The Financial Samurai Podcast - Creating A $1 Billion Fintech Startup And Understanding How 401(k) Plans Make Money With Roger Lee From Human Interest
Primer: Eighty percent of small businesses do not have the resources to offer 401(k) plans. As a result, tens of millions of Americans do not have access to a retirement plan. Find out how Human Interest, a company co-founded by Roger Lee, solves this problem.
Background
Have been interested in the Internet ever since he was a teenager
Started building websites as a teenager. At one point, he owned 3 of the top 10 most visited sites by teenagers on the internet
This experience led him down the path of entrepreneurship after he graduated from Harvard
Entering Harvard
Was a good student with good grades
Not sure whether his internet experience helped him
Kids these days have to join activities, play sports, etc. to maximize their chances of getting into college
Did not know any of that while growing up. It would have added a lot of pressure thinking of all these optimizations
Majoring In Applied Mathematics
When he looked at the course catalogue, he found the classes that he was most interested in taking
He chose the major that would allow him to get credit for the most number of those classes
Applied Math enabled him to take some math classes, some economics classes, and some computer science classes which he was interested in
Was a good student but did not spend a ton of time studying
He enjoyed the social experience of being in college, especially with students of a high caliber at Harvard
Did not have a goal in mind when he graduated
Applied for the standard jobs that other Applied Math majors did: Finance and management consulting
Got accepted into McKinsey after college, but decided to start a startup instead
When he graduated college, he realised he enjoyed creating websites so much that he wanted to see if he could make it work as a career
Was It Necessary To Go To College To Start His Startup?
No, it was not necessary to go to college to start a company
His college experience was positive from a non-financial perspective (e.g. the friends he made, how he grew as a person, the experiences and the activities he was part of)
Why Did Take The Job And Do His Startup On The Side?
It would have been a totally viable route
Have classmates who started a company later when they felt more secure
Decided to start early as the younger you are, the fewer responsibilities you have
What Safety Net Did He Have If He Failed?
Confidence is a generous way to put it
At that age, it was more like hubris and naivety
The websites that he and his friend made in high school were monetized
They ended up making money while in high school and college, and even sold one of those websites
Hence, he did have a financial safety net
Human Interest
A few years into his first startup, which is called Thunder, he got the idea of Human Interest
Human Interest is a digital 401(k) provider for small and medium-sized businesses
The idea for Human Interest came out of his own experience while trying to set up a 401(k) for employees at Thunder
Realised that it was very painful to get a 401(k) off the ground
At Thunder, they were too busy trying to get the company off the ground to spend time on a 401(k) setup
Realised that they were not alone. 80% of small businesses do not have a 401(k)
“As a technologist, it also frustrated me that it didn't feel like these barriers needed to exist. This is 2015, there's no reason it felt that I needed to wade through all this paperwork to set up a 401(k).”
- Roger Lee
Players In The 401(k) Sector: How Do They Make Money
401(k) providers make money by charging monthly/annual fees
The fees tend to be based on the number, but they do take assets into account as well
Another way they make money is off the assets. It’s this kind of shady thing where they put investment options, mutual funds, etc. that they get kickbacks from
It’s a conflict of interest that ends up hurting the employees who are saving their money in the 401(k) because fees are getting siphoned off the assets
Companies could get double charged — paying for the 401(k) plan and paying for actively-run funds that the provider offers
Small businesses do not have investment committees and do not know any better about such arrangements
Larger companies have more bargaining power with 401(k) providers
Actively-Run Funds Underperforming Against Index Funds
There’s more pressure now and 401(k) providers are starting to include index funds in their offerings
However, they are sneaky about it and the default option is not the index fund
People need to really know how to look for the expense ratio to identify the index fund
How Does Human Interest Make Money?
They do not offer funds. They just set up 401(k) plans
Their primary revenue stream comes from the monthly fees that the company pays
They make a small percentage of revenue off the assets
The vast majority of the funds that their customers choose come from index funds from Vanguard
Do Fund Creators Try To Pitch Them?
At the start, they were so small that nobody cared
A few companies have pitched to them, but they said no because of the high fees in the funds
The Most Important Job At Human Interest?
Two core areas that they prioritize:
Getting more customers
Improving the technology experience
They have 15,000 small business customers
There are lots of different aspects of a 401(k). Automating every single one of them is a big undertaking
Regulation Of The 401(k)
Regulations play a key role with 401(k)
Some locations and states are making a retirement plan mandatory for small businesses to offer
The recent regulations have been very favourable to Human Interest
The SECURE Act 2.0 provides financial incentives, via tax credits, for small businesses to offer a 401(k)
Pitching To Y Combinator
Their thesis was that 80% of small businesses do not offer 401(k). As a result, tens of millions of Americans do not have access to a retirement plan
Both numbers could be improved if we digitize and automate a 401(k)
Human Interest is the company that is going to do that
The Conditions Of YC’s Investment
Gave up 7% of the company
The investment amount is between $100-200k
Was It Worth It To Give Up A Portion Of His Company Now That It Is A Success?
Most of the value in YC is not the actual dollars, but the mentorship and advice you get, the access to other YC and alumni companies
Meeting His Co-Founder
Met him through a mutual friend
They both were in a place where they were looking to start their next company
Paul, his co-founder, had experienced the 401(k) problem firsthand at Mozilla
Cash was the default option in Mozilla’s 401(k) plan. Hence, he was not invested at all
His Role
Paul was the CTO while he was the CEO
He was in charge of the business side
Joining Startups? First Think About The Calculations
There’s a financial and non-financial aspect
Financially, the salary is lower, the job is less stable and hopefully, the equity becomes worth a lot
He always cautions his employees that he can’t promise them that the equity would be worth anything
The non-financial benefits include the level of ownership they get, the ability to make an impact, the experience they get from wearing different hats throughout the business
For people who aspire to become founders, they get a front-row seat to the early stages of growing a startup
How Do People Get Into Startups?
Look for a less competitive startup that matches your skill set and experience
How Much Dilution Would A Startup Employee Experience?
Dilution is important to consider
Companies need to raise funding to grow and expand
There are dilution calculators or estimators that could provide a rough estimation
A standard rule of thumb is that companies will give up ~20% in their earlier rounds, and that will go down over time
It’s going to vary a lot from business, industry, the fundraising environment, etc.
Stepping Down As CEO
The CEO, Jeff, was someone who had been on their board for a couple of years
Noticed that Jeff was super helpful and could take Human Interest to the next level
He was feeling burnout and had his first child
Handed the CEO position to Jeff
The Massive Liquidity Event In The Future
Tried not to think about it
He and his wife have an immigrant mindset of frugality
Starting Comprehensive.io
18 months ago, he started a new business called Comprehensive.io
It is in the field of compensation management
They help companies decide, track, and communicate employee compensation
Compensation is still primarily done via spreadsheets and ad hoc processes, which is not as rigorous as people might think it is
Is The Company Self-Funded?
He self-funded initially just to develop the prototype and get their first few customers to confirm that there was a need in this area
Layoffs.fyi
A tracker on the tech industry layoffs he created
He created it in March 2020 when COVID first hit
The idea came by thinking that if he could get more visibility to those layoffs, companies who are still hiring could help these laid-off employees find a new role more quickly
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