Introduction

Patrick: [00:01:30] My guess this week is Zach Perret, the founder and CEO of Plaid. Plaid helps companies build FinTech solutions by creating APIs that allow people to connect their financial data to apps and services. In this conversation, we dive into Zach's philosophy on building products, how the financial system works today, how the financial systems needs to be updated, and the trends Zach is seeing from the next wave of FinTech companies launching on Plaid. I hope you enjoy this great conversation with Zach Perret.

Fostering Curiosity

Patrick: [00:02:00] Zach, you said something that piqued my interest, which is this notion you got from your parents of great challenges. Can you describe what that idea is and why it's relevant for your life

Zach: [00:02:09] My parents are really wonderful and both musicians, so they raised me in a little bit of a strange way. It was very much a kind of treat the child as a mini adult. They gave me adult books quite early. One of the things that my dad always framed was this concept of great challenges. What are the great challenges out there that you're going to go tackle or go work on? As a kid, that makes you a really mission driven kid and also really weird, by the way, because you talk about all of these things that none of your friends care about. But a few of the ones that really intrigued me as a kid were interplanetary exploration, for example. For this irrational amount of time, I wanted to be an astronaut, which was definitely fun, but to the point that I was 22, 23, still thinking about, how can I become an astronaut? Aging was one that really captured my attention, particularly in college, did a lot of work in the natural sciences, focusing, thinking about that, learning economic empowerment and financial freedom. That's the foundation to Plaid.

As we ended up founding Plaid, it was one of the things that really drew me towards the company, towards the opportunity, this concept that we could help consumers live better financial lives, and frankly, be happier. If you look at many of the surveys, the number one or the number two most stressful thing in a consumer's life day-to-day is money. The ability to help people have greater financial freedom was fantastically interesting. This concept of great challenges is this little oddity that my father instilled and has been very helpful in how I think about the world.

Patrick: [00:03:34] How did he do that, literally? What was the routine that installed that idea into your brain as a kid? What did he do as a parent? It seems like something good to do for one's kids.

Zach: [00:03:43] My dad loved to just ask questions and ask questions and try to go towards the base state, or I guess get back to first principles is what people talk about now. But for him, it was just like always asking the next question, always asking why, always asking what's the bigger picture, and how do we zoom out? He was one of those people that had fantastic depth in so many things. He would take me on a walk, and you could walk through the woods, and he could name every single tree that was there. Then he would start talking about ecological systems, and then pull up to why climate change is this thing that we need to be thinking about and that is another one of the great challenges, and then we talked about that a little bit more. I don't know why and I don't know how, but one of the characteristics that he had of raising kids was just constantly asking why, how, what happens next? What's the next question? Where does this path go?

Patrick: [00:04:26] You used another term before we hit record. I think you referred to it as default consumptive state. Can you describe what that means and how that relates to this constant asking of questions?

Zach: [00:04:35] I would describe myself or rather, perhaps my fiancé describes me this way, as having a default consumptive state, where I, by default, love to understand new systems or learn. So, I have always, either a book in the hand or listening to perhaps a podcast or a book on tape. I particularly love your podcast, Patrick. Through that, I get exposed to a lot of different things. It means that I have 1% understanding of many topics, so scratching the surface in a lot of areas. When I think about having FOMO, it's largely just not having time to go explore many of these much more deeply, but perhaps default consumptive status is a negative because it means a lot of things coming at you really quickly all the time, but I found it to be the way that I probably best characterize my downtime.

The Early Days of Plaid

Patrick: [00:05:18] It seems like there's probably an unfair advantage for people that like to do that these days, because there's so much information out there to be consumed, that if you have a high energy or appetite for that consumption, like you just get like a default advantage, but maybe there are negatives too. Right? Who knows? I'm curious how both of these things, the consumptive state and the great challenges figure into the, we'll call it, day one of Plaid. How did the idea for plaid come to be? What are the important early milestones or things that you think back on as important for its founding and the founding idea?

Zach: [00:05:51] Plaid was a fortunate series of accidents with a great deal of hard work and a very clear sense of purpose. My co-founder, William and I, first started working on things in financial services. We didn't have any idea that we would land on this business as it is, nor did we frankly ever have any idea that we would land on a real company that could make real money and scale in the way that Plaid has scaled. In the earliest days, we set out to just build a series of consumer financial products that consumers would utilize day-to-day in order to live a more informed financial life. You can think of this perhaps as just building Mint 2.0 or building kind of budgeting application 2.0, or something that would give the consumer a bit more data about their financial life day-to-day.

We didn't think about building a platform, we didn't think about building a B2B service, we thought about building something directly for consumers. That was kind of through the realization that consumers were fundamentally unhappy with financial services. Our first office was just off of Union Square in New York City. Every day, and this was 2012, every day we would walk through occupy Wall Street protests, and you would hear people screaming about how they were frustrated with the financial system, they were frustrated with the banks. Most importantly, they didn't feel like they were getting the quality of service that they needed or they deserved. For us, that was a huge motivating factor. We set out to build a series of consumer financial applications that helps people, again, better understand their money. Along the way, a few things happened.

One, no one liked our apps, because largely our apps would say things like, spend a little bit less, or you should save a little bit more. Being one that, despite being interested in many things, do not understand consumer psychology all that well, we didn't predict that consumers would immediately just delete the app if that's what it told them. Part two was that we had some really wonderful friends, came along and said, "Hey, your consumer apps are kind of dumb, but the backend to your consumer apps," which was frankly, the hardest thing that we did, which was how do we get data from banks and make it such that the data becomes machine-readable and useful? These friends came to us and said, "Hey, can we license the backend to what you do? We think that would be quite valuable." That led us to this concept of building a platform that enables a FinTech or digital financial applications to interact directly with consumer data, to allow consumers to directly upload their data into these digital financial applications, and then get a great deal of value out of them.

One of their friends basically said, "Hey, look, your consumer apps are dumb. We'd like to pay you though for your backend. Can you please build that?" Being the young scrappy entrepreneurs that we were, we were completely out of money and had very few prospects for what was next. So, we said, "Sure, yes, if someone will pay us to do a thing and we'll get down this path." In that sense, a great deal of luck led us do this. But in realizing that other people were able to build great digital financial applications despite the fact that we had failed at doing so before, we landed on this concept of, by enabling thousands of digital financial applications to exist, we can fundamentally, in a huge way increase the value that consumers get out of their financial lives because they now have choice, they now have options, and there's competition such that many applications are out there all competing to do good on behalf of consumers.

That, for us, led us towards this concept of financial freedom, economic empowerment. How do we help consumers live the financial life that they want to live long-term?

Patrick: [00:08:59] Well, when I think of Plaid, I often think of the various... I'm sure everyone listening has done this. They've logged onto some app on their phone that's a financial application of million different options. You connect to your bank account, let's say you connect to Bank of America, and the little click through that you do to pick the bank, the logo, and then type in your login information, that's Plaid. That's what you build. That's sort of how I think about it at the simplest level. How do you think about the Plaid product original and sort of current lineup?

Zach: [00:09:25] Well, I think that's exactly right, what you just described. Plaid is a massive infrastructural company that has a, on our good days, five second, and on our bad days, 15 second user experience embedded in every single digital financial application, or substantially many digital financial applications, I should say. That very small experience is all about allowing consumer to connect their account very, very simply.

But then, the majority of the work we do is actually on an ongoing basis. Let's say you are, for example, using a budgeting application. What you want in that budgeting application, to be able to see how much money you have in your account, how much you're spending so and so forth. That is the backend data that Plaid is collecting and all of that comes after that initial user experience of linking the account. But likewise, that same concept of needing to access your own financial data via a different kind of third-party application is incredibly prevalent across different portions of financial services. So, everything from opening a new bank account (how do you actually go and fund that bank account? well, you need to link your existing account) to thinking about how you might transfer funds through a brokerage, buy your first Bitcoin, perhaps, to even more broadly thinking about how you pay people, how you transact with friends, how you apply for loans. Interesting thing that we've had is actually a lot of car dealerships have come to us over the past couple of years, thinking about, I want to build a new real-time way to give on the lot car loans.

We've actually had this saying, every company is a FinTech company, or certainly is relying on a FinTech company. Because truly, FinTech has become so pervasive throughout every enterprise that every enterprise themselves either has a financial or customer relationship that they have to manage, or they have some sort of supplier, or they have a payroll provider, or they have some sort of stored value, or something else, where they are sitting on top of a stack of digital financial service providers. Our hope is that Plaid is enabling many of those.

Patrick: [00:11:12] It strikes me as an incredibly hard thing to get going. The amount of complexity in the early days to say nothing of, you're talking about banks and people's money, very sensitive, personal credentials and passwords and all these sorts of things. Can you talk me through how the hell you got through that variety of challenges early on to sort of build trust, I guess, both with consumers and banks, and all the stakeholders in the Plaid ecosystem?

Zach: [00:11:37] Well, there's no magic bullet to doing that. The answer is frankly, just hard work and continued focus.

The best way to build trust is to constantly deliver on the promise that you make.

For us, that was finding ways to go build this infrastructure in a way that it hadn't been built before, and certainly no one had a really high expectation of and deliver on that product promise one by one, and then many by many, and then at scale, and so forth. That for us was foundational to building trust. Of course, we built a fantastic security compliance and infrastructure team. We focused very closely on privacy and enabling consumers to be in charge of their own data, to put it where they want it to go and then to pull it back when they don't want it to be in that place anymore.

That for us has all been foundational to how we think about this. Really, it ties in with our mission and our focus on financial freedom. One of the biggest challenges that Plaid had along the way is that no one believed that our market would be as big as it ever became. When we went out and pitched to VCs for four full funding rounds, many of them, and in some cases, almost every single one of them rejected Plaid because they didn't believe that our market was big enough.

There was a trope in VC speak over the past few years to say that they wanted to fund companies that were tackling really big markets, only in the past 12 months or so, have people started to talk about market growth rates. For us, that was what we pitched the entire time. We said that we believe that digital financial services is going to be really, really important and we believe that non-banks will be able to build digital financial applications that serve consumers really well. The majority of VCs didn't actually agree with that for a while, and now, we're fortunate to have kind of survived that.

One of the interesting things that a lot of people give in startup advice, which by the way, I think most startup advice is generally wrong, but hopefully it makes you think. But one of the things that people do is they tell what I call justice stories, which is a concept that I stole from evolutionary biology. Justice stories are in evolution, you look at the giraffe and you say, "Why does the giraffe have the long neck?" Then you say, "Well, it's obviously because of the giraffe needs to reach the high leaves." Well, it turns out that was actually just randomness and it was in this pile on top of, in this pile on top of, in this to actually evolve in that way. The giraffe didn't start out by having a long neck. One animal had a slightly longer neck than the next.

Same thing in startups. A lot of people say that this startup was brilliant because they went and attacked it in this way and they did these specific things. When in reality, there was some level of randomness probably inside the company and they were good at recognizing that randomness and capitalizing on that randomness, as opposed to having this brilliant, unique insight at the beginning. I think a lot of execution in startups and growth in startups is about recognizing the advantages that have been generated and growing on top of those.

Patrick: [00:14:08] I think this thread is really interesting. The first customer that pulled your backend out of you, and that was just your willingness to go that direction was recognizing that randomness, is that a fair example?

Zach: [00:14:19] Plaid has had so many fortunate events. I think we've been maniacally focused on scaling out this really important infrastructure, focused on this mission, but there are many things that go right, there are many things that go wrong. What I tell the team is, it's all about finding and capitalizing on those things that go right and finding a way to compound the gains that we find, as opposed to worrying about when things might go wrong here and there.

I talked to our product team about this concept of architects and farmers. It's really two somewhat contrasting ideas, to how you think about building a product. As an architect, you come up with this ideal plan and then you go try to build behind it and you know where everything's going to go and you have this thing perfectly set out in your head. Then when it's finished, you hope that someone wants to live in that house. As a farmer, you see a sprout on the ground and you water it, you nurture it, you cultivate it. Over time, you have this big tree. Then you hope, by the way, that the tree is the thing that you cultivated and you didn't cultivate some weed. I think an ideal product organization does a little bit of both, and truly, it depends on your market as to how much of one versus the other you need to do.

But for us at Plaid, we think about doing a lot of both of those. Architecture really matters when you're trying to create something that is fundamentally different and new. Yes, it might be informed by customer feedback, but oftentimes you have to drive towards, well, what does the customer actually say? Or they might be saying that they want this feature, but what's the underlying reason for that request. Then can I go solve that underlying problem? Not the symptom. The farmer side, likewise, will see these elements of randomness. I guess you could say, one of our customers coming to us and saying, "Hey, can I license that backend with an element of randomness?"

Then you just go down the path, you see where it takes you. Sometimes it'll take you nowhere, but oftentimes it'll take you to something that is really quite valuable. I think that the best product organizations are able to marry that concept of farmer, architect. I'll have to come up with a catchphrase for that one day.

Early Customers

Patrick: [00:16:01] What do you think of, apart from the early customer asking for the backend as the first big break or like seminal change in Plaid's early days?

Zach: [00:16:10] Well, beyond that initial request, one of our first major shifts was having Venmo join and use Plaid as one of our first major customers. Venmo was unique in so many respects and they really created both the peer-to-peer payments industry, or recreated, you could say, the peer-to-peer payments industry, but also they reinforce this concept of money being on a mobile device or money being easily accessible on mobile device. If you think back before Venmo, you had bank applications, which allowed you to see your balance and you had mint, I guess you could say, on the budgeting side and you didn't have much in between. There weren't any really good, mobile-first particularly, financial applications. And then you had your cards in your wallet, and that was how you paid for everything and how you did everything.

Venmo was fantastic in so many ways because it put money on the mobile device. It then had a direct connection to the bank account on the backend, which was of course utilizing Plaid. And it had this massive growth across consumers. It really taught people that FinTech was a thing in so many ways. And so we feel so fortunate to have gotten a chance to work with Venmo in the early days, which was a great customer, but more importantly was foundational to thinking about money being on a mobile device, money being something that is internet enabled and internet accessible, money being something that is fun. Before that, financial services felt like it was something that was like you have to do, you have to think about balancing your budget or like all of these icky things that most consumers don't want to think about day-to-day.

However, money with Venmo, where you had emoji in all the payments, was a fun thing. That for us was a major break, both in terms of usage of our products, but more importantly in terms of recognition that FinTech was a very large market and it really set the stage for many of the mobile-first financial experiences that we have today. So, when you look at a company, let's take Chime, which is another customer, for example, Chime being a fully mobile-first mobile only bank, that may never have happened if, foundationally, we hadn't gotten this massive growth from Venmo in the early days.

Patrick: [00:18:10] Can you describe the process of convincing them to work with you? How did you get that done? To what do you attribute the ability to sell a large partner like that, I would assume, fairly early in your company's trajectory?

Zach: [00:18:24] Venmo was actually a relatively unique thing for us. I think it was one of those point in times that just happens to be exactly right. We started working with the Venmo team when there were maybe 30 people. So they'd been acquired, they'd just finished their second acquisition. They were acquired by Braintree, and then Braintree was acquired by PayPal. And they just finished the second acquisition. But the Venmo team was still extremely small, 30-ish people, and we could build very direct one-to-one relationships with everyone in the Venmo team.

And for me, who at the time I had been effectively fired from our engineering team for very good reason and I had to go figure out how to actually sell things, I was kind of our only person that was out talking to customers. It was great because I could go to the Venmo office just spend a bunch of time with them and build personal relationships with a lot of the people in the team, many of which, by the way, still persist to this day.

I'm a big believer, as a startup, building, very, very tight relationships with the early customers because they give you so much great feedback and they become your champions in so many of these things that pay off quite a lot in the long-term.

For us, it was frankly just really sustained relationship building and proof points and getting enough small customers to really prove out the fact that this was a good thing and then asking for a very small deal. I believe in the earliest days of Venmo, our traffic was extremely restricted. We maybe only had one or two of the banks turned on and I think we gave them six months free or something like that on the contract. But they literally were just using the product in some sort of trial mode. At some point that flipped to, all right, great, well, it's actually working. We want to scale it up. But it wasn't without hiccups along the way because we had to deal with all of the scaling challenges as they grew, as they kind of turned on more and more traffic and as more and more users came to the Venmo app. But for us, it was just a very exciting, very fun early customer discovery journey. And they gave us so much product feedback that we still thank them for this day.

Patrick: [00:20:04] It reminds me of the whole Stripe idea that in many ways, as a startup, often you're betting on your customers. You're going to ride their growth rate as it gets bigger and bigger. It also makes me wonder what the dimensions are of building intimate relationships with customers. Like what did you learn about what moved the needle there? Was it literally just time, just talking, asking them questions? Like what were the key things you think in your experience that drive those tight relationships early on?

Zach: [00:20:30] I'm not sure that there's a formula to it. I think that we found a couple of things that worked really well. First, just treating customers like people, like friends. And as I said, many of the relationships that we built with our early customers, not just Venmo, but many of our early customers, they truly were friendships to the point that I still keep in touch with a lot of them. Whether they're still at the company or have moved on, these are just friendships that we were able to build. And that added a lot of value because they'd be very direct. They would say, "Hey, this thing's not working. I don't like that feature that you just launched. Or I have this great idea for you, have you thought of this?"

So really focusing on friendships. Having really high levels of customer engagement, that was crucial to us. And then for us, we actually found this weird shift where texting with your customers gets you over a certain relationship hump, where people, for some reason, on email are not always willing to give a ton of direct feedback. The early days we got our customers to actually text us, they would give us a ton of direct feedback. Now, that hasn't scaled necessarily and also day-to-day texts with our customers, but in the early phases that actually got us a lot of really great relationship building really quickly.

The Fintech Ecosystem

Patrick: [00:21:34] I'd love to take a step back and have you just describe the system in which you're now a key player. I think people probably don't appreciate the complexity of how money is moved around in the modern day, who the key ecosystem players are. So there's banks, there's merchants, there's credit card companies, there's companies like Plaid. There's a lot going on here. If you try to just abstract it and describe what drives this overall system, because I know you're interested in modernizing it, democratizing it, making it better. What are the key levers? What are the key ecosystem players here?

Zach: [00:22:06] Well, how much time do you have is the real question. Finance services is deeply, deeply complex. It is layers upon layers upon layers of infrastructure that's been built over the years, some of which has been modernized and some of which hasn't. As you think about the ways that money moves, in the US it's different than every other country and every payment system and financial system is unique, but in the US kind of the majority of our money moves, frankly, over ACH transactions, which sit on top of a set of servers that are turned off every evening from 5:00 PM to 9:00 AM. This system is a relatively slow and old system yet it's still the foundation for much of the funds transfer. Credit/debit card transactions themselves are actually cleared over ACH later.

Then on top of kind of that layer of the stack, wires, which are a little bit separate. You have bank to bank transfers or the fed wire, which is a unique permutation of it. You have credit and debit cards, which are again, a huge volume in terms of the number of transactions, but in terms of the dollars of transactions, they're still, I think, not as much as ACH. And then you have all of these more modern kind of peer-to-peer ways of paying or kind of cryptocurrencies. And so it's an impossibly complex system that one cannot kind of fully hold in one's head.

Where we play in this system is all around the data side. Our role in all of this is kind of plugging into the data sources that a consumer has, whether that data is stored on your financial history at the bank, or it's stored by a kind of non-bank but bank like application. We integrate with all those, and then pull that data together and focus on creating kind of what we think of as a Plaid's data network of understanding where all the funds are actually flowing and what's happening in that system.

Financial services as a whole though has been undergoing this really massive shifts towards digital. If you think back to the way that you interacted with your money a decade ago, chances are that you were walking into a bank branch and talking to a banker. You probably had one primary banking relationship, and maybe you have a second bank, but it was largely in-person in branch interactions. Fast forward to today and everything is fully digital. But in many cases, particularly in the cases of the small and medium or community banks, it's a digital wrapper on top of a largely paper-based or analog/digital hybrid on the backend.

There are on the order of 10,000 plus or minus financial institutions in the United States, including credit unions and community banks and all of these smaller, long tail local banks. And so it is almost impossible to fully digitize that system, but it's been fascinating to watch the digitization wave come along for financial services. And you see some countries, particularly UK jumped out as an example, that has digitized much faster. And then in the US we are still, because of the breadth and the number of financial institutions, still have a lot of work to do.

Patrick: [00:24:38] One of the ideas I love in just this kind of company in general is the idea that even though you're introducing a new player, you're charging fees, you still can make the market much bigger by virtue of your presence. Like when I studied the early credit card story in the US, I think it was in the '50s or something, you find that it solves a lot of problems for stores. So even though they're charging whatever it was, 7% fees back then, it just caused people to do a lot more transactions. Is that kind of what you see in the modern system that because of Plaid and other companies that are just making it easier to build these applications and interact more, that sort of the market is just growing?

Zach: [00:25:16] Yeah. What's the saying about platforms that platforms create much more economic value than they actually capture.

We think of ourselves as a business, foundationally as a platform for other companies to sit on top of. Within the broad realm of B2B, most people think B2B means SAAS.

And I think that there's this weird portion of B2B that really is a platform where by our existence, now many people can build products on top of Plaid and those products then can have massive distribution and foundationally in the early stages, we were just selling to startups because those were the people that were thinking about creating these brand new digital financial experiences.

And so we worked with Venmo. I guess, despite the fact that they had been acquired, they still were a very small team. Robinhood, I think we started working with Robinhood when they were three or four people. Through the existence of a platform, then many of these applications themselves can launch better or different, or sometimes it's a zero to one concept where, without the platform, then the application doesn't even exist. As we think about growing our business, we think about it as the first derivative of the growth of the FinTech market and we hope and believe that our take rate, our platform fee, you could say, is very modest relative to the economic value that we're creating for all of the applications that are built into Plaid. And that's not even considering the downstream effect of the net economic value that's delivered back to the consumer.

So, I think we're fortunate as a platform to have almost two waves of outcomes created. So the first wave is the applications that are built into Plaid. The second wave is the economic outcomes that are created for the consumers, which are the end users of all of those applications.

Plaid's Business Model

Patrick: [00:26:43] It begs the question of how Plaid works as a business. I assume that it's similar to, I don't know, I'm going to pick Twilio or Stripe, is sort of a usage-based model when someone uses Plaid to log in or maybe when the transaction is facilitated in Robinhood that has to go through your pipes. I think of you as just having kind of built the pipes behind the scenes here, the digital pipes. Walk me through what you think about usage-based versus recurring revenue business models and the relative merits of both.

Zach: [00:27:09] I couldn't hope to understand the full merits of either and there are many businesses that have been built in a very successful way choosing one or the other. In our case, we've chosen to be entirely based on the value that we deliver. So, we want to make money when our customers are making money. And frankly, we don't want to make money when our customers are not making money. From our perspective, that is entirely driven by a value-based pricing model. And so for each kind of bit of data say that an application is requesting on behalf of the consumer, we have some relative rate for that bit of data and that's charged on, either a one-time if you're just getting one time data or recurring basis if you're getting recurring data.

Our revenue model, we try to make really, really well tied in with the value that our customers are gaining from the service, and importantly, the value that our customers are gaining in their own businesses. I think having a business model that is asynchronous with one's customers becomes really difficult in the long-term. And so that's why we've chosen to build these things the way that we did.

Patrick: [00:28:06] You have to manage a lot of complexity. We've already talked about that. You're piped into all these different institutions, banks and otherwise. These institutions all aren't static, they change. Their settings change or their systems change, and obviously the consumer doesn't care. They just want something to work. Talk me through how you maintain all of this in a way that also allows you to launch new products and stay on top of new customer needs.

Zach: [00:28:29] That is one of the most difficult questions that many organizations face, which is investing in the core versus investing in new, so on and so forth. You're right to say that there's an immense amount of complexity behind what we do, and we've spent the better part of eight years now figuring out how to deal with that complexity. Realizing that financial institutions, if there are on the order of 10,000 financial institutions in the United States, they all are different and they all change from time to time. And at any given moment, one financial institution might be, their website might be down or their servers might be down for one reason or another. Inevitably, we try to deliver a 99.99 repeating. That if infrastructure, on top of a bunch of systems that are 98, 99% uptime on the other side, inevitably there are failures and issues with the infrastructure.

And a lot of what we have to do is build in very, very smart and intelligent systems on top of these kind of financial institutions that despite their best efforts, many of them don't actually control their own technology. So they're not in control of their destiny. Many of them are outsourcing their backend technology to a core provider or some consulting firm or something like that. For us, it's about delivering a unified user experience and something that if one of the financial institutions is down, we could fill gracefully in a way that allows the user to still complete the tasks that they want to complete, but perhaps not in the exact way that they'd initially expected it to do so. That is kind of like one of the core layers of complexity though of both our industry and financial services in general is that because, again, it's digitization built on top of a stack of analog, not everything works in exactly the way that one might think that it should.

Patrick: [00:30:00] Because you're a platform and other stuff's getting built on top of Plaid, you get to see stuff being built, even in the very early days. I feel like you have probably an interesting window into the types of financial services applications that maybe most of us haven't heard of yet, or just themes and trends in jobs to be done for the consumer that go beyond the very simple things we might think of when we think of our bank or our brokerage app or the stuff that we're all kind of familiar with. What, if anything, is interesting on the financial services frontier when it comes to consumer jobs to be done specifically?

Zach: [00:30:32] It tends to ebb and flow depending on the phase of the economy that we're in, as to which types of services are particularly important. If we rewind 12 months say, there was a huge wave of growth in services about student lending focused on, can people manage their loans? Can people understand how much they have outstanding? Can they consolidate, so on and so forth. And that was a really fascinating and really important wave of companies and I suspect that that wave will be back. We went into the early part of COVID and immediately it all tilted towards savings and investing where you saw the net consumer savings rate go from something like 30%, 35% to in the upper 40s and sometimes in certain demographics crossing 50%, and everyone was thinking about how do I put my money into a high yield savings account or how do I perhaps invest it in the stock market.

During that initial period, during Q2 of 2020, you actually saw about 300% growth in kind of certain segments around investing. So you can think of this as kind of the investing applications that are out there. And then you fast forward to now, and now we see that all of those student loans are in forbearance. Student lending is not as important of an area. It will be back because forbearance will end at some point. These days we're seeing consumers think a lot about forward financial planning. What comes next? How do I think about financial planning for the future or how do I think about being really intelligent with how I invest? We're actually seeing a continued emergence of financial automation tools. What are the tools that'll help me automatically pay my bills, make sure that I don't miss something, so on and so forth.

And then likewise, we're also seeing a big wave of mortgages being issued. People thinking about how do we issue mortgages more intelligently, this home ownership boom, or move boom, or refinancing boom. And how long is that going to continue? And then consumers themselves thinking about how do I set up the systems I need to actually take care of all these life changes that I might've just made and make sure that all my bills get paid on time?

So it really does depend on where we are in the economic cycle, but we tend to see a new wave of digital financial applications emerging every, call it six to 12 months. I can't predict where the economy will go next, but I am very excited to see what the next wave will bring us.

Patrick: [00:32:39] What have you learned about how to sell and build relationships with developers specifically? So most of the time, Plaid is being used and integrated into another application by a engineering team. So you're facing a very specific kind of customer. What have you learned about serving that type of customer well?

Zach: [00:32:57] Developers are a fascinating and incredibly rewarding market to work with. In the early phases of the company, in 2012 or so, there weren't very many companies that were focused on selling to developers. Some of the banner cases are Twilio and Stripe that were already out there that had said, "Hey, developers are a very important part of the enterprise." And you actually saw the Twilio banners, certainly all over San Francisco, but I think they were all over many cities that said, "Ask your developer." And then said Twilio below it. Which was a brilliant piece of marketing for so many reasons.

One of the things that we believed early on at Plaid is that we should build products for developers. Now, I wish that we could say that we had this fantastic insight and we really knew exactly what we were doing, but the reality is we built an API for ourselves inside of this consumer app. Really, as we started to expose that API to others, all we knew how to do was build products that we ourselves really wanted. So we got, again, quite a bit lucky in as much as our early customers were in fact the developers themselves.

What we realized as we continued to grow is that selling to developers is a fascinating hack to sell into the organization. So instead of selling top down where you have these long enterprise sales cycles, you can actually sell directly to the developer. They'll do an install. They'll then show it to a product manager or perhaps to a head of product and then the product leader will say, "Wow, how did you do that? Normally developing cycles takes so long." But we built Plaid in a way that was very easy to install, easy to get to demo, such that we could very quickly generate these bottoms up conversations.

And for a long time inside of Plaid, up until basically a year ago, our entire go to market strategy was what I call selling through the basement, finding a way to go and get just a mini install, just a mini use case, something within the organization. And then kind of little by little expanding where we start within the organization and then selling up through the organization with a set of champions. And of course we've had to now marry that with also selling top down because we have many large enterprises that are building on top of Plaid.

Selling through the basement when you have a usage based revenue model is actually a fantastic way to get kind of quite large installs over time because, by getting that initial install and then seeing the usage grow, seeing the additional installs come side by side, your revenue model is already mapped to it. It's not like people have to pay you per seat or per kind of an annual licensing fee. It's just based on what they're doing and what they're using. So for us, that was a very fortunate way for us to do a lot of early sales.

Building A Business

Patrick: [00:35:11] What do you think is the thing that you've learned about business building specifically where let's say now you're good or strong or something where when you started, you were no good at all? What's been the highest rate of change for your learning around just building a business in very generic terms?

Zach: [00:35:27] Perhaps to answer the question in a recursive way, I think the actual thing that I've learned the most in building the business is how to learn. The important correlator to that is how little I actually know about almost anything. There was an early phase of Plaid where the founders, you just do things and you have to get things done and your job is individual contributor. The next phase after that in the history of Plaid was one in which I actually couldn't do much because I was not the best at anything, except for perhaps one or two skills, which were basically like recruiting and raising money. I would say actually we spend a ridiculous amount of time on recruiting and that was one of the things that I think we really got right in the organization is learning how to recruit effectively and recruiting great people.

But in that early phase of the company, when we kind of went from me being able to do things to now having people that were either better than me at it or it not being as important, I went from having the job of executing to having the job of what I kind of described as like janitor almost. The job of the organization at that point was to get one or two things really, really right where we hired great leaders. In our case, getting engineering really, really right was crucial and getting initial kind of same customer growth really, really right was crucial. We were kind of getting A's in those areas. And then my job was to make sure that everything else was getting a D minus, but not quite enough. I couldn't make it get a C because then I would be spending too much time on the everything else and then something else was getting an F. So it was just kind of getting D minuses across the board.

And realizing that you are basically almost failing at almost everything you do for a long enough time, it was an incredibly humbling experience for us as a company. And it kind of cemented two really important things. First is learning and just admitting that you know very little, you can always learn a lot, there's always more that you can do. And of course, the importance of recruiting as a kind of subset of learning, because the best way to learn is to actually recruit someone that's amazing and have them teach you day to day. The second was this concept of orienting towards spikes. So that actually is one of the core pieces of our recruiting philosophy, which is hiring for spikes.

And as we think about ourselves as an organization, we also think about this concept of being a spiky organization, where we are amazing at a few things and we really try to capitalize on this few amazing things that we have, and we're okay not being totally well-rounded.

So if we are fantastic at one thing, it's okay to not be as good at another thing so long as that thing that you're fantastic on is the most important thing for the company. And likewise in recruiting, we have hiring for spikes. So we talked about can we hire people that are spiky, so they have fantastic strengths? It's more about having fantastic strengths than the absence of weaknesses.

Patrick: [00:37:50] What did you learn about successful recruiting process to find spiky people? Were there differences or whether that's where you found them, how you recruited them, how you sold them to join you? Any part of that process that you found especially effective for people that have concentrated strengths?

Zach: [00:38:06] In our case, it was a lot of just asking the right question. In the earliest phases of recruiting as a company, we had basically no network. And William, my co-founder and I, we kind of sat down one day and said, "Well, we've somehow raised a small amount of money and we have some customers that want to pay us," but we had basically no one inside the organization, aside from this one really wonderful intern who went on to be a fantastic leader in engineering management inside the organization. But we had basically no one. It was three of us sitting in this massive office.

We realized that we had to figure out how to recruit in a way that we had zero network. So we were not going to get referrals. We hadn't worked in the organizations where we could recruit people yet. We basically got very, very good at cold recruiting. We went down this path of how do we build an outbound reach out process that gets you in front of people that is effective in activating people. We then built a bunch of actually internal software, which now many companies have built better software for, but a bunch of internal software for how do we reach out to people? How do we track and manage our process? So on and so forth. And then in the interview process, it was really just about asking questions and looking for excellence. So we would ask questions such as, "What is the one thing that you're the most proud of in your life?" Or what is the thing that makes you the most excited about when you get to do it?" We oftentimes ask these relationship oriented questions, which is, "What characterizes the best relationship you've ever built in your life?" In all of that, what we're looking for are depth in the answer and a great deal of caring about the answer. It might be that someone has never had many experiences, but they've had one experience incredibly deeply. And that oftentimes is a huge strength and something that if you bring inside of your organization can be incredibly, incredibly valuable.

Now I will say the one area that we don't compromise is on principles. So we have a set of company principles. You cannot be spiky on principles. You actually have to be relatively well-rounded on our principles in that you can't disagree with one or you can't not embody one of them. The hiring for spikes is around skills and abilities. But again, principles, we do think being well-rounded is important.

The Future of Fintech

Patrick: [00:39:57] You sit in a very unique seat because you see sort of the matrix behind the financial system. The financial system is sort of the backbone of the capitalist system. I'm just curious what your thoughts are at a very high level on what's working well and what needs changing against this very modern backdrop of digital and maybe COVID. And as you zoom out and you're an interested party in sort of capitalism writ large, what are your thoughts there on good, bad and ugly?

Zach: [00:40:25] First, let's start with some things that are working well. So the internet economy is working well. That is one of the things I've been particularly impressed by and excited to watch and see grow. E-commerce, we can all read the stories about what's happened to e-commerce during COVID, but it's been really good. Shipping and delivery, despite the fact that there were some initial hiccups, has been quite effective in getting items to people.

One of the trends that we've been watching is the engagement of the 50+ demographic in digital financial services. There've been a number of reports released showing that a 50+ demographic is engaging with digital financial services for the first time. These people that we never actually imagined would be a part of our market are now actually going and saying, "Well, I need to use Venmo to pay this person that's come to cut my hair on my sidewalk because they don't have a card reader." That example is actually incredibly frequent that we find. So they're using peer to peer payments in order to do that. So Venmo or Cash App or choose your peer-to-peer payments application. That I think has gone particularly well.

I'll avoid commenting on anything related to politics and stimulus. I mean, I think there's a lot of opinions there on what we could do better potentially and what has worked well. One of the things that I will say is the bringing of the digital financial lenders into the PPP process has been a really good thing. And I think it's really cemented this concept that digital lending is here to stay, and that's been a really exciting trend for us.

Patrick: [00:43:01] When you think about other business models out there, yours is one that is extremely modern. There aren't that many like it. It is modern in almost every sense. But when you think just about businesses writ large, more generally, what other business models interest you? This doesn't need to be in software. It doesn't need to be anywhere. I'm just curious what else you've learned about or been inspired by?

Zach: [00:43:20] Concepts that I've particularly enjoyed learning about and thinking about is just foundationally compounding and understanding how actions can have a ripple effect long-term over businesses. At Plaid, we're fortunate because we get to compound with the growth of our customer base: get a customer and then, again, we grow as the first derivative of that customer, which is really fascinating. There are many other types of businesses. You could take, let's say perhaps a Salesforce for example, that has this incredible compounding engine. So they do first order sales and then their customer growth is kind of their second order sales. This concept of a platform or of the kind of tool that enables growth in the backend, and it has been one of the things that I've definitely thought a great deal about, I love Shopify in that respect.

Shopify, despite the fact that they've been fantastic at going out and getting businesses onto the platform, the real magic has been the second order effective of the fact that those businesses then grow. It's almost every day that we hear of a Shopify merchant, maybe they started out as a Kickstarter, and then they did a million of sales in the next year. And then they figured out advertising. They did 20 million, 50 million of sales in that third year. These businesses that are able to enable others in a way that generates compounding effects, I find to be fascinating.

Advice for Entrepreneurs

Patrick: [00:44:34] As you think about the state of the business now, and obviously it's much different than it was the three of you just figuring it out on your own and having the backend pulled out of you, what advice do you have for other builders that are still the three person team? I'm not asking for a formula here. There is no formula. Maybe it's the answer is just hard work. But reflecting back on the entrepreneurial journey you've been on so far, if and when you talk to new and fresh founders, what do you think is the most important things for them to be focusing on?

Zach: [00:45:02] A few months ago, I was invited by a VC to do this talk, which again, given my comment on the stories previously, I'm not sure I'm fully qualified to do so, but I was invited to give a talk to a bunch of portfolio companies. And I don't think they realized it at the time, but the theme to my talk was don't die. And truly, my advice to early companies is don't die. Find a way to fall forward and continue iterating.

There were a few times, many times, in the history of Plaid where we ran into really tough financial circumstances for one reason or another. Either you couldn't close around or in the very early stages of Plaid, we were sued by a competitor for what was a ridiculous lawsuit, but we basically almost ran out of money there. I think there were four times in the history of Plaid where William and I had to turn off our salaries just to make sure that we'd make it through that next phase.

I think truly the advice that I'd give to founders is don't die. And simultaneously, as you say, work really hard. And that combination can get you dramatically further than you might realize.

Patrick: [00:45:58] I love it for its incredible simplicity, but there's so much into it. I think just not dying, being willing to sacrifice, being willing to scrap your way through is powerful. Simple, but very powerful advice. What now, looking forward, as you think about this default consumptive state, what are the things that you don't understand well today that you wish you did?

Zach: [00:46:17] The financial system is obviously a huge, complex, and very hard to understand. But some of the things that I've been looking at more recently, so some interests outside of financial services, I've been going relatively deep on trying to understand biotech and how that could potentially change the way that we think about drug discovery going forward and the effects on cancer treatment and so on and so forth. And I've had a lot of fun really just learning a completely new field that I don't personally understand all of that well, but have been fortunate to find a set of good resources and good people to talk to me about it. I actually, I tend to do this every now and then where I'll post on Twitter, "Hey, does anyone know anything good about X." X could be a new field or a new way of thinking or process or something like that. I would say that one of great advantages of crowds is that someone always has a good place to point you.

Patrick: [00:47:06] If you think about Plaid and look forward three years, four years, five years, and the business is 10 times the size than it is today, so resounding success, to what do you think that's most likely attributable?

Zach: [00:47:19] I'll say the true answer, which is our team and our customers. Really all of the success that Plaid has had to date has been as a function of the wonderful people who we somehow tricked into jumping on this journey with us. And then truly we grow at the grace, I guess you could say, of our customers and the success that they've had has been truly astounding and fascinating to watch.

When I think about the dynamics that will create three to five more years of that, which I am incredibly confident in, a few of the really important trends to watch... Well, first is going from zero to one in terms of usage of FinTech during COVID, for us, we suspect will be a very long lasting tailwind. So many people that historically went into a bank branch are now having to use digital financial services to complete their day-to-day financial needs, applying for loans or choose your service that you need. I suspect that what that means is that a lot of people will now be comfortable doing it going forward. We actually ran a survey relatively recently, that showed that something like 80% of people believe that they might never actually need to go back to a bank branch, and likewise, I think it was just under 80%, maybe 75% of people said that they're going to use digital financial services kind of henceforth for all their financial needs, which is amazing. In that sense, COVID could well be a big accelerant of our industry.

Some of the other stuff that I'm really excited for is continuing to expand and scale internationally. And then, likewise, we are currently building a set of products that are very focused on empowering consumers, and helping them understand where their data is going, how it's being used and what they could be using in financial services.

Patrick: [00:49:41] I've loved learning about this business and I think everyone listening knows I'm a sucker for anything facing developers that is a platform in the sense that you described it, meaning it lets other people build very interesting variety of things on top of them and represents let's call it, a fairly small cost center for the thing being built, but it's nonetheless tied to the growth trajectory of those other businesses. I just think that's such a neat, modern concept. I ask the same question every single week at the end of the episode, and I'm excited for your answer. The question is to ask what the kindest thing that anyone's ever done for you is?

Zach: [00:50:15] I really love that you asked everyone this question and I really enjoyed hearing the answers of some other folks. I was thinking about it a bit before, and I think I have two answers. And I'm going to try to get away from the standard answer. People that are required effectively to help you out along the ways. My first answer is actually my now fiancé. When I was starting plaid William, my co-founder and I were working pretty insane hours. And I'd started dating my fiance maybe six months, maybe less than that, maybe three months before we started the company. I'm not sure if it's a feature or a bug, but oftentimes it tends to be a bug about myself, is that I become very, very focused, to the point where I can focus on one thing and ignore the entire rest of the world around me.

At some point in that process of building the company in the early days, I completely ran out of money. We weren't paying ourselves, we didn't have salaries. To the point that I completely ran out of money and actually was in a decent amount of credit card debt because I was putting a lot of cloud stuff on my credit card. My fiancé, when I kind of realized this, I told her, she was like, "Well, just move in with me. That's the obvious answer." I've been dating this person for three, six months. It was just this incredible thing for her to say that for me, I had forgotten about the world, and then one day I looked at my bank account and realized like, "Wow, I can't actually pay my rent." And I was just terrified. It was kind of that first panic moment that your professional adult life and within five minutes of having this conversation, it just completely had been solved. And so I'll say my fiancé definitely wins that one.

The second, if I may is frankly, the kindness of crowds. So I do this thing where I will just send people cold emails. I'll ask them a question or say like, "Hey, do you have five minutes to chat about something?" Or, "Hey, I'm really impressed or interested in this thing that you did. Can I ask you about it?" Throughout my career, people have responded. In fact, that's the way that I met you, Patrick is sent an email and we had a conversation and it was a great conversation. And one of the things that I've found is a huge amount of value in is just being willing to say, "Hey, I'm really impressed by X that you've done. I would love to ask you some questions and learn from you. Could you spare a few minutes?" And people are surprisingly willing to do that. So the kindness surprises, it's definitely awesome.

Patrick: [00:52:20] I absolutely love that answer. And it actually makes me want to ask just one closing final question. So we started with your dad or mom's notion of great challenges. How do you think someone that likes that idea and wants to find and tackle one of those things can know when they've found one? How do you think someone can know when they found a great challenge?

Zach: [00:52:39] I think it comes when you can't stop thinking about something, you can't stop ideating and you can't stop, maybe even worrying about something. It's one of the things where you wake up in the middle of the night and you're thinking about the challenge. A lot of people might say, "I don't know if I'm ready to start a company, or I don't know if I could really go chase down this thing." And I don't think that the right answer is to wait until you're necessarily ready to start the company or ready to go work on the thing. But rather to find that you truly, truly care about the challenge so much, you truly care what the question are you really worried about the problem or concerned about the outcome, so much that you're going to push until you find the right idea and right leverage point along the way.

I think that this concept of financial empowerment and financial freedom for us was just one of those things that for quite a long time, in the early phase of the company, I would just wake up thinking about it or it'd be on the news, or you've walked through, as I said, those protests. And it would just be this thing right in front of your face that you have to think about solving. And then clearly at the early stages of founding the company, we totally failed at solving it. And then through failing, somehow ended up succeeding. But I would say just when you find the challenge that you love, that you can't stop thinking about, go do it.

Patrick: [00:53:48] I love it. Great place to close. So much fun, learned a ton. Thank you so much for your time, Zach.

Zach: [00:53:52] This was awesome. Thank you so much, Patrick.

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