How a partner at Sequoia thinks about startups

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This is what I love about San Francisco: I was out with my son and I met another father who was a founder.

He was telling me about his new startup but what amazed me was the way he thought about it and how he thought about entrepreneurship in general.

Today’s guest is a guy who thinks the way I want to think and someone I want to be influenced by.

Warren Hogarth is a partner at Sequoia and his latest company is Empower, a personal financial assistant on your phone.

I invited him here to talk about how he built his business but more importantly, what he’s learned about startups from being a partner at Sequoia.

Warren Hogarth

Warren Hogarth

Empower

Warren Hogarth is the founder of Empower, a personal financial assistant on your phone.

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Full Interview Transcript

Andrew: Hey, everyone. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. You guys know if you’ve been listening to my interviews that I’ve been traveling and moving around the world for a long time, I think four or five different cities that I’ve been recording Mixergy from.

The reason that I love living here in San Francisco is because of the people that I get to meet here. For example, a few months ago, I took my two kids to the museum, and they were playing with this other family of kids that were pretty much the same age. Before we said goodbye to the family that I saw at the museum, I took the father’s phone number and his name.

As I got home, I thought, “Maybe I should look him up. Maybe he’s someone I should have known.” But I never knew his name. I started looking him up and said, wow, this is a former partner at Sequoia, really interesting background, starting this new startup over here. He’s not just a father who I like getting together with. He’s a guy who’s really doing stuff here.

So the two of us went out to beer a few weeks later. This is what I love about San Francisco. He told me about his new startup, but what was amazing was the way he thought about it, the way he thought about why now, how to put it together, the way he thought about business in general, the way he thought about entrepreneurship and raising money and the connections he’d made. I thought, “Wow, this is a guy who thinks the way that I want to think. This is a person I’d want to be influenced by.” That’s why I love living here, to meet people like the guy you’re about to get to know here in this interview.

His name is Warren Hogarth. He’s a former partner at Sequoia. Sequoia, of course, you guys know, famous for investing companies like Google and WhatsApp and many others that you know. His latest company, his company right now is called Empower. Let me read the official description here and then I’ll tell you why I like it. It’s your personal financial assistant on your phone. It keeps you from ever having to worry about money again.

Warren, I don’t really love that description, but I’m going to tell you a little bit about what mine shows. My PG&E bill is due in a few days. It says, “Hey, your usual monthly payment to your life insurance didn’t go out. Maybe there’s an issue. Hey, did you know that you’re actually subscribed to these payments on a regular basis? Do you want to cancel any of them? Do you want to move money from one account to another?”

That’s what this app does. It lets me keep track of my money, lets me know when there are issues and allows me to move it around, and he’s got plans to do so much more. I invited him here to talk about how he built this, but more importantly what he learned about thinking about startups and businesses from having been a partner who was intimately involved in the growing of several companies.

All right. My two sponsors for this interview are HostGator and Toptal. I’ll tell you more about them later. Warren, good to have you here.

Warren: Wonderful, Andrew. Great to catch up again.

Andrew: You know what was impressive to me is — one of the things that was impressive is the number of people that you’d met to help you promote the business. Do you remember some of them, some of the people in the finance space?

Warren: Yeah. Over time, I’ve been very fortunate to meet everyone from the founders of Stripe and Square to Prosper, people on the boards of BlackRock. It’s just been a wonderful experience over my years at Sequoia. To take the knowledge in from those people and lean on them to help build the business has been wonderful.

Andrew: Not just that. You said to me, “You know, Andrew, I’m about to publish this app.” We talked before it came out. “I want to get to know people like Mr. Money Mustache.” You were just going through and saying, “Who are some influencers who should get to know the app?” Talk about your process for getting to know the people who will eventually talk about your app, give you feedback on it, maybe some of them evangelize. What was that process that you went through?

Warren: Yeah. I think it’s one of those things where you go out and you look for the most interesting people in the space that are giving very genuine advice to help people get ahead. For me, then, it’s a question of, “Do I know anybody that knows these people?” If I do, a warm introduction is always wonderful, but if not, I’ll just reach out cold and I’ll just say, “This is what we’re doing. We have a mission to change the way people manage their money to help really improve and change the game.” It’s something they’ve really responded to.

Andrew: I know Chase Jarvis one person. You said, “I’m not used to putting myself out there.” Chase Jarvis is great at building a reputation and building credibility for himself and his business. So you sat down with him. Are there any other finance people who helped you shape the way you’re thinking about this business or who you’ve reached out to, you got to know just because you’re in the space?

Warren: Yeah. I reached out to Financial Samurai, who is a very prolific writer in the space, and it’s been wonderful to get to know him. Chase has been phenomenal because he’s just so passionate about building educational content. I think we share a vision that education content is the kind of content that moves the needle for people, and there’s not great educational content in the finance space and it’s something that we would like to do as part of building Empower is to really help people access simple tools. We’ve been discussing some things we might be able to do together.

Then there was an introduction from one of my seed investors to a woman named Sue Wagner, who was one of the founders and COO of BlackRock. I’ve had one or two conversations with her just about different things, about the challenges of building companies in the financial space and the cycles they went through and the challenges they face and how they built one of the most amazing businesses from scratch, really in financial services.

Andrew: Just sitting down one at a time, having conversations with people, letting them know what you’re creating, asking them for their feedback and building those relationships.

Warren: Yeah.

Andrew: Okay, kind of like what you did with me, frankly. We had that beer, and then it’s led to this interview, which is going to lead to a bunch of downloads and a lot of feedback and a lot of users. One of the things that I liked about the way you were thinking about your product was you looked out at Uber and you said, “This Uber economy is part of the thing that led me to this business.” How did seeing all these Uber drivers and Instacart people lead you to do this? What was it that you were looking at? I want to know your analysis of the market.

Warren: Yeah. I think that the economy we live in today is fundamentally changed. In the next few years, 50% of millennials are going to have some kind of side hustle, some kind of side income. That just makes life more complex. It makes it harder to get a loan. It makes it harder to balance your books or know if you’re going to have enough money to spend.

It really increases financial complexity. You get penalized on the tax point of view. You sit down and talk to these drivers or folks in the space and none of them have got a basic financial education. We live in a world of self-driving cars, and yet there’s not a single app on their phone that can help them make basic decisions.

Andrew: What about Mint?

Warren: Mint was a good app 13 years ago. It’s not a good app that sits on your phone. It hasn’t done the work of structuring the data and giving recommendations. It’s really there for the geeks that want to go and search their information and do analysis. We want to turn that paradigm on its head and make an app that’s accessible to everyone, where we push you the relevant information, similar to the kinds of alerts you were mentioning that you’ve received before.

Andrew: I see. The bigger thing that I took away from it was you said, “I see that the economy is changing. I see that there are a lot of people with side hustles.” That’s the phrased used for these part-time gigs,” and they’re going to need things that they don’t have right now. It’s something between Mint and QuickBooks with a little bit of financial advisor in there, and that’s what you were seeing and that’s what you wanted to create.

Warren: Yeah.

Andrew: That’s something that I like about the way you think about business. It brings up a word you’ve used a lot with me, which is tailwinds. How does having the right tailwind — in fact, let’s forget about the right one, the wrong one, if not having a wind in your back is helpful. I’m just mumbling over my words. You know what I’m getting at, right?

Warren: Yeah.

Andrew: The reason you know it is because we went over some of the things you learned from Sequoia and from being around this stuff for so long. Talk to me about tailwinds and the importance of them.

Warren: You look at the best investments that Sequoia has made. It’s really been in companies where there has been some fundamental, structural shift in the market, whether it be around the way people consume or something that’s technology-enabled. It sort of creates this complete greenfield opportunity for new companies. On the other hand, some of the most painful times as an investor when you’re partnering with these entrepreneurs is when you invest in the A-team, the world champion surfer, but the waves aren’t breaking for you or the market is going in the wrong direction.

One example I had of this early on was when I started Invention 2008, clean tech was the hottest thing around. John Doerr was up on stage crying about how important this was. Series Bs were dead and gone at $800 million valuations without any revenue, and there were 300 or 400 solar companies created in Silicon Valley.

Unfortunately at the time, the Chinese were also onto this opportunity of solar. They really ran the table, and you had these phenomenal teams. The founder I invested in, Chris Rivest and the company was called SunPrint, they built this world-beating cadmium telluride solar cell, and it was the best technology. We were going to be able to produce solar cells for $0.50 a watt. The market was at $2 a watt.

Andrew: So they were going to cut the cost of producing electricity by 75%.

Warren: Correct.

Andrew: So 75% off of what was already — they had a process for doing this? It was the three founders that came up with this on their own?

Warren: Three founders basically in a modern garage. They were at the molecular foundry at Berkeley. One of them had dropped out of his PhD, the other had come from Harvard to do this. Super tenacious, mission-driven founders. Yet, out of the 350-odd solar companies in Silicon Valley, two of them survived. It was one of those things where as the Chinese started pumping money in and the prices started dropping, no matter how good your technology was, how good the team was, it was heartbreaking in many ways. There was no way to pull through.

Andrew: What did the Chinese do around solar energy?

Warren: Two things. One is they iterated on process very, very fast. So they became experts in the manufacturing. So they would get better at 10% or 15% per year, and as you compound that, it quickly closes the gap on a technology leap. The second thing is they got massive subsidy support from the government to the tune of about $25 billion, which wipes out any venture money that’s invested in the U.S.

Andrew: NPR has done a few pieces on this. As a country, China decided they were going to get really good at this, that they were going to invest in this and beat the rest of the world in this. I’m looking at an article in Scientific American that says that between 2008 and 2013, China’s solar electric panel industry dropped world prices by 80%. So suddenly one company dropping it by 75 competing against a country that’s dropping it by 80 doesn’t seem so impressive.

That’s what you’re talking about. They were phenomenal, but then a whole country came after them and you can’t beat that. That’s you mean if you get the wrong tailwinds. So you’re looking out in the world right now with your business and saying, “Where are the tailwinds?” And the tailwinds are pointing towards an industry where people are all becoming these mini-businesses unto themselves.

Warren: Yeah. And for me, there were two tailwinds. On one hand, from a customer pain point and these self-starting entrepreneurs that were side hustle, there’s this acute new pain the market and at the same time, there’s this massive secular shift in financial services where APIs are being built for the first time and we’re going to break down the walled gardens of banks.

Andrew: Meaning that I remember when Mint first came out, for them to get data out of bank accounts was they had to work with what was that company?

Warren: Yodlee.

Andrew: Yodlee, thank you. Even then, it was kind of a scrape and hope it was going to work out kind of deal. I invested in a company called inDinero. It worked when they were getting my data out of Citibank, but often it would break. That’s because they didn’t have an official relationship with Citibank. You guys now today have access directly through Citibank via their APIs?

Warren: Not just that, we have access not just in the ability to read your financial data, we have APIs that allow us to move money around on your behalf, pay your bills, open new accounts for us. If you look at what Stripe was able to do for developers, if you look at what Square has been able to do for developers, that same opportunity exists for consumers now.

Andrew: As an entrepreneur, do you start out saying where is the industry going? Where are the winds going? Or do you start out with an idea and then say, “Does this actually conform to where the world is going?”

Warren: Entrepreneurs come from all different angles. For me, I was so lucky to sit in this vantage point of seeing these massive secular shifts coming, whether it be on the genomic side of things, whether it be on this workforce, this contract workforce being built, whether it be the changes in financial services. I got to see those changes, and then I would marry that to my own personal passion.

I’ve been interested in finances since my grandfather gave me a few stocks back when I was a teenager and taught me the value of investing. I grew up in Australia. As you know, I came to the U.S. 11 years ago, and the financial system for me is so broken and if it’s broken for me, I can’t imagine how difficult it is for people that aren’t in as fortunate a position as I am.

Andrew: I see. Just taking it back to someone listening to us, it’s about being exposed to so much of what’s going on in the world on the topic that you’re interested in that the ideas naturally come about.

Warren: For me, for sure. In Australia, we don’t have this concept of a 30-year fixed loan or what have you. We have a loan, and if we need to borrow money from the bank, there’s not a fixed loan, a personal loan, there’s other loans, etc. So just that world perspective really helps as well.

Andrew: I see. All right. Let’s talk about the founder himself. You told me that at Sequoia, you had that big win with WhatsApp and then what happened?

Warren: One of the interesting things about the Sequoia is so much is about you’re only as good as your next investment. Literally, we had this giant win with WhatsApp, and we were struggling to drag people up on a Monday afternoon to have a celebratory drink. Everyone was so focused on getting back to work with the next companies and how we could help, but personally I do think it’s important and we all agree that it did make sense to have a little bit of a celebration in that sense.

Andrew: Sequoia’s stake on that, according to The New York Times article I’ve got in front of me was $3 billion, from $68 million invested to $3 billion windfall, essentially, from that deal. Am I off in my reading of this?

Warren: I think it was perhaps even a little bit more than that. If you’d held the stock, it’s doubled again since then.

Andrew: Right. So they essentially make $3 billion on this deal, and they still can’t get together and go out for a drink because why, because they have to sit and go for the next deal?

Warren: It’s a mindset or an ethic that you’re always hustling, you’re always working. You’re only as good as your next investment, and you had 100 other portfolio companies that we’re all working with.

Andrew: I see. You’re smiling as you think about that. Now you’re an entrepreneur. Now you understand that everything you do has got to be embedded in the business in its DNA. How are you doing it? How are you being intentional about it?

Warren: One of the things I learned, I got to work with a really broad set of entrepreneurs. I think entrepreneurs are multiple standard deviations away from the mean, but in many different directions. One of the most consistent things is your company moves at the pace that you move with. You really set the example from simple things, like how quickly respond to an email, whether it be how you treat people at the end of an interview process, who you’re hiring. So much of that stuff sets the DNA company.

So, for me, I want to make sure I bring that work ethic and that tenaciousness and hunger to the business as well as it really is sort of about setting the standard. I think if we do that right, the next five people we hire, we hire great people, then those things permeate out. If they reflect that behavior, those things permeate when you go from 5 to 50 to 500.

Andrew: One of the first events I did at Mixergy was partnering up with a company called Oversee.net. They used to manage a bunch of domains. I don’t know what they’re up to these days. They were making a killing on that. The founder wanted to make sure that people understood that even though you’re making a killing, we still have to worry about the bottom line.

One way that he did that was there was an employee on his team who bought a pair of scissors because they needed to cut some sign out. He looks at the pair of scissors and goes, “What are you doing buying scissors? Don’t even open that package.” He went and got his own scissors from home, I think it was the next day, rusty scissors, I hear, because who keeps a pair of scissors when you’re running a company like that? He brought in his old rusty scissors and started cutting up the sign.

And the message he sent across the company and even people who hadn’t been hired at the time was we watch our expenses. We don’t spend on frivolous things like scissors, and we don’t spend on other things. Do you do things like that? You’re smiling as you hear that, right? That’s the kind of thing that sticks with you.

Warren: It is. We haven’t paid for office space yet. I’ve called in a lot of favors. My cofounder and I have foregone salary to make the business work. There’s been some requests for stand-up desks. So far, we’re said no. Every dollar we have is really focused on being spent on the business and being scrappy and setting those principles right early on.

Andrew: I see. How much money have you guys raised?

Warren: A little over $1 million.

Andrew: I see. Let me take a moment break and come back and continue with this list of things that you’ve learned from Sequoia that you’re using to build your company. So I’ll tell you, Warren, the other day, I was at an event for a company called The Hustle. This guy who wanted to work for The Hustle told me he didn’t just send in an application. He said, “I want to stand out.” I said, “What did you do to stand out?” He said, “Andrew, I built them a website.” “You built them a website? Let me see.”

So I start looking at his website that he built to show The Hustle why they should hire him. It was like HireSam.com or whatever his name was. I thought, “Wow, this is really impressive.” This made such an impression that I first of all went to look at it. I wouldn’t go look at his resume if he sent it in, I wouldn’t look at an email that he sent them, but a website, you’ve got to see what he built just for them.

Then I thought about it and I realized, “Why am I just impressed with him? This is fairly easy to do. More of us should be doing it.” If you have an account with a web hosting company, it just takes $7 to buy the domain, and then you own it for a year and think of the impression you make on someone. That plus a free WordPress website and a free theme.

So all that is bringing me back to one of my sponsors, which is a company called HostGator. I’ve been telling you if you’re listening to me that you can use HostGator to create a website for your business, to host a website for your business or to move your website to them, but it doesn’t have to be for that. If you’re sending out proposals to someone, think of the impression that you make on them by setting up a whole website for them just showing them what a partnership with you would look like or why they should partner up with you.

If you have HostGator, not that hatchling plan that they sell for $3.48 a month, but the one that is way more expensive at $4.98 a month, with that plan, you get unlimited domains. That means you want a partner that you want to court, go and set up a new domain for them, a whole website, let them go experience it. You want to impress your wife the way I did when I was courting her? I created a whole website just for her just with a little inside joke.

Super easy to do. If you’re with HostGator and you have one of these packages—and most of their packages allow for unlimited domains. All you have to do is go to HostGator. If you’re with them, you can easily set up a new website. Free WordPress hosting with one-click install, unlimited domains. All of that comes with unmetered disk space, with unmetered bandwidth, unlimited email addresses, think about what you could do with that. And of course, if you’re unhappy with them, they’ve got the 45-day money back guarantee.

If you’re interested or curious about them, I urge you to go check out this special URL where they are giving us a big discount on their already low prices and where you get tagged as coming through me and frankly, that means that if things go well, I get to promote you a little bit or if things stink or if you have an issue, I stand behind you and I’ll help you work it out with this sponsor or anyone else.

So here’s the URL. Go to HostGator.com/Mixergy. I’m grateful to them for sponsoring and being such good partners. I hosted my new site, my new business on them. That’s how much I like them.

Warren, how does it feel to be interviewed by me considering like we don’t have this deep friendship, but we’ve known each other a little bit? For me, it’s a little bit weird, awkward, I don’t know. I feel like I’ve got to get this right, but at the same time, not so right that I lose the mission of Mixergy.

Warren: Similarly, it’s a new experience for me as well, but hopefully we’ll be able to have a scotch afterwards and you can give me some more advice.

Andrew: I feel like for you, the weird part is that you’re public right now, that you’re on camera, right?

Warren: Correct.

Andrew: For me, this is one of the downsides of living in San Francisco. If I screw this up, be boring or not be at my best here, I can’t leave it at the office. In my head, if we go out for drinks again or a friend of a friend knows you, they now know that I suck. In fact, because they’re more likely to listen to this than to anything else, that is the impression that I leave them with. That’s one of the reasons why I’d like to leave San Francisco. I love the conversations we have. I don’t like that I can’t leave it at the office. I don’t like how I can’t ever just suck at the office but be a great dad out in the world or a great runner or a great something, a funny husband. Does that bother you at all?

Warren: Personally, it does. My wife and I, as you and I have chatted about, I think yearn for a depth in a community, just sort of personally. I think it’s something that builds character and strengthens families. I think it is tough in the Valley with everyone being as focused as they are on their career and having so little time.

Also, it’s partly transient and families are smaller or families are delayed. It’s one of the tradeoffs. It’s one of the reasons my wife and I like to get out of the Valley a lot with our kids. Hopefully my nephew, who turned five recently, just got a motorbike for his birthday and lives in rural Australia. I’m hoping to send the kids over there to get a little bit battle hardened and outside the Valley.

Andrew: That would be great. Yeah. You were kind of a weirdo to have not one kid in San Francisco, which is a weirdo thing anyway, but to have two kids, which is why I gravitated to you and got your phone number. But I’ll give you an example of one of the annoying parts of San Francisco. We were at a birthday party and I happened to see you. I didn’t say, “Hi, how’s the family?” I didn’t ask any of that. I took my phone to you with your app and I said, “Here’s what I think you should be doing with this app.”

And I showed you how it was on my home screen and how I was using it on a regular basis and I said, “What I think you should be doing is not putting the transaction first, but put the name of the person who the transaction was with.” I saw the look on your face, and I said maybe I shouldn’t be doing this. You said, “Andrew, email it to me.” You can’t leave it at the office. If the app sucks, now suddenly I’m bringing this up at a kid’s birthday party.

Warren: Yeah. It’s actually a really important thing, though, for founders and a lot is written about the emotional rollercoaster that founders go through and I think one of the things that I’m fortunate and I know you’re fortunate to have as well is to have a really strong family and support network around things. I’m hopeful that as the Valley matures a little bit or the young generation of entrepreneurs from the last 10 years matures that there will be stronger connections there because there is more than just the business.

Andrew: I don’t think that’s going to happen. I think this is going to be the city, especially San Francisco itself, you come in, you crank out your years, you get your money and then maybe you go back to where you came from, which is great. Then you’re living the high life over there and you get to create the startup community of wherever or you go to South Bay and you have a little bit of a community there.

But there you’re surrounded, again, by all the people that you tried to get away from or you competed with or whatever. Or here’s the worst part of it, they made more money than you or more impact than you, and then you can’t ever forget that you were in a race and you didn’t come in first, which sucks. I wonder if that bothers you. Does that bother you?

Warren: It probably bothered me more personally three or four years ago. Now, with a couple of kids, it bothers me a lot less. One of the things that I thrive on and I love is the stimulation that comes from the Valley and the quality of the conversation. You don’t necessarily leave it at work, but I can have a conversation with someone and we can talk about whether it be AI or the latest sort of developments in cancer or how machine learning is going to disrupt cancer treatment or something like this. Those are the things that if you enjoy those kinds of things that are very unique to the Valley.

Andrew: All right. Let’s talk about timing because that’s critical. You worked at FutureAdvisor. I’m looking at the Google description here. It’s personalized investing advice and data-driven recommendations for your investment goals. That’s what they did, right?

Warren: Uh-huh.

Andrew: Talk about how timing impacted what happened to them.

Warren: Yeah. So FutureAdvisor was one of the three robo-advisors with Wealthfront, Betterment and FutureAdvisor and all got going around the same time. This is really a story of a wonderful market opportunity with tailwinds. All three of the companies were growing really, really well. Both the founders and myself at Sequoia had a belief that we were going to fundamentally disrupt investment advice rather than these advisors that really weren’t very well qualified charging 1.5% to 2%. We could disrupt the industry, cut the cost by 5x to 10x, cut the cost by 25 basis points and run the table. That was happening.

But then there was this tectonic shift. Normally, we don’t worry that incumbents will wake up because it’s very hard for them to innovate in a product. But there was this tectonic shift because the incumbents all of a sudden had a structural advantage. In this case, the Schwabs and the Fidelitys of the world, because they were banks, they were able to make money by holding deposits. So they would make, long story short, they could offer the product for free and make just as much money as we could charging 25 basis points for a product.

Andrew: How?

Warren: Because they hold deposits. So if a user holds 10% of their portfolio in cash, they actually take that cash because they’re a bank and they lend it out and on average they make 2.5% interest. So 2.5% or actually 3% net interest margin is what they make on 10% of the portfolio is 30 basis points. So they could actually be more profitable and offer the product for free.

Andrew: I see. I think everyone knows what 25 basis points is, but it’s a quarter of 1%, for anyone who doesn’t know. I see. That’s the shift that happened. These incumbents, as you said, were awakened to the opportunity and they jumped in on it. So what happened to FutureAdvisor?

Warren: There became this moment in time where one or two of the incumbents wanted to build their own products and one or two of the incumbents saw an opportunity to sort of race ahead by acquiring. Because they had strong relationships with the incumbents and because as a company we were sort of naïve to this tectonic shift, we were in the best position to be acquired when this happened and when there was this moment in time. Once one or two acquisitions had been made, most of the slots are filled up. So it’s this dance between holding out but also making sure that you are one of the people at the right moment in time.

Andrew: How much were they acquired by BlackRock for?

Warren: It’s rumored to be between $150 million and $200 million.

Andrew: Okay. This is a company that raised . . .

Warren: I think it was $15 million. It was a pretty low amount.

Andrew: Oh, okay.

Warren: $15 million total? I thought $15 million was maybe their last round.

Andrew: So what am I getting out of this for timing? What’s the big takeaway for me from this?

Warren: Yeah. For me, one of the takeaways, when you’re a founder and you have this mission and there’s this belief that there’s this, again, these fundamental tailwinds and shift in a market like I believe now in financial services, I’m going to run for as long as I can and I’m going to build an important and public company. I’d love the company to be around in 30 or 50 years from now.

But if there is a tectonic shift in the market, something that changes that you didn’t foresee that can challenge that core assumption, those are good times to rethink because on the one hand, it might scare the living crap out of you, which it did for us at the time. It also does create opportunity.

So I think it’s one of those things that when the tables turned — the company is still doing very, very well as part of BlackRock. It’s got this massive distribution channel now similar to when companies back in the day got bought by Cisco. So you can still 10x the company. You can still achieve your vision, but if there’s some fundamental shift, it’s also an opportunity.

Andrew: You know what? I’ve got a friend who works at another major VC firm who’s still there. We were having drinks the day after the Whole Foods-Amazon deal happened. He said, “Now we have to sit and reevaluate every food company that we have.” It’s not an easy decision to say, “We have to sell quickly because this happened.” It’s, “We’re now in a whole new world and we have to think about how this fits in, in this whole new world, if at all.” That’s what you’re suggesting.

Warren: Yeah. This world is going to change. Let’s say Microsoft acquires one of the storage companies, whether it be Box or somebody else. That will change the dance cards. If things like Trump ever gets his repatriation of cheap tax go through, then all of a sudden, a lot of Silicon Valley and tech companies are going to be flush with cash in the U.S. and they’re going to be very inquisitive again. So those are the kinds of tectonic shifts that create opportunity and challenges for businesses. You just want to make sure you’re at the right place at the right time with those.

Andrew: So the other thing you talked to me about before we started in relation to timing is you said there’s an issue where you could be too early. There’s an issue where you can be first. If you’re first, there’s an advantage to that. But you also said hanging in for a long time could also help. I was kind of struck by that. Talk to me more about that, the importance or the power of sticking around.

Warren: Yeah. I think of a few examples that come to mind. Even if you take the example of FutureAdvisor, a year earlier, none of these companies were even remotely interested in being inquisitive. So, just that timing of one year can make a huge difference in what might be happening in the market or the interest of people.

One of the companies that I was involved with early on was another company called Sunrun, which is the largest residential solar company in the U.S. now. It’s a public company. I remember I was actually at my sister’s wedding. We were about to close a huge and very critical deal. It was over $100 million of financing to finance the next round of systems and at the very last minute, there was like someone threw a wrench into the whole process and literally the company for a period of time was sort of like six weeks of runway or something if this thing didn’t close.

Luckily with the Sequoia connections, I rang the guys up and this was one of the top Wall Street banks, make a phone call and we got the thing unstuck and closed within a few days. But the whole world can change very, very fast and had that — they still had to make changes, but that staying power and just being focused got them the extra year of runway that they needed. It got them to be a public company and that is a company at the end of this year, they’re supposed to be cash flow positive, I believe. So that staying power and willpower, you’ve just got to be battle-hardened for those kinds of things and good things happen. Things change.

Andrew: What about when it’s time to just be done? How do you know? We’re so tenacious. We’re so determined. At what point do you know it’s too long, move on?

Warren: This is an age-old question that I’ve had many discussions with founders about this. A lot of it is sort of a deeply personal belief in what you’re doing. A lot of founders in Silicon Valley are missionaries, they’re not mercenaries. You need to have some of that ability to just power through.

I remember again, going back to the 2008 financial crisis, I was a newly minted person at Sequoia. This company called FireEye comes in for their series F. No one is willing to fund the company. We bridge the company. Four years later, it’s worth $4 billion or $5 billion. Pretty much everyone except the core team and founders would have probably walked at that point. You look at that example and you go, “How do you know?”

Andrew: Right.

Warren: I think for me, as I think about it, I personally had these core beliefs, like what have I believed in to build this business and has that been shaken in any way, shape or form? If it hasn’t been shaken, you keep going as long as you can, I suppose. Ultimately, the money runs out. But if those core beliefs are set, then I believe you keep going. If something shakes them, then I believe that’s the point in time where you have this reassessment. It’s okay to hang up the gloves or try again because for good people, there’s always another opportunity.

Andrew: All right. Let me take a moment to talk about my sponsor and then I’ll come back. This time, instead of talking about Toptal in relation to developers, I’ve got to tell you guys if you’re listening about my nanny.

Three years ago, my son was ready for a nanny. I remember as I walked away to the subway to the subway, to BART, the first time that I left my son with a nanny by himself with essentially a stranger — yeah, I did a lot of research, but I don’t know this person that well — I thought, “Why am I feeling okay about this? Maybe I’m being a bad dad. Maybe I should go back in and just watch her.”

Then I thought about it as I kept on like standing there right outside the 24th street BART station I realized I know why I feel confident with her. Yeah, it’s all the research, but research just handles the head. What is it about my heart that’s telling me that it’s okay.

I realized it’s because of the little things that she did that communicated confident and trust. Like she knew how to calm the baby down when I watched her with him. It just showed her experience. She knew which bottles that we bought. We bought every bottle from Amazon possible. She knew which ones were actually going to help and which ones weren’t. She knew how to change his diaper in a way that wouldn’t have him pee on me, which is what he did before.

It was all these things she brought into the experience, all this calmness, all this experience and knowledge that she brought on that communicated not to my head but to my heart this is someone that I feel good with. This is someone who I can trust with my kid.

The reason I bring this up in an ad here for a company called Toptal that helps you hire the best developers on the planet, the reason I bring it up is because there’s something about someone who’s got that experience, who’s that knowledgeable. That doesn’t just mean they could handle the job but it means that you can trust them to do things that you couldn’t do yourself, trust them to do things that you wouldn’t trust other people.

So, if you’re out there and you’ve been looking for developers and it’s taking you too long or maybe you’ve been working with developers and you don’t have that sense of trust, that sense of confidence, that sense that they can really take care of things for me, your business, your product is your baby in some ways.

I urge you to go and have a conversation with Toptal, top as in top of the mountain, tal as in talent. Go check them out. When you go this URL that I’m going to give you, yes, they’re going to give you 80 hours of developer credit when you pay for your first 80 hours, yes, they’re going to give you an additional no risk trial period of up to two weeks means there’s no risk here for two weeks.

But the first thing they’re going to do is have a conversation with you where they will understand what you need and then help you find the right person within their network to talk to and once you talk to that person, if it’s a match, you guys can go work together and you’ll see the difference that a top developer can have on your business.

So here’s the URL. I want you to go check out Toptal.com/Mixergy. If you guys see me talk about them now for what’s coming up on two years, every single freaking interview, every single freaking interview, it’s because so many people in the audience have been signing up for them that it pays for them to keep sponsoring and the relationship has been so strong even with that two-week no risk trial period that they know that they’re getting paid by our listeners and our listeners continue to work with them. It pays for them. It pays for our listeners. If you haven’t tried them, go check out Toptal.com/Mixergy.

All right. Let’s go with one other thing and then I want to talk about you more about your app. Gross margin, you said one of the things that you took away from your experience at Sequoia is the importance of gross margin. Why is that important and where did that come from?

Warren: Yeah. It’s one of the things that Don Valentine, who’s the founder of Sequoia, he’s over 80 years old now, you sit down with him and it’s pretty much the only thing he talks about. It’s so important for the businesses. One of the examples was a company I was involved with, this genetic testing company that helped, SureX, that helps get people on various mental health drugs on the right drug the first time. 40% of people are on this concoction of drugs that actually don’t work for them and have pretty negative side effects and with a very simple test, you can get a large portion of them on to a drug that really helps changes their lives.

But it was never smooth sailing for this company. They were based in the Midwest. There were all of these ups and downs while you’re waiting for regulatory and what have you, but fortunately because this was sort of an 80% or 90% gross margin product, when they did sell the product, there was enough cash that came off the business that they didn’t have to raise a ton of money, they could continue to invest it in R&D and they could ride through the bumps. For me, it was one of these great examples and it was another example of the company that successfully exited for I think over $400 million now that was able to benefit from just having wonderful gross margins.

Then I’ve seen the other side of it as well. I think solar was another great example. You had to build factories. The average gross margin in manufacturing is like 25%. So you just have to have so much throughput and there’s so little room for error. If your gross margin is low, if your gross margin is high it means people need your product. It’s a real pain and it just makes growing the business and the sustainability of the business that much stronger.

Andrew: I’ve got a quote from him that I’ll sum up, well here, “There are two things in business that matter. You can learn this in two minutes. You don’t have to go to business school for two years. Here they are — gross margins and cash flow. The other financial metrics you can forget. With high gross margins, you can grow the company as fast as the market will allow.” Gross margins, doesn’t that mean that basically you need to stay in software or biomedical but you have to stay away from services, right? Gross margin is the revenue you make from the product you’re selling minus the cost of producing each item that you’re selling, right? It’s as simple as that.

Warren: Yeah.

Andrew: The office doesn’t go into gross margin. The light doesn’t go into gross margin here in my interviews. Doesn’t that keep you from being in any — I see a smile on your face. What have you picked up on from what I’ve said? Am I missing something?

Warren: No. You have this massive service economy happening right now. I think it’s one of the most contentious pieces. If you go back to one of Sequoia’s most I think embarrassing investments was Webvan back in the ’99 boom and bust and yet, we were the series A investor in Instacart. Everything has sort of like a corollary or a yin and a yang.

I think the difference is there are these services businesses, which are low gross margin. You’ve got to have a lot of courage to do those because you have to believe that they can have hyper-growth and you have to believe that you’ll be able to raise money to support that growth because if things stop, then things blow up in pretty bad ways. You’re seeing that in bunch of the delivery businesses.

Andrew: Instacart and Webvan, neither one of them has high gross margins, right? Webvan they owned every single thing that went into running an online grocery store, right down to the vans that would show up at your door. Instacart doesn’t do all that, which makes it seem like it’s got much better economics and it does. But they still have to pay a big portion of the cost that we pay for grocery pickup to have to pay to the grocery store and to the people who are going to go and pick the stuff and deliver it to my house.

Warren: Correct.

Andrew: So that’s a dangerous business to be in based on what you’re saying.

Warren: I would argue a riskier business that’s traded off against the potential hyper growth that comes out of it. If you look at the ones that are likely to be successful, whether it be an Instacart or an Uber, it’s because they do a very good job of using software to get leverage. So Uber takes a 20% cut.

So, if you kind of abstract away the rest of the business, really, of that 20% they take, they make very high gross margin off that. Instacart is doing something similar, where they don’t have the infrastructure and the warehouses. They don’t have to support that high overhead. So, on the software part of the business, they’re doing well. I think that’s what a lot of investors have looked for in services businesses, how much of the leverage is driven by software.

Andrew: Right. That’s essentially what we’re coming down to. All right. You’ve mentioned the word pain a few times. How does pain factor in to the decision to invest in a company or to build a company, customer pain, I mean?

Warren: Yeah. We would always describe it on the Sequoia side as a must have versus a nice to have. Going back to the gross margin comment, the higher the gross margin means the customer is paying more, which means it’s a big pain. So it’s one of those early leading indicators of the ability to grow a nice business, the ability or the likelihood that people will refer it. It’s one of the core things we would look for from our investment pieces.

Andrew: You know what? So I started writing a book on this, on the importance of understanding the pain. Did I talk to you about that?

Warren: I don’t think so.

Andrew: And then a friend of mine, Colin, the guy who works at — I keep thinking of them as like NWA. What’s the name of that VC firm that’s all initials? Anyway, he said, “You know what, Andrew? That’s just one of the first checkboxes, pain.” What is the process for finding pain? It seems like you guys just — it’s just one simple step in your process. But how do you think about it?

Warren: I think it depends if it’s a consumer or an enterprise business. On the enterprise side, we would pull people up, there would be references and we’d have this super-extensive network of CIOs or CTOs that we would call up and directly ask.

Andrew: To ask them — so if you’re selling to a CTO, you’d call them up and ask them, “Is this a real pain?”

Warren: If we were likely to invest in a company, we would ask for some references. We’d often introduce them to people we knew to see if they could sell. One is to see if the entrepreneurs could sell and two, if that was a pain for the handful of people we could introduce them to. So, that’s how we would do it on the enterprise side. On the consumer side, really, you could talk to a lot of people, but at the end of the day, just looking at the engagement metrics of the business is one of the best indicators. Are the dogs eating the dog food? Are they coming back.

Andrew: Engagement. Here it is. Colin is at NEA. I do these things in my head. I learned these memory tricks that are now causing trouble for me. Like NEA becomes NWA and then it gets stuck there and I forget what that’s supposed to remind me of. All right. Let me ask you how you look at engagement then if that’s the way that you’re figuring out whether your product is working or not. My sense is you’re trying to figure out how often are people coming back to my app, right?

Warren: Yeah.

Andrew: So what do you do to spike the numbers. Is it about sending me more alerts here in the app? I can’t show your app because it’s got too much private information in here. I’d love to show it on the screen.

Warren: We had a really big debate about this early on because there’s this bias in the Valley to focus on daily active usage. We didn’t want to force fit our product. We had a belief that there would be a percentage of our users that would want to come on a daily basis, but if we wanted to actually reach this broader set of folks, it would be much more sort of weekly or monthly.

So, for us, we look at weekly and monthly active because there’s this belief that we should be able to give you some nuggets of information about whether something has happened, you can improve something, you could save money in some way, that’s something that’s on a frequency of weekly or monthly. If you’re coming back and checking that or we look a bit deeper on what actions you’re taking, for us that means success. Then the other one we look for is are people are referring it. Again, we instrument a lot of these pieces. We can get pretty good proxies for those things.

Andrew: You said you care about weekly and monthly active users. Is there something you did that helped?

Warren: This is where you start to get into the behavioral side of both sort of psychology and finances. So we are doing some lightweight work around giving people information around the spending or what happened last month that I think can influence behavior and we’re trying to do it in a way that’s not obtrusive, similar to the Fitbit or the Apple Watch gives you sense of like how you’ve done each day. We focus on throughout the week or on a monthly basis how are you doing and what are some ways that you can’t improve but in a very non-judgmental way.

Andrew: Do you have anything more specific than that?

Warren: One of the best ones is are you spending more than you’re earning?

Andrew: Wait, am I spending more than I’m earning?

Warren: Correct.

Andrew: So, if you show me on a regular basis am I spending more than I’m earning, then what? How does that impact your usage?

Warren: I think a lot of people are flying in the dark on some things. Again, if you go back to this gig economy or the side hustle economy, you don’t have it in the back of your mind how much you necessarily earn and certainly not how much you spent throughout a month. So just giving people that information, that simple report card at the end of the month, for us, we have over 20% of our users come back — the day we send out the monthly report card, 20% or more open the app that day just giving them that simple piece of information.

Andrew: I see. All right. How did you come to that conclusion? How did you know? Or was that just a hunch and you tested and you saw that brought people in?

Warren: It’s a little bit of both. It started off with intuition and personal experience. We did a lot of early focus groups. But at some point, it is this do you believe you have some innate product sense around these things that will engage people and matter to people. So it’s a mixture of taking some bets, but very quickly measuring and testing.

Andrew: You did focus groups for Empower?

Warren: Yes.

Andrew: Where you actually got people in a room and you asked them questions?

Warren: Yeah. We got people in different age groups, different phases in life, asked them about what’s troubling them, get a sense of where they get anxiety around their finances, it’s amazing, again, if you look at millennials, one of the great things and encouraging thing for the country is millennials grew up seeing the challenges the parents had with money and how credit card and the debt cycle that a lot of people in America get in negatively impacted their family.

A lot of the people in our early focus groups, they were working much harder to avoid debt all together or get out of their student loan debt and get on top of these things faster and faster. So sometimes I think we see things from our own life experiences that we want to emulate. They’re also things we want to do drastically differently. We notice that within our focus groups, for sure.

Andrew: I see. You were doing the focus group yourself, did you say?

Warren: Yeah. I was part of it. I tried for very specific reasons not to lead it so that I would be more impartial, but with everyone’s permission, we record these and I would sit in on some of them as well.

Andrew: Who did you bring in to lead it?

Warren: Someone I know, her name is [inaudible 00:55:04], who’s done a wonderful job on this stuff in the past. So, she’s independent and can sort of advocate for both the people in the room who were going against our ideas as well not lead the horse to water, as it were.

Andrew: I get it. Every time a founder asks me questions about his product, I can see that he’s guiding me towards what he wants to hear and it’s really very tough and awkward because at some point, I realized I’m not going to argue with him because I want him to like me. That’s why we’re friends. If I keep telling him no, this doesn’t make sense, he’s not going to listen anyway, so what’s the point.

All right. I really like Empower a lot. What I like about it is it’s much cleaner and clearer than the other apps that I use. I didn’t really intend to look at it because I don’t really care that much about my personal finances, I have to be honest with you. I’m not in a situation where my personal finances impact my life that much. It’s more my work finances that impact things and that’s what I want to look at on a minute by minute basis.

I just like how simple the app is. I like how you didn’t even ask me to create an account. You just asked me to log in to my bank account. You even had the ability to connect with LastPass. So LastPass filled in my username and password because I don’t know what that is. I think what you already have right now is the ability for me to move money from one bank account to another, that’s already implemented?

Warren: That’s implemented and coming out in about two weeks is the ability to start to pay down your credit cards as well.

Andrew: That’s really helpful. Actually, I set that on autopay because I can’t stand dealing with it. I only use banks and credit cards that allow me to do autopay for 100%, but I can see how that would be helpful for other people. I know that wiring money is a pain I the butt. I know about it not because I do it. I don’t wire money from one account to another. It wouldn’t bother me.

But my wife does it all the time. We have Schwab account which she likes to keep our money in and we have a Citibank account which we use for day-to-day expenses and sending money from Schwab to Citibank is a pain in the ass. I have to hear about it for hours. Why am I not doing it? Why does she have to do it? That’s one of the issues. I’m curious to try that.

The only thing that I wish that you did differently — I can show you this. I’m seeing an $8.78. If I look at the main screen, it says debit card purchase and it gives me the date. But it’s not until I click in that I see from 26th and Guerrero Market. It should be 26th and Guerrero Market first and then the debit card purchase so I can see where it came from. What do you think of that?

Warren: I agree. We’re doing a lot of work to clean up the data. One of the things we care about is stripping out all the noise. So send me an email and I’ll add it to the list.

Andrew: See, the thing is that I feel awkward that I just interrupted this interview to give you my product feedback, but I like Empower so much that I can’t stop looking at it and coming up with suggestions for what I’d like to see done differently. I’ll save it for the next birthday party. While you’re having cake, I’ll say, “Please put down the cake. I’ve got a few more suggestions.”

Then I’ll show you screenshots on my screen, but I won’t even show you my phone because I don’t even want you to see my finances. That’s kind of awkward. In fact, before I even installed it, I asked you what kind of protection — in fact, why don’t I ask you publicly? What kind of protection can I get that you at Empower don’t have god view and can’t see everything that I’m spending money on?

Warren: Having exposure to the tech scene, it was one of the most paranoid things that we cared about. So a couple of things we did on the security side is we have not just encryption for SSL, for all of the transfer information, we have 256-bit encryption at rest, we store personal information in a completely different database to all of your financial information, so there’s only a token that connects those two things. We have heavy restrictions on who has access to any of the data in the first place.

Andrew: So my bank account data, like the fact that I just spent $8.78 at Guerrero Market, that’s sitting on your servers, but it’s not connected to my name?

Warren: No. It’s a randomized token. Then we store your other information in a different database so that information can only be joined when it goes into the app, effectively.

Andrew: I see. Is there any way for anyone at the company to go and connect the two or am I being too paranoid? No, I’m not being too paranoid. I’m going to ask — is there any way for anyone at the company to connect those two pieces of data?

Warren: There is in the situation that you reach out because there’s a problem. Like let’s say you say hey, something happened, this money moved and I think there was a problem, just like you would if you called your bank. That’s on a very restricted basis who would have access to that information. It’s only exposed if a user reaches out with a specific request and only for the segment of information that they’re asking for, not all of your information.

Andrew: So your customer service person would only have access to that one question. So if I asked about this specific purchase, they would have only that but not the rest.

Warren: They actually don’t have access to that individual level. It would be, for example, if you said, “Hey, I transferred $100 from the Citibank to the Schwab. There’s a problem with it.” We can go in and we look at that transfer and make sure it’s completed successfully and there were no other issues that came up in the process.

Andrew: I think god view is one of the big issues that’s going to eventually come out and it will be a big scandal and people are going to talk about it. When this comes out, will you be one of the issues? Have you gone in and seen my expenses? Have you gone in and seen other people’s expenses in Empower?

Warren: People don’t even have to put their name into the app.

Andrew: I saw, actually. It wasn’t until a moment ago that the app finally asked me for my name. You don’t have my name because don’t you pull it from Citibank?

Warren: So, if you want to get into the weeds, we only pull it if you go and do a transfer. We do an extra level of identity verification when it comes to money movement and we have to do that for regulatory reasons.

Andrew: And then do you save that name?

Warren: Yes, we have to.

Andrew: Okay. So only when I want to do that. The other time that you asked me for my name was when I wanted to do autosave and you said, “Tell you what, for us to do autosave, I need your first name and last name.”

Warren: Yeah. The government has a bunch of very specific rules to make sure nobody’s financing terrorism. So, for those reasons, we have to collect that information.

Andrew: All right. The only reason I’m asking all these pain in the ass questions is because I freaking love the app. As a user, with my journals and with my finances, I’m especially cautious about data. I guess I’m also cautious about it with Google Drive and Gmail too. I hate all the different apps that get access to Gmail. But I like the app. I’m asking as a fan now. I’ve become a fan of this freaking app. I feel like my usage of the app is going to outlast our relationship.

Warren: I hope not.

Andrew: I think there’s a little bit of intimidation on my part, I don’t know why, in our friendship. I feel like that’s going to be okay. You’re probably going to move to a different city. Who knows where I’ll end up, maybe in a different city too. We’ll ping each other from time to time when we need something and we’ll know we can count on each other because we’ve become friends, but the app is really where I’m going to stay connected with you. I really like the app. I don’t put a lot of things on my home screen. That’s one of the things that I’ve added. Empower is really good. Congratulations on building the app.

Warren: Thank you, Andrew.

Andrew: All right. Thank you all for being a part of this. The app is called Empower. You can find it in the App Store. Is it available for Android too?

Warren: It will be available for Android in about two months.

Andrew: Two months on Android, which means like a day before this interview gets published. I record ahead of time. So, if you’re listening to this interview, there’s a good chance it will be in the App Store and the two sponsors I mentioned are HostGator and Toptal and I’m grateful to them for sponsoring. Thanks, Warren.

Warren: Have a great one.

Andrew: You bet. Bye, everyone.


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