He pitched 100 VC and spent 3 years building— then grew to $7B AUM. | Doug Scott, Founder of Ethic

Douglas Scott (00:00:00):
When I help work with other founders and friends and whatnot. It's like, make sure you're timing your capital through a moment, where you can get operational leverage. When you're actually growing, you start to see things happening. And then we also started to figure out distribution partnerships, and that was really important as well. And so that helped us get from the first few customers to multiples of that. From a founder or CEO perspective, that's when you want to raise. When you can see it, when you're like, I can see the next, whatever. Two years of this and if we don't close money by this. It's going to be very hard to service these clients effectively. So we need to get ahead of this.

Previous Guests (00:00:33):
That's product market fit. Product market fit. Product market fit. I called it the product market fit question. Product market fit. Product market fit. Product market fit. Product market fit. I mean, the name of the show is product market fit.

Pablo Srugo (00:00:46):
Do you think the product market fit show, has product market fit? Because if you do, then there's something you just have to do. You have to take out your phone. You have to leave the show five stars. It lets us reach more founders and it lets us get better guests, thank you. By the way, if you're a fan of this show. You should definitely check out the GTM Now podcast. It's hosted by Sophie of GTM Fund and they tell the stories, and tactics of how the top 1% of operators, founders, and investors. Build, scale, and invest. It's one of the best podcasts for founders and revenue leaders that are trying to figure out how to grow. Just search GTM Now podcast or check the show notes. Well, Doug, welcome to the show, man.

Douglas Scott (00:01:21):
Pleasure to be here.

Pablo Srugo (00:01:22):
Dude, so you've built a pretty impressive business. I mean, you have, what? $7 billion AUM, you were telling me? Raised over $150 million in funding. I mean, it's been a long road, right? When did you start, like 10 years ago?

Douglas Scott (00:01:32):
Yeah, 10 years ago.

Pablo Srugo (00:01:33):
A decade, man, a decade. I mean, that's what. You know, it's funny. You go into it and you think it's going to be quick. You know what I mean? And it never is.

Douglas Scott (00:01:39):
Right, overnight successes take a decade, you know?

Pablo Srugo (00:01:42):
That's right, that's right. Well, tell me a bit about Ethic. What is Ethic? What do you guys do?

Douglas Scott (00:01:47):
Yeah, so Ethic is, we partner with advisors and institutional investors. To deliver very customized investment portfolios based on the issues or objectives that are very personal to that particular investor. So the simplest use case would be, let's say you want to invest in a broad based index. Like a large cap S&P 500 type index, and you want to customize based on your values, your tax preferences, and your financial preferences. Our role is to then sort of effectively unwrap that exposure and then make those personalization choices. And then deliver it in sort of an end-to-end user experience. And then to manage that capital on an ongoing basis.

Pablo Srugo (00:02:23):
Is it mainly about ESG values and things like that. That you personalize on?

Douglas Scott (00:02:28):
Values is definitely a big component. I mean the areas that you really see clients personalizing around, values has been a very strong use case for us. Because personalization is what is personal, what is personal is often values.

Pablo Srugo (00:02:39):
This would be like climate friendly? Things like that? Those kind of values?

Douglas Scott (00:02:41):
Yeah, exactly. So if a client wants to align sort of climate priorities or biodiversity issues, or gender lens, or a whole host of different issues and they want to embed that in the way that they're investing. And they have a thesis around that particular issue or topic, we are very, very good at that aspect. But it can also sort of broaden that to financial exposures, factor exposures, tax exposures. There's a whole host of different sort of characteristics that make up a custom portfolio and our role is to help discover what those objectives are for clients, and then to translate those into a portfolio that's actionable. And then to do that in sort of a custodial friendly way. So we are, you know, we're US based. We sit on about thirteen or fourteen different custodial partners. So essentially we are sort of integrating with those different custody partners and then we are able to deliver the portfolio management solution on top of those brokers, and custodian businesses. And then we deliver, as I mentioned. The personalization across the user experience as well. So everything from the before the portfolio. So proposal generation, all the way through to transition experience, and then also the integrated reporting. So whatever the objectives of the clients are, how do we deliver something that demonstrates alignment with those particular objectives?

Pablo Srugo (00:03:44):
So what's an example? That like somebody goes in, I mean, you partner. First of all, you partner with a financial institution or do you sell directly to end clients?

Douglas Scott (00:03:50):
It's always financial institutions. So our customers are, an ideal sort of customer fit for us would be a registered investment advisor here in the U.S. So a wealth advisor that's working with, let's say a hundred and fifty clients, managing a few billion dollars. Those clients want to embed some sense of whatever the objectives, personal objectives of those clients. What we're trying to do then, is then discover what those objectives are and help the advisors through that experience. Because it's not always obvious and then to translate those into portfolios that are personalized at each individual client level. And then we manage those, as a what's called a sub-advisor. So essentially we're managing that, on behalf of that advisory business.

Pablo Srugo (00:04:25):
And so, yeah. Maybe walk me through an example and then we'll get to how everything actually happened. But like somebody will walk into a wealth manager and what's the sort of thing they might say? That would then lead them to kind of use the ethic platform for it?

Douglas Scott (00:04:35):
Yeah, so the best use case would be. Let's say you have a wealth advisor serving a multi-generational family. That generational family is trying to engage different parts of the family. They're trying to understand what's important to the first generation. Maybe have a lot of the focus on the investment aspect and they're trying to engage with the second generation or the third generation. There's different priorities, right? So maybe there's some clients that care a lot about values. Maybe some of the other clients care a lot about tax issues within that family essentially, and so what an advisor will do is say, okay, what is this client care about? And they'll work with Ethic, we have sort of an onboarding process. Where we'll help them discover what are the issues that are important to that particular client, and then we'll deliver essentially a proposal. A proposal for you saying, okay, these are the financial exposures you're looking for, here's your tax objectives, here are your values objectives for the clients that have values objectives, and then we're delivering that in a sort of a simple proposal on the Ethic platform. We are already onboarded with that advisor, so it's a B2B2C motion, right? So we are serving advisors or intermediaries that are then serving clients and those clients could be families. Like the example I just provided, or it could be an endowment or a foundation. Let's say a foundation wants to personalize based on the issues that that foundation covers and where they're making gifting, and those kind of things. That could be another area that a client wants to customize around. So we have a variety of different use cases, but the motion is essentially B2B2C, and then we're essentially both an investment partner, and a technology partner for the investment advisor.

Pablo Srugo (00:05:56):
Got it and so take me back to that. You know, 2015 or even 2014, 2013 area. I mean, where does this idea come from, right? This idea of personalizing portfolios. I mean, people have been slicing and dicing, equities and portfolios in a million different ways for a very, very long time. But this sounds like, maybe the origin has to do more with the ESG, the value stuff. In any case, yeah, walk me through how that all happened.

Douglas Scott (00:06:16):
Yeah, for sure. I mean, if I go back ten years or a bit over ten years. I was in Australia. So my experience growing up, my father's Irish, my mother's American, I was born in Sweden. I was raised in Australia, very international background. I spent the early part of my life, I grew up in a very working class area in Melbourne. In the south of Australia, and when I went to university. I studied engineering, I studied commerce and I said, I wanted to build something. Australia does not have a very entrepreneurial sort of community. It's not really known for that, now it's different ten years on. But when fifteen years ago or more, it really was not like that. That was not an option that I was sort of thinking about and so, I went down the path of investment banking as the like vortex of talent that gets sucked out of universities. Is this the case and it was not exactly where, I wanted to end up. But it's funny, because my parents were kind of environmentalists and definitely had a social sort of focus as people. And so then when I went into investment banking. The ironic part about it was, that a lot of the clients that we serve were natural resource clients. Because Australia, that's what Australia's economy is really built on and so suddenly I ended up in this area. Where I'm working in sort of oil and gas investment banking, which is not exactly where I intended to be. When I sort of set out on this journey, but I really enjoyed a lot of the work we were doing. It was like complex problems, smart people, and I sort of felt like after doing it for several years. This is not exactly where I wanted to end up long term, and so around that 2014 mark. I was like, okay, I want to do something different and I remember very clearly. The moment I went back and I'd be working very late as, you know, sort of par for the course or whatever. And I ripped out a piece of paper, in this notebook that I had. And I was like, okay, what am I going to do for the next ten years? And I had this one line that was like, keep going down the banking, private equity path, you know, sort of that usual flywheel. So that was one path and I thought, yeah, okay, but that's not that exciting to me. The second path was like, oh, maybe I can do study more, business school, something like that. That would allow me to go move to a new country. I had a passport, US passport, because my mother's American. So I thought maybe I could do that and the third option was I could build a company. As you said, the background here, it's not a very risk-taking culture. So this is a very abnormal move.

Pablo Srugo (00:08:15):
How did that even make it, on your list? Was that something you'd always thought about in the back of your mind?

Douglas Scott (00:08:19):
It's a good question. I've been chatting with this, one of the guys who became my co-founder actually. Worked at the same company, and we met many years before actually. And we'd sort of been chatting about the idea of starting a company. And he was based out here in the U.S. So had a bit more of that influence, I think, the American pioneering spirit. Which I think is awesome, and so I sort of planted a seed. And then my dad ran sort of small businesses. He was a small business consultant. So he ran his own business. So he had a little bit of the entrepreneurial blood and I just thought, yeah, maybe I just want to build something. And I kind of go, well, the biggest risk I think in life is not doing what you really want to do. And I was at that point where I didn't have dependence. I didn't have the sort of those things that kind of, you have to be a little bit more careful about later in life and so I thought, I'm in my late 20s. I'm like, why don't I go and take a swing go build something. And then I thought well, you know, there's that old adage like if you want to be an actor, you move to Hollywood. You want to build a company, you know, the U.S. is a pretty good place to do that culturally and because the capital markets, and everything else. And so, I moved out to the Bay Area. Within three weeks that piece of paper, circling this, going I want to start a company. Within three weeks I'd like, sold everything, got rid of stuff, donated stuff and I was.

Pablo Srugo (00:09:22):
Is that typical for you to just go all in? Because the normal thing would have been. Do it on the side, try it out, find somebody who wants to do it, and then maybe at some point. If things are going, move to the Bay Area, right?

Douglas Scott (00:09:31):
Is that normal for me? No, I think this is like, the irony is the most important decisions you make. Are sometimes the ones that are like, it was definitely an abnormal decision.

Pablo Srugo (00:09:38):
What pulled you then? So strongly towards just taking an all-in kind of burn the boats decision?

Douglas Scott (00:09:43):
You know, the feeling. It was like the most quintessential gut decision, realm. The biggest risk, as I said. Is doing something you don't want to do.

Pablo Srugo (00:09:50):
The Jeff Bezos 'regret minimization framework' always sticks in the back of my mind, right?

Douglas Scott (00:09:54):
Exactly and it's like, yeah, go regret minimization framework. Take a swing, and to use the Bezos quote, it's like you take a swing in sports. The most you can hit is four runs.

Pablo Srugo (00:10:03):
Yes.

Douglas Scott (00:10:04):
In business, you can hit four thousand, you know, whatever it is, right? So I looked at that and said, there's great potential here. And then I also had this in the back of my mind. Because, I both left a job to start a company and left the country, right? I went to a place that I didn't, almost know anybody. So my mother's family lived in the Bay Area, but that was kind of it. So anyway, I moved to Atlanta in the Bay Area, and the first few months were definitely very uncomfortable. Because you're used to having this structured environment. You have tons of stuff going on. I like that metaphor, is like when you're in a big company. It's like you've got this fire hose at you and you're trying to work out what to do. When you start a company, you don't even know where the water supply is. You don't even have a map, you know? You're like, you don't even get a hose.

Pablo Srugo (00:10:42):
It's hard to realize that unless you do it. Just how many things that you want to do depend on another thing, that depend on another thing, that then you have to do this random thing. You're like, oh my God, this is so annoying.

Douglas Scott (00:10:52):
So I had that feeling. I got there, I was like, what do I do?

Pablo Srugo (00:10:55):
Yeah, you didn't have an idea, did you? You're just like, I want to start a company at Bay area.

Douglas Scott (00:10:58):
I also think there's a little bit of that, sort of bias you have. When in that sort of, the entrepreneurial journey. Where you're like, oh, there's one aha moment. I think it was just like you pull the thread of curiosity and see what comes. And that's kind of been my experience. And I do love just problem solving. I'm just a very curious person naturally. So when I moved to the Bay Area, that's kind of what I did. I started to build community and my co-founder, we sort of spent time going and meeting people, and connecting, and finding problems we want to solve. And we knew it was in the fintech ecosystem, because that's what we knew. One of the people that I met pretty early is a guy that runs a think tank at Stanford. This guy named Ashby Monk, who fast forward now. I'm actually part of the organization called the Stanford Long Term Investing Initiative. Which is really cool, but in 2015. He wrote this paper called Organic Finance. It was basically, the metaphor was looking at food and saying there's this big push to have better transparency in what people are consuming in food. That is a really important thing. People are really aware of what's going into their bodies and what's going into their children's bodies. That same thing is going to happen and is happening in financial services. Where there's sort of increasing commoditization and products. You've lost connection with what you're actually investing in or whether those things are actually aligned with your priorities and your objectives as an investor, and as a person. And that became the metaphor, and it was like okay that. That is something that is really both aligned with my experience personally, but also I think there's a great opportunity to build something very different and so that really became. And at the time then we were looking at accelerator programs, and how are we going to fund this thing. Up to that point we were pretty bootstrapped.

Pablo Srugo (00:12:24):
Did you even know what this thing was? Because that's a very high level thing, this idea. Do you have a sense of what you're going to do within that?

Douglas Scott (00:12:31):
No, I mean. At that point it was an idea and it was a direction. And then you start to go, then that curiosity thread and it was really like, okay, where are the biggest problem statements here? If you're trying to connect with where people are investing, or we first thought is like, okay, well, index investing in 2000 was, you know, one percent of assets under management. You fast forward to 2015, it's approaching fifty percent, right? So it's almost half of all assets are invested in sort of passive or index-like products. Which have a really important diversification benefit, but have this trade-off to say, well, it's not customized to what is important to you. It gets its exposure and so we thought, well, maybe that's an area we can start. We started building some of our first products where, get insights into how you're investing. Is it aligned with your values? Can you see what's inside it? Is it aligned with how much you're paying for these products? All of this sort of insight into what people are doing and then pretty quickly we said, okay, that is important. But then what do we do about it, right? So we thought, oh, could we help people understand what other options are out there? And he said, you know, that doesn't really make sense. So very quickly you end up in this concept of, can you create an operating system to personalized the way you invest, and that metaphor of organic finance into this concept of helping people customize, or personalize how they're investing. Really stuck and that became then, okay, well what we've got to do is. We've got to build products that help you, then understand what's in your portfolio but then we still got to start to build these frameworks for how do you invest and how do you align it with all of these different objectives, and then how do we do all the trading, and management of those portfolios on an ongoing basis. And that's where a lot of the complexity lies. From a fintech perspective is like actually the workflows and risks associated with managing individual portfolios. That are personalized at scale is very complex.

Pablo Srugo (00:14:08):
And you're alone at this point? Or you're with your co-founder? How does that happen?

Douglas Scott (00:14:11):
With co-founders.

Pablo Srugo (00:14:11):
He moved with you as well? Or you met him there?

Douglas Scott (00:14:13):
He was based here. So he was coming out from New York and we were in the Bay Area. And we had those, three of us. And so we were bouncing between New York and San Francisco. And it was actually, one of the other people we met pretty early along. I don't know if you know Sheel Mohnot from Better Tomorrow Ventures, FinTech Fund. He's a great investor, early stage investor in the FinTech ecosystem. He and Jake Gibson, who founded NerdWallet. They now run Better Tomorrow Ventures. But back then, ten years ago it was 500 FinTech and so we got into the 500 program. Which was really valuable.

Pablo Srugo (00:14:41):
This is part of 500 Startups?

Douglas Scott (00:14:42):
500 Startups, yes.

Pablo Srugo (00:14:43):
Which batch? I was in 500 Startups. When, I was 2014, I think. I don't know when you went through it.

Douglas Scott (00:14:48):
This is January 2016.

Pablo Srugo (00:14:49):
Okay, we were close, man. We almost met there, that's crazy.

Douglas Scott (00:14:54):
Some of my closest friends came from that.

Pablo Srugo (00:14:56):
It was fun, man. It was fun back then, for sure.

Douglas Scott (00:14:59):
And it was early. It was like batches were a bit smaller, I imagine.

Pablo Srugo (00:15:01):
Yes, there was probably thirty or so companies all in the office, right? And just banging it out.

Douglas Scott (00:15:05):
Yeah, it was like thirty or forty companies and there was less than ten of those were fintech. So we had this little cohort within the cohort, if you like, and the fintech track was covering all kinds of things, payments and all different other things. It's a forcing function to build and so we really focused our efforts. We raised our first few hundred thousand through the program, going into it and then the program itself. And that allowed us to get to these positions. Where we started to build some of our early experiences and started to build what became the Ethic platform basically. But it was still small and we had this challenge. Because we serve this institution and we said, okay, our customer profile is going to be focused on this advisory audience. Because one, it aligned more closely with our experience as founders. But also, because we felt it was this underserved market. Where the jobs to be done or the problems essentially that these folks are facing. The way we saw it from an advisory perspective is, they're trying to connect better with their client to understand what is important to them. They're trying to personalize the way that they're investing and they're trying to create this in a very seamless environment. Because you'd had this issue and we'd like to think of as customization bit. If you do something different for every customer and you're not set up from a technology standpoint. It doesn't scale, the business doesn't scale and most advisory businesses are, you know, medium sized companies. They're not, you know, there's some big large ones, of course, as well. We serve several of those, but in general. It's relatively small to medium sized companies.

Pablo Srugo (00:16:20):
Did you do a bunch of validation or talking to these customers in that stage? Or did you just kind of know from your experience?

Douglas Scott (00:16:27):
No, we did. It was a mix of the experience we've had as founders, but then actually going and doing the customer discovery, customer developer work. In that getting to the problem statement, if you like. It's sort of you go wide, you start to speak with all different flavors and it's one of those elements. Where advisory firms are very different and you really get underneath it. Each firm is a little bit different, they've got their own priorities, they've got the way that they run the business, they've got different customer sets they focus on and so from you sort of standing back. They all look similar-ish. They're both different flavors of the way that they serve their business. But when you get into it, they're extremely different and so we would spend so much time obsessing about the customer problem. Like, understanding what they're going through, what are their workflows, what are the challenges they're facing, how are they connecting with their customers.

Pablo Srugo (00:17:06):
Do you have any stories from that part? Because I find, you know, when it comes to building companies. Obviously your early moves matter so much in terms of the direction you ultimately go, and a lot of what you decide to do comes from those early conversations, you know. How many you have, who you have them with, how deep they are. Curious, what you remember from back then?

Douglas Scott (00:17:25):
If you're serving this kind of client, especially investment management. It's very difficult to convince someone to invest millions of dollars with you. When you don't have millions of dollars under management, right? This is just a chicken and egg, 0-1. Classic 0-1 problem, and so one of the insights we had in this through a lot of the discovery we spent was, well, okay, it's going to be difficult. Because these assets are generally quite sticky wherever they're being invested. It's going to be difficult to get people to move existing dollars. But if we can help them win business, if we can help them win a client, convert a prospect, then we can win assets that way and that was such an unlock. Because at the time we were saying, okay, you can switch from whatever sort of asset manager or platform you're using today and switch towards Ethic. But it was so difficult to do that, but we weren't at any scale in the very earliest days. But then we said if we can go in with some very unique differentiated solution, that we felt was maturely better than what was available. We could help you win business, and that was really some of the early wins that we had. And the first assets really came through that outside, of some sort of close connection beta customers if you like. The first big wins that set us on the trajectory towards like a product market fit. Real product market fit, were definitely those kind of wins. Where we could help the advisor win a new client essentially.

Pablo Srugo (00:18:36):
How did you manage to do that? What was it about it? What change did you make in the product that actually helped them win clients?

Douglas Scott (00:18:40):
I mean, a lot of it was the way we mapped. So a lot of our earliest clients, very back to my original element. Is personalization is what is personal, what is personal is often values. We did a lot of work on sort of the values discovery piece, and so one of our earliest wins was a foundation client. Where we were helping do a lot of deep work in mapping, the priorities of this foundation. Very large foundation, back to the advisor to give this sort of holistic map of what was important for this client and how the allocations were today. And then translated that to this great sort of proposal. We built this sort of proposal feature within the platform that allowed us to do some strategy back tests, and do all these different things. And so to give a look into that portfolio, given these unique and very customized requests. And so we started to go down that element in the mapping of the data. We did all of these different elements that we felt was just very different from the alternative and the alternative was largely. Let's say, a pooled vehicle like an ETF or a mutual fund, or something like that. Where essentially you have just a single strategy that goes across the entire allocation or some portion of it and so we felt this was very different. And then we basically joined the advisor, and helped support them through that journey, and sort of pitching this client effectively. And this advisor won it, and it was a very pivotal moment for that advisor. We helped him win this big business and that was really important for his career. And so suddenly we then built trust. Because we are ultimately in the trust business and that helped us get that first point. We go, okay, if we can repeat this, if we can create, essentially a mechanism to help our advisors win more business. That's going to be really powerful for both our growth but also the success of our customers and so that became some of our earliest journeys. And there was another very similar version we had. About what we were doing. It was essentially, a consultant but similar type of process to an advisor working with a large single family office. Same process, help them win assets. Suddenly one trusted that consultant, that became really powerful. So it's these sort of insights that you only get, when you actually are in there and doing.

Pablo Srugo (00:20:34):
And when was this, by the way? You started 2015, when did you get into 500 Startups for example?

Douglas Scott (00:20:38):
So we raised the first few $100K in 2015, like going into the program and through the program. I had some beta customers through 2016, but we spent years building technology to help deliver that customization. You know, by the end of 2018, we probably. Well, actually, so at the end of 2017. We had about $5 million on our management. That gives you like, you know, we're very small. End of 2018, we started to get our first few customers. We had about $50 million at the end of 2018, and going from 18' into 19', is where we really started to hit that inflection point. We got about $250 million or so at the end of 2019, and then started on the trajectory.

Pablo Srugo (00:21:09):
And that idea, the helping advisors win business. When is that?

Douglas Scott (00:21:14):
That's, at that early. That basically sub 50 million, right? Getting from our first few and, you know, early customers are often immediate community people that we've worked with. Sometime investors or client investors, partners and that helps you just go out, and test, and understand. And it's mainly for feedback. But then getting to that point where we're actually winning business. That's our first, let's call it customers three through ten. That kind of window there. Where it really, you start to see it work and you start to see the flywheel work. And we're going in there, and showing how we can help win business, and case studies, and these kinds of things.

Pablo Srugo (00:21:44):
So, like BPS off the AUM?

Douglas Scott (00:21:45):
Primarily AUM.

Pablo Srugo (00:21:46):
Which is what? Sub one percent or so?

Douglas Scott (00:21:48):
Oh, yeah.

Pablo Srugo (00:21:49):
So when you're talking about $50 million AUM, right? We're talking less than, I don't know, half a million ARR sort of thing? $250K.

Douglas Scott (00:21:56):
Oh yeah, it's definitely and this is always the challenge around AOM business models. It's very different to software subscription models, like.

Pablo Srugo (00:22:02):
Yeah.

Douglas Scott (00:22:03):
Completely different, and that's often the challenge. And frankly going to the fundraising side, that was one of the tricky part about capital raising for the company. Was that there are some investors who really get the AOM model and really like it. And there are a lot of investors that really don't. And there's definitely more of the latter category, than the former. It's really hard to get to scale, it's really challenging, and it takes a long time. And, you know, all that is true. It is tough, it is hard to get to scale, it is difficult, convincing institutional and professional investors to invest millions. Tens of millions of dollars is challenging, and that's where I felt like the other element we got right, I think, early was that sort of investor company fit. Some of our earliest investors, I think, really helped. We had some of our earliest checks. So we did a $7 million seed, but it was really over a couple of different tranches and essentially, in aggregate. We had a lot of individual investors who were folks that added a lot of value personally, and I found actually some of them still to be the most valuable investors on the cap table.

Pablo Srugo (00:23:00):
We have tens of thousands of people who have followed the show. Are you one of those people? You want to be part of the group. You want to be a part of those tens of thousands of followers. So hit the follow button. Did you run formal pitches? Or how did you? When you're fundraising franchises, how did that happen? Were you always fundraising?

Douglas Scott (00:23:16):
Yeah, that's the early stage life, you know, you're always a little bit fundraising. I mean, it does help when a lot of the kind of folks you're speaking with, as customers are also allocators, right? So there's a nice sort of double effect. So some of our early investors then, also potentially became clients and heard that we had that crossover opportunity as well. Single family offices, some angel checks, some small venture funds. The value for us in that early part where, you are effectively always pitching. You are essentially spending time with potential partners, that could become investors or could stay as just clients.

Pablo Srugo (00:23:48):
But you were taking money every time or would you do these mini rounds. Like, oh, now we're doing half a million or whatever?

Douglas Scott (00:23:53):
We kind of batch it and say, hey, we're going to raise a little bit more. And essentially, the capitalization strategy was right, because of the way the business profile works and it takes time to ramp assets. As I said we spent years building technology before we really started taking assets. Because of that profile you really had to raise enough to de-risk the business to get to the next milestone, you know, product milestone, build milestone, traction milestone and then we started to kind of do that. And going into we raised our Series A in 2019. I mean, that was led by Nyca. Hans Morris, Nyca is great but prior to that. I would say, we definitely did a lot of tranches in that component and it was, as I said, I think that was the right fit for us. It keeps you really scrappy, though.

Pablo Srugo (00:24:29):
Yeah, how many people were you through that time? For example, 2015 to 2018?

Douglas Scott (00:24:33):
So 2018, we were sub-20 people. We're talking about fifteen.

Pablo Srugo (00:24:37):
Okay, so that whole time. You're five, ten, fifteen sort of thing.

Douglas Scott (00:24:40):
Yeah, exactly. You know in the early days, you're a couple of people just the founding team and the first few employees. And by 2018, we're like sub-20 people basically. We started to go in and post Series A, and then even to Series B we started to really burst the walls a little bit, of this. I'm actually at the old office today, but it was definitely challenging at that time in terms of fitting everyone in. But in that motion, where we were going from getting into that Series A mindset. That was actually a very, that was a tough. Going from seed to A is, I think one of the more challenging. I'm sure a lot of folks that you know well and work with. That is a very difficult drop off, right?

Pablo Srugo (00:25:13):
It's a crazy drop off, man. You know, it's funny actually, too and that data is worse now than it was, I think, post-COVID. If you look at the overall, about forty, forty-five precent of seed companies make it to A.

 Douglas Scott (00:25:24):
Yeah.

Pablo Srugo (00:25:25):
Given an unlimited amount of time, right? But two years in, it used to be a few years ago. It was about thirty to thirty-five percent of seed companies that get to A after two years. Now it's fifteen percent in the last cohort. So it's dropped, like, a lot.

Douglas Scott (00:25:40):
What do you see in the success stories in that conversion, then? I mean, I'm happy to talk about our journey in that. But like, what do you see as those attributes to make the minority of that?

Pablo Srugo (00:25:47):
There's just, the timing has to do so much, right? So you look at the COVID years and frankly. It was very easy to raise an A, relatively speaking. These kind of last few years, the bar has just gone up a lot and the ones that have made it. Part of it, again, is timing in the sense that. If you're doing things with AI, it's just been so much easier now than if you're not. But that's only true as of the last couple of years. I think in a Series A, the number one thing you can always count on is insane growth, I mean.

Douglas Scott (00:26:11):
Yeah.

Pablo Srugo (00:26:12):
The ones that are growing really fast, regardless of everything else. Tend to raise an A, but it's not true that the ones that aren't don't, because.

Douglas Scott (00:26:18):
Yeah. 

Pablo Srugo (00:26:19):
There's so many other reasons, why you'd want to back a company that early. Now the core, I think. Principle in this, you know, hence the show, right? Is fundamentally proving product market fit and I think that's the key thing. And I say that in both senses, like in a perfect world, only the companies that have. Maybe there's exceptions, but in general, only the companies that have product market fit would get funded and only the founders that have product market fit would want it raised. You know, a $10, $15, $20 million Series A. Because frankly, if you don't have it. It's a lot of money to have and unless you're just very strong-willed, and able to just bank it, and only use what you need. In reality, most founders that don't have private market fit, but have $15 million are going to spend it and if you don't have it. It's not going to get you what you think, it's going to get you.

Douglas Scott (00:27:01):
You know this well, obviously. I find it, different variants of product market fit. Because you have the one where it's like the hair on fire problem. Where it's very competitive and everyone's kind of solving it, and coming in. I think we fit more into the category of that hard fact issue. Which is, you know, you're trying to build the market for customization and how you can solve this, and do it differently to how it's been done before. Which had its own challenges and, you know, my experience there is the technical challenge was very real. Because, and the go to market challenge, the zero to one problem of how do you get scale to get assets. Because people don't want to invest until you're at a certain scale and have history, and all these kind of things. And as I said that unique insight we had I think around helping advisors win business. And that being really the initial set of customers, and using that to show the traction that we need to raise more capital. Whether that was another sort of seed round, essentially or whether it was going into a series A. That was very much and then, you know, for our world is distribution, right? Distribution is such a huge part of it. Is once you've got that technical mode. Once you have that from product perspective is, can you get distribution? We found as we had to kind of reinvent a little bit to think about distribution. Because typically in financial services, you have sort of wholesaler model. So people used to go out and sell ETFs, and mutual funds. We have a very consultative model, because we were going in there, discovering what the clients care about. We're setting them up from a technology perspective and then building these portfolios, and sort of workflows around it. That was quite different. So we found like, there was actually a talent challenge. You know, trying to find the right people as well.

Pablo Srugo (00:28:29):
This is post-series A, you're talking about?

Douglas Scott (00:28:30):
Yeah, basically post-series A or around the series A time. Kind of pre-post that era. It's basically when you do your first true sort of sale or business development on a high. Because you have to then productize or you have to create the road map of how your product works and how someone can come in, and step in, and solve it. And we weren't your sort of SaaS salesperson, and use to that. And we definitely weren't your wholesaler model. We were neither of those, and so we had to kind of invent. A little bit the playbook about, how our customer discovery worked and how you, as a relationship manager or business development person would step in. And be able to work with this kind of customer, work with investment advisors, and institutional investors that have very bespoke needs. And that was also an interesting win. I think we spent so much time obsessing about how to get that model right. That we felt like it was, that was and again at the time. A little bit like the fundraising, you can see him at the time like, oh my gosh, we're spending so much time on this and it's really draining but the grittiness that you get from that. And I think, as I said before building transformational companies takes decades. I don't see that there's any shortcut to that and I think a lot of these learnings you kind of have to take in some ways the hard way. You can try to learn from peers and whatnot, but a lot of them is just by.

Pablo Srugo (00:29:42):
Sometimes you got to do it yourself, a hundred percent. Curious to dive into that 2016-2018 period. When you're just mainly building from a few different angles and take it however you want to take it. But it's interesting, like with the PMF show, I speak with obviously a lot of successful founders and there are many that had effectively like some form of a long build period, whether it was by design or not. But me as a VC, it's a tough period because everybody can build. Like frankly, you know what I mean? Everybody can build product and everybody can. And I say everybody, and obviously in air quotes but in general. That's not the hard thing, showing progress and building a product. The hard thing is finding product market fit and ultimately traction, and all these sort of things. And so it's kind of like, on the one hand, I know that there are companies that do need to do that and it takes time, and ultimately leads to success. But when you're actually going through that time and I'm curious your experience going through that time. There's a lot of doubt, like inherent doubt of, man, like am I, what am I doing here? You know, first of all. There's companies that are growing really fast. Second of all, I'm sure when you were 2016 in 500 Startups. You thought it would be much faster than it was and so you've got to reconcile all these things. Just curious if you could tell me more about that build period and what that was like.

Douglas Scott (00:30:45):
I could spend an hour just talking about that. There's so much there, because you're a hundred percent right. It's like you're in this motion where, you're building towards a vision and in our kind of world. Where it's, how do you show traction, really? In terms of assets under management, because of this sort of chicken egg issue. Where it's like until we feel we are, so much more advanced in what the alternatives are. It's extremely difficult to go in at all. We can't go and do this sort of, move fast and break things type software mindset. Because you can't do that in institutional capital management, and so definitely. You kind of go, oh my gosh, is this the right thing? Are we on the right direction? Are we going to get to product market fit? Because you can do all the customer discovery calls in the world. But until you actually transact, until you actually cross over that hurdle, where you're actually managing capital and you're working with that client. You can get, oh yeah, definitely, we could definitely help, we could be part of this. It's a very, I think as a founder, it's probably the most lonely time. Because one of the elements is you can't look at what other people are doing. Because you don't know what sits behind that. So you can go and see other companies that are out raising, and every tech crunch. So I just tried to ignore all that, because it just doesn't help you. It doesn't advance our mission. It doesn't advance what we're doing. So let's just focus every day on execution. Let's just be better every day. We'll capitalize the companies, we need it. We'll bring in strategic investors that understand our space and can help us with things like distribution. What we found also, in getting up to that 2019. I know we're talking 2018, earlier but we started to get to the 2019. Then we saw, okay, what we need to do is bring strategics on to the cap table. Because that can help us with this, like scaling our product market issue. So that was always one of the things we were thinking about all along. But it's definitely a very challenging and I can see from a venture lens. It's hard to separate builders, right?

Pablo Srugo (00:32:25):
Well, what kept you going through that? Were you confident that this is going to lead to the promised land? Or was there serious doubt? Or at some phases of ups and downs, where you're kind of like, yeah, I don't know.

Douglas Scott (00:32:35):
It's always the up and down, mate. You know, in hindsight, you look back. Like, oh yeah, we did this, we did this and you're like, oh, it was the good old times. And you're like, no, no, no, no, no. There was so much, so challenging. Where you've got, you know, short on runway and you're having to, go and raise funding, and then going to build stuff. And then you also getting rejected a million times. That's always a real challenge.

Pablo Srugo (00:32:57):
How many investors did you pitch, for example? Through those fundraisers?

Douglas Scott (00:33:00):
Well over a hundred and a very small portion of those ended up investing. But that's just par for the course, right? That's what normal is, I think, anyway. I mean, there are exceptions, of course. But I think normal is meeting with a lot of investors and I think. Actually, the benefit of doing that is, because you're also doing the reverse, GD, if you like. You're looking at them, as like, is this investor who's going to be with us for the entirety? Are they going to help? Are they going to help us really unlock the value that we believe we can unlock? And so you get both of those sides. You spend a lot of time with investors and you get to learn them. You get the rejection, of course, but then you also get the other side of it. Which is you start to get a feel for, what are the investors that are really good for us? And also the people who are a good fit for me, as CEO or us as a founding team.

Pablo Srugo (00:33:40):
And you found the investors really made a difference? Because sometimes that gets overhyped, you know what I mean? You're like, oh, these investors are going to add value and then they just sit, and go invest in other things.

Douglas Scott (00:33:48):
I hate to say it, but I think the venture investors that have to sell their value adder off. Are not the ones that are the value adder. The ones that are the value adder are often the people who have been builders before. The people can empathize with the early stage experience, the ones who've been through that, who understand so much of that zero to one, especially within that zero to one phase. There's a category of investors that are really valuable there. I think the other category of investor that's really valuable ,are the people that understand your market really well, right? They can help you either with that initial set of ten customers or twenty customers. Or can understand the product experience in a lot of intricate detail and we had some great fintech investors early on. I mentioned a couple earlier, who understood the business, who understood we're trying to build, who believed in what we're trying to do and could help us with those early kind of customers. And, you know, when I do these days. Fast forward, I help some of our venture investors and then speaking to portfolio companies, and whatnot. And I'm like, everyone will pitch you the value add but the ones who really add value. Are the ones who are either your first call when you've got a real problem or they're the ones that help you get customers. The ones that get you customers, are so valuable. Because they're the ones who are like, hey, we'll go to a reference call and yep, you're early but we'll help. We'll say, you know, we support you and we've got capital behind you. And that mattered a lot. And those are the ones that I think, I have the most gratitude for. If you like, the investors that I think were the most. That truly actually added value, especially in that early phase. Because later on it becomes very different, you know. The support you need, in the Series B, C, we've passed the Series D milestone at this point. It's very different than what we did, when we were like, yeah. You know, ten people in a room kind of thing.

Pablo Srugo (00:35:14):
In the ten people phase, when you're building. Are you kind of have a feature parity situation and you just know where you're going to get to? Or are you kind of in this motion of customers tell you, you need ABC. So you build ABC and then they tell you actually I need DEF. So you build DEF, do you know what I mean? Which of the two models are you running?

Douglas Scott (00:35:29):
Definitely the latter.

Pablo Srugo (00:35:30):
Okay.

Douglas Scott (00:35:30):
You know, I remember there was times. Where we were like, literally we would build stuff from one day to the next. Based on a meeting going, oh this client's looking for this thing. Oh yeah, I think we could probably and like hack together something, and go test that again. So it was very much, as agile as we could possibly.

Pablo Srugo (00:35:43):
Any mistakes made in that? Did you over build? Did you find you build things and then ultimately, didn't get the sale that you thought you would get? What were the learnings from there?

Douglas Scott (00:35:50):
Yeah, some of the learnings were also things like, oh, we integrated with a custodial partner that's not well adopted or things like that. Because you don't know some of these areas, where you're like, oh, we'll go spend time with this custodial partner and then you realize. Actually, the market you're solving for is on this other one and so you spent time over here. And like, yes you look in hindsight, and go that was important. But I also go, that's kind of part of the journey. You have to meander a little bit. I think it's never going to be this element, where you like nail the customer journey out of the gate and get all the feature requests right, and build the product exactly. You have to have these mistakes along the way and go, oh, we built this feature and functionality. You know, I remember some of the early ones. Where we thought, oh, we could embed some of these workflows that are like what we're doing into our customer journey and we built that way too early. And then it ended up being, you know what? People aren't using it. That's not the good use case. Let's focus on the narrow and deep, what we're really good at. I think one of the other things that we did very well is focus as a company. We were very focused on the customer segment, on what we're trying to solve for, on their problems. That became very much part of the DNA of the company. Because it's very tempting in that building phase like, you're talking about, to go and start building an entirely different, for an entirely different customer problem set. Because you're like, oh ,we haven't seen the traction here or we haven't been able to get to this point. You're like, okay, maybe we should change, maybe we should go to retail and we stayed very focused. Despite all of those elements and to give you the context of the time. Five years or more before us, was the robo-advisor phase. Some of the early robo-advisors started to scale up. So there was a big direct-to-consumer push and so that had got traction. That was very well-funded. So then it was like, oh, well, is that a world we want to go in? And there were some of our competitors, that started at a similar time. That went off into the direct-to-consumer route and then eventually made their way to advisory. But we stayed very much focused on the advisory space and what then became institutional space over time. And that really served us well, because it meant that the journey. The customer journey we were building around was very consistent.

Pablo Srugo (00:37:41):
When was the most insane growth? You grew, you were at 50 in 2019. You're at $7 billion now, six years later. What was that kind of curve like?

Douglas Scott (00:37:48):
So yeah, between 2017. We're a handful of a million on a match. At the end of 17', $50 million. At the end of 2019, we're about $250 million. So going from 18' and 19'.

Pablo Srugo (00:37:58):
Okay.

Douglas Scott  (00:37:59): 
That was a huge year, in the early phases.

Pablo Srugo (00:38:01):
And what clicked? What specifically happened in that year, that you would say was the thing?

Douglas Scott (00:38:05):
It was a mix of things. So that insight we had in year 18', really. Which was this, how do we help advisors win business and how do we really show that works. That was extremely helpful. The other thing is we started to get distribution, right? I was saying before the way, our distribution work. We really spent a lot of time iterating, on how we actually do the entire sales process and how we work with clients to get them set up, and all of that. So that started to click, and then we also started to figure out distribution partnerships. And that was really important as well for the industry we're in. And so that helped us get from, the first few customers to multiples of that.

Pablo Srugo (00:38:36):
Tell me about distribution? People talk about high level, all the time. You know what I mean? You got to get the go to market right. You got to get the distribution right. What specifically would you say you got right?

Douglas Scott (00:38:40):
So one of the big partners we had, was a big financial institution and we worked with them for a long time. And they came on the cap table, and what we had. Is can we leverage that partnership to help us grow more? Can we leverage some of the way that they are already, because they're also in this mindset. If you look at most financial services, they're wanting to innovate and it's always very challenging. Same problem you see in most industries, it's like hard to innovate around. Because it's hard to build these things and they have a certain way of doing it, and maybe doing that way for decades. And so we started a partner with folks who we then shared some of the revenue with. But we were essentially able to leverage and get much more sort of well-known in the industry. And then also help us really convert customers much quickly. Because the RA market, which is a lot of our customers today. It's quite independent, it's quite fragmented. It's not like in software land if you're selling to, from, within the startup ecosystem. Where you're sort of one investor has all these portfolio companies and they can, you know, some subset of them could be customers. That's not ours at all, right? We're serving very different types of customers and so we need to work out these nodes of influence. One of the things that I think the insight on the go-to-market that we had, and we still use it very much today. Is you look at the stack, right? So if you think about a wealth business that is an executive team, an investment team, an operations team, the advisory team, and then the end client. These are all the different personas within the firm, all the different sort of roles to be played within the firm and then you have these different types of firms, and they play it away. If you want to have real success, you've actually got to activate each of these different levels. You have to make sure.

Pablo Srugo (00:40:09):
Right.

Douglas Scott (00:40:09):
You're connected at the executive level.

Pablo Srugo (00:40:11):
It's kind of your classic enterprise sales motion.

Douglas Scott (00:40:14):
But I think that, that is not as well adopted in some of the world that we're in. It's much more adopted in enterprise software than it is in, you know, advisories in the wealth space. I think we did a very good job of that, right? I think early on, especially we started to really say, hey, do we influence all these different areas to get the full push behind the firm essentially. You innovate in your product, you also innovate in the way you distribute. Like how you think about it. The channels you go down, the types of partners you work with, and whether you're going direct. Whether you're going through another partner. We've tested lots of these things and you run these experiments. And say, does this work? Does this not work? You know, a lot of our businesses and that's true about a lot of folks, it's referral. If we do a great job, then hopefully that client will sort of refer that and we get well known for that. And you build a reputation around that, and that ends up being your go to market flywheel. It's not paid model at all. So that becomes really powerful if you can really nail that.

Pablo Srugo (00:41:03):
And was that how you got that series A? like that distribution really starting to work and kind of the numbers coming up?

Douglas Scott (00:41:08):
Yeah, because in 19' we closed our series A, in the middle. I think we announced it in the second half of 19'. So it was like, that was a window there. Where we were kind of going from a handful of assets sold.

Pablo Srugo (00:41:18):
Right.

Douglas Scott (00:41:18):
Through the roof top to $250 million. That really help us propel through and I think you know in venture world. One of their things that is very important that I hope people do. Is capital raised timing. Like its not just important, as you said before. Timing is so crucial in the macro environment but its also true in the micro level, and when I helped work with other founders, friends and what not. It's like make sure you're timing your capital to through a moment where you can get operational leverage. Like when you're actually growing, you start to see things happening really well.

Pablo Srugo (00:41:45):
The momentum is what drives the FOMO and the FOMO is what closes deals. There is just no doubt about it.

Douglas Scott (00:41:50):
But then, also having a real timeline. That's tied to operational milestones, right? You're like, I need to close this round. Because we are onboarding these customers and I need to ramp up our go to market team by this. Therefore, and you can see it there, right? And that, I think is very important. Because it shows this like, a very real time and it's not this sort of artificial. Like, oh, I want to close by X because it's a nice round number. You're closing it based on a milestone that matters for your business, and I think that's an important timing. And also it makes sense, right? If you're from a founder or a CEO perspective, that's when you want to raise. When you can see it. When you're like, I can see the next, whatever. Two years of this and if we don't close money by this. It's going to be very hard to service these clients effectively. So we need to get ahead of this. It's a nice forcing function to get these rounds to come together.

Pablo Srugo (00:42:36):
Perfect, well, listen. Let me stop it there and I'll ask the final three questions. We always end up on. First one being, when was the moment for you. Where you felt like you had found true product market fit?

Douglas Scott (00:42:44):
It was, the moment where we really saw that conversion of helping our advisors win business. That's what sticks in my mind, when I think back to it and I would say in a conventional sense. That's probably a little bit before seeing all the metrics come. But as soon as you saw that early win, I go, we can replicate this. I know how to do this. We know how to do this. That was definitely the moment and then it really played out in the metrics in late 18' into 2019.

Pablo Srugo (00:43:06):
And the second question is, was there a moment where you thought maybe things just wouldn't work out? The company might actually fail?

Douglas Scott (00:43:13):
You always have doubts as a founder in the early. Especially, like, you have these moments where you're like, wow, this is really tough. It's very hard to build companies. It's why, only a few people do this are crazy enough to do it. So many of those, and I'm a big believer in sort of stoic philosophy. It's like control what you can control, you know? Focus on what you can control. So like, don't let your mind get caught up in thinking about, well, what if we don't do this? Or what if we don't do that? It's like, I can't control that. Let's just focus on the customer and we'll build, and that'll be our single source of truth.

Pablo Srugo (00:43:40):
The last one then, if you could go back ten years ago and kind of give yourself a piece of advice. What might that be?

Douglas Scott (00:43:47):
Could I have like, a laundry list? It's so much of the people, we didn't talk a lot about the people. It's all so much about the people you surround yourself with and that's like your team, that's your investors, that's your customers. That I think is the most important part of the journey, is really focusing on the people and getting the people right. And, you know, I think we have done a really good job of that over the years. There's a certain naivety as an entrepreneur, that you kind of have to just keep convincing yourself to try and do these impossible things. All the time and so if you knew all of those things. I don't know if that's a good thing. I think it might be better not to know them in some ways. Where you're like, oh, I didn't realize how difficult it would be to do these things. Because if you knew how difficult it was, maybe it was more challenging than you want to endeavor and someway that would put you off wanting to do it entirely. So, there is some joy and importance of just like that beginner's mindset. That allows you to just go and experiment. So anyway, I have a lot of lessons I've learned for sure, but I think that element around people and then also just that experiment mindset for sure.

Pablo Srugo (00:44:45):
Perfect, well, Doug. Thanks so much for sharing the story, man. It's been great.

Douglas Scott (00:44:48):
Ah, pleasure. Thanks, Pablo.

Pablo Srugo (00:44:50):
Wow, what an episode. You're probably in awe. You're in absolute shock. You're like, that helped me so much. So guess what? Now it's your turn to help someone else. Share the episode in the WhatsApp group, you have with founders. Share it on that Slack channel. Send it to your founder friends and help them out. Trust me, they will love you for it.