There are a thousand reasons to start a company, or take any job for that matter. On the day we started Proof, I wrote a blog post announcing our intentions and reasons, although to be honest it was somewhat shallow. Now that we’re almost two years into the journey, this feels like a good time to look back, reflect on what we’ve done so far, and attempt to articulate in a deeper and more genuine way what exactly we’re trying to do here.
The backstory: choosing to work in finance
To fully understand the leap it took for us to start Proof, an important piece is what we gave up — our opportunity cost — and how we got there. Up to now, I have been incredibly lucky in my career. Let’s say 20% skill and 80% luck. I’ve spent my whole career on Wall Street, specifically in US equity trading. My introduction to the industry came my sophomore year of college. I had just soured on being pre-med, and a friend suggested I read Liar’s Poker. At that point, I’d never even heard of Goldman Sachs, but the book made trading sound like so much fun that I joined the finance club and never looked back (not a good reason to go into finance — I know). My first job was an internship on the cash equity trading team at RBC in 2008 (i.e. human traders buying and selling public company stocks). It was a total fluke how I landed that job — the president of the finance club messaged me one night at 2am that another interviewee had dropped out, and I could have her spot if I could be at a hotel in San Francisco by 7am. The interview went well, and I would wind up sticking with the same bosses I reported to that summer for over 10 years.
It’s taboo to talk about, but I think most people who choose to work on Wall Street do so because of the high pay (I mean, duh). We do all sorts of mental gymnastics to justify our value to society, but at the end of the day the primary motivation is financial. I haven’t seen public numbers on this, but my impression is that median front office pay on Wall Street is somewhere in the ballpark of $500k these days. And that’s just the median, with a huge tail to the upside, and I think it was even higher in the “good old days.” Most of this compensation comes in the form of a year-end bonus, and the day when everyone gets told their “number” is probably the biggest day of the year. The compensation process seems pretty arbitrary and extremely opaque, and banks are exceptionally skilled at keeping even unhappy employees on the hook as a large part of a compensation package vests over several years, similar to equity grants in the startup world.
Early on in my career, I really liked the Andrew Carnegie Dictum on how to split up your life:
- Spend the first third getting all the education one can.
- Spend the next third making all the money one can.
- Spend the last third giving it all away for worthwhile causes.
Looking back, I think this line of thinking is more convenient than sincere. It’s a great copout to be able to say “no, no, I’m not trying to get rich because I’m greedy — I just want to do as much good in the world as possible down the road.” Sure, the freedom to give to worthy causes is a great perk of having money, but it probably wasn’t my number one motivation for choosing a career in finance. Also, why only focus on learning for the first third of your life? It seems much more fulfilling to prioritize learning throughout one’s entire life.
Every company has a mission, but it seems like very few companies are genuinely mission-driven, as in genuinely trying do good for the world. I’m not totally sure on how to distinguish the actual ones (maybe B-Corp certification is a potential indicator?). In finance this is especially true. Does Robinhood “democratize finance,” or do they lure young traders into a game where the vast majority lose the shirt off their backs? In our little corner of the industry, an example is proprietary trading firms who run what we would consider predatory trading strategies, reaping profits from basically a zero-sum game. Firms like this often tout their contribution to society as making markets more efficient, which may be true of an actual market maker, but in a lot of cases this is a pretty big stretch. That’s not to say individual folks who work at such firms are fundamentally evil or wrong — let’s just not delude ourselves.
During my 3 years at RBC from 2008–2011, I would describe our team as pretty mission-driven. We had a mandate from above to be honest and do right by our clients. This was the immediate aftermath of the financial crisis, and Wall Street had a pretty terrible reputation (e.g. Goldman Sachs is a vampire squid). As a risk-averse Canadian bank, RBC had fared relatively well through the crisis, and it used its position of strength to expand and also lean in to its reputation as a “nice” Canadian bank, particularly compared to its ruthless American counterparts. I can’t speak for the whole company, but on our team at least we were encouraged to do the right thing over maximizing profits, and I remember thinking how crazy it was that simply being honest with our clients was our core point of differentiation. Now, I wouldn’t say we lived and breathed this mission at RBC, and in retrospect, there were some things we did that were inconsistent with it, but “do the right thing” was a marching order that the team generally followed. In addition, our team had its own micro-culture of curiosity and experimentation, and we did come up with some novel and effective technology that became the backbone of our offering and fueled significant growth.
After 3 years as a quant and algo developer at RBC, several colleagues and I jumped ship to start IEX. By the time we broke out on our own, our boss in particular had an excellent reputation within the industry of being honest and innovative, and I think it was well-deserved.
With IEX, the mission became absolutely front and center. In the few months before and for maybe 12 months after starting the company, the entire team devoured business-y self help books — like Tribal Leadership, the Innovator’s Dilemma, Crossing the Chasm, Founders at Work — and countless TED talks. We already had a good sense of shared purpose, and consuming these materials really reinforced that rah-rah mentality. We really believed that the status quo was evil, and that we were doing God’s work by exposing bad practices and offering an alternative solution.
When Flash Boys came out, we became famous (infamous?) overnight. We were the white knight heroes trying to fix a “rigged” stock market, and we gobbled that stuff up. That was our core identity. We were inundated with literally thousands of emails and letters from random folks who wanted to work for us, invest their life savings with us (not that we were a vehicle for that), or simply thank us for the good we were doing. When I interviewed potential hires or did the culture orientation for new team members, I would say things like, “We’re not curing cancer, but within finance, we’re just about the only company that’s doing good.” I not only drank the kool-aid; I served the kool-aid. We often talked externally about how we helped protect pension funds from predators, and I do believe this is true to an extent (although it’s harder to say how consequential such protection is in the grand scheme). But anyway, my point here is that we always emphasized the pension funds. IEX did and continues to have a solid relationship with the pension fund community, but almost all of our initial backers and early adopters were actually activist hedge funds. It would probably be most fair to say that we were primarily helping protect hedge funds from prop shops and other hedge funds, which doesn’t have quite the same feel-good ring to it. Like I said, mental gymnastics.
Where am I going with all this? I do think IEX is a relatively good company within this not-so-great industry, and I think Proof so far is in a similar boat. Proof hasn’t done a whole lot yet, so I guess the jury is still out. That said, we do aspire to be a good company. In order to do so, we need to be honest and tangible about our goals and accomplishments.
Leaving a dream job
My 7 years at IEX were a dream job in almost every way. My title was Head of Quantitative Strategy. My core role entailed data science and product idea generation, but I also had the opportunity to dabble in many other areas including sales, software development, and policy. I worked with amazing people (several of whom I get to work with again at Proof), I had tons of autonomy, enough influence to push through most of my and my teammates’ ideas; I got to publish papers, speak at conferences (1, 2, 3), do podcasts (1, 2), get recognition for my contributions, and represent the firm with clients, SEC commissioners, journalists, even senators and congressmen.
Plus there was Flash Boys. I was a super minor character in the book, but that was still a wild experience. To wind up a character in one of Michael Lewis’s books was surreal, especially given that Liar’s Poker was literally what got me interested in finance in the first place. Plus, all sorts of other perks came with it — like being in the NYT, 30 under 30 (which is how I met Allison by the way), etc. That was a fun time.
Not every moment was perfectly rosy, and these highlights are cherrypicked across many years, but yes IEX was an amazing ride. So why did I leave?
I could list minor gripes, but the truth is my decision to leave was mostly about my excitement to start the next chapter of my career. Maybe not since childhood, but certainly since before IEX I dreamed about starting my own company one day (technically I co-founded IEX, but being a junior co-founder is quite different from being CEO — and a large part of my initial decision to be a part of IEX was to build experience toward this goal). Starting a company because it’s a dream of yours is a pretty lousy reason in and of itself, but in late 2018, the timing felt right. My wife had just accepted a job across the country in San Diego, where we planned to raise our family long term — and staying on remotely wasn’t going to be a great option — and most importantly, Allison expressed interest in leaving too to try to do something new.
Why start a startup?
1. Setting the agenda / autonomy
While Allison and I did debate what exactly we would do, we never really considering doing anything other than starting our own company. There are many pros and cons to starting something new, but for us probably the biggest draw is complete autonomy. We had a great deal of autonomy and influence at IEX, but we ultimately weren’t the ones driving the agenda. There were often little things we would have done differently, for better or for worse. As an example, IEX was first and foremost a sales/relationship-driven company (granted, with a strong technology/research backbone), and even at an honest data-driven company there is always a subtle tension between sales folks and data scientists. Particularly in an industry like ours with an abundance of noisy data and a dearth of standardized metrics, it is disturbingly easy to craft whatever message you want with numbers. The whole team was generally on the same page (full honesty trumps business goals), and we were able to embrace relatively straightforward and legitimate metrics, but there was a subtle underlying pressure to make the company look good or tell the client what they want to hear. It is very nice to no longer even have those discussions.
Another example is company values. The explicit and implicit values at IEX morphed over the years in ways that bothered us. Again, nothing horrible, but it does feel wonderful to be in a position where we can set the tone for the company and we don’t have to make compromises with anyone other than each other.
2. Motivation and stress
Throughout my career, my greatest personal deficiency has been work ethic. Over the years, I’ve rarely been running at 100% burn, and I do get easily distracted. I probably wouldn’t say I’m running at 100% now either, but the dynamic day-to-day nature of running a brand new company seems a good fit, and I do think the last two years have established a new watermark for my effort level.
Also, even though there are a ton of curve balls at an early stage startup, I find Proof to be a less stressful than my work environment in the past. First, when you don’t have a boss, there are none of those 10pm-on-a-Saturday emails that immediately snap you to full attention and get your heart pumping (regardless of whether it was anything urgent or even important). Also, about halfway through my tenure at IEX, I was put on a remediation plan for six months and I legitimately thought I might get fired. When someone else has control over your destiny, and that person is upset with you, oof — nothing I have experienced as CEO of Proof has come close to that. It was the most demoralizing and stressful period of my career.
This is probably true for everyone, but I have found internal motivation to be much more powerful than external motivation. I feel a great deal more pressure to do a good job at Proof, particularly for the sake of my colleagues, than I have at any point in the past. But even though I do feel this greater weight on my shoulders, it has been more invigorating than stressful, at least so far. We haven’t hit any significant road bumps yet, so we’ll see how that holds up.
3. Efficiency and productivity
No politics. No bureaucracy. (Almost) no meetings. Working at a brand new company is pretty amazing. You have to put an enormous amount of trust into your colleagues, as every single person’s work is mission critical, but when you don’t have an established business to lose, you can afford to have so many single points of failure. There is an incredible volume of work to be done, but we just divvy it up and miraculously it all gets done. When there aren’t multiple layers of gatekeepers, decisions just get made in real-time and there are almost no bottlenecks. We may not fully appreciate it on a daily basis because a lot of the work starting from scratch is tedious — this is not our first trading platform, and not every component we’re building is glamorous, but it all needs to be there. But looking back over the past two years, it is incredible how much we’ve built with such a small team.
Now the flipside to this is scale. As a new company, we are starting from literally zero, and it is a long journey before we’ll have anywhere close to the actual impact on the world that we had at RBC or IEX. Literally trillions of dollars have flowed through order types and algorithms that I conceived and wrote in the past, which is crazy to think about — trillions! By the end, it may have been a slog to get a new product idea through the bureaucracy and out into the world, but once it did it would immediately have real impact. With Proof, there’s no slog, and the rapid progress is a ton of fun, but it remains a question mark whether we’ll ever be able to match our past success and scale. At least we have complete control over our destiny.
4. The lotto ticket
I would be remiss not to mention the lotto ticket aspect of starting a new business. Starting a company and hitting the jackpot is just about the only way to go from not-a-billionaire to billionaire. Just as finance idolizes hedge fund titans, Silicon Valley idolizes successful entrepreneurs and venture capitalists. When we did Y Combinator last year, pretty much the whole program was geared at becoming the next unicorn. No doubt the longshot chance at a wild payday is a substantial draw for lots of folks who work at or found a startup.
For me personally, I don’t believe I am trying to optimize for an ultimate payday. But from a financial perspective, starting a company probably is the rational move in my situation, and it actually probably would have been the rational move years earlier, the moment my founder equity at IEX had fully vested. Because of my past experience, I’m in the fortunate position of having a springboard from which to launch something new, and it seems more likely that I can help take Proof from zero to one than to help push IEX from 1 to 10 as a cog in the machine. So rather than doubling down on that first lotto ticket, I’ve cashed in and bought a new one (okay fine, the analogy has broken down).
Why a broker-dealer?
Sadly, we do not have a particularly romantic origin story for why we decided to start an institutional equities broker (e.g. like Elizabeth Holmes starting Theranos because as a child she was terrified of needles). I’m not even sure what that story could possibly look like — maybe if my parents’ retirement savings vanished at the hands of an unscrupulous institutional equities broker, and as I watched the bank take away our home, I looked to the sky and swore an oath that I would fix this system that caused them so much pain? Hm anyway, no that didn’t happen.
Like I said earlier, I didn’t even know that finance was an industry until I was 20. Our reasons for starting a broker are not those of destiny but of practicality. Allison and I did discuss other ideas before landing on Proof — and yes, bourbon distillery is on that list — but an institutional broker-dealer is the most natural extension of what we were doing at IEX, and its the business in which we believe we’re most likely to succeed and have substantial impact.
The stock market is what we know — we know which aspects of it work well and where are the most glaring deficiencies. Unlike 10 years ago, there are now quite a few compelling options for institutional investors at the exchange/venue layer of the ecosystem, IEX included. A greater issue these days is that those tools aren’t fully embraced by the sell-side. And probably even more important, execution quality is a lot bigger than just sub-second market dynamics. The sub-second world is the most straightforward — it is relatively easy to understand what is happening and to distinguish good and bad outcomes. As you zoom out to larger timescales, the data becomes far noisier, but the actual effect of good and bad decisions is probably much greater. We want to focus on the most impactful issues that we’re well positioned to tackle.
Andy Rachleff says “you learn more from success than failure,” which definitely resonates. There are a ton of decision points in building a company, especially one in such a complicated and regulatorily intensive industry, and it’s so helpful to just think back on what we did last time, which decisions turned out well, and which ones caused headaches down the road. We know the market structure, the players, and which roles are most important to fill on the team. Perhaps most important, our track record has opened doors for us. Specifically when meeting potential investors and clients for the first time, we seem to get a substantial benefit of the doubt. This was true when we started IEX, and it seems even more apparent this time around (or maybe just this time I see it first hand).
Our business goals with Proof
Alright, without further ado, here is what are we actually trying to do:
- Build a better mousetrap(s) — we’re in the algo trading business, and there are two main pieces we’re working on: the trading strategies themselves and the metrics by which we measure success. The most important short/medium/long-term business goal is that we do a good job on our core product and metric.
- Launch — The most important immediate-term goal is that we launch! Everything we’ve done up until this point has been working toward launch. Until we actually have a live trading offering, we’re just a professional blogging company with an adjacent unpaid data consultancy. We do expect that initial version of our product will work well, but we can’t really be sure until we see in action, and the iterative post-launch feedback loop is a hugely important step toward finding our ultimate value proposition.
- Break even — As much as I may think it would be on brand for Proof to be a non-profit, unless we can turn this into a self-sustaining business, the clock will continue ticking ever closer to our demise. We do not want to become dependent on the VC treadmill, so until and unless we hit breakeven, we will operate crazy lean to give us the longest runway possible.
- Add way more value than we extract (don’t profit-maximize) — This is obviously a simplification, but the finance industry is basically just a bunch of intermediaries moving money around, all taking a generous cut. Innovation in finance is when someone new comes in and does things “more efficiently” by disintermediating one of those middle men while taking an ever-so-slightly-smaller cut. Almost all of this innovation is incremental, not revolutionary (okay yes, there’s the decentralized finance movement, but it hasn’t really changed the normal course of business in our industry). On the surface, Proof fits this model. If we build a better performing algorithm, we’ll effectively be cutting out some intermediaries from the trading process and getting paid to do so. One (aspirational) difference is that it would be amazing if the outperformance of our algo far exceeds any payment that we’re collecting. In other words, I would prefer for us not to be a profit-maximizing entity. I am not the only decision maker at Proof, nor am I the only stakeholder — and it is easy to make statements like this one when your revenue is zero and you are not yet sacrificing anything, so I guess we’ll see what happens. What I will say is there are a lot of widespread business practices (in general, not just in finance) that seem pretty slimy and that I hope we can avoid.
Our not-directly-business-y goals with Proof
Perhaps these are more values than goals, but nevertheless one of the most innately satisfying things about starting your own business is the ability to do things however you want:
If there is one word we live by, both internally and externally, it’s transparency. We document and publish just about everything we do, and we don’t believe that we should have “trade secrets.” Allison wrote a blog post that describes our approach through the lens of cryptography. We believe sunlight is the best disinfectant, and we wish the rest of the industry was more transparent too.
2. Curiosity, growth, and mastery
If we succeed at our business goals above, it will be a direct result of our curiosity and growth mindset. We are not just trying to capitalize on an inefficiency in the market and then dig a moat; we want to search for better and better ways of doing things and then share those findings with the world, rinse and repeat. The thing we have most exceled at over the past two years has been assembling an incredibly talented team (myself excluded); I feel so lucky to be a part of it.
As Allison put it in a recent blog post: “So who are Proof-y people? They are people who tell the truth even when it’s unfavorable. They are people who ask a lot of questions, who seek mastery over their craft, and want to solve problems, not just appear smart. They are people who join mission-driven startups in the middle of crises.”
3. Diversity, Equity, and Inclusion
This is an area that we haven’t done a great job at so far. DEI is a priority, and we have implemented a handful of policies that we believe promote fairness and that we hope will be productive toward this goal:
- Pay transparency — everyone at the company has full transparency into everyone else’s compensation (both salary and equity).
- Equity formula — we determine new hire equity grants based on a standard formula, and we will follow a similar approach when we start issuing bonus equity grants. Our four partners, myself included, all have equal equity stakes and a six-year vest.
- Standard interview process and Rooney rule — we have a standard set of questions that we use to evaluate every candidate, and we require that we interview at least one minority candidate who passes our “hirable” threshold for before filling any role.
- Solid parental leave policy
4. Do good
This is our most nebulous goal, but we really do want Proof to be a vehicle for social good, and not just relative to the rest of the industry. I don’t know how exactly we will bridge this gap from company that prioritizes positive values and conducts itself in an upstanding way to actually generating material social good, but this is something we aspire to do.
These are my reasons for starting Proof, and my preferences, priorities, and aspirations for how we conduct ourselves. Now that said, Proof is driven by all four of our partners, not just me. We are a cohesive team, but we are also different people, and I cannot entirely speak for them. Maybe the others will write their own version of this post too at some point — I hope they do!