How Riskalyze CEO Matt Pistone grew to $33.4M revenue and 19K customers in 2017.

Aaron launched risky back in 2011 under underscores the importance of making great hires he's done it 175 times that's his team size to date again they raised 24 million bucks helping over 19,000 paying financial advisers who now are paying 145 bucks a month when they join the platform uh they've got annual retention rate that's in the low 90s so super healthy spending on average 400 bucks to acquire call it an $88,000 lifetime value customer again based there North of San Francisco and Auburn this is episode 728 coming up tomorrow morning you'll learn from David he launched edelman's digital branch and now he's leading artificial intelligence in the marketing world with a brand new product so what's he betting on tune in to find out but first here's today's episode this is the top where I interview entrepreneurs who are number one or number two in their industry in terms of Revenue or customer base you'll learn how much revenue they're making what their marketing funnel looks like and how many customers they have I'm now at $20,000 per talk 5 and6 million he help B on global domination we just broke our 100,000 unit soul Mark and I'm your host Nathan lka hello everyone my guest today is Aaron Klein his career has largely been at the intersection of finance and Technology as co-founder and CEO at risk he led the company to twice being named one of the uh world's top 10 most Innovative companies and finance by fast company magazine today over 150 risk Salyers serve thousands of advisers who have aligned the world's Investments with millions of investors risk numbers we'll talk about what that means here in a second Aaron has served as a Sierra College trustee and in the spare time he co-founded a school project for Orphans and vulnerable kids in Ethiopia investment news has honored him as one of the industry's top 40 under 40 Executives Aon are you ready to take us to the top hey let's do it all right riskalyze Financial Service fintech it's a hot space where do you play what do you do it is you know um our mission and our our our Dream from the very beginning of this company was to uh empower the world to invest fearlessly it's our belief that you know investing is really broken for the average consumer they really struggle to understand what they're invested in and how to how to you know um uh understand the context of of the choices that they're making and you know a big problem is that our psychology works against us as investors right because when markets are up we're feeling optimistic we're excited about putting money to work when markets go down we start getting fearful we want to sort of pull back Warren Buffett probably said it best that you know stocks are the one thing the American Consumer refuses to buy when they're at their cheapest and only wants to buy when they're at their most expensive so we invented this thing called the risk number and the idea is is we can create a short-term framework a score to understand how to react to risk appropriately in the short term and if we can do that using the risk number that allows us to become a long-term investor somewhat counterintuitively the only way to become a long-term investor is to make a bunch of really great short-term decisions along the way so we focus on the short-term very counterintuitive for our industry but it is really transformed how our industry thinks and talks about risk in order to understand and really you know have a lot of confidence behind that statement you have to do cohort analysis over time to actually see if that pans out but you have to kind of gain that because you haven't been around for 80 years so how do you know your current short-term decisions do indeed pan out over the long term well I I'll put it this way um we know that all the harm that comes from in you know from when people make bad investing decisions all that harm comes from short-term decisions what I mean by that is something bad happens in the market we get scared we sell at exactly the wrong time and the reality is what just happened was normal for the kind of portfolio that we've been in so what we need to do is we need the context to understand how to make a good decision in the short term uh and and and generally what we've seen is investors who get in all of a sudden I I'll give you a really good example investors will call advisers who aren't using risk alliz and they'll say um hey my portfolio is down 2% am I okay um the normal behavior for that portfolio is that in a six-month period it could be down 8% it could be up 12% like that's normal for that portfolio that they're in when you equip the investor with that kind of short-term framework and context for what is normal you allow them to like get comfortable and go okay I get it like I've got to be comfortable with my portfolio dropping 8% a six mon time frame where I have no business investing in this portfolio in the first place so why not just go be a keynote speaker and tell the world to expect you know plus or minus 8% fluctuations what what software or Tech value does riskalyze out of the equation well it's a little bit more complicated than that right because everybody's different and that's one of the things that our industry has not done very well is we tend to stereotype People based on their age right so we go well Nathan looks young therefore he must be aggressive or you know this investor sitting in front of me looks a little bit older they must be conservative and then we take that stereotype and a typical question that you'll see in the industry is something along the lines of um well uh if your portfolio was a car what kind of car would it be or do you get a thrill out of investing right well I'll tell you what I got a far greater thrill out of investing over the last few months that I did in say 2008 right that's a market sentiment question so I stereotype you based on your age and then I nudge your stereotype a little bit aggressive or conservative based on your Market sentiment I can call that your risk tolerance tell I'm blue in the face it doesn't make it your risk tolerance what we found actually we had a team of academics delve into the data and the methodology behind the risk number and what they found was that about 52% of of investors age 20 to 29 are aggressive just like The Stereotype but the other 48% are spread across the rest of the risk number Spectrum and so what the technology really does is helps the adviser assess who the client is how much risk they can really handle in a quantitative objective way and then it also brings in almost a quarter of a million different Securities that advisers might invest their clients in and helps them build a portfolio that actually fits that client's risk number so it's really about risk alignment and so I have a bunch more questions about how the tech works but now that we understand kind of what it ises at a high level help us understand how you make money oh we work with financial advisers and equip them I mean what we do is we help them make their clients more successful we help them uh you know demonstrate to their prospective clients why they're going to bring a different approach to investing than the other advisers who are sort of trying to sweep risk under the rug and so you know we're a subscription software kind of business we deliver subscription software services for that technology to advisers okay so it's SAS pure SAS play it's a it's a pure SAS play that is in the middle of expanding because we're launching uh the next generation of our Auto pilot platform and autopilot is all about helping advisers take those decisions that they made for clients in riskalyze and actually Implement those investing decisions with a click so it it certainly is expanding a little bit beyond that but the core of business is a pure SAS play and on average what are these advisers paying you per month I'm sure you have a lot of cohorts but on average yeah so risal Life Starts at 145 bucks a month so it's extremely affordable for an adviser and we found that cost is definitely not an objection is that what most people pay you though is that the average kind of arpo yeah okay got it so and then let's go back here to the founding story quickly so when did you launch the company what year 2011 and walk why like where was your brain at that point you know I I uh before this company I ran Global product for division of an options brokerage firm and I was just struck by how poorly average investors thought about the concept of risk and I I expressed this to uh a buddy of mine who was a financial adviser and he said if you think that's crazy you should see how their advisor think about the concept of risk so from that company was born and he and I are co-founders now did you guys just 5050 yeah start come on Aaron that's that's that's never 5050 is never the right answer how do you get out of a deadlock it was absolutely oh no no no I'm the CEO I've been the CEO since day one he wasn't operationally in the company I thought you were talking about like when we first started carving up the equity but that's that's what I meant you guys SPL the equity 5050 well yeah but we quickly brought in we brought it we li we we acquired some patents as a part of that with stock we actually raised capital from the beginning so none of us started neither of us started out with 5050 so so but you know we we were both on the board and we built a great board around us even before we brought on real investors you know by like institutional capital okay um but our early investors have done very very well um you know knock on wood and that's great we've actually you know done a transaction that that bought back some of their shares and so they've they've seen good returns and and have what's a good return like 10% 20% no there are some of our early investors who've earned a 10x return already right um from the company so that was great for them why did you decide to do that I mean obviously you're weighing your cash on your balance sheet and you're going okay it's smarter for us to buy this back and UND dilute my shares or the com any common kind of holder shares why do that you know yeah we're we're we're talking about Investors who are um later in life and so they were looking for liquidity after being in the company for 5 years and they were there for a long time so we were able to facilitate some of that you know as a private transaction do that on purpose to only raise from old Angels so that you have a leverage over them to buy out the company no no no no I but but you know you know I hadn't thought about it that way but we we did you know we we we were very focused on like going to financial advisers who could see the value and then maybe going to degree out from that Network and that's sort of how we funded the company at the beginning and we were very very Capital efficient what was that first round of funding uh 400 my my number is like $420,000 off the top of my head okay and on a note or Equity all equity and we and we deployed uh just a little more than $4 million in total Capital prior to um bringing FTB capital on board last year as our First Institutional Capital so we really built a pretty substantial business uh you know where we don't talk about Revenue numbers publicly but you know our AR R was actually a multiple of the capital deployed before we went and did institutional Capital with FTB y that makes a lot of sense so how much total Capital have you raised to date uh well to date you take the four and add 20 to it so 24 got it and just to be clear that first four million that was from customers financial advisers and then maybe one degree out from them well you know I it was before they were even customers because we're talking to some friends who were financial advisers saying hey this is the idea like we need to go solve this problem and they loved the concept and and and got behind it then there wasn't an advisor product for two years got it makes good sense okay and then again fast forward today so you raised that much capital what's team size uh we're now to 175 riscal liers as we call them and um and it's it's it's pretty amazing to see we were 90 last October so it's definitely very fast moving Target right now based uh we're largely based here in Auburn California which is probably 2 and a half hours North and uh east of San Francisco of get it's it's perfect we get like like out of the San Francisco craziness we have like a crazy good talent people who have decided to move up here and like start a family and raise their kids up here for the quality of life but um so amazing talent pool but very loyal like we we we've never lost an employee to Facebook and we don't expect to right um and then and then you know we also are based in Atlanta on the East Coast so our East Coast operation is about 55 of those 175 people now and Atlanta has been a great market for us so when we when we recruit and we try to relocate employees into the area we can generally give them an option and say do you want the rural Lake Tahoe kind of lifestyle or do you want the urban midtown Atlanta and how how many financial advisers do you have using you to dat we serve 19,000 today across the country that's great and are those all paying or those free and paid yeah no no no we don't do any free I love that people always they they try and trick me they go we have 10 million users I go how many are paying and they go zero and I go you have no business that's right no no no no we we started from the beginning I'll tell you I'll tell you something as a funny as side so advisers are notorious for wanting to be really efficient with money and that's good I can I can get behind that like like the the the wealthiest people I know are really efficient with their money right so that's that's a good thing it's not a bad trait but um you know psychology works in a lot of interesting ways when we first rolled the product out uh we actually tried a free version we got exactly what we should expect I guess from a free version we had a lot of people asking for more free trials so we just said you know we want to invest like time and effort into getting advisers successful who are willing to invest in their own businesses so we'll we'll work with you and we'll make it affordable we'll make it accessible but you got to put some skin in the game too um and and the other thing that was funny is that the product was originally $99 a month and you know we uh I we were just like like apple like the price is the price is the price we don't negotiate we don't discount we don't do any of that kind of stuff um and sobody just say we were doing fairly well but we tested pushing the price up uh I think it was initially to 129 and now to 145 and you know like we pushed it to 129 and started discounting back to 99 immediately and Bam um conversion rates like tripled right so we were we were charging the same amount of money but it was a discount and conversion rate triple baby yeah today we're at 145 we don't do a lot of discounting but uh but there you go talk to me about some other critical numbers in any SAS business what's your gross monthly turn look like um our we we measure it as annual retention and we are um you know toying with pushing that number we pushed that number over 100% for the first time in February give me gross not net yeah yeah so gross is in like the low 90s okay got it so 91 92% turning less than 1% of your customer base again gross per month we we we we typically lose advisers to God or golf got it so they either die or they retire and we found a solution so the solution to God um that's still in the advanced research Labs like we haven't been able to figure that one out yet uh the solution for retirement is actually pretty funny he bought a golf ball company no what they do is they actually figure out who they sold their practice to and say we can do this really smooth transition of all the data over to the new adviser if you'll introduce us to the new advisor and then your clients will feel at home because the new adviser will be using the risk number great and that that works the one problem we found is sometimes the new adviser they sold it to is already a customer we can't do anything about that tell us well I I imagine you have ways to increase arpo expansion based off some value metric of those financial advisers and how many of their clients are putting on you right yeah so we um you know a couple of of things we actually sorry give me the number first so what what is your net arpo expansion annually and then tell me the drivers you're used to grow that don't that number yet you don't know we're just tackling it for the time and so you know a couple of way first of all we just actually installed Zora went live on January 1 so that we actually are are capturing I mean we here's what happened we rolled out the advisor product in March of 2013 and it just like exploded like we just went into this hypergrowth mode and we had like quy that for me uh we went from you know zero to probably I think we ended the year with like 380 ended the next year with like 2,000 200 what financial advisers on it yeah customers so so it was just you know for us man you know with four people in the company and having to start grow a company like that that was a lot of growth really really fast so we were doing a lot of that on spreadsheets a lot of that just like on stripe with subscriptions and it quickly got out of control where we just didn't have everything tied together we didn't have a lot of good data about things like expansion and contraction and and all that kind of stuff so we're we're getting to the point that we are starting to produce our first version you know our first our first sets of those numbers from the first quarter because we to start tracking all of that what are you paying to acquire new customer on average yeah so we um we usually spend um like direct sales cost probably about $400 our new customer you want to F load that cost with like our fixed conference and marketing spend probably about 600 bucks to got it and what are you what do you kind of assume in your kind of pro forma's lifetime value is per customer well we're we're pushing up that fiveyear range now if you look at a traditional LTV calculation so it's it's really healthy it's it's a great place to be we love that and so now talking about that you know arpu expansion real sorry real quick there Aaron can I take again five years or about 60 months multiplied by 145 bucks on average per month to assume LTV is somewhere around you're planning somewhere around 8,700 bucks uh you broke up a little bit there for a second sorry sorry I'm taking 60 months right so five years times 145 bucks per month is your average arpo and assuming your lifetime value you're saying is somewhere around 8,700 bucks I think it's fair to say I I I don't have that number in front of me and you know one of the things I really want are dashboards that update this on a regular basis but I tell you I I use this company I actually I did a big article on this that Nathan LC analytics about I I searched so hard to find a tool and a dashboard that would do that and I finally found one but I cut you off there so so tell you told me you you were talking earlier about uh well there's a couple things that we did number one is we rolled out a premier um tier of risk um uh in February and and that's been great we we sell about 12% of our new seats in the Premier tier right now we've done a bunch of upgrades from existing customers so that's that starts at 245 bucks so that that you know again just a little bit more depth of features works on retirement plans works with you know different aspects of an advisor's business so that's been one way that we've started to grow the sort of that average revenue per advisor as we look at it internally and then the other big thing is the new autopilot platform that's rolling out that really gives us the opportunity we we're focused on delivering like you know real numbers about a 50x impact on efficiency in what it takes for an adviser to actually implement the investment DEC decisions that they make for their clients and in exchange for that 50x impact on efficiency we're probably going to capture as much as a 10x impact on our own revenue on that advisor um I I want to talk more about that in a second and related it back to Warren Buffett but first uh can I mean this if I'm doing the math correctly you're super healthy business can I take 19,000 customers that you said earlier times about 145 bucks per month and assume you're doing north of 2.7 per month in mrr um not quite and again we can't re we can't release that number I just took your your numbers though Allan so which one of those is wrong 19,000 or 145 um I the the number that I can you know we've got lots of Enterprise deals we've got lots of different uh ways to look at that Revenue but bottom line is um 19,000 financial advisers okay got it so so you may have had people on in your early days that you gave maybe it for lesser and you grandfathered them in and so their number might actually be deals today so I'm talking about the average price that an adviser comes on for maybe I'm talking median price but I I I again it's something in a highly competitive industry we just don't release Revenue numbers no I don't want that I'm just taking math from numbers you gave me right so so what just to clarify that $145 arpo you gave me is not your arpo that's what new customers are paying on average not the arpu across your historical customer base fair to say got it okay so you're lower than 2.7 million per month can't comment okay I I'm I'm doing the math from your numbers but that makes sense take me back uh well let me see here let me make sure uh got all that good okay so let's listen let's wrap up here with the famous 5 these are easy like super easy questions compared to what I fired at you you ready yeah number one what's your favorite Business book okay favorite Business book um it would have to be extreme ownership right now with ja by jao willink uh I don't know if you've heard of that one but it's it's something else it's it's a couple of Navy SEALs uh who fought in Iraq and uh and are taking sort of the principles of how Navy Seals and how their how their units work and applying them to business leadership um I just bought that for every member of my senior leadership team and they're all reading it right now we're having dinner next month to to talk it over that's great and I'm GNA actually interrupt the fous 5 for a second because I remembered I wanted to ask about this why isn't Warren Buffett sending everybody to riskwise and instead he's saying go invest in a low expense ratio Vanguard 500 um Vanguard 500 is a fantastic investment it's on the risked platform and we can figure out who that fits but a Vanguard 500 is about a risk 78 so it's going to fit the people who are in the 70s and 80s on the risk spectrum and there's a lot of people who if they put all of their money in the in in the Vanguard 500 GNA out of that a long time because guess what they don't have Warren Buffett's wrist Towes yeah but I mean Warren Buffett doesn't say I this is what I do he says for those of you listening wanting Financial advice there's nothing stronger there's nothing better than putting your money in a low expens ratio thing so when I hear you and he even he even goes out and specifically says if you work with an adviser you're losing percentage to that adviser you're have to pay them over time so so Aaron so with that in mind if you were talking to Warren right now what would you tell him I would fantastic advice and Vanguard the Vanguard 500 fund for example should be a big part of most peopleo but what about the person who is a risk 45 and the Vanguard fund is a risk 78 and Market dropped they're going to sort of freak out and they're going to sell at exactly the wrong time when the market is low Warren would look at that that's a good point people are individuals they're spread across the risk number Spectrum we can find a lowcost index type of portfolio that actually fits their risk number rather than stuffing everybody into a one- siiz spits all box at a risk 78 but the hypothetical you just gave where everything crashes and they sell is not what Warren recommends he says put in the Vanguard 500 in a weighted cost way where it's a certain thing every single month M what happens so again I think that's probably how he'd respond when you say that this way some of the best people in our industry saying I'm going to rein what war is saying in some different words look don't open your statements don't watch television just all the news out there just you know buy that that Vanguard fund that represents the whole market and just let it run that's you know great advice there's only one problem with it humans are incapable of following that advice so it's our belief that me I would disagree I would disagree with that that's why they've got four trillion under management no no no no I'm not talking against Vanguard vanguard's awesome my point is is that you can't just say to somebody you should put all your money into something that is higher risk than you can handle and just let it run and ignore it mathematically Warren is right that over the long term that person will make more money okay but if you're if you're in a situation where you're going to sell anyway out of fear you're better off accepting a lower long-term return and staying invested for the long run with which is the real core of what Warren is trying to say saying if people don't want to listen try to buy and sell and beat the market yeah yeah I mean what based on what I've heard from Warren and I've been in the investor conference and I'm sure you've studied the heck out of him considering your background I mean he doesn't say buy or sell right he says ignore the emotion so like your hypothetical you keep giving of people freak out and sell at the bottom is not what Warren's recommending no totally my my point is people do that and the risk is what stops them from doing that because they go I've got a portfolio that is actually going to fit me so it's easy for Warren to say to everybody in the world buy a risk 78 investment and ignore your emotions it's easier for Warren to say to everybody in the world ignore your emotions because what you've bought fits you and what you can handle yeah see this I mean look this is I've my mom is like Nathan you're making money you need to meet with an adviser every time I do the first question is when do you want to retire it's the stupidest question ever because I I don't even know what retirement means I it just doesn't even make comprehend in my brain so I'll never work with an adviser and also the ones that I do kind of like then they finally give me their little fee sheet and I go crazy I don't I don't need this so like and and many people like wealthfront and Vanguard I've had both of them on would argue like we don't need advisers so like do I mean how does it feel being latched on the back of things that you know Warren Buffett and Vanguard and Andy and John Stein and betterman are saying we don't need advisers so look I don't use a financial adviser right now but I'll tell you what I probably will in two or three years because life has changed for me I own a company that you know is is creating wealth for a lot of people inside of our company so I'm going to have more to than about I'm going to have taxes to worry about I'm going to have some tax I could create a lot of tax Alpha for myself with some good Financial advice in two three four years I've got kids I need to think about trusts I need to think about inheritance taxes down the road and how to minimize those and maximize what I can pass on to my kids I want to think about like intentional giving to the school project in Ethiopia we're involved in and how to make sure I can maximize that in the context of taxes so you know the idea of advisor as person who who is your is just like unlocks The Secret of what magical funds to invest in to get a good return that ship is sailed like that's gone that's not why you should use a financial adviser the reason to use a financial advisor is a lot more complex than that and I would argue that at your stage in life you probably don't need to at my stage in life right at this moment I don't have one either but in the future I think it's going to make sense for me for a lot of reasons and to go back to the core point I completely agree that what we want to do is get emotion out of it stop trying to beat the market that's one of the core points of our message is that's right stop trying to beat the market get yourself aligned with how much risk you can handle so that you can stay invested as a long-term investor these advisers though don't make money unless they're convincing you to change they they make money off velocity of you know new stocks being sold or stocks being bought or do you agree with that or not no that's not true the new fiduciary adviser charges a flat fee based on your assets okay and they and and they they make the same amount of money whether you don't change anything at all or whether you do in fact one of the really controversial things in our industry is that a lot of advisers are fighting against is the SEC will come in and say hey you're charging this management fee to help somebody manage their money and you haven't executed any trades in the client's account for the last year that that you know we're going to assess a penalty against you Mr adviser and adviser going wait a minute what if the right decision for the client is not to change anything so there's a lot of discussion going on in our industry around that and so yeah the old line Brokers got paid commissions for transactions I would say the vast majority of industry is beyond that and you know if if we want to have a debate around the value of human advice um that's one that I think that we're you know long since in the process of winning very good I know you guys enjoy listening to every episode each morning but what if there was an easy way for you to get all of the data I capture on my podcast in a very simple Excel like format where you just go there you view it you sort all the companies by revenue or CAC or arpu or lifetime value or churn or gross margin or valuation whatever you want you can now get it I spent $25,000 to build a beautiful piece of website okay that's what we'll call a beautiful piece of website it's g.com g t l a t ka.com now here's the deal this data is super valuable I think mattermark CB insights pitchbook they do a great job with data but they don't tell you revenue and customer counts and revenue per employee and gross margin this is stuff...