Andrew: Hey there freedom fighters. My name is Andrew Warner, I am the founder of Mixergy.com home of the ambitious upstart and the place where over a thousand entrepreneurs have come to talk about how they built their businesses, teach you what they learned along the way, and hopefully they do it all. Hopefully so that when you build a successful company you’ll come back here and do the same thing yourself.
Andrew: Today we’re going to find out how a Medical School dropout built and essentially sold a bank. In 2009 Joshua Reich founded Simple, an online replacement for traditional bank checking accounts. It features elegant apps that make it easy for people to see how much money they have and manage their money. Simple eliminates the shocking fees that many customers are hit with. It’s basically the kind of bank you’d create if you could imagine it yourself without all the old weight of the old system. Less than four years later it was acquired for a reported 117 million dollars. I invited him to talk about how he did it. Josh, welcome.
Josh: Thanks for having me on.
Andrew: You were in a hospital working, helping a mother deliver a baby and at the same time doing what?
Josh: Well it wasn’t literally at the same time but I was doing my obstetrics rotation at a hospital in Australia. This is my fifth year of medical school and I looked pretty much then as I look today. Sort of a shaved head, nerdy guy. I had a quota of the number of babies I had to deliver and for some reason all the mothers would choose other student doctors to deliver their babies. I got a couple in, but I spent more time sitting at the nurse’s station, logging into my servers, programming when I probably should have been meeting my quota for live child births. I was involved in a record number of Cesareans because I think with that mothers don’t care what you look like. But the live births I missed out on my full quota.
Andrew: You were sitting there coding which to me says something about who you are and who you were almost meant to be in this world. You suggested in the pre-interview that we take a look at a site called dataserve.org and actually go to the way back machine to look at it, which I did, and I saw that it’s a company that you started when you were about 10 years old, right?
Josh: Well, I co-founded it with my friend Luke when we were about 10 years old, yes. I think we then went off and acquired another company when we were 11. We spent more time sort of in the machinations of running the business then actually running the business. The idea is that we’re all going to write software because we’re all computer geeks. But we spent a lot of time having general meetings and writing minutes and passing motions and resolutions. It was a lot of fun, yeah.
Andrew: It seems like it was a lot of fun and you had big dreams. I see a letter here from Luke Howard, age 10 to Bill Gates.
Josh: Yep.
Andrew: Right, somewhere on there is a letter from a friend of yours who wanted to buy out your company, and your refusal. But what I’m getting at is, Josh, were you an entrepreneur internally even at that age? Was the person who we’re looking at today represented at that stage?
Josh: I think so, and you know I gave this talk maybe a year or two ago about what I think some of the skills I have that’s led to the success of Simple. I think one of the core things that I brought to this is that I’ve always liked taking things apart and putting them back together. When I was, you know six, seven, my friends hired me to take apart all their televisions and their telephones and just work with electronics. I had no sort of fear of not knowing what I was doing, which I think is a really useful skill when you’re trying to do something that hasn’t been done before. If you’re looking to follow a play book and follow these ten steps to success, I’m sure that works for a lot of people but that’s just not how I’m wired. I’m much more interested in taking things apart, working out how it works, and being comfortable being uncomfortable.
Andrew: I see, and so then was medical school not a break from this entrepreneurial path that I’m seeing, but an extension of the person who wants to look on the inside, see how things works, and how you can make it better or is it just a random thing that…
Josh: No…
Andrew: Where did that come from?
Josh: My last job as a doctor, I got the grades in high school to really do whatever i wanted at college. So when you get the grades to go to a top medical program, you go to a top medical program, and for me it was kind of the opposite. The first half of a medical program it’s all one degree at six years as long as you’re not pre-med and then med school, but the first half is all book learning and a lot of memorization. It wasn’t really about sort of taking things apart and putting them back together. It was like, there are 50 muscles in the arm, you have to learn all their names, all their insertion points, and origins, and their innovation, and [???] memorize a bunch of stuff.
That was kind of the opposite of what I was looking for. But, in my fourth year I started getting involved with patients. And doing clinical rotations and that actually became a lot more interesting than through the academic world of medical school. I’m dealing with people and having empathy and seeing people in their lives, that was something that I honestly will miss for the rest of my life. I’m not going to go back and be a doctor but those moments were rare and cherished.
Andrew: All right, I get that. I’ve been in the hospital talking to the doctor and when they feel the connection with me I fell like I’m more grateful to them and more present in the conversation with them than I am with anyone else in my life, for obvious reasons.
Josh: [??]
Andrew: So, one of the reasons why you started Simple is you experienced frustrations. The experience happened when you were overdrawn somehow?
Josh: You know this would be the perfect standing story if it happened one week earlier. This story, actually, I think the one you’re referring to, I wrote about this in my blog happened the week after I decided to start working on Simple. It’s not to say that Simple wasn’t born out of my frustration with banking, it certainly was. It’s just that, that experiment happened a week after was like every single thing that could have gone wrong in banking …
Andrew: What happened? Help me unravel the situation because it is one of the reasons why Simple exists even if it didn’t happen just before.
Josh: Right, so, what happened is I woke up on a Monday morning and I was checking my email as you do before you get out of bed and I saw that the name of my bank saying I was saying I was overdrawn. And that made no sense to me because I was hanging out at home that weekend, didn’t do anything and didn’t spend any money on the weekend, how could I have been overdrawn Sunday night. And so you get out of bed, login into the online banking website and it turned out what had happened is my paycheck had come through [??] this week. And a lot of people, when your paycheck comes in, you schedule all of your bill payments and you check your checking account, any money left over I used to pay off my credit and any money left over from that I used to put away into a savings account.
Actually, no, I was paying off a home equity loan so everything else went off to our home equity loan. Anyway, so, what happened on Monday morning is I logged in and I saw that all of my bill payments went through twice. And I remembered that when I was filling out the bill pay section on the banks website and I’ll name, names cause what are they going to do? It’s Chase. So, [??] my bill pay text on Chase, you hit return and it pays . . .
Andrew: . . . which people like.
Josh: And so you hit return again and refresh the page again and things would come back …
Andrew: I’ve experienced that with banks. You do know when it went blank, it usually means nothing happened but you don’t know.
Josh: Right, and so I went through and just resubmitted the page, all my payments went through twice. And it wasn’t the worst thing in the world. It meant that I was paid two months in advanced, my electricity and gas and oil. So things … but because I took any money that was left over and put that to pay off my home equity loan because I wanted to pay it off as quickly as possible. It paid that twice which meant that I was overdrawn.
Andrew: Yes.
Josh: And the way the bank made out to that is A, they charged me a fee, a $35 dollar overdraft fee or something like that. And then to pay for the overdraft they took money out of my credit card with a 30% interest rate so I could pay off a home equity loan at 3.5% interest rate. So they charge you a fee, it’s broken technology; they’re doing financial choices on my behalf that are completely bone headed by taking 30% to pay off 3.5%. And then when you call the customer service you get nowhere. I loved everything, every call I made at that point. I was thinking about doing this Simple thing and I wanted to track what the experience was like. I called back and it took a week of just going around and around in circles. The web people would say speak to mortgage people, the mortgage people would say speak to the credit card people. You go around and around in circles and in the end I got this thing resolved and the end of conversation was, “Look, this stuff happens to our customers all time”.
Andrew: And people live with it and it’s frustrating but you know what I’m wondering is, how did you know that economics of competing with that would make sense without that revenue. How many people have said, I get on a plane, I’m shoved in like a sardine, It’s uncomfortable, It’s inhumane and then they launch an airline that then ends up suffering because they have to compete with the realities of that world. When you took a step back from your frustrations that you were noticing and started to really write out what the finances would look like. What did they look like to you that told you, this makes sense even without the crazy fees?
Josh: I was fortunate to have a co-founder who I went to business school with. A guy by the name of Shamir Karkal, he, after business school, went to McKenzie and primarily did banking consultancy. So we spent a couple weeks of kicking around at length a very high level economic model.
Andrew: Yes.
Josh: And we got this to make sense and the very high level … the large banks make little over half of their revenue from fees and charges and that but when you’ve got the costs, 65% of the costs go into distribution which is primarily brand network [??]. So if you can get rid of the cost of distribution which is expensive real estate. We were living in New York at the time and when you walk around New York you see these really fancy bank buildings that are always empty. But primarily this is a customer acquisition channel. You can find better channels then building real estate. You get rid of 65% of your cost, you can pick up 65% of your revenue and still be right side up from [??].
Andrew: That makes sense. I get that, and that also helps me understand why when you had this idea you reach out to him first. What was his response when you emailed him and said, “This is my vision.”
Josh: So he was like, yeah, let’s do it. And being a consultant they oversell too. If it averages six months, we can totally do this/We’ll both quit our jobs and finish it in a couple months.
Andre: So there was no sarcasm in Shamir’s voice when he said, “Let’s do it.”
Josh: No.
Andrew: So he saw the sale thing you saw.
Josh: We had been speaking for a couple of weeks. We had been speaking throughout business school. He and I worked very closely together in business school. He was my boss in management class, so I had to report to him. I think it was time to turn the table around. We kept in touch throughout the financial crisis. I was working more recently at a hedge fund doing a lot of stuff in that line of work. He got stuck in a mortgage space. Then we’d been talking for a number of years and then the conversation in the three months prior to officially jumping into this really trying to understand why banks in America were so screwed up. Both he and I were immigrants, but he and I had different banking experience we had. And by the time I sent that email thing and said, “Let’s do something about this” we were on board.
Andrew: I see. So now you’ve got the two of you on board. You had how much time to sit and plan out unlike your first company, Data Serve?” How much time here did you spend thinking things through?
Josh: We found that email that was sort of . . . We call that the inception of the business. Before then we were just sort of [??] notes and understanding why this was what it was. But when I sent that email, it was July 19th – I should remember the date – 2009. This was really the start of the business. I also see succeed another friend of mine who is an angel investor in New York which I’ve worked with in the past in marketing service business. He sort of made this comment to me, “If I ever started, he’d write me a check for 50K.”
And so I let him in on this email hoping that even though it wasn’t going into marketing services he could find a way to write me a check which he did. HIs response was [??] to that email.
Andrew: Still he said, “Oi vey, we’re going to deal with regulations, but I still believe enough in you to back you on this.”
Josh: Yeah, I think, you know, he just had faith in the consumer and he didn’t have any background in financial services beyond the stuff he did in marketing. But I think I’ve worked very closely with him. And we’ve developed a close relationship is really what he was investing at that point. So that gave us 50K. We both quit our jobs at that point, and we probably spent the next year really focusing on two problems.
One is, how the hell can you do it? This is 2009. Getting a new charter was difficult for a number of reasons I could go into. How do we do this from a regulatory perspective? This is not like starting a typical startup.
The second problem that we want to solve is what would a bank look like if you didn’t sort of have to take an existing model and sort of recreate that? What should a bank do with the customers? What purpose is a bank serving society? How can you make a bank that one should be proud of? Because our initial hypothesis was to affect the economics that if you could build a [??] that people actually enjoyed you could have an adversarial relationship with, that would stand in such stark contrast to the other brands [??] in the space they’d refer their friends. And they’d tell people about it.
It’s a common pitch that people have when there are two people working out [??] customers or referrals that I think like every entrepreneur at that point you really believe it. And luckily it actually panned out.
Andrew: I do remember how true that was for you guys. Just the vision, just the images of what was coming was enough to excite people and have them talk about this and say, “This should happen.” So I get how you envisioning it would be excited about what you could create. What’s the first time that you said, “We are in over our head.” It wasn’t when Gerry said regulations. What did make you say this might be too much?
Josh: The fund raising [??] a process was really interesting.
Andrew: How many venture capitalists did you talk too?
Josh: Over 100.
Andrew: Over 100.
Josh: Over 100.
Andrew: and the common response was?
Josh: No. It’s funny your hear from entrepreneurs and you hear a lot of community that you should never say no. but when you are two bums walking into an office saying you want to start a bank, you get no’s pretty quickly. We get them on our side.
Andrew: Why did they say no? They gave you a reason they didn’t just say no.
Josh: The quick no’s were regulation. there is no way its humanely possible to do. The more nuance no’s were around marketing and customer acquisition. Getting people to the point where you can even have a conversation about the economics and customer acquisition was a huge challenge. Look at where we are today in 2014 and the amount of [??] that actually exists right now. You have a large base right now of investors who understand the regular [??] environment, understand that it is possible.
You still think most of this is happening on the payment side versus banking but back then the closest was mint and they weren’t a financial services company. There was a huge challenge to spend a year educating people as to what you can and can’t do and how you can do it.
Andrew: Was there a period there where you and Shamir [SP] Kakhal [SP]. said let’s get out of this and create some other app.
Josh: No we both probably thought it in the back of our minds but we were working close quarters and I don’t think we ever mentioned it to each other. Then it affected that we were just pushing each other further and further and further. He’d be up till midnight working on something so I’d be up to two in the morning working on something. Even though you don’t know if this is actually going to work, you have this camaraderie and this competitiveness which I think drove us to keep on pushing on.
Andrew: I talked a little bit about childhood. There is one other thing I want to bring up which is your mother is an entrepreneur who built and educational video business. Where she created videos that taught software and she built it up. How b big did she get with it?
Josh: She was the largest distributor and producer of educational videos in Australia and they were doing a fair amount of business in South East Asia as well. Head count wise, I think they got up to two hundred people at their peak. Then she sold the business. That was a really interesting experience for me. My mother prior to having a family she was working in communications and P.R. I’m not sure where the idea came from for educational videos but I remember her starting just in the study at our house and shed find videos she would get from the BBC and made little catalogs that she would photocopy it on and send it out to schools.
Over the course of two years it went from one person working out of the study in my house to an office. Then a new office and hundreds of people and me working in the shipping room. It was really great to see her as a person grow. she is a very similar personality type as me which is tend to be on the introverted side of the spectrum, tend to be fairly quiet and shy, but to see her at the office every day, leading groups of people was really inspiring for me. I could say “Hey maybe I could be that shy nerdy guy and do that someday too.”
Andrew: I know for me, having met someone that ran a marathon made the whole idea of running a marathon more accessible. Did that same thing happen to you with your mom knowing that she did it then it’s possible. I could do it or at least it could be done.
Josh: I don’t think I thought about that conscientiously. This was happening when I was eight years old. It was part of my life growing up. It was just part of how I was brought up. I think it goes deeper than making that association.
Andrew: Okay. You eventually, according to crunch base, you raised money. Where is that crunch base tab? How much money did you raise?
Josh: I probably have that number memorized. We can toss then on a bit. We did 50k from Gerry. We raised probably about 150K from a bunch of people. We did a series A of 2.9 and a series B of 2 million dollars.
Andrew: I see it right here. Then a series C of 2.2 million. Is that right?
Josh: Yes, that was a bridge loan.
Andrew: Okay. So then something did work out. What eventually did you say that allowed you to convince SV Angel, First Round, Lerer Ventures and the others to say, “This makes sense”?
Josh: It was persistence. I’m thinking if you look at that series, First Round Capital were the lynchpin there. They were one of the first firms that I spoke to in New York. I spoke in New York at the time so I spoke to all the obvious names there and all the obvious names, First Round Capital included, said no. And they said no multiple times. I don’t know what it was, but a guy who was an associate there and is now a partner, Phin Barnes, and I just hit it off. He got excited by the idea and sort of realized that this was a crazy idea, but we’d done a lot of work and we understood the {??} of the challenges and it could work and it could pay off. So he did something unusual. We never actually did a partner meeting at First Round. What he did instead of telling us where the partners were across America, was to organize a trip for all of us to go around and meet each partner within a week’s period and sort of plead with them individually to…
Andrew: Interesting.
Josh: … to do this round. By the time it got to that point, it became a competitive round with a number of firms saying yes. Then during a period of three weeks it went from one hundred “no’s” to ten “yes’s” and we got to put together a round.
Andrew: Wow. So now you are off and running and the interesting thing is most people who I interview at this point subscribe to the Minimum Viable Product idea which is create something, put it up quickly and get going. Were you able to do that considering that you were taking on banking?
Josh: Look, I read 4 Steps to Epiphany a million times. I definitely subscribe, but it’s difficult. Let me tell you about an experience with an Angel investor in New York. We were looking to get about $10,000 to $20,000 from this guy, and he said, “Come back to me when you have a thousand customers; when you have a thousand cards issued.” I need to have about $3 million in working capital just to have a contract for insurance to let me put on one customer let alone one thousand customers, so his $10,000, well that’s not how this business works. The way that we approached minimal viable product was to really put a lot of emphasis on customer development. So we launched the marketing website in February of 2010, outlining some really simple things such as: “We want to treat you honestly. We want to give you respect. We want to use technology. We want to be transparent. Sign up for more information.”
To everyone who signed up, at least initially, [??] and I would Google them and write them a personal email. For example, “Hey, Andrew. I see that you {??} one of those interviews with entrepreneurs. I’d love to know your perspective on banking.” So we had this form email but we put one sentence in per individual. The response rate we got from that was phenomenal. We had this professional website and this CEO of a bank was responding to you and people were touched. People never really spoke honestly to their banks about how they felt about banking. They felt like they had an opportunity to do that with us. So we did about twenty thousand of those.
Andrew: Twenty thousand of those, all customized, where you were Googling every one of them?
Josh: Yeah. I mean, we ended up hiring some summer interns. We had four interns working with us and I wrote an iPhone program to do the Googling and all that stuff for us, but we still had to write that sentence. We got a huge amount of data and a huge amount of stories. And a huge amount of feedback that allowed us to really think about what the product should be even without having it on the market.
Andrew: One of the reasons we are supposed to talk to customers is to discover the thing that we wouldn’t have known otherwise. What did you discover by having talked to customers in this way where you emailed them?
Josh: One of the big things that they seemed particularly concerned about, and I wasn’t for some reason that I started to get concerned about, which is how a customer is going to trust this. You’re completely new. You’re a startup. You’re online only and you don’t have brick and mortar. How are they going to trust {??} a replacement to their bank? And so we ended up doing a survey. We just put something together on Survey Monkey. We catered it and designed it toward the question of trust, and we learned that people extended their trust in the banks to the FDIC insurance. They know if they put a dollar in the bank today, it will be there tomorrow. We fully intended to be FDIC insured. We are SDIC insured so we get that out of the gate. But when you ask them if they trust the bank to have their interest at heart, do they trust their bank to communicate honestly….
Andrew: Mm-hmm.
Josh: … that is where the rankings fall through the floor. And while I don’t think it was a conscious decision like sitting down to {??} Brand strategy, I admit that we took a very friendly tone with how we spoke to customers and we can see that to today. I think that allows us to have a level of trust with our customers that’s quite different than the trust established banks have. That’s shaped one of our very early communications. It came from [??] of trust with potential customers.
Josh: So you’re building this trust and if I’m understanding you right. Its the way you communicate with your customers that was most influenced by these customer conversations.
Andrew: Yup.
Josh: Okay. So you’re doing all this and in the process you are building the product. How much back and forth do you go with your customers as your building the product itself?
Andrew: It was really difficult. It took about a year to build the first version of the product but it took two years to launch. For a bunch of other reasons that had nothing to do with technology. We had a year with the prepping live with I think one hundred friends and family using it. so we had some very early adopters who were using the product. there was a lot of back and forth. there was still a small group of people, a hundred people who were mostly friends and family of the employees and investors. So we got some feedback but we would have liked to have gotten more feedback earlier on. When we launched a year later, that was July of 2012, we on boarded maybe 8000 customers in our first month. That was our first moment of proof and feedback. One of the things that was really interesting is we had two things that we wanted to be [??] to the price experience.
One is the notion of its safe to spend. Another is a feature called galls [SP]. Safe to spend tries to answer how much you can spend today without hurting yourself tomorrow. It’s a fairly significant departure from available balance which is what most banks show you. It’s not that much of a leap. Once you’ve seen it once you understand what it’s all about. We were comfortable launching that. Gall is a replacement for savings accounts and budgeting. It’s a whole bunch of things rolled into one. It was a complicated really wacky thing. We spent a lot of time before launch trying to come up with messaging and tutorials and a bunch of ways to introduce these featured products. This product to people. We end up launching without the galls feature thinking it would be too hard for people to use. About a month later we just turned it on. We flipped it on to customers there was no…
Josh: Without saying a word. No teaching, no nothing. Just let’s see what they do with it.
Andrew: Galls have appeared. At the end of the day we had a few million dollars put into galls already. Just customers, work it out. If you set up and this goes back to the point of communication and trust, when you log into Facebook and your news bar is moved to the other side, something like that. You say “Oh Facebook is just changing. that’s what I expect from Facebook.” you don’t freak out and go “Oh my god my Facebook’s broken.” If you log into your banks web site and the log in button is moved across, banks are really hesitant to make those changes, because they have a customer base that doesn’t expect change. The way we communicate. Because of that design esthetic. Because our expectations of early customers when we launched something new people felt completely comfortable clicking on it, playing with it and working it out. that is just because of the way we presented ourselves to customers. We learned very quickly that we can be a lot more dynamic in terms of how we adjust our product and how we tweak things given that customers don’t have that expectation that things are going to be the same every single day.
Josh: I see, you are not quite Facebook but you don’t have to be like Chase Banks where everything has to be the same or else your older customers get more frustrated. Your long term customers I should say.
Andrew: we’ve been around for two and a half years now so we have customers that have been around that amount of time. We have older customers as well. I think it’s nothing to do with the customer, It just has to do with customer expectation. Which is that we want to be a company that’s changing things, that’s pushing boundaries, that’s always trying to improve. They have that expectation so they are OK with change.
Josh: I see that by the way. I’m looking at your older site and I see the safe to spend as something that’s coming up and one of the reasons why you wanted people to sign up. i want to be clear to the audience about what it is. It tells people not only what they have in the bank today but based on their past spending what they should expect to have in the bank. Or what they should expect to be able to spend.
Andrew: Yes, it’s a really rough calculation right now. One of the things that we got from speaking to customers is we saw this really common pattern that people went through. While you are at the bank’s website. you might have a checking account, savings account and a credit card let’s say. Add up how much money is in their checking account. Add up how much money is in their savings account and subtract how much money is in their credit card. then they know how much money they have. You’re sitting in front of a $2000 computational device. And you’re doing mental arithmetic to understand how much money you have. We should totally just do that for you. And the reason that things do that is very clear: the more you don’t understand how much money you actually have the more likely you are to get into an overdraft situation.
Andrew: Like what we described earlier.
Josh: Yeah, I mean Bank of America, when they first launched their web banking feature, they used to sum those numbers up for you. They dropped that within 6 months, in ’90 or ’98 or something. The only hypothesis that people have is that overdraft fees were driving that.
Andrew: How about Alex Payne. How did he come on? He came on directly from Twitter, right?
Josh: Yeah, de did. Now, when we were individually emailing people, he was one of the first 2000 people, 5000 people, to sign up. Shamir was allocated his email, and I saw the response, and I said, “I know that guy, I read his blog.” And we were looking, at that point, actually for someone to join us as a, kind of, design calendar. And I had always liked Alex’s writing, because of the clarity that he writes with, but he also has a strong visual aesthetic, similar to mine, and he’s also an extraordinarily talented API engineer, and we thought, maybe this guy should bring something to us from a design perspective that we didn’t have, as 2 finance guys.
So I was on the subway when I got that email from Shamir, I just jumped off at whatever the next stop was, and gave Alex a call. He flew out to New York a week later. He’d already moved to Portland a year prior. He spent a weekend with us. Shamir and I had already written out a list of 25 features that we wanted on the launch and he just crossed off 22 of them, he said, “These are the 3 that we should launch with.” And we said, “By we, do you mean you want to do this with me?” and he said, “Yeah, totally.”
Andrew: Wow.
Josh: Yup. He went for a walk to talk to his family and he was gone for 2 hours, and we wondered, did he get lost in Brooklyn? Is he safe? And he comes back and says, I’m going to call Biz and Ev and I’ll start at Simple on Monday.
Andrew: Do you remember one of the features he crossed off that hurt at the time but is smart now in retrospect?
Josh: I can remember all of them. I still have that document of 25 features. One of the things that we had on the list was to make it predictive, which is similar to what you were talking about; it’s not currently predictive.
Andrew: Oh, so I’m reading older material. Okay.
Josh: Yeah, so we cut that out, so it takes into account your upcoming bill payments and your upcoming goals, but it doesn’t predict income. We were scared of making it predictive, because we didn’t want to get it wrong, now we’re at a point where we can do that, but Alex was like, “You don’t want to scare people with that, just make it super-simple, just make it arithmetic, don’t make it super-fancy.” And that’s a great way to launch.
Andrew: So it does say, based on your past spending, here’s where you can expect to be.
Josh: Well, based on, how much money you have today, less any pending transactions, less any scheduled payments, less anything set aside for goals.
Andrew: So straightforward, nothing predictive, just math. Okay.
Josh: Just arithmetic. And it’s going to get into a little bit of math in the future, but that’s coming up at some point.
Andrew: You went to Las Vegas, you met Tony Shay, you had an ulterior motive. What was that?
Josh: The only ulterior motive was to meet with Tony Shay. For some reason, I was invited to be the judge of Startup Weekend in Vegas. I have no connection to Vegas whatsoever. We wanted to build that customer relations team and we’d always looked to Zappos as a company that had a great reputation for customer service, but also was operating in the space with extraordinarily thin margins. And so we have a lot of venture capitalists who say that you can’t do customer service in this business because you don’t have the margins for it. And the margins in banking are much larger than they are in apparel, so if Zappos could do it, we could certainly do it. So we spent a lot of time trying to poach a particular person at Zappos to join us.
Andrew: That’s what I was getting at. I see.
Josh: Yeah. And I think what had happened is that Tony had found out about this and, made me come to Vegas and he was like, “Don’t poach our people. But interview them all. Go and speak to them, Sit on the floor, do that Zappos tour, take phone calls, talk to our systems people, learn how we do our systems, and just learn how to do this, because I’d love to see this happen in banking.” So, that was a really phenomenal experience.
Andrew: So he knew ahead of time that this is what you were trying to do, that you were talking to one of his people, I see, and he had you come in. I talked to Robert Richmond who did a course here on Mixergy about why Zappos does that, and he said that we help other people but we really ingrain our message in ourselves when we show it to them, and that’s what…
Josh: And I think it gives you pride in the process. When you’re sitting and you’re speaking to a customer service agent and you’re with some other company, and you’re spending a day with them, that shows a pride in their work that they carry every day. But they don’t often get to show externally. I think it’s a hugely smart thing that they do that.
Andrew: I never would have expected all the benefits that come to helping out people like you who want to do the same thing. Did you get any upside besides just a good feeling from your customers when you gave them good customer service?
Josh: A really huge upside. I think when known in the Tech Crunch circle as a technology company, that customers really see us as a great customer service company. They sort of just assume that the technology was what it should be. It is what it should be for the most part. The customer service, if you are a consumer and not a technologist and you don’t realize how difficult it is to make a great app. Facebook has a great app, Twitter has a great app and your bank has a great app, that makes you say okay they have great apps. That’s what they do. You can relate when you are speaking with someone on the phone or you are having a messaging conversation and you interacting with a human, you can see that they care. That is something that you, someone with a professional background can appreciate as hard work. It really speaks strongly to our brand. That leads to the love that we get from our customers. I really low cost of customer acquisition because our customers tell our friends about it.
Andrew: I also heard you got a good share of your ideas for product improvement and features from those calls.
Josh: We strongly believe in three cultural principals. It’s simple. One is high bandwidth communication from customers. We always have to be listening. not only listening and fixing problems but internalizing those lessons. Two and have an environment where all out employees have a huge amount of agency to apply the creativity, challenge and passion that we hired them for. Solve the problems that they want to solve. The third thing to tie it all together is having a shared, a very clear shared sense of purpose to what we are all trying to achieve. You can take that agency. You can take that feedback from customers and all drive towards the same thing.
One of the ways I measure that is looking at the number of ideas that are generated by customers and service agents. Right now its 62% of all new product ideas come from our customer service team. They are the ones writing the tickets. They are the ones writing the specs and managing the product process because we are not just hiring them to be customer service agents. We want them to be integral people that shape the future of this business. They use Gif[SP] hub, they do pull requests. They are learning all the same technologies as our engineers so we all speak the same language. Our marketing team and finance team all use Gif hub, pull requests and markdown. We all talk the same way so we all have a level playing field of communication.
Andrew: Josh, I remember speaking to Tony during the early days of Zappos and asking him how does he measure whether all this customer service he is putting in actually pays off. He said he didn’t have a way of doing it. When you’re in banking you have to have a way of managing things. How do you know for sure that having all this customer service is better than something else or what the value is of it? Or is it something that you just can’t?
Josh: I’m sure we could. I’m a [??] guy I am sure we could measure it. We have a lot of metrics that we look at. Really what’s driving it is the need to do the right thing. Why do you make great application? Because it’s the right thing to do. There is great technology out there right now why would you do bad processing when you have real time. you want to do engineering the right way. You want to do every part of the business the right way and if you do that, our fundamental belief is by doing that we’ll do our customers a favor and a service. They will be proud of it and they’ll share with their friends. I think probably the metric that bears out not only the success of customer relations but also the success of our engineering efforts. Other things that just cost the customer acquisition which is just a fraction of what the industry pays today.
Andrew: In the pre-interview we asked you what was your lowest moment and you said “Every six months something horrible happens.” I’m realizing we have gotten through a large part of this interview and haven’t seen anything horrible happen. Just seems like an easy epiphany followed by easy growth. What was the biggest challenge that you had to face.
Josh: Three weeks ago at the time of this interview. Twenty one days ago today. We launched a new piece of technology. We did a massive systems upgrade. We let our customers know that for a seven hour period on a Wednesday night their cards wouldn’t work. For a small set of customers, 8% I think it was in the end, couldn’t use their cards for 24 hours. There is an even smaller group of people that are still having problems today. It sucks to do that to people who are relying on us as their primary bank. Simple is my primary bank.
Knock on wood my account is totally fine. I’ve been spending the last two, three weeks just calling up customers who’ve been impacted and we’ve done bad things by and trying to make that right. It’s tough. It’s funny we can’t talk in details about what we did technologically because it seems silly and sort of trite to be bragging about holy sit we made this amazing thing when we have one hundred customers right now who can’t use their card. We’ve done some pretty amazing stuff and I am s sorry for the impact that we’ve had on the customers who..
Andrew: I see that in the blog post that you posted about it.
Josh: Just before I got on the phone to you, I was speaking to a customer. They all have my cell phone and he’s looking for an update. The reality is I need to get an update to him as soon as we get off this interview. He’d in a bad spot and that’s not great. We had lots of challenges building this business. Our first challenge has become a lot more real when you’ve become an integral part of people’s lives. When customers are relying on you to take their families on vacation. When customers are relying on you to do the things they want to do every day.
Andrew: And frankly Josh. this is one of the reasons why people are afraid to join a new bank. They want to kinks worked out and see how the C.O. handles them when it happens. There is a reason why all these customers gave, overlooked the fear of something like this happening. What was the big problem that made them say, you know what, I am willing to take a risk on this company, even if my card doesn’t work, even if something bad happens, there is something worse going on in my life right now I can’t deal with anymore. Something..
Josh: I can just tell you the experience I’ve had over the last couple of weeks speaking to the customers. I’ve spoken to over one hundred customers. So far i have had one customer ask to shut down their account and I get it. The customers that I am speaking to are the ones we did the worse by. To have 1% of those shut down their account is testament to what I think, not what I’ve done, what my team has done. When they speak to our agents they get that we care. I had a customer that demanded I take him out to lunch. He was in San Diego and i couldn’t because I’m in Portland and I was busy. I said I’ll send you a thirty dollar gift certificate for lunch and tell me what you like to eat. He then sent me the next day a fifty dollar gift certificate for lunch over here. There’s a great business model, sending out gift certificates. It’s not about spending money, it’s the fact that we’ve bent over backwards, hats a really bad choice. We really care.
Andrew: I see that and that’s really touching that you’ve pulled away from the cliche that you bend over backwards. It’s more than that. There is something real about you caring enough to send them something but even more reflective in him sending you the certificate and saying I also want to treat you. That doesn’t happen just because you sent them a thirty dollar certificate. That happens because of what you have done before.
Josh: We’ve put customers in a bad spot and it’s a small number of customers and they understand. It has been the most humbling experience. I have been on the verge of tears for the last three weeks, outright crying a couple of times. Just seeing the love repaid back to us when we shared back to our customers. Why do people trust us? Is that, when they think about it you know, every large bank has gone down for long periods of time and people just put up with it and they know they are not going to get a response. We are working around the clock to do the right thing. We care and they hear in their voice. They see it in their actions and they love us for it and we love them back. I think that’s why people are sticking through.
Andrew: You know in the intro I really wanted to not say that you were a bank b because i am not sure that you are a bank. I was trying to get around it. I think part of the challenge is you solved this issue that I mentioned earlier and you mentioned earlier, about regulations. With a partnership from Bank Corp right? What was that? Was it right for me to have called you, was Bank Simple, which changed its name to Simple. Was it a bank? Was it a front face for a bank?
Josh: It’s an issue with infrastructure. Back in 2009 when we started to this we wanted to become a bank. We wanted to get a banking charter. That just wasn’t happening. There were a couple of groups trying to get a charter at that point. john Snow the former U.S. Treasurer, I got in touch with him and he was trying to do one. If he couldn’t get one then we couldn’t get one. We discovered that a partnership model was a good model for us. That allowed us to concentrate on customer experience. While our bank partner took on treasury and payments operations.
A big part of the upgrade we did a couple of weeks ago was getting more and more of that technology in house. Because the more and more we can control the more quickly we can innovate the more liable, ironically enough, we can make our systems be. Obviously now we have gone through another big change in our business which is our acquisition. We are now a wholly owned subsidiary of a bank. That sort of takes us to the point where we wanted to be in 2009 which is being able to own the entire sort of banking stack end to end. So we’re going to get to the point as we deepen our relationship with the BBVA family.
Andrew: We’re going to talk about how, where is that, the BBVA, I want to make sure I’m getting everything right, the BBVA acquisition happened. It happened because of something that your co-founder said about banks at a conference, right?
Josh: Yes. So we had taken part of our seed run, with some money from Dave McClure [SP] and Dave McClure, one of his LP’s was BBVA. So Dave McClure was having the LP day and my co-founder went down and just talked about how horrible banks were. We’re happy to talk about that as a topic. Little did we know that the Chairman of the BBVA bank, which is nearly a trillion dollars in assets, was sitting there. He said, “Well, I think not all banks are horrible. We’re doing some pretty interesting things. You should keep an eye on us.” And Sheila was like okay, yes, maybe you’re doing some good things. We’ll wait and see.
Then a few years later we saw, this is after we’d launched and we’d partnered with Bancorp Bank, we saw a press release saying that they’d launched an America real-time payments processing system, what’s called a core banking system. They told us, the Chairman told us they were working on that. We didn’t believe that they were actually going to do it because it’s a massive, massive undertaking. I think they’re the only bank of their size in America with real-time processing. So we reached out to them a couple of years ago saying, hey we’d like to do a partnership. We’d love to use your technology and marry it to what we do because we think real-time is critical for delivering the experience we wanted to deliver.
And we spent, probably eighteen months, trying to work at how we could do a partnership with them. They had a ventures group that understood investing in companies. They had a bank in America. But they didn’t have sort of a partnership business that would sort of foster the sort of partnership that we wanted. So they danced around like they doing an investment in us. They couldn’t do an investment that was large enough to be meaningful given bank holding company X regulations would limit their holdings to sort of under 5% and all that other sort of stuff. Then we started raising our Series C, we had a fair amount of inbound interest from some payments firms, some banks. The word got out. They heard that there was [??] interest and they just jumped on it. So in a period of, I think it was 3 weeks from them first hearing that there was inbound interest on our business, Josh having sort of assigned [??] to doing the deal. We had a long relationship with these guys and it became a very clear path forward for us.
Andrew: I checked the price that I said in my intro. The acquisition price of $117 million. Is that accurate?
Josh: That’s accurate, yes.
Andrew: It is. I remember when Mint sold for $170 million dollars. Jason Fried said another generation of start-ups bends over, gives over to the old guard, instead of building on their own. What would you say if Jason Fried said that about your business selling out to a bigger bank?
Josh: He wouldn’t be the only one who said it. There are particular dynamics in banking that are different and Jason Fried is interesting because day to day, obviously, if I’ve got my story right, the [??] of $1 of equity that he sold for like a billion dollars evaluation day haven’t raised venture capital.
Andrew: Now they did sell a piece of their company to Jeff Bezos. I think they told me it was because they were nervous about where the business might be going. They wanted to get a little bit of personal safety, I think.
Josh: Okay. Probably, I think a lot of the smarter VCs saw this and, including the VCs on our board, if our end goal is to become a bank, look at the return of capital in banking. It is a stable business, decent returns on capital. It is not Facebook. It is not the typical end game for venture capital business. We were reaching a point whereby we were looking at private equity rounds that would fund regulatory capital to go out and buy a bank. The constraints that were being placed on where we wanted to take the business first is where private equity and sort of larger VCs want to take this business, would make this business a business I wouldn’t be proud being a CEO of.
Looking at things like well if all the other banks can charge fees, maybe we can charge lower fees but I’m going to charge some fees and that will bump up your return on capital. Or now let’s cut customer service, make it web only or outsource it overseas and we can cut some costs there. The fundamental business was right from a banking perspective. in a cost of customer acquisition versus their lifetime value [??] So the lifetime for a banking customer, it takes, sort of, about five years from a customer to go from a checking account customer to a customer that gets married, has the family account, gets the mortgage and really returns that capital. Lining up those timelines to the venture capital world was getting increasingly difficult. We had some fairly strong ambitions for what we wanted to do.
We want to own the business stacking end to end. We want to be able to offer a full range of financial products. Not just a checking and savings account we offer today. We want to offer great mortgages, great lending products, high yield savings products, joint accounts, a bunch of things that our customers will be clambering for. And we wanted to be able to do that in a way that where didn’t have to make trade offs to what the fundamental vision was.
The chairman of [??], Francisco Gonzales, he started his career like me as an engineer. He sees banking fundamentally as an engineering problem. And I think what his most interesting principal is not that we have had the success that we’ve had at the scale that we’ve had. But rather that we built that company culture that he believes can grow in scale into a new culture for banking. Being an engineer, he believes that banking is fundamentally a technological business. You can see, sort of, his sketches on this. But he is in this position where he has a 100,000 person organization. And he has to steer that ship.
I spend a lot of time with his head of visual banking talking about how our culture works and how we can build that into a much larger business. So from that perspective they get to keep us as an independent business, growing the way that we want to grow. And we get the capital, the resources, and banker products that we need to grow in a way that we can be proud of.
Andrew: When you were raising money, did the venture capitalists, and even you and the team at Simple not realize these limitations that you just discussed? That banking has? That it’s never going to be a Facebook? It’s going to be a very profitable bank company/financial company?
Josh: I think what the story we told ourselves, that we honestly believed early on, was by doing it with a partnership model, we could isolate ourselves from the drag on returns caused by the regulatory capital requirements and reserve requirements.
Andrew: I see.
Josh: But the reality is that we wanted to maintain a pace of innovation. We have great partners today. We love working with the partners at the bank. But they are running a business, we’re running a business, there’s only so much the [??] supply. We wanted to have that all for ourselves so that we could do the things we wanted to do. They run a business that’s great for fairly standard financial products. Pushing them into the full range of products that we want to offer, would mean that we would have to form a new partnership, and another partnership. When you’re at the center of a complex web of partnerships, it becomes hard to move at the pace that we want to move at.
Andrew: I see. It makes sense. At the end of all this…actually, before we get to the end with closing it out with a sale. There’s one thing that I actually don’t know how to fit it in with the story but I’ve got to wedge it in. Where I kept seeing Simple online was the card. The iconic card. And I’m actually looking right here on my screen. Someone who took…are you hiding your number?
Josh: I’m hiding my number.
Andrew: Oh. You’ve got a thing over it, a blue wrapper.
Josh: A white rubber band. It’s kind of dirty. Sorry. It’s off brand. I should get a clean one for interviews.
Andrew: By the way, why do you have that on there? Is that because you show the card a lot and you want to keep it. Keep the number handy.
Josh: This is my wallet. This is actually what we actually ship to customers.
Andrew: I see that wallet. The connection is actually a little fuzzy. That’s why I couldn’t see exactly what you were showing me. But I see from something you sent to someone else. Is it wood?
Josh: It’s cardboard. Laser cut cardboard. Yeah. It’s different.
Andrew: The card just looks stunning. It’s part of your brand. The story I want to get to is what happened when you took the first card out. Or maybe it was your co-founder who took the first card out to use it. What did the card look like?
Josh: So it was a plain white car. So, like, no logo on it. Whenever you want new bankers, as you do. You do a period called white card testing. And it’s confusing because our cards are white. When we mean white, we mean nothing on the front, nothing on the back, no signature. Just mag stripe and embossed numbers. We got our first card after years of working on this and we got it shipped to the office in Brooklyn. We were in Dumbo, you know, sort of a janky part of Dumbo and we were like, “We’re going to buy a nice bottle of wine to celebrate.” So me and our interns were all carrying our phones, videoing, and actually walking to this shitty liquor store to buy a bottle of wine.
And my co-founder is walking around, picking out a Spanish bottle of wine. His wife is Spanish, which is another connection, but anyway. We get up to the counter and the guy behind the counter is like, what is this? This doesn’t have a Visa on it. Doesn’t have a signature on it. You’ve got four people videoing this. I’m loving it here. I’m not banking this guy. Get out of my store, I don’t want to see you again. We’re like, no we’re starting a bank, you know and this is how you do it. And they’re like, no, get out. So, we then took it to an ATM and it didn’t work in the ATM. And we’re like, oh god. And the ATM had a message on it that was very computer jargon, and it felt extraordinarily offensive to us, like unknown issue or invalid issue. That’s an offensive statement to make. Then when we took it back to the office and we had a square, and we swiped it through the square and it worked.
Andrew: And that was the first transaction.
Josh: That was the first transaction, yeah.
Andrew: Yeah. You know, it didn’t occur to me until you told this story right now that I get it why he wouldn’t take the card. He could have just assumed that you bought the number online somewhere and you were testing it in person.
Josh: You get really good at using those white cards after a while. There’s a certain amount of swagger when you hand it over and you know what you’re doing.
Andrew: This is my bank and this is my card that goes with it. Alright, I want to close it out with this, you sold the company. I see you’re still on board. You’re still obviously very actively engaged. You’re talking to customers and getting them dinner sent to them, et cetera. But, I was going to ask what you bought with it. And actually Jeremy in the pre-interview asked you and you just said a camera. That’s all you did that’s different to change your life?
Josh: I had goals. I had this goal of saving up for the new Nikon camera for the past three years. I went out and bought the camera. I bought myself a new bike. I’m trying to buy a car, because I’ve never bought a car before. Look, I just really like work. I like what I do. I like the people I work with. I don’t want to go and run off and do something silly with my money. Just put it away, save up for retirement or something.
Andrew: You left the hedge fund industry because?
Josh: The money was great, but there was not a lot of purpose. You ask people on Wall Street what value they add to society and they’re like, we create liquidity or we add liquidity to the market. Yeah, OK, I see the argument for that being a valuable thing but no one has ever come up to me in the streets and gone, Josh, why isn’t there more liquidity in the upper market? I really am blessed by what I do here.
Andrew: And you do that with Simple, you didn’t just build a business, you built a meaningful business where people do get better lives because of it.
Josh: I really hope so. You know, that’s what we’re going for.
Andrew: I told you before we started this interview, I’ve been really looking forward to doing this interview. I’ve been following your story for a long time and I’m really proud to have had you tell it here on Mixergy. Thank you so much.
Josh: Thank you, it’s been a pleasure.
Andrew: Same here. Thank you all for being a part of it. Bye guys.
