean, you remember this time? Well, like when you were in, in VC, in New York and there weren’t a lot of VCs in, in New York and for less than a dozen at the time, Yeah, I knew them.

All right. And so, and so it was kind of like a, a small, a small community there, there wasn’t that there was no FinTech. That was not a thing that existed. There were very few startups in New York. I used to go to New York tech meetup and there would be 50 people there. And that was like the entire New York tech community of like founders and entrepreneurs and all those kinds of things.

And, you know, and there were other entrepreneurs at Columbia, but it was kind of like a, it just felt like. You know, it wasn’t like a focus. Um, they were trying to grow it like to, you know, to the credit of the school. They were investing in it and growing the program. But it was, um, it was maybe not the most popular curriculum.

So, uh, so it was kind of a fun time. I mean, we could, we had had meetings that we’d walk around union square and go to coffee shop and, you know, it just felt like, it felt like we were really onto something I felt at the time, like this is gonna be big, you know, like, like we’re, we’re, we’re in it. We’re in a moment.

And everyone said to me back then, um, this is, you know, when I was first that we launched in 2010, but remember that the mortgage bubble burst in 2008 and nine and things were real bad and financial services at that time. Everyone was saying, uh, you know, like why would you be in financial services? Like this is a terrible spot to be starting a business.

And, um, I think we’re so lucky that we got started at that time. You know, if we hadn’t, we would have been lagging somebody else who would have seen, you know, this obvious idea that we were pursuing and building it and next gender generation, you know, customer aligned investment platform.

MPD: [00:30:32] Yeah, I’m with you.

I’m a contrarian in that I think is industries get decimated. That’s what you want to kind of fill the gap, fill the void financial services aren’t going away. It just needs to be redone.

Jon Stein: [00:30:43] I agree. And what I worry today about, you know, all the, the buzziness in, uh, in, in the markets. Um, and the contrarian in me is, is, is nervous.

Uh, given, given what I see, you’re talking about

MPD: [00:30:58] the market kind of hitting peaks and. High evaluations, et cetera,

Jon Stein: [00:31:02] a hundred percent. And listen, we don’t time the market. Um, you know, I don’t, I don’t, I don’t, I I’m not trying to today. I’m not say, um, you know, my reaction permanent assets are invested for the long-term.

They’re invested the same way that they were four years ago and 10 years ago. And that that’s sort of the way it should be. But, um, in my sort of personal life, Um, you know, I am, I have a lot of exposure to the market, through my equity in betterment. Right. Like we have, you know, I have a high beta, you know, sort of asset there.

And so when I think about like, what do I want to do with like the little, you know, a little bit of like liquidity that I have from the company. It’s like, I’m not like looking to go out and like, you know, Throw it all in stocks today are all in like, sort of like early stage startups I’m doing. I’m like I’m helping companies and really enjoying that and advising folks.

Um, I’m having a lot of fun with that right now, but, uh, but I do get worried about the kind of state evaluations,

MPD: [00:32:04] you know, it’s interesting. So I read Howard marks. Are you familiar with him? He’s a legendary hedge fund investor and he writes a. I want to say, it’s almost monthly letter, which a lot of these hedge fund investors do.

Um, he’s iconic. I mean, I, I’m probably gonna get the facts wrong, but I believe he dumped $10 billion of capital into the market at the bottom in 2008, something like that. Right. So he’s, he really knows what he’s doing. His, yeah, he’s in that zone for those who don’t know him, he’s. One of his insights, which I think was, uh, very telling recently in one of his letters was that he doesn’t think the market’s over valued.

Now I’m probably I’m paraphrasing him here. So I’m sure if he’s listening to this, which I’m sure he’s not correct me on a few things. Um, his point was the increased prices actually reflect inflation that the fed and the government has dumped so much money in that everything’s going up. I saw the first report today too, that, um, the consumer index has stepped up.

So it means there’s inflation. For basic household goods. And this is the thing I’ve been hearing for a while that there’s actually two levels of inflation there’s inflation in the market, and there’s kind of an inflation for people with assets. And there’s an inflation rate for people without the assets, the haves and the have-nots of different inflation rates.

So his point was, if you, if you adjust for that, the valuations are still in the band of reason, which I found very telling. Uh, and that was, I think the conclusion from it was, it’s not a good or a bad time to invest, but it’s. It’s not something you should be fleeing or expect a short-term crash. Do any of that resonate with you?

I mean, I’m sure you’re dealing with your chief investment officer and all these people all the time, and you’re paying more attention to the market that I am

Jon Stein: [00:33:45] absolutely really resonates. And I, I worry about inflation. Like I won’t be the only person that talk about it and. And inflation will come when, as soon as, you know, enough people believe it suits coming.

That’s, that’s what, you’ll start to see it in prices. Um, uh, and I, I agree that it’s possible that we’ve already seen some of it, you know, and we’ve sort of built it into, you know, the future prices. Um, but I worry about it because as we haven’t lived in a world of inflation and you know, most of our, our lives and, uh, and so I just, um, I don’t have that kind of like, I was born in 1979 when the last inflationary period was maybe, um, you know, close to its its peak and kind of coming down through it through the eighties, things were, things were getting better.

And, um, so I just don’t have like firsthand experience. Um, I don’t know what it’s like and I, and I worry a little bit about, uh, that world and how to, how to, how to, you know, how to invest through it is something that yes, we, we spend a lot of time, um, Thinking about, I think this is

MPD: [00:34:50] one of the big motivations for the crypto market, right.

You know, um, a lot of, one of the major drivers for inflation for folks listening is government printing money. And there’s just a greater supply of dollars. It takes more dollars to buy things. That’s inflation. Uh, what are the big thinking piece thought pieces behind Bitcoin was that a government doesn’t own the currency.

They can’t make more of it. There’s a fixed supply. Crypto’s obviously picked up a lot lately. John, how does, how do you think that plays into the overall world of finance? Do you think it’s an asset that every family should own?

Jon Stein: [00:35:27] I, uh, listening to an older planet money this week on, on inflation and. Um, they were revisiting the idea that money supply, uh, is it contributed to inflation.

It’s very logical you and I learned it in economics and, and, uh, and it makes a lot of sense, but the newer texts, the newer, I won’t say a hundred percent, like who knows what percentage of professors think this way? But my, my takeaway from the episode was like, no, where like the, the industry is, is. Uh, or state of the state-of-the-art is that money supplied doesn’t really drive inflation it’s expectations about future inflation that drive inflation, um, because we’ve had huge increases to, you know, the money supply and shocks and longterm increases and it hasn’t hasn’t materialized.

So it’s hard to say that’s the driver. Um, I so therefore, do I believe that, um, money supplies is linked directly to the value of the currency? Um, no, I think there’s a lot of other things and, and I would take that into the crypto example as well. The supply. Um, is not what’s driving the run-up in prices.

It’s not like supply has suddenly been constrained and then, oh, and then the price shock, it’s just expectations about future value. Uh, people, people believe that, uh, Bitcoin will be another, whatever, whatever your crypto choices will, will be, um, you know, increasingly accepted increasingly part of, you know, a normal society or, you know, like, and you’ll be able to use it to buy hamburgers and shampoo, not just, um, you know, Uh, things on the dark web and I, uh, like I’m here for them.

I think that’s fine. I just, I’m not sure that I believe that in that world where crypto is, you know, incredibly more accepted that, um, Bitcoin or any, one of the, kind of like stores of value that exists today are at the, you know, Continue to be the stores of value that they are at this moment. And maybe they have another, a hundred X to grow from here.

I’m listen, I, I wouldn’t have predicted the growth to date, so don’t listen to me. I miss. But I also just don’t see, I don’t see a lot of competitive barriers to, you know, other things coming out and like, why should, why is that a store of value? There is what I do. What I believe is that like generally, um, assets.

That appreciate have some intrinsic value, even gold, you know, which is maybe like people are like, oh, crypto’s like, well, I mean, gold has some value be it, you know, in jewelry or, um, in, you know, manufacturing or something, but, but definitely real estate stocks, bonds, like, and these kinds of things have like real value crypto just doesn’t and.

MPD: [00:38:30] Right. It doesn’t have any intrinsic value, right? It’s just a piece of paper or whether it’s a digital asset

Jon Stein: [00:38:36] now that’s a totally, that’s totally right. It is an imaginary thing. And yet it is

the U S government. It has that additional piece. And like there’s only one us government and Bitcoin is backed by a bunch of like people saying Bitcoin is valuable. So like, and there’s only one of those and they get like, so I, you, you like, listen, you’ve got a country with this, start your own thing. And you know, a lot of people have tried and eventually, I don’t know that I see like real barriers.

So you’re comparing

MPD: [00:39:11] it though to the U S government. The point I wanted to make is if you’re in a country where the government’s changed six times in the last six decades, And there’s a dictator at the helm. Um, and they print money whenever they want to buy more arms. I’m making the, the most God awful scenario.

You can imagine the idea of something not controlled by anybody, but an algorithm might seem safer than something with a human hands on it.

Jon Stein: [00:39:38] Interesting. It does. Are you, are you holding Bitcoin? Are you an owner? I am not. No

MPD: [00:39:45] interesting. Fascinating. Okay. So Bitcoin will not be showing up on Betterment’s platform anytime soon, I assume.

Jon Stein: [00:39:51] No. So it might, right. Like, cause I think there’s enough people who do want it and where, where I would like, what’s a responsible way to invest in these kinds of assets. I said it early, like you want 90% and these kinds of things and 10% over there. Part of the challenge of investing in Bitcoin has been kind of, uh, or, or investing in crypto has been, uh, you know, diversified liquid access, right?

Like, you know, if you want to invest in a basket of things like that, maybe makes more sense than like then like picking, picking one and those, those products are coming, right. Like they’re there, they’re here or you know, about to be here. Uh, and so I think you’ll see more, more ways to kind of.

Responsibly invest. And that’s also, by the way, the expectation of that coming has been driving the price of these assets up to

MPD: [00:40:41] I’m going to change topics for a second here. Thank you for thoughts on Bitcoin and crypto. Uh, you’ve recently made a move, right? You’ve transitioned from the CEO of betterment to the chairman.

And interestingly, I view that as a promotion and I think, uh, there’s complicated. Perspectives around that transition in the market. And it varies interestingly by country, I was talking to someone recently who is Israeli and they were saying, you know, in Israel, someone leaves a CEO role. No one cares.

You’re just going to the role where you’re best suited at that moment in time. It’s about the company, but in the states, it’s loaded where we tend to have a lot more context and implications and judgments. Good and bad on stuff. Um, how did that transition go for you? What was your mindset as you went through it?

Uh, when I ask you a couple of questions on this, cause I think this is a really important concept for folks. I think a lot of people are afraid to stop being CEO. And I don’t know that that’s logical or even rational. I think it’s a fantastic way of, so please tell us a little bit more. If you don’t mind.

Jon Stein: [00:41:46] I put myself in that, in that bucket, maybe at people who were like afraid to, to stop. Um, and I agree with like that, um, you know, maybe you say, say there was an Israeli sentiment, a bit sort of being like a logical next step or the right role at the right time. Like a metaphor that came to my mind in the last week.

This is a recent thing for me. Right. I, uh, and I’ll go into a little bit more of the backstory, but, um, uh, transitions, um, End of December Jan Jan one, basically I, um, uh, you know, became the chairman and Sarah is the full-time CEO. And. I thought it’s kind of like, um, it’s kind of like your, your kids graduating.

I mean, people ask me, how could you leave? How could you leave betterment? You know, like this company that you love so much, it was like your first child, you know, and it’s true, like in like all of that is true. And I love it very much to, you know, still, and I love all the team and I love everything that we do.

Um, but the company is in better hands now. And the company is like, you know, the team is in better hands and, uh, the mission, you know, remains and. Um, and it’s a little, like, you know, I can’t teach my kids everything, you know, like, and so it’s, it’s good that, you know, they get to go off to college or they get to go to school.

Like, of course, like I loved it, but of course, like, I, you know, I want to do do the best I can for them be there for them. But like, that doesn’t mean like I’m not everything. Um, I guess, uh, uh, like to go back to the, to the story I’d been thinking. For, let’s say a long time about like what succession would be like.

I mean, I remember when I started the company and we took our series a, I was, you know, at that time I remember thinking about, you know, now I have a board, you know, and like I serve at the pleasure of the board and someday, like, we might find somebody who can do this better. And you know, over time I remember periodically kind of like bringing up the idea of like, Maybe, you know, maybe someday we want to find somebody else, like who can like take, take the company forward.

And I always got like, oh, like you’re a founder CEO. Like you, you know? Um, and I used to tell this story, this like metaphor. That is telling of, of being on a startup. I said this all the time in so many people, you’ll probably see it in interview notes. You hear it here and there, but it like being a founding CEO is like being on a roller coaster, you know?

And, uh, lots of people use that metaphor. There’s like, there’s great highs and great lows. But like the thing I always thought was particularly apt is like, and you can’t get off. You’re stuck in until the end of the ride. And. And I was talking, uh, about, um, a year and a half ago. I think it could be a little longer to a good friend of mine who stepped down from his company around that time.

And I was shocked. I was just like, wow. Wow. And it had this. And he was so happy. He was, he was like, you know, I just, I just tell them like, and it was this process. You have to kind of like come to the point where he was like, I’m going to do this. And like, You know, we were with other, uh, other friends and like a lot of other founders and a lot of people are like, ah, you know, they were all asking questions about like, how could you do that?

And, you know, it just made so much sense when he explained his reasoning and like, you know, it just like, you know, he was ready for the next thing. And I, so I, I had been interviewing a number of, um, executives, knowing that I wanted some kind of additional like, you know, partner of somebody, like at my level, um, Who could be a successor, uh, for the last year plus, and COVID was actually great time to go through that process.

It was it’s like I met maybe a hundred senior executives and wow. Last year it was just, it’s so cool. Cause you can call up anybody and they’re yeah, you don’t have to like fly around the country to meet folks and, you know, schedules are just so much easier. So I found it great. And um, In, in, in that context, uh, in the context of hiring a CRO chief revenue officer or COO, and that Sarah Levy, um, in the spring of 2020, And she was, she had recently been, uh, um, uh, uh, the COO at Viacom, which is a huge, you know, big, big company managing tens of thousands of folks in her org.

She started out there and Nickelodeon. And so we like to say, you know, she’s been marketing to millennials, her entire life. Um, and I, uh, I was just immediately taken by her and she likes to say, like, I ghosted her after that, which might be true. I might’ve been interviewing like a bunch of people at the time, but like I was like, oh, she’s really awesome.

And like, I quickly came around and, um, uh, you know, invited her in as a consultant to betterment. And, uh, you know, fortunately she took me up on that opportunity and I love the sort of like try before you buy approach in general for our roles, but like, Particularly for like a super, super senior role. It feels really important to me.

And to be honest, I don’t think any of us, me, her, the board were like positive. When we started out like that, you know, this was going to be like the, you know, the path. But I was, so I was just so impressed by her. Like she, she came in and, you know, she was in our exact meetings and I just saw us like having a better conversation and getting to a better place more quickly.

And. Um, I just thought she should do this, you know, like she’s, she’s great. Um, and so I’m really happy to report that. Um, the team seems happy, you know, here, like, you know, I’m knocking on wood cause it’s like early days, but, um, the company’s doing well. We grew. 50% year over year in Q1 and up from 40% year over year for last year.

Um, you know, we’re, we’re doing great and she’s like making smart investments in B2B. The 401k business is betterment is like really booming. Um, you know, we’re, we’ve, we’re launching new products. HSA is continues to really deliver and, and she keeps like expanding, um, you know, checking savings, functionality, all these things that like, you know, she’s, she gets it.

Um, uh, and. Uh, so I’m happy about how that’s gone

MPD: [00:48:10] advice for folks listening. There’ll be, I’m sure a lot of CEOs listening to this conversation. When is the right time to pass the Baton? How do you think about that?

Jon Stein: [00:48:20] Um, it’s tough. You know, it’s a thing I’ve thought a lot about and. Um, you know, people, people have all different incentives.

Right? I remember talking to some folks and it’s a hard thing to talk about because what are you going to do? Are you going to go to your most trusted team members and say kind of tired? I kind of think I’m going to go cause like they’re not gonna to like, if tomorrow is where you’re like, where you’re, where you’re at.

Like it’s a lot of uncertainty around a transition like this. Um, so it’s delicate. Um, it’s a tricky thing to talk about with the board, you know, how do you, how do you sort of say, um, cause you know, you’re probably like can get them to like also invest in your next rounds or, you know, like there’s just so much uncertainty and like what if things go sideways, you don’t find the right person.

So it’s, it’s really hard. And I talked to my coach about it, like my exec coach. Uh, we were chatting about exact coaches just before the show started. Um, I’m catching up with him again again tomorrow, but he said. Don’t you know, don’t though, you can’t really go like you, you, you are a better man. Like that’s what a good coach is supposed to do, I guess, is like, try to talk you up and like put you back in the game and go, go, go, go.

I think it’s so tricky. It’s tricky. Um, uh, and, and what’s, my advice is be open, you know, like, um, it’s I don’t like, I don’t like think. If I were still the CEO, like I’d be having a bad time. Like that was a great job. And I often, you know, I’ve often said I would like the best job. Like, this is great, but I can also say, you know, I’m, I’ve never been happier, right?

Like I’m just really, I’m delighted with, um, where things are for the company. For me personally, like, um, like, um, you know, but I feel very lucky, very, very fortunate that that’s the outcome. And, um, it takes a lot. It took a lot of work to kind of land in that plane. Um, not just for me, but from a lot of fun.

Tell us

MPD: [00:50:20] about, about landing the plane. What’s the most important tip you can pass along to folks about how to navigate a transition,

Jon Stein: [00:50:28] hire the right, hire the right person. I mean, it’s all, it’s all people. This is like everything. This is like everything. It comes back to people. Um, and you know, that’s a tricky, tricky thing to know.

Um, Uh, as it is with any higher, but this is a particular tricky one. All

MPD: [00:50:45] right. We’re going to shift on here. Um, there’s probably a lot of entrepreneurs are going to listen to this. I’m assuming this is going to track folks who are in the financial industry, FinTech folks. What are areas of opportunity?

Where should people be building? If you’re an entrepreneur out there looking for a concept, where should they focus? Yeah,

Jon Stein: [00:51:06] I think there’s so much. Work still to do in FinTech. I’m just going to talk about FinTech because that’s what I know, no Avastin. Oh my gosh. There’s so many interesting things happening in biotech and AI, and like, please go innovate there if you know anything about. Cause we, cause we need you. We need smart people in those fields.

But what I know is, uh, has been taken, there are so many problems that remain, even though it seems like, wow, there’s I am just floored by how much innovation there is compared to 10 years ago. Um, There’s still a lot to do in traditional financial services businesses. So number one, you know, it is still despite all the innovation it’s like kind of annoying to design, build, sell a home, everything, you know, it’s pretty easy now to like get a mortgage.

I feel like that process is, I mean, could, could definitely be more streamlined, but people are like working hard to streamline that, but wow. There’s a lot of interesting innovation around, you know, making. Um, identifying a home financing, you know, like, um, uh, remodeling it, um, all through through digital technologies.

Uh, prop tech I think is super interesting. Insurance has been talk ad nauseum, but, um, having just. You know, got, you know, I just got life insurance using PolicyGenius, but for my, my friend, Jen, who runs them and I thought they did great, but wow. The processes, you know, the backend is still, still terrible.

And like these big legacy, you know, companies have not totally embraced. The FinTech revolution yet. And there’s, there’s, there’s more years and more miles to go there. Maybe betterment, you know, wow. We manage $30 billion in like Coinbase, just IPO. And what they say they manage was in 19, the billion and 200.

But I guess there was maybe last year, 90 billion. It’s thinking kind of an incredible number. I mean, like obviously inflated by, by the, the value of crypto these days. But. I, you know, these are tiny relative to the trillions of dollars of, of assets, um, in, uh, in, in, and so there’s a lot of room to grow, uh, in traditional businesses too.

I think alt is a really interesting spot on the kind of wealth tech for, you know, um, I, there there’s, there’s all this school, um, you know, opportunities to invest in. Art and collectibles and, uh, and fractional real estate, you know, residential real estate. And I’ve always had a bit of a skeptical view towards these things.

You heard me talking about, you know, crypto, that is another one of these, right. And like I said, that same pitch, but, uh, where we are now is, is the reason I was skeptical was because I think there’s this adverse selection that for the retail investor, going to invest in art or collectibles or even cryptocurrency.

You don’t really have an information advantage over the institution or the person who is spending full time doing that thing. I, as a, you know, casual, like as a CEO, doing angel investments would have no chance against you mark the VC. Who’s like looking at deal flow and like networked and understands like the, the, the, the bigger picture professionals have an advantage in these, in these Nishi Nishi investment markets.

And so that’s why I was skeptical, but I think increasingly I’m seeing access, you know, democratized access to great managers. Right. Um, and that’s interesting to me, uh, because you can, we’ve reduced the cost of investment. We’ve reduced the cost of KYC we’ve reduced. So, um, that opens up some more interesting, like investment opportunities for it.

But anyway, that’s, that’s two is so traditional businesses is interesting autism. Interesting. And then three. I people have talked a lot about picks and shovels investments like plaid or what have you, um, alloy, you know that as being like interesting. I know, um, uh, this is a common topic in FinTech is like, you want to build like the infrastructure layer that powers all these startups and, you know, gathers their venture dollars.

I don’t think we’re done with that either. And I don’t think it’s like doing the same things that these other companies are doing. Um, but I think it’s interesting new data sources. So yes, like, um, Uh, we’re, we’ve got your bank account and log in credentials and like that, like, lots of people are doing that and yes, we have your credit report.

Credit karma did an amazing job of kind of like making that available to folks. But there’s so many interesting data sources that would be useful in providing a better financial and overall wellness to, to people such as, um, your, um, Uh, your, your Texas, which are kind of like over here and like hidden, you know, in, in your tax software, but make that accessible to people.

And you can do a lot of really intelligent, fun things for them on off of that or your spending data, which, you know, a few people have tried, but I haven’t really seen anyone do like great, awesome. You know, uh, intelligence based off of my, uh, past spending health data, um, is one that I’m like really excited and patent advising a company and looking at another one that.

You know, are kind of in and around this, what can we do if we know everything about your present past payrolls? Like how could we, you know, help you, um, save, you know, borrow all like what, there’s a lot of great information. Um, and so making that accessible, I think is a really interesting opportunity.

MPD: [00:56:31] Thank you for that. That was more than one area of focus. That’s great.

Jon Stein: [00:56:35] No, that’s great. Hopefully some people

MPD: [00:56:37] will be inspired to start some, some, uh, businesses from that. So, um, as far as entrepreneurship goes, you kind of won the game and you’ve got some free time now, where does John Stein over the next 10 years?

Jon Stein: [00:56:52] Today, I’m enjoying it having free time for the first time in a long time. And I’ve got two, you know, pretty young kids, five, five, and six. And so. Um, enjoying, you know, being dad enjoying, um, uh, working on, um, our, our house and that just, it’s just, it’s just so nice. I mean, this kind of stuff, uh, was always like when I would look forward to on the weekends and I still feel really, is he like the kids are there every day?

Like I’m doing. A lot of work still there during, during the days, but, um, um, and doing, getting to do more of those things that I love. And, uh, and then, um, what’s keeping me occupied is, is really, um, I, I love, uh, meeting founders. I love, uh, getting to know companies. I’m finding this curiosity that drew me to betterment and to the opportunity in the first place is coming back.

And I had. You know, like I really had, had kind of had to put a lid on it and stopped reading so much. And you know, of course, and just, just stop, like put my head in the sand a little bit because. Everything I looked at, if it wasn’t directly relevant to betterment felt like cheating on betterment. Right.

When you’re the CEO, it’s like, Nope. Like, you know, like it, like, you could always be doing 5% better, 2% better. And like, and so like, just do that now. I’m just enjoying, um, you know, um, The the, the, my, my leisurely exploration of, of, you know, the kind of broader areas of, of tech, uh, around what we’ve been doing.

And I’m finding it so fun to like, help, like early stage entrepreneurs. Right? Like, there’s all your questions are like, cute. And like, you know, should we go B2B or B to C? And I’m like, oh, you know, like, or one person was like, should I do both? And like, it was just really funded to say, don’t try to start out doing both, just pick one, like, you know, the kind of like fun, obvious stuff.

So.

MPD: [00:58:55] That’s fantastic. Thank you so much for making time and being on the show today.

Jon Stein: [00:58:59] Better mark. Always great to see you. Um, and, uh, thanks for doing this. It’s a lot of fun to do. Cool.

MPD: [00:59:10] Well, that was awesome. Huge. Thanks to John for sharing what he’s done with betterment. I particularly enjoyed the bit about navigating a highly regulated sector. That’s become a pattern of advice on the pod and goes against the conventional wisdom that scrappy entrepreneurs fall off. So I think it’s super interesting and helpful.

Hopefully you took that to heart. I’m excited to see what John does next. If you liked what you heard, please look us up at the lake or a five-star review and feel free to share with a friend. You can find me on Twitter at M P D. And to hear more of my conversations with innovators, subscribe on YouTube, Facebook, or any major podcast platform.

Just search for innovation with Mark Peter Davis.


Building A $30B AUM Unicorn with Jon Stein Founder of Betterment was originally published in @MPD on Medium, where people are continuing the conversation by highlighting and responding to this story.