Executing a Consumer Fintech Startup within Goldman Sachs | Cold Call

0:01This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hey Chicago, class it up with Crocs. You know back to school is coming in fast. So why wait to find your new fave footwear?

0:35Step into a local croc store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today. The German Revolution of 1848 was inspired by workers protesting high taxes and political censorship. For a relatively modest revolution, it had a lasting impact, leading to the breakup of the German Confederacy and the establishment of the German state that we know today. But not everyone stuck around to see how it turned out. The unrest and rising anti-Semitism led to a wave of emigration to the shores of America, the land of opportunity, one of those brave souls, Marcus Goldman, landed in Philadelphia, where he found work as a merchant peddler and started a family with his young bride, Bertha.

1:32Before long, in search of opportunity, he made his way to New York City, where his knack for finance and entrepreneurial spirit earned him the reputation as a trusted advisor to the jewelers in Lower Manhattan and the tanners on Beekman Street. And the rest, as they say, is history. Today, Goldman Sachs is one of the best-known financial institutions in the world, a brand steeped in tradition and synonymous with big finance, and definitely not the place accessible to the average Joe. Today on Cold Call, we'll discuss the case entitled Marcus by Goldman Sachs with case author Rory McDonald. I'm your host, Brian Kenney, and you're listening to Cold Call on the HBR Presents Network.

2:13Rory McDonald's research focuses on how firms compete and innovate effectively in new technology-enabled markets. It's the perfect focus for today's conversation. Rory, thanks for joining me today. Thanks. It's great to be with you, Brian. Appreciate it. First time having you on the show. We will make it as easy as we can so that you come back and join us again. And I think this case lends itself to that really interesting case about, as I was teasing in the introduction, just a storied brand in Goldman Sachs. I would say if you look at the stalwart brands in the world, I certainly like to think Harvard Business School is one of those.

2:45And I think Goldman Sachs is a brand that holds up right alongside that. People will certainly know the name, and I think they'll be very surprised to hear about this new direction that Goldman Sachs has gone in. So I'm going to ask you to start by letting us know when you walk into the classroom, what's your cold call to start this case with the students?

3:01Rory McDonald:I set it up in terms of it's 2014. We've got Goldman Sachs,$34 billion company looking for growth. They've settled on a digital direct-to-consumer offering. And to kind of get the juices flowing a little bit, I show a couple of quick videos of the Marcus by Goldman Sachs offering. And what's pretty stark about them is just how different it looks relative to how you sort of think about Goldman Sachs. So they really couldn't be farther from the buttoned-up elite B2B investment bank that we're used to talking about. One of them has a dad who is kind of an everyman who doesn't seem to do a lot well in his house, but he gets really excited about saving money with a Marcus checking account.

3:40Rory McDonald:And he has this little jingle that he sings. So maybe I'm not a genius at every single thing, but saving more is enough to make me sing. And it says, you can money. The reason I show these videos is because it really pushes students to reevaluate their thoughts about Goldman Sachs and how far and different this thing is that they're doing. So I follow all that up with, Why did they do this? What are they trying to accomplish? And that's my cold call. And people will come out of that direction. I was hoping I might get you to sing that jingle, but I guess that's not going to happen. You can money.

4:12Very good. First vocal performance on Cold Call ever. Thank you. We talked a little bit about your area of scholarship. I can see why this case interested you. How did you sort of set your sights on Marcus? And how does it relate to the work that you do more broadly?

4:24Rory McDonald:Like all these cases, right? It's a confluence of factors. And so my research, as you mentioned, tries to understand how companies effectively navigate nascent industries and product categories. And a lot of my research is set in the financial technology context or the fintech context, where we've seen startups like ventures, like Lending Club, who pioneered peer-to-peer lending or Wealthfront in the robo-advisor category. And these ventures have created new product categories and combined previously unconnected enterprise models. And they've done pretty well. This episode is brought to you by Google Chrome.

4:59You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18+. Hey, Chicago. Class it up with Crocs. You know back to school is coming in fast. So why wait to find your new fave footwear? Step into a local croc store and step into your new look.

5:35Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest croc store today.

5:51Rory McDonald:In their own right. but they've simultaneously reshaped and transformed the financial services landscape. But here, we don't have a fintech startup. We have Goldman Sachs, a 150-year-old elite investment bank. It is the most established of established companies and an incumbent in the space. And yet here, they're getting into the fintech game by creating their own internal startup. And as someone who teaches the course Building and Sustaining a Successful Enterprise, it's an elective course where we often look at the challenges incumbents face when there's certain types of market and technological change, the case is sort of a perfect match for my research interests and my teaching interests.

6:29That's great. So let's talk a little bit about Goldman Sachs traditional business. What business are they in as people sort of know the traditional Goldman Sachs?

6:36Rory McDonald:So as you alluded in the intro, right, it founded in 1869. Goldman Sachs is sort of a global investment bank and financial services company headquartered in New York. And they offer investment banking, financial advisory, M &A, underwriting of public offerings. They do asset management, trading of securities, private wealth management. And I think particularly relevant for the case is that this is a 150-year-old institution that has historically served only businesses and the wealthiest individuals. That's obviously very different than what they're doing with Marcus. Yeah. So why move off of that?

7:10What prompts them to want to kind of stray into uncharted territory?

7:13Rory McDonald:As you can imagine, opinions differ and it sort of depends on who you ask. And I think their own answer may have evolved over time, but I can think of at least three reasons. So one is sort of the classic of chasing growth. Here you are at the beginning of the case in 2013. Revenues at this bank have stagnated below pre-crisis levels and the firm has yet to rebound from a substantial decline in securities trading revenues. We need growth and we need it now. So that's a good reason to pursue this. Another is sort of being opportunity driven or maybe even opportunistic. They want to make a strategic use of what they think of as an underutilized asset.

7:52Rory McDonald:And that's this banking license that Goldman has acquired in its conversion from broker dealer to bank holding company during the 2008 financial crisis. And the idea here is that they were paying the costs of being a bank, but they weren't doing much banking business. And so we're the only one of our peers that doesn't have a consumer bank. And so let's go ahead and utilize that underutilized asset. And I think the third is sort of the preemption of fintechs. So there's this widely circulated analyst report that was produced by two Goldman Sachs equity researchers called The Future of Finance, The Rise of the New Shadow Bank.

8:27Rory McDonald:And the report argues that fintech and other non-banking lenders are going to potentially capture a big portion of bank profits over the next few years. And so Goldman Sachs was one of the underwriters of Lending Club's IPO. And so they felt they had some unique advantages and could get into this business. The case goes into pretty good detail about the way that they brought the team in. But I would love for you to describe a little bit about Harit Talwar and his background and how do they even begin to think about bringing in the right people to do something that is in many ways a complete anomaly to what they've normally done.

9:00Rory McDonald:Yeah. And this is a really important idea and the theoretical backdrop of the case. When we teach the case, we usually pair it with a module note on identifying and developing capable leaders. And the module note introduces a theory or a framework that we call schools of experience. And so it basically contrasts two different ways of hiring somebody or putting together a team. The first one is what we call the right stuff approach, which basically means you're looking for that magic combination of talent, fearlessness, grit, sustained self-confidence, anything that helps people climb the ranks of their organization and get to the top, looking for those attributes of successful managers.

9:38Rory McDonald:By contrast, there's this schools of experience approach that focuses on specific career experiences and asks, what past experiences would the ideal person for this role have? And the reason this is relevant is that this episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50-page restoration block or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome.

10:12Check responses set up required, compatibility and availability varies 18 plus. Hey Chicago, class it up with Crocs. You know back to school is coming in fast, so why wait to find your new fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up, it shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest Croc store today.

10:47Rory McDonald:What's relevant is that just because you have a really smart, capable person who's climbed the ranks at Goldman, it doesn't mean they're going to be great at running a consumer startup within Goldman. Meanwhile, if you have the best entrepreneur in the world, it doesn't mean they're going to be great at running a venture that has to interface with the culture and the processes and priorities of this larger organization. I think this is a really, really key idea here is how do we get the right leaders in and how do we build this team? So as you mentioned, we've got the two key hires here are really Harit Talwar, who was tapped to lead what was called at the time Project Mosaic that eventually became Marcus.

11:25Rory McDonald:And he eventually became the global head of the consumer business. He came over from Discover Financial Services, where he was the president of U.S. Cards and the chief marketing officer. And so it's pretty clear that he had at least parts of those schools of experience in the sense that he had the consumer experience in a regulated environment and probably could work in a larger organization. But then there's this other hire, this Omer Ishmael, who is the managing director in Goldman Sachs' private equity arm. And he comes in and he calls himself or somebody else calls him the Goldman interpreter or the Goldman whisperer.

11:58Rory McDonald:The idea is that he sort of understands the culture at a very, very deep level and can help Harit and the other members of the group really navigate that interface between the startup and the larger organization. But that's really, you can't underestimate the importance of that, right? We have done other cases on Cold Call where you bring somebody who's a star in one environment into an environment and hope for the same kind of magic to happen. And it just doesn't because of so many reasons, these unwritten rules that exist in this language that they just don't understand. So I think that's a really interesting move that they made in having somebody play that buffer between Harrett and the tradition that he was stepping into.

12:35Rory McDonald:Yeah, and I think this effort has no chance without both of them together. Obviously, they encountered plenty of struggles as it was, but I think those two key people were really, really important here. So they've got to recruit a team underneath Harrett to support him. And I would imagine as great as the Goldman Sachs brand is, and people would be enticed just to be able to work for that brand, I would think they'd also be a little hesitant to step into a situation where it was no guarantee that they're going to succeed here. So what's their value proposition to potential hires that they're going to bring in?

13:05Rory McDonald:That's a great question. I mean, you'd think because it's Goldman Sachs, top company, arguably the top brand in financial services, this is going to be easy to recruit people. But remember, they're looking for entrepreneurial managers who could function in a larger organization. There's not a lot of these people floating around. And then you've got the challenge here of your lack of business plans. You can't really talk candidates through a business plan because you don't have one. And you've got Goldman's commitment and interest, but really Goldman doesn't have any track record in the consumer business.

13:35Rory McDonald:And so I think the value proposition and I think what ultimately convinced people who came aboard was this combination of brand, excitement over the challenge to do something new, and the demonstrated commitment by Goldman, you have the CEO is backing this thing and talking about it publicly. It means that they really want to do this and do it right. All right. So you've got this team of entrepreneurs who's now assembled and they're ready to go. What were some of the decisions that they had to make early on? Like how did they define the operating model? There was a couple of issues that came up with that.

14:02Rory McDonald:I think a lot of the things really were about how do we structure this within the context of the broader organization such that we can get the best that Goldman Sachs can give us to support this initiative, while also not letting those things hold it back. Two really fun anecdotes from the case are, one is kind of figuring out the reporting lines. So we've got Goldman's head of technology, which is insisting that Marcus's CTO, who's Bo Hartman, should report to him, right? Because all the other technology people within Goldman Sachs report. But Hart is like, well, that doesn't make a lot of sense here because technology is the product when we're talking about Marcus here.

14:42Rory McDonald:So it's not a support function like it is in the larger Goldman Sachs organization.

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15:43Rory McDonald:At the same time, Harit knows he's an outsider. He needs the support of the Goldman parent organization, and he's got to figure out which battles he wants to pick. And so he did something I thought was pretty clever. He lets him report to the head of technology, that is the CTO. But he and the other engineers, they actually sit on Harit's floor. And so as a result of that, they're still working together and getting done what they needed to get done. The other big deal was, where do you locate this thing? Do you locate it in a garage, off-site in a completely different geographic area. It turns out that they actually locate it within Goldman Sachs itself.

16:18Rory McDonald:Hart's got this great quote from the case where he says, many large organizations put new and innovative things outside the mothership to avoid contamination. My view is that's wrong because you've lost the battle on day one if you're convinced that contamination will occur. Successful change agents immerse themselves in the body they want to change. They become proud of the body they want to change, and then they change it. And so as Talwar alludes to it, many sort of theories would argue for a different approach here than the one Goldman took of doing this thing within the offices at Goldman Sachs.

16:53Yeah, and we've seen so many instances of that over the years when the internet came into being an e-commerce popped up. You had a lot of traditional places that were launching these side businesses, like experiments to see how it was going to go, but never really having that full commitment to bring them in. So that's a pretty smart decision, I think, on Harit's part to make that.

17:10Rory McDonald:I would say very controversial, controversial internally and controversial with scholars who would look at this and say, oh boy, I don't know if this is going to work if you do it inside the parent organization like that. I also want to talk about the brand Marcus. Spoiler alert, I kind of blew it in the intro talking about Marcus Goldman, but I just thought that was a really cool story about how they came up with the brand. Can you just share that? I'm glad you like this, Brian, because I just love this part of the case. This is just so fun doing the interviews here. Basically, the backdrop is within the firm, you've got opinions that range widely from call it Goldman Sachs, right?

17:45Rory McDonald:Call this new initiative that they're doing, call it Goldman Sachs, all the way to anything but Goldman Sachs. And so as you can imagine, there was some trepidation that this sort of new initiative would spoil Goldman's reputation or harm the brand. And that was a big, big concern. And so they did their market research, their focus groups, and all the things that you would imagine when coming up with a brand name. And Goldman didn't actually feel accessible to the kinds of consumers that they wanted to reach. But when they tested X by Goldman Sachs or Y by Goldman Sachs, what they found is that trust levels rose and purchase intent increased.

18:20Rory McDonald:And so they stepped back from that. And as you alluded to in the intro, they paused to consider Goldman's history. The firm was founded by Marcus Goldman. Plus, you had these first name brands such as Amazon's Alexa and Apple's Siri, who were trendy at the time. And they came up with this Marcus by Goldman Sachs brand name. And it turned out that was really a stroke of genius. I mean, consumers seemed to like it. It was a hit for getting buy-in for the venture at Goldman, that larger organization. When it was unveiled to senior management in February of 2016, you had Lloyd Blankfein, whose reaction was famously, why didn't I think of that?

18:57Rory McDonald:So really, really kind of a fun process with coming up for it and really was kind of a clever stroke of genius. Yeah. Sometimes the answer is right beneath your nose and you don't even know it's there. So I just thought that was really cool from a branding perspective. All right. So let's talk a little bit about the challenges that this team faced being entrepreneurs in this long established culture. And then this soon becomes a case of opposites. It's almost like they're going to do everything opposite of what Goldman Sachs has done, and they have to justify it all along the way. So they decide to take a very customer-centric approach, but the customers they're working with are nothing like the traditional customers.

19:31And that sets up interesting dynamics, does it not?

19:33Rory McDonald:The big, big deal here is we're pursuing a client, or in this case, a customer that is just very, very different from who we've traditionally served. So we traditionally...

20:11We'll be right back.