Contrary Radio: SoFi cofounder Dan Macklin

On this episode, we cover:

  • Why Dan worked at a bank for 12 years out of undergrad
  • How business school at Stanford made SoFi possible
  • How to build a moat when the product you’re building is somewhat commoditized
  • The brand value of creating delight and community

Listen to the episode on Spotify, iTunes, or Stitcher. You can also listen and read the transcript below. Enjoy!

Subscribe here to get emails when we release new podcast episodes!

00:00 Will Robbins: Hello and welcome to Contrary Radio! This is your host Will Robbins. On this episode, I talk with Dan Macklin who’s both an investor in Contrary’s fund and the co-founder of SoFi. We talk about the value of business school, getting SoFi off the ground, and using brand as a long-term moat when it’s really hard to differentiate your product. Let’s jump in!

00:39 WR: Dan, thank you so much for joining!

00:41 Dan Macklin: Will, thanks for having me.

00:41 WR: Let’s start out with some context on your personality and what you’re interested in. I know that you worked at a bank for 12 years out of school, which is not a very common path taken by founders. Could you give us a little bit more info there on what you decided to do out of school and how your interests developed?

00:57 DM: Sure I grew up back in the UK. Born in ‘76, so by the time I graduated school this is around… I graduated university this is around ‘98 and it was almost a default option for me to go into banking. I was decent at numbers. My dad had worked for a bank. I think it was a reasonably, or it seemed like it could be a reasonably lucrative career and also I enjoyed the potential for travel that it gave or potentially gave me. So, honestly I didn’t really seriously consider too many other things it just kind of… I almost fell in to it as the thing for me.

01:35 WR: Yep. That makes sense. So, why go to business school after your 12 years at a bank. There’s a lot of talk in Silicon Valley about should you go back school? Should you focus on building companies? Like how do you deliberately think about getting the best experience for yourself? What was going through your mind there?

01:52 DM: Well for me I worked at this bank, Standard Chartered Bank, for about 12 years. I had a great time. I moved around the world. I worked in London and Singapore, back to London and then over to China for a few years and it was very rewarding. I was doing well. I was getting promoted but I had always at the back of my mind thought about business school and I did the GMAT when I was around I think 28 years old. But then for some reason or another promotions at work, moving overseas, starting a family, it didn’t feel like the right time for business school. So, for me I suddenly discovered this one-year program at Stanford. They have a full-time, one year program at the business school at Stanford, then called The Sloan program, now called The MSX program and really it’s only offered at three schools around the world including Stanford.

02:45 DM: So I found that one-year program and to me that represented the right balance of not taking too much time out of my career, not losing too much money, if I’m being honest, and I managed to convince my old employer, the bank, to sponsor me for that. So really it seemed like a bit of a no lose situation. I could have a year with my then young family in California, hopefully learn some stuff, hopefully enjoy it and then go back to to where I was working. I would say on the outskirts of expectation there was a chance that I might find something else but I really would put that at like 10%. I think there was a 90% belief really that I’d go back to my old employer. So for me perhaps the decision was a bit different to other people. But looking back now SoFi came out of Stanford, so SoFi would not exist were it not for Stanford. So it’s very hard for me to kind of have a go at the business school experience or to be negative towards it because for me and for SoFi it was instrumental in starting SoFi and getting SoFi to where it is today.

04:00 WR: So let’s dig into that a little bit. You were pretty sure you’d go back to the bank after graduating. When did that begin to shift? How did you come across the idea? How did you choose your co-founders? And when did things really start to come together?

04:13 DM: I think it changed quite quickly. I think first of all it’s a one-year program, at the time actually it was more like a 10-month program, so it’s very quick. I had a month or two looking back now where I was basically just trying to survive. Get used to business school. Get to know my classmates. Get into a routine. But then very quickly I discovered, and maybe Stanford is similar to business schools around the world and around the US, but perhaps it is an amplified version just ’cause it’s in the heart of Silicon Valley. I was very, very quickly exposed to the venture community, the startup community, the founder community and very frequently in classes we would have founders coming in and explaining or just talking about their story, and perhaps similar to what we are doing today, and the fact that they had gone from an idea to starting a business.

05:10 DM: And in many of those cases the businesses had done well and they had gone public or sold them. Stanford is not short of those kind of examples. But I think what that did to me, was it exposed me to a world that I hadn’t previously been exposed to. I hadn’t seriously considered starting a company until that point. I’d been relatively… Well, very happy in my job and this kind of world hadn’t been exposed to me, but Stanford did a great job of doing that. So I think probably within three months, doing something entrepreneurial was a very real opportunity or possibility for me post business school.

05:48 WR: Gotcha. So what exactly about the school environment there was so conducive to you starting SoFi? You’ve mentioned that you are a fan of the incubation model before and I think it’s probably why are so involved with Contrary today. Was there anything structural about working with other students or taking advantage of university resources that really made the difference for you?

06:08 DM: Definitely, I think… I had a 10 month experience that I was unlikely to ever repeat again. Going to a business school at that stage, relative early stage of your career, is a once-in-a-lifetime, for most people, thing. And I realized I had an opportunity to do something different or at least, think about doing something different. The likelihood is or was, if I went back to my previous employer, this kind of world would not be closed… The door wouldn’t be closed forever but if I was going to do it, it felt like now was the moment to do it.

06:43 DM: And I do really believe that business school, and you know the university environment in general, is an amazing place to think about this stuff for a few reasons. And this is obviously based on my experience but also based on what I’ve seen since then, including the reasons why I’m involved with Contrary. And those reasons include the following: Firstly you’re surrounded by very smart people. For many people, when they go to their work, that’s the same thing. But this is a really intense experience of being surrounded by extremely smart and able people. Secondly, you’re being taught to think in different ways, you’re just being… You’re just thinking about how the world can be different, how you can do things differently.

07:35 DM: And in one sense, even though it’s a very intense experience, you have time. I would argue that you have more time to think about this than if you’re in a normal nine to five job. Again, added to that is the fact that you’re surrounded by other people who, maybe some of them have done it before, maybe they’re people you wouldn’t otherwise interact with. And then another reason would be that you’re surrounded by faculty, staff, professors and other students who can help you on that journey. They’ve either done it before, they have insight into the industry you’re thinking about, and they’re willing to help, as well. And maybe the biggest takeaway that I have from that experience was that we had access to an alumni base who were really, really wanting to help us. Really, really willing to help us.

08:22 DM: And we would contact alumni, ask them for a coffee, ask them for advice and almost without exception, they said, “Yes.” And I think that, that school experience is quite unique in giving you that access, because once you’ve graduated, sure, you can still go through the alumni network, you can still ask them for coffees, but you’re less special then. People remember fondly their student experience, they remember that with good feelings and they want to help the current breed. So I think all those things combined give you an opportunity to build a company at school.

08:55 WR: Yeah, that all makes sense. Now, let’s switch gears into the early days of SoFi. So you raised from Stanford alumni, used that to validate your model, and then expanded elsewhere. Did you run into any issues once you grew beyond campus and no longer had the goodwill of your classmates and alumni to support the first iteration of SoFi?

09:12 DM: Yeah. Well, maybe just to kind of back up and to explain to people that maybe, don’t know, SoFi, certainly at the time, at the beginning, it’s evolved since, but at the beginning was in the student loan business, and we were making loans to people while they were still at school, current students. At the very beginning, we were funding those loans with investment dollars from alumni in kind of a version of a peer-to-peer model, it was a many-to-many model. So it was a great business to launch from a university environment because obviously, our customer base was there and we had access to our supplier base, if you think of the investors as the suppliers in that context.

09:57 DM: So as I mentioned earlier, the alumni that we contacted were extremely willing to help us, and meet with us, and give us advice, and that just opened many doors. And through those conversations, we found people who liked the idea of the company and wanted to invest. And the other benefit of taking it through school, through those kind of six months of… And we would put this into every class, if there was a marketing class and they needed a case study, we would use SoFi as that case study and grab our classmates and get their help for this case study. If there was a strategy class, if there was an HR class, whatever the class was, we would use it as an excuse to do something relating to SoFi. And that had the benefit of helping the company, or helping us rather, work out how we’d position the company, but it also had a massive benefit that it just raised awareness about who we were to what was a future customer base for us. So, yes, we enjoyed or we benefited from launching the business at Stanford. When we launched, there was already an awareness level about who we were and what we did. That was then, slightly more difficult to take that outside that environment to other schools but not impossible. And we learnt a lot at Stanford that we could take to other schools.

11:21 WR: And that resonates pretty strongly with us here at Contrary because a big challenge of raising our first was bridging the gap between founders, who really understand what we’re building for, and then institutional investors which are a little bit more removed and might have a harder time understanding why we need to build a platform for what we’re doing. Could you tell us more about how you started focusing on institutional investors, and raising the money that you needed to scale?

11:43 DM: I mean, we had to do that quickly. Again, the benefit of Stanford is it’s next door to San Hill Road. So we trotted up and down there and knocked on the door, and had conversations and meetings with many, many VCs. At the beginning, pretty much all of the traditional VCs, or all of them, did say, “No” to us. So you receive many more no’s than yes’s, but we… That was more, I think, due to the complexity of the business and the fact that it was a bit complicated as a lending business, where we needed to raise money both for equity and for debt to fund the loan. So I think that was what prevented VCs from signing up immediately, but we found enough investors who were interested and who believed in what we were doing and wanted to sign a check. To come back to your question, kinda, how do we move that outside of our inner circle and get that out to other places. We learned on what had happened at Stanford. We learned on how to get the message out to the Stanford students and then as we expanded across the schools, ultimately to every school around the country, we were building on that experience. But obviously different, it was less personal. It was more learning kind of more mass market kind of outreach methods.

13:08 WR: Let’s dig in there a little bit. Back at that time, SoFi seemed a lot riskier than it does now. What did you have to do to better communicate or de-risk from the perspective of both investors and consumers?

13:18 DM: I think lending businesses are really difficult because you are in this catch-22 situation where even if somebody believes in what your thesis is about why you can lend in an efficient way and give value to the borrower and make money for the investor. The problem is it’s very difficult to prove it until you have money to lend and people can then say, “Okay yeah you know how to lend. Everyone’s paying you back. The money is moving around in the right places, you’ve got the lending licenses, etcetera, etcetera, etcetera.” But you are in this catch-22 where until you have any money to lend, you can’t prove that unless you’re lucky enough to have a prior back history of doing this stuff elsewhere or you have a huge amount of cash just sitting around that you can dip into and start lending.

14:06 DM: So I think every lending business in the country, really in the world, has this problem and the way that SoFi, and I think most companies in the industry, have got over it is you start relatively small with a small amount of money from early adopters who really believe in the mission and perhaps are less worried about the absolute returns on that money. And then over time you prove that and then you start going to family offices and then gradually people begin to accept that you know what you’re doing. You have a track record and you can go off to the bigger institutional money. But that process is not a short process, it’s not an easy process, so I think that that’s what scared the VCs at the beginning. They weren’t quite sure how we were going to navigate that. No one had really done that before in that way. So I think that was the tricky thing about the business model. If you have a business that doesn’t require you to have the money to lend then I think you have a much better chance of getting funded.

15:11 WR: So then going off that, student loans have been around for a long time. What do you think about SoFi was really the main differentiator that set you apart from the pack and helped you build a long-term business?

15:23 DM: Yeah, that’s a good question. The strange thing was that student loan re-financing that became SoFi’s main product, didn’t really exist as a product for weird reasons that I still to this day don’t completely understand. So in one sense it was a bit of an untapped market, but in another sense it wasn’t a market in an industry dominated by traditional financial players that really no one had much affinity towards. And I think what we tried to do at SoFi and did successfully was build a company that had a great product. We delivered it through great service but I would say that the kind of third leg of the stool was that we built a brand and an emotional connectivity with the customer, with the member as we deliberately called them, that didn’t really exist in financial services before.

16:12 DM: And I should make it clear I left SoFi a year ago and I’m now advising early stage companies and that’s one of the reasons I’m involved with Contrary Capital. But I truly believe that the Internet is fast commoditizing many industries and it’s hard in many industries to stand out on product features alone because other companies can quickly replicate and because that information access to consumers is there to see how you compare to your competitors and personal finance is a great example of that. You know if you need a personal loan, you can go on to a comparison site and you can look at tables which show different lenders by a variety of measures, whether it’s loan rate, loan tenor, fees, etcetera, and what happens over time is everyone replicates each other and everyone looks the same.

17:04 DM: You know I remember at SoFi, I think we had at the time 5, 10 and 15-year products. Everyone else had that so we introduced a 7-year product to be different, but then within a couple of weeks everyone had a seven-year product and it is just an easy example to show that it’s hard to truly innovate in some products. And even if you’ve got great service, it’s hard… It’s difficult to provide that great service. No company says we have bad service. So companies or rather potential customers may take your words with a pinch of salt. So I truly believe that you need to make your company stand out from the others in those comparison tables and I believe that that’s where the brand kicks in. Ideally people have heard something about you. There’s some kind of name recognition. Something to differentiate you from the crowd and that’s why they would choose to click on your company rather than the others on these kind of comparison tables.

18:04 DM: But unless you have a massive advertising budget, it’s tough to get that name recognition. And I believe that to build awareness among potential customers, you need your existing customers to want to tell their friends. You need to encourage sharing. And I think that’s hard unless you have an emotional connection with your customers, unless they have an emotional connection with you that goes beyond the pure transactional nature of their purchase. And in some ways, that may be counter to what many companies are trying to do, where they’re trying to create a seamless, fast, easy experience for their customers. I think that’s great. Your product should be easy to use. It should be quick. But I think some companies take it to the extreme, and it ends up being that the consumer has no feeling towards that company that’s providing it towards them.

18:57 DM: And I think at SoFi we did a good job at creating a brand that people cared about because it cared about them, and I think in turn that led to them wanting to tell their friends about the company, which led to word-of-mouth, which reduced our acquisition cost, etcetra, etcetra. And I think that allowed SoFi to get ahead of the pack and stay ahead of the pack and be the dominant player in the market. And that’s the kind of thing that, I meet new companies, irrespective of the industry they’re in, I want them to make sure that their product is different to the other products out there, and resonates with their customers, on more of an emotional basis, not just a rational basis because consumers aren’t completely rational.

19:39 WR: Yeah, that’s super interesting. So more on the companies that you advise in the early stages now: What are the most important levers that they can be pulling to focus on brand as a moat and really mobilize customers to do all the things that you mentioned?

19:54 DM: Well, I think it’s giving people the opportunity, giving customers the opportunity to interact with you in a way that fosters this. So if you just limit it to the transaction, you sell them something, they buy something for you, it’s difficult to build up that relationship. But if you have an ability as a company to build a relationship over time, and build trust over time, obviously, with a 10-year-lending product that gives you that opportunity. Other products are slightly harder. But if you have some excuse to keep in contact with your customers beyond that initial purchase transaction, then I think that’s a start. And I think a lot of it is giving them something. So too often companies will get your email and then they’ll only really email you when they’re trying to sell you something else, trying to up sell you or cross sell you. But I think if you, as a company, get in the habit of giving your customers something, then they will open those emails, and they will look at you more favorably and be more willing to interact with you.

20:57 WR: That’s great. And in the last couple of minutes that we have together, would you recommend any books or resources to learn more about this?

21:06 DM: I think maybe a good book that talks about this is Chip Heath, The Power of Moments, and it talks about the ability that companies have to create moments that people remember. And like I mentioned earlier, individuals aren’t always rational, they don’t necessarily compare the different offerings in a truly rational way and emotion comes into it, and if you can do something as a company to stand out from the crowd, then you have a great ability and opportunity for that individual to remember you. So in this book, it talks about transitions, peaks and pits, and it talks about these as being opportunities for companies to interact with their customers and give them something that they otherwise wouldn’t get. So they use the example I remember, where when you pay off a mortgage, as a home owner, instead of a bank manager just charging you for an additional fee, for the deed transfer, a bank manager actually comes around to your house and presents you the deed and shakes your hand. But people don’t do that, but why don’t they do that? Because if someone did that and added some personalization and emotion into it, then I truly believe that I would be more likely to go, “Wow, I had that great experience,” and I’d refer that institution or that company to a friend. But often companies look for the cheapest, the quickest, the most frictionless way of doing things and sometimes I think it pays to be a little bit creative on this stuff.

22:36 WR: So Dan, thank you so much for joining us. I really had a great time.

22:40 DM: Thanks, Will. Appreciate the time.

A venture fund backed by the founders of Tesla, Reddit, and other iconic companies that identifies and invests in top early-career talent.