Betterment: Jon Stein

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.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Guy Raz?

  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 5. I'll be sitting down with Michael Dubin. He's the co-founder of Dollar 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 LA area on December 5, 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.

• 0:38Speaker 01

  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 the last three years. And I had a BlackBerry at the time, and the BlackBerry time stamps 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.

• 1:11Guy Raz?

  From NPR, it's How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built.

• 1:24Guy Raz?

  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 he grew it into a business that manages more than $10 billion.

• 1:42Guy Raz?

  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.

• 2:25Guy Raz?

  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

• 3:10Guy Raz?

  that this thing was gonna 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.

• 3:33Speaker 01

  Every Christmas, we'd be up there at their Red House in McConnellsville, New York, and all of the community would come by. 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. 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 build things the best, from the finest cherry, you know, from our own land.

• 4:16Speaker 01

  Like, you know, I think I draw from examples, and I draw, I draw from their example that, hey, they were able to do this. And I think those are things that I, I learned from them.

• 4:26Guy Raz?

  Hmm. When you were a kid, like, what were you into? Like, sports? Or were you into... Comics or anything like that?

• 4:33Speaker 01

  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 rolled past into the goal. And I never was was big into that. But I loved 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, you know, two-week expeditions that we do in New Mexico and Colorado. And I became an Eagle Scout.

• 5:02Guy Raz?

  Wow, all the way up.

• 5:04Speaker 01

  Yeah, I still get called a Boy Scout sometimes.

• 5:06Guy Raz?

  Yeah. And were you like into business or like selling stuff as a kid? Or was that not even part of your world?

• 5:15Speaker 01

  Well, when I was a freshman in high school, I started getting interested in the high school paper. I started enjoying writing. And I got super into it. And by the, 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 and they published my college essay. And it said, "My internship at The Met got me into Harvard," was the headline, which was great. It was in their style.

• 5:49Guy Raz?

  And you actually did go to Harvard, right? So what did you study there?

• 5:52Speaker 01

  I studied economics was my major. And I had a real interest in psychology as well. I was taking human behavioral biology with Irv Dvorak. 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 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 like 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 those worldviews?

• 6:36Speaker 01

  And I, 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 roommate's 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 gonna, gonna 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-bac pre-med year after I graduated. But I just, I couldn't stand it.

• 7:19Guy Raz?

  What was about it that you, that you couldn't stand?

• 7:22Speaker 01

  I, I, well, blood, for one thing.

• 7:25Guy Raz?

  It's hard to be a doctor, yeah.

• 7:27Speaker 01

  And I realized through these types of experiences that really my, my heart was, was most likely in business. It just took me a while to find my path.

• 7:37Guy Raz?

  I mean, were you interested in finance at that point? I mean, you, you knew you weren't gonna go to medical school. So did you start to think about what you were gonna do?

• 7:47Speaker 01

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

• 8:14Guy Raz?

  Yeah. So you graduate, and then what'd you do next?

• 8:19Speaker 01

  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, you know, 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, around the world. But when people would ask, what do you do?

• 9:04Speaker 01

  I'd say, my job is helping banks make more money. And 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.

• 9:17Guy Raz?

  So you're working there. And how long did you end up at, working at First Manhattan?

• 9:24Speaker 01

  I was there for, between four and five years.

• 9:27Guy Raz?

  I mean, did you, while you were a consultant, did you ever sort of think, yeah, 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.

• 9:41Speaker 01

  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.

• 10:23Speaker 01

  Now, 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.

• 10:36Guy Raz?

  When did you start to think about, I don't know, believing, doing something on your own?

• 10:43Speaker 01

  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 of years, but I knew from day one, I felt like I was, 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.

• 11:10Guy Raz?

  It's like 2006 or something like that.

• 11:13Speaker 01

  Yeah, exactly.

• 11:14Guy Raz?

  But you were, the kind of financial consulting you were doing was for like, big companies, right? Like institutions?

• 11:20Speaker 01

  Correct.

• 11:21Guy Raz?

  Were you pretty good at picking stocks and making investments yourself?

• 11:26Speaker 01

  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, I had a bunch of different mutual funds that I'd bought. I had an E-Trade account, a TD, a Scottrade account, and-

• 11:42Guy Raz?

  Is that bad, by the way, to have all those different accounts?

• 11:44Speaker 01

  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 they, 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 what was right for me or how I might make the most of my money.

• 12:11Guy Raz?

  Yeah. Did you make a lot of money?

• 12:13Speaker 01

  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.

• 12:22Guy Raz?

  Like what?

• 12:23Speaker 01

  I bought Enron on the way down.

• 12:25Guy Raz?

  Wow, you bought Enron?

• 12:26Speaker 01

  I did. I bought it at $11. It had fallen from like 70.

• 12:31Guy Raz?

  Yeah.

• 12:32Speaker 01

  And, and I sold it at zero.

• 12:34Guy Raz?

  Wow.

• 12:35Speaker 01

  And, 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, 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.

• 13:18Guy Raz?

  When, 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?

• 13:31Speaker 01

  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.

• 13:47Guy Raz?

  Right.

• 13:48Speaker 01

  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 ING Direct. 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, 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, you know, some great Vanguard mutual funds. But the interface was terrible. The experience was just not keeping up.

• 14:31Speaker 01

  And my initial idea was, what if I just kind of combined these two things?

• 14:36Guy Raz?

  Right, like ease of investing, but with a better user interface, something like that?

• 14:40Speaker 01

  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.

• 14:55Guy Raz?

  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, to business school, right?

• 15:05Speaker 01

  I did. I went to business school knowing that I wanted to start a business.

• 15:09Guy Raz?

  Right.

• 15:10Speaker 01

  And by the time I started 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, 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 the long term. We don't do well with thinking about things three weeks from now, much less 30 years from now.

• 15:45Guy Raz?

  Right.

• 15:46Speaker 01

  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.

• 16:01Guy Raz?

  So essentially, you were talking about people who have roughly how much to invest?

• 16:06Speaker 01

  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 meaningful 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.

• 16:44Guy Raz?

  So, all right, you, you get to business school and you, you went to Columbia, right?

• 16:47Speaker 01

  Yeah.

• 16:48Guy Raz?

  And, and then you, you start to work on this and what? You, you start to talk to people about it?

• 16:54Speaker 01

  I talk to everyone who would listen. My poor classmates, you know, I put them through a lot.

• 16:59Guy Raz?

  So, but people would say, okay, so let's say I've got 10,000 bucks. Like what, I just give it to you and, and you take care of it for me? Like, why wouldn't I just go to Vanguard? What would you say?

• 17:08Speaker 01

  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 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

• 17:52Speaker 01

  what your goals 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?

• 18:20Guy Raz?

  Yeah.

• 18:20Speaker 01

  One thing I found that was common across everyone was 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.

• 18:37Guy Raz?

  And this was just you. It was going to be just you building this company.

• 18:43Speaker 01

  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.

• 18:51Guy Raz?

  You thought you were going to build the site?

• 18:54Speaker 01

  Everything.

• 18:55Guy Raz?

  Wow.

• 18:56Speaker 01

  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.

• 19:07Guy Raz?

  This is Sean Owen.

• 19:09Speaker 01

  That's right.

• 19:10Guy Raz?

  And he was, I mean, what amazing luck that your roommate was an engineer at Google.

• 19:16Speaker 01

  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.

• 19:34Guy Raz?

  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 a shingle and say, "Okay, send me your money and I'll invest it for you."

• 19:55Speaker 01

  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 I was, it was in my, in 2008, in my second year of business school, in the early fall, that I had a chat with Eli Braverman.

• 20:35Guy Raz?

  And who's Eli Braverman?

• 20:37Speaker 01

  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, that's a, 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.

• 20:59Guy Raz?

  So what was Eli's job? Like, what was he meant to figure out?

• 21:04Speaker 01

  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?" And we settled on investment advisor, because an investment advisor is ultimately a fiduciary and someone who's bound to do right by the customer, which just felt right to us. It felt like the right kind of organization.

• 21:36Guy Raz?

  So Eli joins. By the way, how are you funding this? I mean, you're trying to build, you know, a website. You gotta pay for servers. You gotta, I mean, how much money did you have in total?

• 21:49Speaker 01

  So remember, I mean, I had a good job as a consultant for several years. 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.

• 22:10Guy Raz?

  And it probably didn't cost you that much.

• 22:13Speaker 01

  Yeah, we were mainly paying ourselves. It started to cost more as we started to hire our first employees, but that was later.

• 22:19Guy Raz?

  So you have this idea and you've had this plan and you launched this company. And at this point, it's just you and Eli and your roommate, Sean Owen?

• 22:30Speaker 01

  And Sean. And at that time, right after I graduated, we hired Anthony Strouth, 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.

• 22:52Guy Raz?

  So what was your plan in May of 2009 when you graduated from business school? Was it a plan to get this thing stood up really quickly?

• 23:01Speaker 01

  Yeah. But I think one thing to remember is September of 2008 was the beginning of a real financial crisis.

• 23:09Guy Raz?

  Yes, exactly.

• 23:10Speaker 01

  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.

• 23:32Guy Raz?

  Really?

• 23:33Speaker 01

  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 it 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, eh, 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 at that time that still exist.

• 24:18Speaker 01

  Everyone who's started since is either really tiny or has been acquired or... So that, so it was a good time to be starting this business.

• 24:28Guy Raz?

  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 like money, people willing to invest their money in this. And so did you make it by the fall of 2009?

• 24:47Speaker 01

  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 be there. I can't, I can't like 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, TechCrunch.

• 25:14Guy Raz?

  And TechCrunch essentially is like a tech startup conference where you pitch and compete with other tech startups.

• 25:20Speaker 01

  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.

• 25:39Guy Raz?

  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?

• 25:49Speaker 01

  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.

• 26:24Guy Raz?

  You said it was going to be like Facebook for investing, like, hey, just put money into this.

• 26:29Speaker 01

  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.

• 26:37Guy Raz?

  You thought people would want to share all this stuff, just like with the world?

• 26:40Speaker 01

  Yes, I did. And I learned, you know, from user research, thankfully, that only I wanted them to do that.

• 26:48Guy Raz?

  Yeah, right.

• 26:50Speaker 01

  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.

• 26:59Guy Raz?

  And who were you testing it with?

• 27:01Speaker 01

  Our friends and family.

• 27:02Guy Raz?

  And they were putting real money in?

• 27:03Speaker 01

  They were putting real money in.

• 27:05Guy Raz?

  Wow.

• 27:05Speaker 01

  At that time, we had to actually start to test the pipes, right? And thank goodness we did, because in that week before, we'd all been depositing. 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.

• 27:34Guy Raz?

  They didn't work at all? Like, she could not take her money out?

• 27:36Speaker 01

  Yeah, like it traded through, but she couldn't actually get her money back.

• 27:40Guy Raz?

  Oh, wow.

• 27:42Speaker 01

  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 wire. It was the last day they could possibly have given us approval. We got the final approval on that Friday.

• 28:10Guy Raz?

  The Friday before, and the TechCrunch was on Monday?

• 28:12Speaker 01

  The TechCrunch was on Monday.

• 28:14Guy Raz?

  Wow.

• 28:14Speaker 01

  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 typing ideas all night. And I woke up in the morning, and the BlackBerry time stamps when you leave these notes. And I saw every 30 minutes or more, all night long, I had been awake and writing down edits to my presentation. And so, of course, I had not slept at all.

• 28:53Guy Raz?

  She got up the next morning, and what happened?

• 28:56Speaker 01

  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 it's going to be successful. And I've been, I've been telling all my friends in business school and so on. Like, this is, this is my life for the last, you know, three years. And now it's on stage and now we get to see how, how have I done?

• 29:30Guy Raz?

  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.

• 29:53Guy Raz?

  Hey, welcome back to How I Built This from NPR. So it's May of 2010 and John Stein and his 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 Sacca, a well-known venture capitalist.

• 30:17Speaker 01

  And Chris Sacca and I had this amazing exchange where he says, I, this, this thing is, it's, it's just too simple. And, 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, like, this is great. Like, I love what you're doing. I mean, the credit to him for just, you know, his, 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, if they, and if they actually made it harder to use this thing, you would be more excited about it? And Chris Sacca says, yeah, that's, that's, that's what I'm saying. And, and of course, he was wrong.

• 31:00Speaker 01

  People do value ease of use, even in financial services. And I've talked to him about this since and, and he's, he's, he's laughed about it and said, I've been wrong, you know, as often as I've been right. So it's not, it's not the first, won't be the last.

• 31:15Guy Raz?

  So let's just remind people that at that exact moment you are making this pitch, you were also launching the company. You're launching Betterment, right?

• 31:23Speaker 01

  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 the presentation, but also had headsets on and were answering emails from live customers and monitoring the site traffic.

• 31:40Guy Raz?

  Because they were the customer service.

• 31:42Speaker 01

  Because they were the customer service. They were everything. And we turned it on for the first time right like an hour before I started talking.

• 31:49Guy Raz?

  So how did you do?

• 31:51Speaker 01

  20,000 people watched that presentation at TechCrunch.

• 31:56Guy Raz?

  These are not all in the room, right?

• 31:58Speaker 01

  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.

• 32:08Guy Raz?

  Right then and there?

• 32:09Speaker 01

  Within the week. So 300 that day, right?

• 32:12Guy Raz?

  Wow.

• 32:13Speaker 01

  350. They were just, and we were amazed. We're thinking, this is incredible. And they were small deposits at first. Nobody put in more than 10K or so. But all of a sudden, but within a few days, we had $1 million under management.

• 32:27Guy Raz?

  Wow.

• 32:27Speaker 01

  We brought in 500 customers in that first month.

• 32:31Guy Raz?

  So $1 million now under management.

• 32:33Speaker 01

  $1 million under management on the Betterment platform. And we were just, we were thrilled. This was incredible.

• 32:40Guy Raz?

  Yeah.

• 32:41Speaker 01

  And then we started getting fewer customers and fewer customers and fewer customers.

• 32:45Guy Raz?

  Wait, what do you mean? What do you mean? I'm thinking, and then 20 million and?

• 32:49Speaker 01

  Yeah, and then it takes off. No, so for those first few months, I mean, remember, we were not yet funded. It was just-

• 32:55Guy Raz?

  Still bootstrapped.

• 32:56Speaker 01

  Our bootstrap savings.

• 32:57Guy Raz?

  But pretty quickly after TechCrunch, were you approached by actual people who wanted to invest in your business?

• 33:05Speaker 01

  At TechCrunch, there's this- Blast of excitement. I mean, we won best startup in New York and there was all these investors there who wanted to talk to us and let's get meetings and yes, yes, yes. And let's go in this breakout room and talk. And I was 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, 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

• 33:48Speaker 01

  to pay themselves. So we were buying time as best we could until we could raise some capital.

• 33:54Guy Raz?

  So you were asking the people who worked for the company to pay to work for the company?

• 33:58Speaker 01

  You bet. And gratefully, they believed in what we were building and they did.

• 34:04Guy Raz?

  How many? And it was still like six or seven of you guys?

• 34:07Speaker 01

  It was less than, it was five of us. 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

• 34:51Speaker 01

  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.

• 35:01Guy Raz?

  You were looking for a million dollars?

• 35:03Speaker 01

  We were looking for a million. We ended up raising three.

• 35:06Guy Raz?

  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, you know, 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.

• 35:28Speaker 01

  Yeah.

• 35:29Guy Raz?

  You're saying, "We're going to give you a similar service, type of service, but you don't have to have a million bucks."

• 35:34Speaker 01

  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, 1,000 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?

• 36:14Guy Raz?

  And how are you making money off that money? Like, you were charging a percentage of the returns?

• 36:20Speaker 01

  We were charging, at that time, 90 basis points. And we've since lowered the fee.

• 36:28Guy Raz?

  90 basis points is just under 1%.

• 36:30Speaker 01

  Just under 1%.

• 36:31Guy Raz?

  And what is it today?

• 36:33Speaker 01

  Today, it's 25 basis points, or 0.25%. It's a fraction of what the, you know, the traditional mutual fund charges or the traditional financial advisor charges. And we provided a really incredible amount of value for that.

• 36:49Guy Raz?

  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?

• 37:01Speaker 01

  Yeah. We expect to be in the ballpark of $18 billion to $20 billion by the end of 2018.

• 37:06Guy Raz?

  Amazing.

• 37:07Speaker 01

  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 than 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 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.

• 37:43Guy Raz?

  So, I mean, obviously you're growing and this is always a bit of a delicate question when I ask 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?

• 38:05Speaker 01

  It's tough. It's always tough. And there was a moment where I realized I'd done it wrong in the early days.

• 38:12Guy Raz?

  What did you do in the early days?

• 38:14Speaker 01

  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 just agree and we would have to rehash the whole thing. And it just, it became too tough. And ultimately Sean decided, I just can't do this anymore.

• 38:59Speaker 01

  And initially, when I remember the day in my apartment, I sat down with Sean and Eli and we talked about how are we going to split this thing up? And I think they're just like, Sean and I had had this sort of like, you know, equal partners view. We're roommates and he's obviously got tremendous experience to bring with his technical experience. And Eli comes in, 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. Thirty-three, thirty-three, thirty-three, right?

• 39:30Guy Raz?

  Yeah.

• 39:30Speaker 01

  And I forget if it was, you know, weeks or a month, you know, a couple of 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 were, they agreed that they should take smaller shares.

• 40:01Guy Raz?

  I mean, even hearing you talk about it now, you sound a little bit uncomfortable about it, and I understand, I would be too. It's, it's an uncomfortable conversation.

• 40:11Speaker 01

  I don't think one of my strengths is negotiation. I think I'm OK at it, but I probably didn't negotiate the best, the best deal for myself from the, from the get-go there.

• 40:23Guy Raz?

  So, but, I mean, I want to sort of dive into this. I mean, this is, this is a very hard thing. Like, we hear stories of co-founders who are best friends, co-founders who split up.

• 40:34Speaker 01

  Yep.

• 40:35Guy Raz?

  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, it's not fun.

• 40:50Speaker 01

  I feel really lucky to have a great relationship with, 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 remain very close, so.

• 41:07Guy Raz?

  Yeah. So, I mean, what do you say to people who ask you for advice and are 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?

• 41:21Speaker 01

  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 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.

• 41:41Guy Raz?

  Yeah.

• 41:42Speaker 01

  And I'm the CEO, and I feel like we need to be fair.

• 41:46Guy Raz?

  Did you have a feeling early on that this was going to be huge?

• 41:50Speaker 01

  I always hoped, and I thought, if we're successful, this is going to be a massive opportunity. I said when we launched at TechCrunch onstage, 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.

• 42:11Guy Raz?

  Do you see yourself as a competitor to Vanguard or to Fidelity or Schwab, these are the companies that people can invest with?

• 42:21Speaker 01

  Yes, and I see us as partners as well. There's a little bit of this, like, clubbiness in financial services. And so, I never really liked that. I thought there ought to be more competition in this. But there is this sense that even though a customer could choose between us and Vanguard, well, anyone who's invested with us is also getting some Vanguard funds. So, in a sense, we're partners with them.

• 42:50Guy Raz?

  Yeah.

• 42:50Speaker 01

  So, we work with a lot of the other financial services institutions.

• 42:55Guy Raz?

  You know, John, I'm just curious to understand whether there were any times where you kind of reflected on the world you got into, which isn't a bad world. Of course, there are 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, 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 by blood, right?

• 43:29Speaker 01

  Right.

• 43:30Guy Raz?

  But was a part of you disgusted with some of the, I don't know, the culture of the financial world?

• 43:37Speaker 01

  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, 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 like the-

• 44:03Guy Raz?

  Cutthroat.

• 44:04Speaker 01

  Or like the wizard, you know, in The Wizard of Oz. I just, I 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. 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.

• 44:40Guy Raz?

  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 the requirements, the 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've become one of them.

• 45:12Speaker 01

  If, if I become rich. I think we still have a lot of work to do.

• 45:15Guy Raz?

  This is all on paper. We should, I guess we should be clear about that, right?

• 45:18Speaker 01

  On paper.

• 45:18Guy Raz?

  Okay, yes.

• 45:19Speaker 01

  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.

• 45:36Guy Raz?

  Do you feel like you're rich? Or does that just seem like a paper thing?

• 45:41Speaker 01

  I am living in the same apartment that I've lived in for the last 12 years.

• 45:49Guy Raz?

  Before you had kids?

• 45:50Speaker 01

  Before I was married. The same apartment that Sean and I moved into that apartment together 12 years ago.

• 45:56Guy Raz?

  So you're like paying rent on an apartment?

• 45:58Speaker 01

  Paying rent on an apartment. The same place. And now we've got both daughters living there. Pauline's parents live three blocks away, so we've got a pretty good setup.

• 46:07Guy Raz?

  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?

• 46:17Speaker 01

  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. 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.

• 47:02Speaker 01

  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.

• 47:31Guy Raz?

  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.

• 47:59Guy Raz?

  And please do stick around, because in just a moment, we're going to hear from you about the things you're building.

• 48:08Guy Raz?

  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.

• 48:22Speaker 02

  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.

• 48:30Guy Raz?

  But one night, one of his friends finally talked him into playing a game, just one game of pinball.

• 48:38Speaker 02

  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.

• 48:45Guy Raz?

  And what he loved about it was that it was kind of a physical game. You could 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.

• 48:59Speaker 02

  While the ball's rolling around this painted piece of wood, it's not doing anything other than just rolling.

• 49:06Guy Raz?

  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.

• 49:24Speaker 02

  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.

• 49:34Guy Raz?

  So Jerry set out to do just that.

• 49:37Speaker 02

  So I started with one friend who's a mechanical guy, and we connected with an audio engineer, a very popular audio engineer.

• 49:44Guy Raz?

  And after three years, working nights and 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.

• 49:57Speaker 02

  So that the ball, while it's rolling towards the physical devices... Could interact with these virtual objects.

• 50:05Guy Raz?

  And one of the games they developed is called Rocks, which is kind of a riff on the popular video game Asteroids.

• 50:12Speaker 02

  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.

• 50:29Guy Raz?

  As their prototype got better and better, Jerry and his team decided to show it off at a pinball festival in Frisco, Texas.

• 50:36Speaker 02

  And so many people came to us and thought it was amazing. People stayed there and played it for hours.

• 50:41Guy Raz?

  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 had been mostly doing it for fun.

• 50:51Speaker 02

  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.

• 51:02Guy Raz?

  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.

• 51:20Speaker 02

  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.

• 51:30Guy Raz?

  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.

• 51:43Speaker 02

  And some of them see this new machine with this virtual interactions, 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 on their face, thinking, wow, that was really a lot of fun.

• 51:59Guy Raz?

  If you want to learn more about Multimorphic or hear previous episodes, head to our podcast page, howibuiltthis.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 [email protected]. And if you want to send a tweet, it's at howibuiltthis. Our show was produced this week by Deba Motasham, with music composed by Ramtin Arablouei. Thanks also to J.C. Howard, Nora Kudsi, Neva Grant, Sanaz Meshkampur, and Jeff Rogers. Our intern is Mia Venkat. I'm Guy Raz, and you've been listening to How I Built This

• 52:44Guy Raz?

  from NPR.

• 53:03Speaker 03

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• 53:06Speaker 04

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• 53:09Speaker 05

  Yeah.

• 53:09Speaker 04

  It's just me and you, right?

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  Well, sure, let's say it is.

• 53:13Speaker 03

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