(Listed below is an edited transcript of Brian Barnes' conversation with Dan Carmody)
Dan Carmody: Hello Everyone. My name is Dan Carmody and I'm the Executive Director of TreaSolution, and in this episode of FinTech Intellects In-Depth Conversations, I'm really pleased to have Brian Barnes, who is the founder and CEO of a great app, M1 Finance, join us today. So thank you, Brian, for joining us.
Brian Barnes: Thanks for having me.
Dan Carmody: Brian, tell me a little bit more about M1 finance and what you do for the company.
Brian Barnes: So what I do is I was the founder and CEO, so, you know, probably more influential earlier on and now I just ask other people to do things. But M1 finance is a personal finance platform. We offer three main products. The first one is M1 Invests that is free automated investing in a custom stock or ETF portfolio. We have M1 Borrow which is a portfolio line of credit where you can borrow against your M1 Invest portfolio at rates as low as two percent. Then we have M1 Spend which is a high yield checking account... a checking account that gives you one percent interest on checking one percent cash back on an M1 debit card. And it moves into this comprehensive platform where you can replace your checking account, sweet money into a custom portfolio of the investments you want for free and borrow at one of the lowest interest rates on the market.
Dan Carmody: That's amazing, it seems like an all encompassing financial solution. Is that what you intended to build when you when you first started M1 Finance?
Brian Barnes: Yes. We do call it the finance super app. In some sense we are trying to manage all of the customers, or users, finance on one digital platform as opposed to putting together a bunch of point solutions here and there. I would say the genesis for M1 was more on the Invest side and it very quickly morphed into this all encompassing solution where... The user wants to manage their money. They don't want to just manage a component of it. And so we really want to give the platform the tool where you go to manage all of your money and very intuitive, seamless, low cost ways.
Dan Carmody: That's great. So you said first you started on the investing side. How were you able to get the feedback from your customers to know that they had other demands or other requirements that you could fill through, like the money movement and money management side?
Brian Barnes: In a startup, especially in a heavily regulated space, it is going to be a combination of vision of what you ultimately want to build long term, as well as responding to customer feedback and in a sense, seeing whether you're fulfilling on that vision. In some sense, what we started with was more a manifestation of the personal finance or investing account that I wanted that I wished existed on the marketplace and thought, you know, if I want something like this, there would be other people, too. So it was a little bit more conviction led then feedback led. We really took a premise that people need fantastic finance tools now. They'll need it five years from now. They'll need it 15 years from now. They'll need it one hundred years from now. And there are some principles of ease of use, simplicity, lower cost automation that never go away. And so if you're able to deliver an incredible money management experience, there's always a market for something like that.
Dan Carmody: Sure. You've had an interest in finance for a while, obviously. How did that start?
Brian Barnes: It really started in the home, growing up, as in childhood, that parents were both in business and just introduced me to business, the notion of investing at a pretty young age. So they showed me what a brokerage account was, sort of 10, 11 years old, and said, "Hey, if this interests you, you can dig in, you can learn more." You can do it under the purview of my parents. If it doesn't, you need to learn the basics. And from a very young age, I was just immediately captivated by the notion of investing that it was this super hairy intellectual puzzle of, you know, here's a company operating in a complex world. What's it worth? What are the competitive advantages?
Dan Carmody: Just to be clear, this is all at 10 years old?
Brian Barnes: I think my thinking likely or hopefully progressed. I don't think I peaked at ten, but I was a curious kid who liked puzzles and I viewed investing in a company as this ultimate puzzle and you were making a bet behind it. And so from a kid (perspective), it was do this puzzle as well as try to make money. So those are the two things that, you know, just like lit my eyes up and got really into investing and I did that middle school, high school and college. That was where I developed the passion and became know sort of a finance nerd about it.
Dan Carmody: Sure. So let's talk a little bit about college. You went to Stanford. Got a degree in economics, if I'm not mistaken. Was it a second degree in math?
Brian Barnes: A minor math.
Dan Carmody: OK, great. Then you graduated. Three years later you started M1 Finance. Can you tell us a little bit about that whole process? Did you graduate knowing you wanted to start a fintech company? What was that three years like between graduation and the launch of M1?
Brian Barnes: The quick answer is no. I did not graduate knowing I wanted to do a finance or fintech company. If anything, while I was at Stanford, I was, you know, in the heart of the beast, the belly of the beast with Silicon Valley and what was going on from a startup landscape. Truthfully, my entire time there was a little bit eye-rolly. I didn't think super highly of it. And if anything, wanted to go to the more like establish a work for a big corporation type thing. Did the economy math and then did a short stint at a hedge fund doing equity research for them and pursued the investing path and then worked at a management consulting firm. It was getting in there and realizing the the slow progression of corporate hierarchy. I sort of saw what the people saw on startups have the ability to put your product or put your work on display and letting the market decide what it was worth. So I had this entry level job that was good training ground, gave me a lot of exposure, but in there very quickly realized I wanted to do something with... I don't know if it's just more risk attached or more putting forth my effort and letting the world decide rather than for a promotion in two years. That didn't seem super exciting from a career progression standpoint. So I left the consulting job. I knew I wanted to do something more entrepreneurial. I actually sat down every day with a stack of text books and started to teach myself to code. I started with the front end and moved through the back end from different coding principles and paradigms and languages and whatnot. Then it was really in the management of my own money of saying, "Hey, I see what's out there. I think I can create something better." I see the new players. I probably hubristically or naively thought I could create something better and ultimately went for it. Here we are five years later.
Dan Carmody: Very cool. So would you consider coding a critical component of someone who wants to go into finance nowadays?
Brian Barnes: I don't know if you need to be able to code, I think you're at a massive disadvantage if you don't know the underlying principles or structures of it. I think, broadly speaking, there is sort of a long trend towards automation, where computers used to automate really basic tasks that humans did. So it could do really basic things just over and over and over again, much faster than a computer. Now they're beginning to automate more and more complex task and I think over time they'll be able to automate pretty complicated tasks, if not very human intellectual tasks. I think not having an understanding of that digital ecosystem, how things are given, puts you at a pretty significant disadvantage. Even even broadly like... My role I'm not coding for M1... none of my code would pass production level quality that we demand and run SQL queries and run analyses of my own. It does just give you this fundamental lever of power that you don't have if you don't know the underlying principles.
Dan Carmody: As an entrepreneur myself I can remember the day where I decided to start my own company. Is there one day? Was there one catalyst that sticks out in your mind as to.... You're sitting there saying, "That's it, I'm going to do it?" Did anything like that happen for you?
Brian Barnes: I don't know if there is one day... I might be able to describe it to one day because I, you know, sat down with the coding stuff and was managing my own personal finances and sort of got back into it. I wasn't able to do it when I was at the hedge fund or consulting firm and really got back to it and thoroughly enjoyed doing it. But I was massively underwhelmed with the tools that were out there. So ideas are percolating of, "Hey, if I could create the best tool for me, what would it look like?" The benefit of going to Stanford is you meet a lot of other entrepreneurial people, some of which have been quite successful. One of my good friends was one of those Wonder Kid early successful people and it was in talking with him and him saying, "You should do this! You have the passion, you have the intellect, you have the drive. It might fail, but you should absolutely pursue it." It was in that conversation I decided to sort of take the leap.
Dan Carmody: Very cool. So you're based here in Chicago. It's interesting, you went to school out west. You could have very easily have stayed out west. What's it like doing a startup, a fintech, in the Chicagoland market?
Brian Barnes: Chicagoland is home for me. I grew up in Naperville and really wanted to come home and I thoroughly enjoy being here. Truthfully, like Chicago has a absolutely fantastic finance history with the CBOE and Mercantile Exchange and all that. Then optionsXpress was started here. Braintree was here. We have a lot of fintech presence in Chicago. I do think it's a top tier city to start of fintech company. Broadly speaking, we were creating a consumer facing application. I do think in the valley there's a little bit of "It needs to take over the world in one or two years or else let it die." I think most finance firms, the successful ones today are large because they've compounded for incredibly long periods of time. I thought that there was a little bit of benefit from being away from that mentality, that culture, that ecosystem and taking a longer term approach of, "Hey, it's going to take us a year to get through the regulatory process. It's probably going to take us another six months to iron out the kinks. It's going to take a while for people to learn about the app and try it out and and have us continue to build." And then we're asking people to hand over their life savings, which is also a long term process. So having an area where it was a little bit removed from the boom and bust cycle of the hot startup of the day, I think was a huge benefit for how my mind works and how I wanted to build the company.
Dan Carmody: I think that's interesting. Can we dive into the details a little bit on the regulatory side? You're working in a highly regulatory environment with personal finance. What was that like? How do you go from launching and then tackling the regulatory requirements on top of it? Because I presume you needed to address that first before you could get customers. Right? So can you talk a little bit more about that?
Brian Barnes: Absolutely. So we have the three main products Invest, Borrow, Spend. Invest and Borrow or run through our broker dealer. And so we had to become a broker dealer prior to going and even talking about it with clients. Then on the Spend side we partnered with a bank, but that was a product that was recently released. On the broker dealer side of the world, we're regulated by FINRA, which is overseen by the SEC. And it is something that you need to become a broker dealer prior to advertising your product, prior to getting customer feedback, prior to being able to buy a security on a customer's behalf. That is a year long... They say it's a six month application process, it's probably closer to nine to 12 months. But, you know, it's that from an application process once things are submitted and once you're in the door you have to prove that you have a balance sheet to support another year of business without any revenue coming in. So coming to the table, you have to say, "I have two years of balance sheet. I have a plan to get through the regulatory process." In conjunction with building everything that you need to launch a product to the public. So it is a pretty heavy lift. It's like financial services, especially in the broker dealer space is not something that two people in a garage can create. You do need to have upfront capital. You need to have a long term plan. You need to come to the table with.... Yeah, and I mean, it's you can't even throw out an MVP. You're dealing with people's money. It has to be perfect. The bar is, I think, considerably higher for creating an application from the get go.
Dan Carmody: Sure. So, I would imagine that's a pretty wide moat then for people and organizations that are able to establish in that space.
Brian Barnes: It is a wide moat. I joke that while I was not a broker dealer, I wanted them to lower the barriers. And now that I'm on the other side, I want them to increase. You know there are pros and cons of being regulated. It does make you up your game from the beginning, which I think there are benefits. But yeah, there are some friction filled activities that you would otherwise not take on if you were just sort of a standard start up creating a consumer application.
Dan Carmody: Sure. Let's talk in general, not necessarily consumer finance or broker dealer, but fintech in general. Right? Do you have any advice or any kind of guidance that you might give to someone who is looking to start their own fintech related company?
Brian Barnes: If you're starting your own I do you think you need to think incredibly long term but have short term milestones that you need to hit to be able to be funded along that journey. You're not going to be able to conquer the world sort of minute one, but you do need to have a big audacious plan and deliver value over time where there's success at each milestone. Personal finance, investing, whatever it may be, just money management in general is such a large marketplace and there are giant firms. And so you will get the benefit. No one will question how big the market can be, how big your company can be. If you do well, you're going to be a large company, but it's going to be more time intensive, more expensive, have additional burdens put on and so you do have to be a little bit more structured from the get go. I think there is a lot of ways to do entrepreneurship. You know, one is to start something from scratch and, you know, try to go raise the money, build it yourself and take on all the risk. There's also joining small companies that are in the progression of getting bigger, whether that's pre-products, pre-revenue, or like even launching their second product and trying to scale that. You can get a lot of the ownership, the buy-in, the risk, the ability to create something from scratch with not being the sole entrepreneur in the broader landscape as well.
Dan Carmody: That's that's great advice. You don't have to start from step one. You could start at step three and maybe see that venture through. And then maybe the next time you you decide to start at step one.
Brian Barnes: You'll definitely have a couple of at bats and learn a whole lot on every aspect of the journey.
Dan Carmody: Sure. So you've had a couple of really successful rounds of raising funds, I believe a series A and Series B back in June, if I'm not mistaken. That's can you talk a little bit about that?
Brian Barnes: Yeah. In the progression, we were fortunate enough to actually raise a relatively large seed round. So that was $9 million, the series was $12.5 and then we recently closed on a $33 million dollar Series B. As the progression goes in the early stages it's buying on 1. team, 2. idea, 3.) ability to execute and 4.) providing the business with the capitalization that it needs to hit various milestones along the way. Then as you mature in the organization, it's much more driven on results. And so the seed was, better or worse, conviction on me, conviction on the team that I had built and assembled, and then the general idea of where we were going. Series A we had the product in market. We probably had $100 million dollars on the platform. And so, you know, starting to show early traction. In the B we passed a $1 billion on the platform in February. We had to use the startup jargon, "real product market fit", and people were in trusting us with their life savings. You know, people bring over multi hundred thousand dollar accounts, a million dollars accounts from Fidelity, Ameritrade, E-Trade, Schwab, you know, the big incumbent. Investors look at that and say, "Hey, if you've done that with short amount of time, you know, mediocre budget, relatively speaking, and are able to get people's life savings, you're definitely on to something. And, you know, we also have a business model in our making revenue." The progression goes more to the fundamentals of the business and how it's performing.
Dan Carmody: I see. I'm interested when you were conceptually talking about the seed round. What were your communication tactics like? What strategies did you use to to talk about where your vision for M1 was going to the point to where investors bought in, literally, and decided to fund you at the seed level?
Brian Barnes: Yeah, I think the funny thing is.... I thought at the time I was creating the world's best presentations. It was such an obvious no brainer! I'm sure that led to overconfidence and hubris going into those presentations.... When I look back at the presentations are awful. I can't really gauge how the presentation alongside my written work was. I think we always approach things from a fundamental perspective. People will need to manage money for all the time. So it's an evergreen market. They will always be interested in the best tools, whatever categorization you sort of define "best" in and there's different wants and needs. I started this in 2015, in 2015 the set of possibilities of what you could create in a finance firm was dramatically different than what a finance firm could be created in 1870, which is when most of them actually were (created) or 1960s or 70s when Schwab and Vanguard were created. I think there was a inherent belief that someone can create a next generation financial institution. It can be built on different principles that are fundamental to how people want to manage their money moving forward. I think I just delivered a very straightforward path of what we're going to build, how we're going to build it, how it was different, why it was wanted from the customersj. And people were willing to place a bet on that.
Dan Carmody: Well, it seems like they've probably made a good decision, I'm guessing, because, just a couple of weeks ago you announced, I think, greater than $2 billion AUM... If I'm not mistaken.
Brian Barnes: We launched to the public three and a half years ago. It took us three years to get to the first billion, six months to get to the second billion. Our investors are happy. The early investors have made many multiples on their money. So we just close on our series B and we will likely have something else coming out in the not too distant future.
Dan Carmody: Very exciting, exciting stuff. Let's talk about the future a little bit. One, the future of M1... in five and 10 and 15 years from now can you paint a picture as to where you would like to see your solution, your company be at that point in time?
Brian Barnes: At M1 we probably focus on three main things. And so the first is we focus on the holistic nature of your finances. We don't want to be a joint solution for one aspect. We want you to come to M1 and manage your money in all respects. We think that there's benefits to managing it on one platform as opposed to putting things together. We then focus very heavily on personalization... So how people manage their money is pretty unique and specific to them. How you earn money is different. How you spend money is different, how you invest is different, why you might want to borrow. We very much focus on, "Hey, can we create a customizable tool to empower you to manage the finances, how you want?" And then we really focus on optimization and automation. So every dollar, how can it be, you know, if it's into the M1 platform, seamlessly, effortlessly, costlessly put to its best use. Every dollar that comes in, every dollar that comes out, how can the software take over to automate all the things so that your finances are just in the background optimized to your heart's content. That's the general principles that we like to espouse and build towards. If we talk about what we're going to be building long term, I think M1 will have every product feature in a different domain that you would expect from a big bank, a big brokerage, big asset manager and the like. That being said it will never be two products under the same branded umbrella, where they feel like very different products, probably built up via acquisition. We focus on the integration and the automation between the two. The perfect example is the Invest / Borrow. If you invest with us, can we let you borrow for cheaper? We focus on... you different pockets of your money, but how do you think of it in the whole and how do you sort of leverage all aspect of your finances to manage it more intelligently?
Dan Carmody: On a more macro level above and beyond just M1. Are there any overarching trends, things that you're really interested in the fintech space that you would like to talk about or things that you're keeping an eye on?
Brian Barnes: Yeah, There's two... Definitely more than two but a lot of big trends...
Dan Carmody: That's it. Just two. Ha ha.
Brian Barnes: Ha ha. There's two and M1 perfecting both! No, so the first is the general rebundling of the application or bank. I think for a while there was an unbundling where one company would sort of pick off one component of a bank and what they offered in auto loans. And they (fintech) say they (banks) focus five percent of their energy towards auto loans. If we focus 100 percent, we can do it better and they create a better product. I think they did that and there is a progression. Now, everybody has 14 finance related apps on their phone and they have a folder and they are managing their money across everything. New things are coming out... it's just it's too noisy. I think there's a broader trend towards rebundling and saying, "Hey, if you spend your money and we manage your income and we manage how you spend money, can we better underwrite you from an auto loan perspective?" And so it says, you know, if you bank with us, can we actually provide something that a sole auto loan company providing in isolation couldn't provide? I think there's a broad trend towards that rebundling, the integration, in some sense, the Holy Grail is that finance super app that does everything perfectly. The other is just generally the demographics that people are going for. You have a lot of fintech companies going after the unbanked, the under banked and these are people who the big financial institutions have generally overlooked. I think the quote is "Democratizing Access." Everyone will talk about how they're democratizing and a... Big benefit. You can serve with the digital products much more people than you could serve, sort of like doing hand-to-hand combat or, you know, having everybody advised or whatnot, so, you know, there is a democratization of access.
Dan Carmody: Well, listen, Brian, I appreciate you taking the time to talk with me today about M1 finance, your opinions on on fintech, some of the back story before you started the company. I think that's really interesting. And the fact that you started looking at stocks at 10, that's pretty amazing. Right.
Brian Barnes: I owe a lot to my parents. They've stoke a curiosity that has paid dividends.
Dan Carmody: That's right. That's great that they were able to see that you had an interest in that and to try to foster that. Right? So that's that's awesome. Thank you so much for your time. Thanks for talking with me today and I hope you have a great day, Brian.
Brian Barnes: Thank you. It was a lot of fun. Take care.
No hype... just intelligent conversations about financial technology.