Full conversation transcript

Why did you decide to launch M1 Finance? What did you think was missing from the traditional asset manager players?

There are two reasons why I started M1, and then I can talk about what I thought was missing. For creating M1, half of it was just a massive personal interest in investing and personal finance. I was fortunate enough to be shown over to a brokerage account at a young age, at 10, 11 years old, and I was immediately captivated. To me, deciding what a company is worth is this hairy intellectual problem, and then you can make a high conviction bet behind it. If you are right, you make money; if you are wrong, you lose money. This intellectual problem with stakes attached sort of scratched a couple of itches for me as a kid. So I just became a personal finance nerd from quite a young age. I was always interested in investing, learning how to manage money, developing a natural fluency with it, so this is an area that I enjoy and I am passionate about.

The second part is just more on me wanting to do something more entrepreneurial versus working in a big incumbent firm. I am probably a typical millennial in that I want to see the impact of my work, and I want to feel like what I'm doing is important. I thought, let me put something out and let the market decide. If I fail, I fail; if I succeed, I get the rewards for that. So I think it was the combination of personal finance interest and wanting to do something more entrepreneurial, taking a big swing at things and trying to have a bigger impact.

What I saw with M1 that was not existing in the market is… I was investing at 10 or 11, and by the time I was 25, none of the tools had changed. And I looked at it and sort of said, every consumer application I deal with is getting orders of magnitude better. And for some reason, personal finance, which is incredibly important, hasn't changed that much.

And when I looked at how I managed my money, I'm making investment decisions relatively infrequently, but I am consistently adding money to that investment portfolio. So I have this incremental "x" amount with my paycheck every two weeks and want to put it to work. And in the manual world, that's just really time insensitive and costly. The hope for M1 is you can tell a software platform: "here's how I want my money managed, I could personalize it to me, I have as much control or say as I want to have or feel comfortable having, and then software just takes over and automates it". And I looked at the investing landscape out there, and I don't think there was an automated solution, customizable at low cost, so that was the genesis of starting M1.

When do you decide to go all-in and launch this new company?

I did undergraduate at Stanford, so I was in the belly of the beast of Silicon Valley and saw a lot of companies go from nothing or an idea to something pretty big in a short amount of time. But while I was at Stanford, I wanted nothing to do with startups and then getting into the corporate world, I wanted everything to do with startups. I talked to other friends that I met at Stanford and connections I made there that had started their own companies. Some succeeded quite dramatically, some had not succeeded, but everyone was very encouraging of "you gotta do this."

I also think that the risk of doing a startup is way less than people think. I felt that if I started something and worked on something for 12 to 18 to 24 months and failed. I still think I'd be further along in my career than if I worked at a corporate job. I thought: "this is an opportunity that has very low or limited downside risk, and it has a lot of upside potential of working on something you are passionate about. Potentially creating something, creating a company of value and creating value for the end consumer." It was a low-risk, high-reward opportunity, so I decided that was what I wanted to do: start a company.

How did your experiences as a management consultant and working at a hedge fund help you build M1? Did they?

They are unbelievable training grounds. I learned more in the hedge fund and the consulting firm than I did at college and it's nice that in college you pay a lot for and the other firms get paid to do so, you get paid to learn, which I enjoyed doing.

I think they are fantastic training grounds; you get exposure to really smart people and exposure to a lot of different industries. And I think it's just exciting and gives you a little bit of pattern recognition and matching. But I looked at people who had been in consulting for incredibly long periods of time and looked at them, saying that's not the career I want. I don't have a lot of ambition to work up to that. I don't want to be here forever. I think it's just like do my tour of duty and then move on to the next thing. The thing that I have come to realize in the entrepreneur versus the consulting thing is, I think consultants take a lot of credit that they do all the work, they put all the output in a deck and they say "the work is done we saved a 100 million dollars" and move on to the next thing. And in the entrepreneurial world it's like "you haven't done anything". That's just the step 1 of a 100 to actually get something done.

I think in the building of a company, the strategy is necessary but I think the strategy only needs to be 70–80% right and that could be done very quickly. It's then the perseverance of executing against that for long periods of time that is actually the tricky part that gets a little bit lost in the pure strategy focus of consulting.

Yeah, execution is everything…

Execution is everything, and it's hard. It's very easy to create a strategy that says: "we are going to gain market share, we are going to price happily, we are going to create great products, we are going to cut costs"… it's harder actually to do that.

I've read that your goal for M1 is to become the next generation Vanguard. And Vanguard was defined by the idea of index fund investing. So, my question is: What would you say is what would define M1 Finance?

I'd say it is free, personalized, automated finance. It's what we do, so every person can create a unique personalized financial plan that fits their plans, needs, unique perspectives, and then it's automated for them. So, any dollar is intelligently directed according to that customized plan.

And what has been your most formidable challenge in building this free, personalized, automated finance platform?

Uhm. All of it is hard. It's complicated tech; it's complex regulation. Truthfully, I think the hardest thing is that the needs aren't simple if you want to deal with someone's money.

So you have to build a pretty flexible platform that handles some complication. People who have a quarter-million dollars are thoughtful with their money, they have a lot of different options, they are not trying to do very simple things. So it's a lot easier for trying to build a digital piggy bank or trying to collect $5 a month. It's very different if we say, we want to manage your life savings. Those are pretty big goals. So, we have created an extremely powerful platform. I think it is hard to describe it very quickly and gain users' trust in a very short amount of time because you have to use it to see the value. It's sort of that chicken, and the egg of the platform does deliver an incredible amount of value to our users as they use it over time but they have to use it first to get that value. So, it's being able to describe that as a new player without a brand, without a big history or the like. And really get people to trust us with meaningful amounts of money early on into the process.

Yeah, we are amazed by M1's success in building brand value really quickly…

Yeah, the thing that builds your brand the best is happy customers. That spirals and it grows, we have a 32,000 person subreddit that talks about the good, bad, and the ugly about M1. But it's really people liking it and telling their friends. That does more marketing for us than we could ever do with banner ads, or messaging, or anything like that. Trying to have happy customers is really what we focus on.

And how do you prioritize between growing as you've done and having happy customers, isn't it hard?

It is very hard. M1 has been around as a company for 6 years, public-facing for about 4 and a half. In all that 4 and a half it's really been 3 years of like good, but linear growth and then a year and a half of pretty exceptional growth. We were working hard all the time but we only saw the results of those efforts many years into the journey. I said that, because we had at the start of 2020, so 15 months ago, we had 40 employees, about 800 million on the platform, 100,000 customers. And all those numbers have 5X, so we now have 4 billion on the platform, 200 employees, over half a million customers. You are building, scaling, and growing while operating a big thing. In January of last year when we had 40 employees we were opening more brokerage accounts than Etrade was, and they have 4,000. So you are underwater and trying to build, trying to grow, and the like. It's not easy but it also makes it so much more fun and so much more rewarding. It is cool to be the David vs. Goliat and saying, "hey, we are competing against Etrade despite them having… you know, our annual budget is a weekly marketing budget for them and we're beating them at their own game". That is insanely fun, rewarding thing to work on on a daily basis and it keeps everyone inspired.

What would you attribute to that pivot point? Between the 3 years of good linear growth, and then to the exceptional, exponential growth?

Broadly speaking anytime you have exponential growth, if you start small, it gets big over time and it gets you that hockey stick that everyone raves about. It's building a snowball, it's pushing it downhill and at some point, it's just like "oh, this got really big". The thing that is probably less appreciated in the fintech realm that M1 appreciates quite a bit is that if someone has a quarter of a million dollars to their name… they don't trip and fall and put the money into your platform, they don't do it within the first week. It is a little bit slower built and once you acquire them, there's a chance that that's a 30-year relationship with the customer that you are going to develop over time.

The good thing about our business is that the new people that sign up every month are growing every month. The cohorts keep getting larger, and we also started seeing people that had been with the platform for six months start to deposit a lot more money. If our new cohorts behave anything like our old cohorts, this thing will build pretty quickly and just the manifestation of that happening, is what really drove the growth. We planted many seeds over a couple of years and just take a while to grow and bear fruit. And the nice thing is that we have every inclination that that's going to continue. Our January cohort was the largest ever, and then our February was the largest ever and March was the largest ever. The cohorts keep getting larger and larger and if they behave as our older cohorts we will go from 4 billion (in AUMs) to double-digit billions in a very quick amount of time.

And what's next for M1 Finance, in terms of new products? Do you have any new product launches in mind? A credit card perhaps?

We are coming out with a credit card, that should be Q3 launch. It will be a pretty unique credit card. A credit card that is comparable to the Chase unlimited card or anything like that but there will be exciting ties with our investment platform and our borrow platform. So it will feel much more like a comprehensive personal finance sweep. Where it's not a credit card in isolation but you are really getting an M1 platform where you have a best-in-class investing platform, best-in-class borrowing platform, best-in-class spending platform and it's all integrated into one comprehensive application and sweep. We focus very heavily on a best-in-class product experience within our platform. So, for our investment platform, we want to be the best for long-term, systematic investing; for borrowing, we want to be the lowest and most flexible cost; for spending, we want the highest rewards in cash and the highest rewards in cash-back. And then we want them to work altogether so that each one enhances the other so that there are synergistic effects. We have no shortage of ideas on how to improve and more ideas than time to execute against it, and there will be improvements across the M1 platform for many years to come.

I would say that with the launch of the debit card, now loans, and a future credit card, M1 is converting into a neobank. Do you agree?

Yeah, I've said that we want to be the next generation Vanguard, we also say the next generation Schwab, but we look at those companies as they launched in the seventies like Vanguard was going against the mutual funds. Schwab was going against the big brokerage houses, the wirehouses and they just created a better product, better pricing and got huge as a result. We think we can create a next-generation financial institution using a 2020 toolkit that can offer a better product, better pricing, and we believe we will get very large over time. We will combine the best of digital brokerage and digital banking, and whether people call us a neobank or not, we will have a lot of banking features and functionality.

This is exciting and gets us wondering, when are we going to be able to own M1 shares? Any plans on going public?

We are hyper-focused on individualized, personalized financial investment decisions and we would love nothing more than our user base to own M1 on the platform. It's more of a timing and when we are ready perspective and I think we have a lot of growth to do before we are ready for that. That being said, what's reasonable for a public market company seems to be decreasing with all the SPAC-mania and that's going to continue. But unfortunately, I'd said we are still a couple of years away from being public.

And when the time comes, how do you envision M1 tapping the public markets? Via an IPO, a SPAC, a direct listing?

I don't know. Sometimes the dynamic seems to change so frequently that it's sort of, we will do whatever makes the most sense at that point in time. I do think that we would love to be creative on how to make it beneficial for our user base versus investment banks. I don't care about investment banks. I love our users, I'm indifferent to Goldman Sachs, so…

We've seen that there are people asking M1 to come to their home countries. I would, for example, love to see M1 in Mexico. Do you have any plans on geographic expansion?

I think that is also a few years away and the problem is more regulatory than tech-driven. You know, Netflix, there's only one way to watch a movie and you can open it up over the internet anywhere. So that's not that hard to launch into an international market, there might be some licensing stuff like that. The tough thing is that there's different regulatory rules and requirements and the tech of the financial industry is different in every market that you go into. So, it becomes less of like a copy and paste in the different countries and its rebuild it as you have done and it becomes time intensive and costly. And we have so much growth potential to do here that we will get to the point where it makes sense to go internationally but we're just unfortunately not there yet.

And what do you think is going to happen in these other less developed markets? Do you see big players coming in or do you see local founders creating their own solutions?

I think it's going to be a combination of both. When you look at the financial landscape right now, JP Morgan Chase is the world's largest bank and I think they only have like 11–12% deposit market share. And so this is a very fragmented market; Pepsi and Coke have like 98% combined market share or something like that, so it's not the same dynamics as a lot of the other industries. So there are a lot of opportunities for a lot of different winners. I think the unfortunate scenario is that in financial services I think there are more regulatory things that need to be overcome than what we currently could solve with tech. You mentioned that you want to see us in Mexico and we could open it up to Mexico residents tomorrow to use the M1 platform for US stocks, it's just the regulatory stuff of international money transfers is insanely complicated, insanely expensive and it introduces a lot of risk and compliant costs on to M1 and so it just becomes like a tough thing to do. It is not a technological problem, we could do it it's more of a regulatory thing of what do the rules and laws allow. That is gonna be like the big question of how things develop in other countries. If rules and regulations are lowered, I think it opens the door quite a bit massively to have this worldwide, best-in-class finance applications. I think the second that you have unique rules and regulations to each local market, opens it up to a pretty fragmented market with local law to local players.

What other fintech companies or founders do you admire?

Robinhood has obviously done a lot of fantastic things. They still have a lot to do but they've created a giant finance firm, I think they're going to have one of the biggest fintech IPOs in quite some time. They introduced an entire generation to investing and forced an industry to go free. So the impact of them cannot be understated. I think there's a lot in the lending space of not using very traditional credit scores or income verification, but trying to say: "how an we more intelligently underwrite risk to provide access to credit, access to loans to more people. Chicago is huge for that and so there's a lot of different companies doing interesting things there. And there is a lot of interesting things on the back end, of like fintech. We use Socure as a player and I think they do of a lot of interesting things on identity verification and anti-fraud type stuff.

Now that we have introduced Robinhood to the topic, what do you think about the recent backlash against Payment for Order Flow? Is it really a bad thing?

I don't think Payment for Order Flow is bad. I think it's a mechanism. Broadly speaking over the last couple of years, spreads have gone down dramatically and liquidity has gone up. And so, every investor out there is operating in a much better world than we were 20, 30, 40 years ago. So, the tech improvements, the structure, everything is meaningfully better and I actually do think Payment for Order Flow is a main, driving factor of that. So, I don't think it's bad, I think it's very similar to, any time you swipe a credit card there's something called interchange, this is very similar to that. So, I don't view PFOF negatively at all, I do view super-active trading as not the greatest strategy. I think what a company is worth at 10 am on a Tuesday versus 2 pm on a Tuesday is anyone's best guess, the price might change 1%, the value didn't change that much. Value is a little bit more stable over time, the price can move around value quite a bit but I think it's very hard to predict those changes and I think it's costly, it is tax-inefficient, it's hard to predict. So I would like to have more people focused on long-term investment ownership and building up stakes in things that they know and understand and they are trying to appreciate in like systematic value over longer periods of time as opposed to playing earnings or getting into Dogecoin, that kind of stuff is not a great wealth-building strategy.

And talking about Dogecoin... What do you think about the rise of crypto as an asset class?

Crypto gets a little bit out of my realm of expertise and so I'm a little bit agnostic and I don't have a strong perspective on it. I have something of a "time will tell", type of perspective on it. If something is rare and people value it a lot, the price goes up. Crypto has baked-in rare value, apparently, the math is uncrackable that it is going to be rare for all time. I think the big question is how much people could value it over long periods of time and whether this is a fundamental thing that they'll value like other hard assets or it is a fad in nature and doesn't get valued. I completely understand the rationale for the bear case of bitcoin and the bull case for bitcoin but I don't have a strong perspective on what I think is the winner. I think it could go many different ways.

Dogecoin, I don't like the fact that, I think investing and money management should be fun, engaging, rewarding. I don't think it should be a joke. And I think that there is when it crosses the line a little bit and the fact that a joke has… I don't know, I don't think it does the world a lot of good to have people make fortunes on something that they know is going to crash at some point, and that there's gonna be an equal amount of losers as they are winners. People will make a lot of money, people will lose a lot of money and I think it is like distracting to what actually matters from the wealth management creation perspective.

You mention that investing should be fun. How do you combine making investing fun with long-term investing goals?

The hope is that we've done something similar with M1. Whereas, oriented towards the long-term, oriented towards systematic investing but where there is a sense of engagement and ownership where you are putting your money into things that you know and understand and want to do well over long periods of time. It's almost to the extreme of too much fun is hyper-active trading and that's not a great strategy for success and then the other extreme of it is so boring you don't want to do it. There's not a lot of good there because behaviors do matter. And it's the same thing about eating healthy or exercising, you want a balance of something that encourages you to do it while also not getting tied up into the fat or bad long-term strategies. And so, it is how do you make the things that are good for you enjoyable enough that you participate in it, and do the right behaviors by default.

Finally, if you could give one piece of advice to someone looking into founding its own fintech company, what would it be?

Get started, start doing. There's a million ways to analyze everything and try to build confidence and the big thing is you're going into an unknown. Truthfully, odds are not that great in you favor but you have no idea until you put something out into the market and let it decide. The results will speak for themselves and it's on you to manifest the results, so get started, launch the product out, continue to improve it, make it better. To many people can get to the analysis paralysis where they are trying to perfect everything before they start and they are so many unknowns that it is impossible to perfect prior to getting going and doing.