April 16, 2023
Mike Katchen, Co-Founder of Wealthsimple | How to Come up with an Idea that Gets Product Market Fit
Wealthsimple is arguably the hottest private startup in Canada, with over 3M users and a valuation of over US$4B.
In this episode, Mike (CEO) shares stories he’s never shared before. He goes deep into how he came up with the original idea, launched the product, and got early traction.
From getting rejected by YC, to running around Toronto hosting Lunch & Learns, and calling every single one of his first customers personally, this episode is filled with stories you wouldn’t expect given where Wealthsimple is today.
But all start-ups have humble beginnings. Wealthsimple is no exception. If you want to learn how one of the biggest successes coming out of Canada got started, check this episode out.
01:50 - The Beginning
04:59 - The Inspiration For WealthSimple
07:51 - A Simple Prototype
09:33 - A Leap Of Faith
15:28 - One Foot In Front Of The Other
19:26 - In The Business Of Trust
25:12 - Meeting The Regulators
28:34 - No Such Thing As A Good Idea
32:03 - The Public Launch
37:02 - Product Market Fit
38:08 - Recap
WEBVTT
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Vanguard is the company I most respect in financial services.
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Invented the index fund.
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Incredible company.
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They got started 30-plus years ago.
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Today they managed– back then it was like they managed 4 trillion.
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They're much bigger than that now.
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It took them 30 years to get to their first trillion dollars.
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Pretty incredible.
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Blackrock is the largest asset manager in the world today, and it took them 25 years to get to their first trillion.
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It's like the next company to get to a trillion is going to do it in 15 years or less.
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Let's go be that business.
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And here we were on day one.
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We had zero clients and zero assets.
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Welcome to the Product Market Fit Show, brought to you by Mistrial, a seed stage firm based in Canada.
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I'm Pablo.
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I'm a founder turned VC.
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My goal is to help early stage founders like you find product market fit.
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Today we have Mike, the CEO and founder of Wealthsimple, an app that many of you are probably familiar with, and it's an app that helps two and a half million Canadians manage their finances.
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They are based out of Toronto, have over a thousand employees, and in the last round were valued over$4 billion.
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The topic of the episode today is how to come up with an idea.
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So it's going to be an interesting one.
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We'll be diving into the very early days of this company, which is really a brand name here in Canada.
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So with that said, Mike, it's a pleasure to have you on the show.
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Thanks for having me.
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So let's start at the really beginning.
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I think it's all kind of going to tie in as listeners find out over time.
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Maybe just instead of coming into when you came up with the idea on where you were, let's rewind a little bit and just give us a bit of your background and and what had happened that's relevant.
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What had happened before in the years leading up to Wealthsimple itself.
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So some people are probably sick of this story because at one point, I think we even turned it into an ad.
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I grew up here in Canada.
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I was super fortunate that I got introduced to the world of investing at a young age.
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So my sister entered me into a stock-picking contest at 12 years old for charity.
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You got to pick a portfolio of up to 10 stocks and whoever had the highest balance at the end of eight weeks won the grand prize ski vacation to Whistler, BC.
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So at 12 years old, I win this competition and take my dad skiing for a week.
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Think I am the coolest 12 year old kid around and fall in love with investing.
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That was a very early and formative experience for me that I owe enormously and entirely to my older sister, Jody.
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Fast-forward many years I started my career here.
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What happened, by the way?
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Just in between there, do you have the opposite experience?
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I remember I wasn't– I think it was actually Ray Dalio saying his first stock tripled and then he throws a genius and then he lost whatever it was in the next one.
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I get asked– when I tell this story, I do it at every onboarding class of new Wealthsimple colleagues and I get asked often oh, what did choose?
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I remember, I bet the farm– my strategy was you had to pick 10 stocks and I bet the farm on one.
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So it was the minimum investment in nine stocks and then the maximum possible allocation to one stock.
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That stock was called MGI Software.
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In the eight weeks of the contest, the company was up 256%.
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I blew away the competition.
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Thought I knew what the hell I was doing.
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For my birthday that year, my dad actually bought me a share of MGI Software and I think it was trading at 25 bucks a share.
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I was now a 12 year old kid.
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I had my portfolio of one share of MGI Software.
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On the road to riches.
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The year was 1999 and you can imagine what happened to MGI Software very quickly.
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I watched it go from 25 bucks a share and representing my entire 12 year old bank account savings to a year and a half later, the company was acquired for a buck-18 and learned a brutal lesson about stock picking and how hard that can be and how easy it is to fool yourself that you're good at it.
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So that was was my entry into investing.
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In 2022, a lot of people are kind of relearning that lesson.
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Every 20 years or so, it all comes back.
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Anyways, that– but I appreciate you you sharing the other side of that.
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So as you're saying, you fast-forward, there are a few years and then...
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I had the good fortune of moving down to San Francisco, joining a few friends who were building a company out there.
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They hired me into that business.
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We built it, we sold it, and it was a modest sale.
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For the first time in our lives we had a little bit of money to invest.
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The team came to me and they said, Mike, you seem to like investing.
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Help us figure out what– what should we do?
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It was my belief at the time that it is so easy to manage your own money.
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You should never hire someone to do it for you.
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I built a simple spreadsheet in Excel that tried to show these friends basically how to build a portfolio, how to choose a set of ETFs or stocks to build your portfolio with, how to rebalance it, how to optimize it for taxes.
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I gave it to them thinking I was empowering them to take control of their financial futures.
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The feedback they gave me was, Mike, we love this approach, but we're lazy.
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Please just do it all for us.
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That became the initial inspiration for Wealthsimple, which is people knew this was smart and important, investing, being smart about money.
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It's the way you live the life you want, provide the life you want for your family.
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Yet they didn't really want to do it themselves.
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They didn't really want to hire a traditional financial advisor.
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We thought, wouldn't it be really cool if we could use great software, great design to make it accessible, simple, human.
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We basically started iterating on that problem.
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Maybe just to set some context, what year was this and what's the landscape at that point?
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Today there's just so much stuff going on in fintech, so much stuff going on for financial management, but back then I'm sure it was different.
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What were some of the brands and some of the things that actually existed at the time that you could look at?
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So this would've been probably in 2012 with this first attempt to help friends manage their money.
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That's when we sold the company and started exploring this concept.
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There wasn't much going on in the world of fintech really back then.
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As we got more and more excited about this idea– we worked at the company that acquired us for a year afterwards.
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There was some time where we were hacking on this idea nights and weekends and really thinking through it.
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It was during that year where I think Wealthfront in the states might have raised their first seed round of capital.
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I could be wrong, but that's what I think happened.
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That seemed to be some validation.
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Oh wow, making investing easier for people, that seems like something that people want.
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It's attracting some capital.
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So when I decided to move back to Canada, it felt like a extra validation that we were onto something and it was a space I wanted to commit myself to.
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So what happens at that point?
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You've got this kind of ah-ha moment; oh, people are lazy, but they want this product.
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Fintech is not a thing.
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Now there's BAS.
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I mean, there's all this infrastructure.
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It's like, oh, I'll do a fintech app.
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Not so 10 years ago we're talking, so what's your next move?
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Well, so a bunch of things.
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So one is okay, interesting concept, but I've never worked in financial services before and none of the people that I know work in financial services.
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What do you do?
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I was still pretty stuck on this first idea that you ought to manage your own money.
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That is the best thing and you want to empower people to do it.
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We started building our best attempt to solve this problem of making investing easy without having to get any regulation, any licenses to operate in a space and by building tools that made it easy for people to manage money.
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It was at this point we had a really simple prototype.
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We were calling the business at that time Steady Up and it essentially was like trying to turn this spreadsheet that showed you how to rebalance portfolio into a web app that would send you a set of instructions once a month of sell some of these shares and buy some of those shares.
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That's how to rebalance your portfolio and keep it consistent with a financial plan.
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We had about 50 people using it, if I can call it that.
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We applied to YC.
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Little known fact about Wealthsimple's history at this stage, got turned down because they didn't quite believe that anybody wanted what we were trying to build.
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In hindsight, I think they were right because the first implementation of it wasn't exactly spot on.
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Essentially what happened is we had this web app, we had like 50 people using it in month one, maybe like 10 people came back in month two, and then no one came back in month three.
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We realized that people were intrigued by this idea of yeah, of course I want a way to make investing easy, but that actually to solve that problem for people would probably require that we go out and get a license to manage money and actually do it for people.
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So it was a point of having to make that tough call of making those investments, figuring out how the hell to go get a license to manage money, building the infrastructure to make that possible, which was not easy.
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How much validation did you– and even in hindsight, hindsight being 20/20, did you do or should you have done?
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I'm coming at it from your first iterations of this were very much in this kind of MVP mode of what's the least I can do to get at the problem?
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That's where Steady Up comes up.
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Now you're like, okay, the least I can do is every– it's the whole stack.
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All of a sudden you're going to have to take this leap of faith.
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What's in between that and how much validation do you seek out to say I think this is real and once we build it, they will come?
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Well, I think the benefit we had– and one of the things that I've always related to is when you're solving a problem with a business for yourself.
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I found for our business, especially in the early days, that was really helpful.
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It was trying to figure out what do we want.
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We want something to manage our own money.
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That's who we're building it for.
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The first attempt of me trying to help some friends do it themselves wasn't exactly what they wanted, but taking their feedback and learning that actually they loved the approach, they loved the way we were managing money, but they just wanted to do it with the tap of a button.
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They didn't really want to have to do the work themselves.
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Made it pretty obvious that there was a group of people here who would be interested in that and maybe that group would only be the three or four colleagues that was trying to help out.
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As we did more research, as we invited more people to participate in this web app, it just became increasingly obvious that no one knew how to manage– no one knew how to invest and no one was particularly happy with the way they were doing it or they weren't doing it at all.
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There was a solution to this problem somewhere in this product space, and we would just need to keep iterating until we found it.
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It does.
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I mean I think it's this classic solve your own problem and the more you're doing that, the easier it is to take that leap of faith because you assume there must be other people with this.
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I'm curious.
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You're also an angel investor now.
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When does that fail?
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Again, it's cliché.
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It doesn't always work.
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Do you have any insights into when does– solving your own itch is not the answer?
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I don't know that I have a great way to think about that.
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I mean, I think intuitively the way to think about that is we got lucky.
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I mean, we operate in financial services.
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Financial services is so huge that if we only build a Canadian business and our aspirations are bigger than that, even though we're focused here in Canada, we can build a really big company in financial services in Canada.
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That's not always true.
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I think the question is if you're operating in other markets, does the question am I an N of one or is there a big market behind my need that I know that if I just keep hacking away at this problem for myself, there's going to be a million or 10 million other people behind me that are going to want this to?
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I think we're lucky.
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We just operate in such a giant space that that was never going to be an issue for us.
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That makes sense.
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Back to the common story arc here, you decide you're going to take this leap of faith.
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Grounded in your own personal belief that you're solving a real problem.
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Again 2012, what's next?
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You have to go get license.
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What's the next big hurdle?
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Yeah, so I moved back to Canada.
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We get rejected from YC.
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I moved back to Canada, decide to start the business and it's exactly that.
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It's like, okay, what do you even need?
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Around this time, I start meeting with other financial services entrepreneurs that I had heard great things about and really admired.
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One of them turned out to be Som Safe who became our first angel investor, is just an incredible partner and was the first believer in this business from the very earliest days.
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That provided the first set of insider expertise that– we had no idea how naive and ignorant we were until we had someone on the inside that showed, okay, these are the pieces you need to build a financial services business.
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You need a registered financial advisor, obviously, but didn't think of that one.
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You need a compliance person, obviously, but who does compliance?
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I didn't even know that was a profession, let alone know anybody in that industry.
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You have to apply to these securities commissions.
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And by the way, in Canada there are 10 securities commissions, not just one.
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How does that work?
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What is the license that you're applying for?
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So someone that just helped navigate all of that.
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Then that's just the stuff you need to assemble to apply for a license.
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Then you need to figure out the infrastructure that says where do you hold the money?
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How are you going to place a trade?
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In the US because the industry is so big, you have these infrastructure players like Apex, Clearing that if you want to start a stock-trading business, you just ask them for their APIs and you plug in.
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It is super simple.
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In Canada, none of that existed.
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In fact, in Canada, if you wanted to open up an investment account at that time, there were rules that said that you needed to meet a financial advisor in person for an in-person suitability assessment for that person to actually build a portfolio on your behalf and offer you financial advice.
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Then if you wanted to open an investment account, there was no way to do it without paperwork.
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Literally the final stage of trying to apply for an investment account was mail or fax this application somewhere and hope weeks later you hear back that it's open.
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I think that if we had known the scale of what we were trying to build at the time and hadn't been so naive, I might've just said that just seems way too ridiculous and hard.
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I don't know anybody who works in financial services.
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I don't know any of the people.
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I don't know any of the things that we need to build to do this thing.
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Are you hitting these one by one?
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Here you list all of them, but you're doing the one thing and then you realize, oh, there's another door behind that and another door behind that and so on.
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Yeah, you just put one foot in front of the other and try and solve okay, I am trying to solve for an N of me and a few friends.
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We have some money, so what do I need to actually move that money into an account at Wealthsimple or whatever we were calling it back then, Steady Up I think it was still called.
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How do I place a trade?
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How do I actually enable that first transaction to happen?
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It was just one step after the other trying to figure it out.
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How expensive was this?
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Did you get funded in that in the meantime, just thinking licensing, compliance, infrastructure?
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Yeah, we raised– we were convinced that we would need some capital to get going and so we raised, I think it was, a$2 million seed round, which at the time was a huge round.
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Now it's like I feel like people did ridiculous seed rounds.
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Last year.
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This year, we'll see what happens.
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But at the time it was big because we thought we would need runway and capital to get the regulators comfortable and really make a go this thing.
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So tell us some stories from back then.
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I mean, I think you– just getting this across the line, you mentioned regulators.
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What was that process like?
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Yeah, it's all these funny things.
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The first step was try to find a financial advisor because you can't put the application in unless you have someone registered to manage money.
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There's certain requirements for good reason to who is qualified to do that.
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Som introduced me to someone that he'd known for quite a long time, a guy named Dave Nugent, who became a founding team member and our first chief investment officer, in fact our chief investment officer and chief compliance officer.
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I remember we got introduced and we were scheduled to meet for a coffee somewhere downtown.
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Both of us showed up at an hour late to the meeting.
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We knew from that moment that this was probably a perfect fit.
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He was scheduled to leave on a trip.
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I want to say it was either to Costa Rica or Hawaii, the week after our meeting.
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He was going to be there for a week.
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We hit it off and I told him that we were planning to submit our application to the regulators in 10 days and that if he wanted the job as our CIO, he would need to complete these five requisite courses and pass them within seven days so that we could put his name onto the application that went with the regulators.
00:17:52.240 --> 00:18:00.000
I remember he printed off– because he didn't know he was going to have wifi at this place he was going in the rainforest in Costa Rica or something like that.
00:18:00.079 --> 00:18:14.970
Hundreds of pages of exam prep materials essentially that he studied on for his entire vacation by the pool or wherever he was so that the day he got back, he could write this exam.
00:18:15.170 --> 00:18:20.930
It was like, you better pass because A, you have to quit because you have to be dedicated to this full-time to be on the application.
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By the way, if you don't pass, the job's not yours, and you got to spend your entire vacation studying to to approve this thing,
00:18:32.589 --> 00:18:36.289
How do you get– how do you convince him to do that back then?
00:18:37.200 --> 00:18:41.529
I have no idea how we did it, but it's just Dave.
00:18:41.530 --> 00:18:44.529
Dave was just an incredible partner and believed in the vision.
00:18:44.868 --> 00:18:46.049
He was a financial advisor.
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He'd worked in this space.
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He understood the need and the opportunity to build something different, and he knew Som well, which meant a lot to why he would trust me and this opportunity was that relationship.
00:18:56.131 --> 00:19:00.450
He took a leap of faith and fortunately it all worked out.
00:19:03.289 --> 00:19:09.250
Maybe on that, was the vision– once you had spelled it out to people, was it obvious back then?
00:19:09.250 --> 00:19:14.210
People were like, oh yeah, I could see everybody using this, or was it like, that's stupid, like Airbnb type thing.
00:19:14.211 --> 00:19:14.849
Early days?
00:19:17.779 --> 00:19:30.809
I don't think it was quite Airbnb because having people sleep in your living room was really out there kind of concept, but I think people thought it was a good idea, but were very skeptical that it would ever work because of two particular reasons.
00:19:31.009 --> 00:19:35.210
One is we are in the business of trust.
00:19:35.529 --> 00:19:37.170
We ask people for their life savings.
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It is an enormous ask.
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When I started, I was what, 25 years old, had never really worked in financial services.
00:19:44.250 --> 00:19:46.049
I had no track record.
00:19:46.329 --> 00:19:49.089
Like what business did I have earning people's trust.
00:19:49.130 --> 00:19:56.960
So there was just this giant amount of skepticism of who is this kid and what right does he have to do anything in this space?
00:19:57.240 --> 00:20:00.559
In particular, there was the second base of skepticism of who is this kid?
00:20:00.720 --> 00:20:13.920
In the context of Canadian financial services, which are dominated by these five giant banks that don't let competitors come into the market, crush anyone who tries to do it, have a monopoly on trust.
00:20:14.160 --> 00:20:16.480
People were just like, it's never going to work.
00:20:16.599 --> 00:20:17.000
It's cool concept.
00:20:17.559 --> 00:20:21.200
Sounds like young people might like it, but they don't have any money, first of all.
00:20:21.358 --> 00:20:25.200
So you're never going to be able to build a business that's interesting and B, the banks will just crush you, so no thanks.
00:20:25.400 --> 00:20:27.599
That was generally the feedback we got.
00:20:34.880 --> 00:20:41.589
So it was really a matter of finding those people crazy enough who also thought you were crazy enough to really get this thing across the finish line.
00:20:42.140 --> 00:20:45.029
Yeah, I mean, I still remember it.
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