EP 68: Immad Akhund (CEO, Mercury) on How Mercury Added $2 Billion in Deposits After SVB Collapse

31:16But it was only, I think, 6 ,000 debit cards that were issued. So it was very minor, no lending, blah, blah, blah. But obviously, at the end of 2022, so many crypto failures had happened. And it had affected this other bank, Silvergate, which was heavily crypto banked. That was basically all they did. And Signature, actually, they were both crypto. Because of that, everyone was like, okay, who else might be affected by this? And Evolve was just kind of caught up by this rumor. Banking is a weird perception related industry where you talk about contagion. But if people think something to be true and say it loud enough and spread it enough, it can become true.

32:01Well, I mean, fractional banking specifically has like this kind of faith associated to it, right? Like you give it, if like 100 people give like 1 million each, like the bank does not have 100 million on hold. Like they have maybe 10 million or 20 million on hold, right? And the rest of it's been lent out. So you have to like believe that like, you know, and that's basically. We all banked around the corner and we said, hey, I heard the bank doesn't have our money. And we all showed up to go get the money. But the bank doesn't have your money. That's true. It's 100 % true. And we wouldn't be able to get our money back, right?

32:35Because it's lent out to mortgages. or it's lent out to whatever, car loans. I mean, that's just how the banking system has always worked. But obviously the problem is if then there's a rumor or it's actually fact that a bank put the money somewhere not sensible, then it becomes a game theory thing of who pulls their money out first will get it and there might not be enough money left basically in the pot. So there is this inherent trust aspect to banking. And actually, I would say that was and continues to always be the hardest thing for Mercury. When we were launched, I was like, who's going to trust us?

33:16And it's like, we're going to startups. Especially early on, I had these conversations where someone was like, the money I have for my startup is like a million dollars. He was like, this is more money than I have ever had touched or thought about in my life. Totally. Like, how can I put it in Mercury? And it's a reasonable question, right? It's like, how can I? So we launched on like a Tuesday. It was a very distinct memory. It was April 17th in 2019. And by Friday, someone had signed up, not spoken to me or my co-founders or anything. And there was only nine of us at this point. They signed up and sent a million dollars into a Mercury Bank account.

33:58And I was like, this is insane. You know, my perception was that anyone, especially at the start, anyone that would send like a million dollars would at least try to call us. We had a number out there, I think. And it wasn't someone totally random. I had no idea who this person was. Some of our initial customers were investments that Seed invested or friends of mine. That makes a lot of sense. They had trust in me. But this was completely random. They'd literally probably seen a tweet on the internet and signed up to a bank and sent a million dollars. So that was crazy to me. But to come back to the original point, And like building trust and building a brand around that has always been the most important thing for us.

34:42And there's kind of an exchange. I mean, the partner bank is lending you – or not lending you, but you're working with them for their bank license reason. And you're – and they're borrowing – or the exchange, there's some monetary exchange. But there's also like a brand level exchange that like you're helping funnel leads or actual dollars to them as well. Is that a fair characterization? Yeah. Well, the exchange is actually like a little bit more from their FDIC insurance to like that's the, you know. So if you think about like trust, right, there's like two levels to the trust. There's like, you know, do I like Imad slash Andreessen Horowitz who were like original backers?

35:32Like, do I trust their brands? And therefore, I think they will do sensible things, which is like kind of like a moral faith kind of thing. And then the other level of trust is like, okay, you know, is my money guaranteed slash protected in some way? So the FDIC like provides the second level. They can say like, you know, originally we launched with 250K and now we have 5 million. But, you know, the$5 million is, I guess, the other level of, like, trust and guarantee is also, like, what are you trusting and guaranteeing against, right? And, like, in that case, it's, like, this kind of original thing, like, if there's not enough money there, will I get money out kind of thing.

36:10And the$5 million basically, like, guarantees that you will get$5 million of your money out. And then there's, you know, you have to kind of go down this, like, rabbit hole of, like, oh, what else am I trusting here? Like, you know, like, and then I can say, hey, we never touch your money. Therefore, like, you don't have to, like, worry about Mercury. And, you know, if Mercury dies, your money is safe. And so there's all of these layers of trust and guarantees. And I would say a lot of things are mostly feelings. Like, people don't always dig into all of this. Like, in moments of crisis, like, you know, you asking this question about, like, oh, is this FDIC insurance real?

36:50And like, that's when people dig in a little bit. But, you know, I have always been surprised that like people didn't really dig in very much from, I mean, it's not just Mercury, right? Like DeFi yields, like none of it made that much sense if you dug into it. But people were like really willing to go like, hey, you know, the website looks good. There's a good investor. I'm going to like go put my money into it. There's so many interesting parts of FTX from my perspective. But the brand washing that FTX was able to do through venture firms, through arena sponsorships, through celebrity sponsorships.

37:32It's crazy how – and I get it. We all have a finite amount of time in our day. And so getting to the root of these answers is just like no one can do it for all the things in the world, right? To some extent. And this goes to news media and whatever. You sort of have to trust at some level. You need to pick what you're going to trust just because someone's already done the work for you. But inherently, you're going to understand it far less. And so the summarization or the brand association level trust is obviously it's one element of it. And I get it. It's a mental shortcut that keeps you from having to understand assets and liabilities and FDIC insurance and all this crazy stuff.

38:18I would say you just can't. There's plenty of really smart people looking at SVB, and they didn't understand all the risks involved. I think it's too much for people to understand. And that is why these things, especially in the world of social media, trust can flip as well. Panics can happen and all that stuff. So it is a much, you know, it's the trust element goes both ways as well, which is, you know, kind of an interesting thing to think about. But I do think we're kind of in this moment where like there's like three types of like banking right now. There's like the big banks that, you know, like GSIBs that have kind of been like somewhat guaranteed by the government.

39:07there's like people like Mercury going like hey we'll go above and beyond in FDIC insurance and then there's everyone else and if you're in the everyone else bank bucket and you have a lot of insured like uninsured deposits like deposits above 250k it's kind of like a difficult bucket to be in and I do feel like the government should do something about like that bucket. I know that lots of people looking at like extending FDIC insurance and Congress needs to do it. So it is, it's not probably not going to happen super quickly, but, but it is like, you know, if I was a customer with a lot of uninsured deposits in the third bucket, it's like kind of a weird space to be in.

39:47I guess to that point, like why, why should they maintain uninsured deposits in that third bucket versus putting something in a treasury product or something else that provides protection, if not the FDIC insurance point. That was one of the biggest criticisms I heard from my financial service-related friends is like, why did all these people just have deposits sitting in their bank account at that level? And so I guess as you think about the debate of the moral hazard, of increasing FDIC insurance, at what point does it, are there just other products and ways of dealing with this? That FDIC insurance has been marketed and branded in like this safe, secure way that now people feel comfortable at it.

40:41But like there's money markets and treasury things that you can do that are different than that. Believe I read, and don't quote me on this, but I'm pretty sure this is accurate. We're going to air this. Someone can quote you on this. fact check me then. About 40 % of deposits in the US banking system are uninsured. I'm pretty sure that was the number. There is like kind of this interesting point of like, and like it's been happening over the last like few months of like deposits leaving the banking system and going to money market and treasury funds. So there's kind of this abstract point of like, okay, what would happen if 40 % of deposits left?

41:15Like, I assume, I mean, a lot of banks might not survive that. But also, there'd be a massive like lending and credit crunch, because banks are the main source of funds for consumers and businesses and things like that. So that's one point that I don't know if we'd have to come up with other ways to fund lending, which will be more expensive. So the cost of doing business will go up. Liquidity in the system. Yeah, liquidity will decrease and the cost will go up. So that's one aspect, but maybe that consumers don't need to care about that or businesses don't, that the government probably will. the second aspect is yeah people do generally care mostly about convenience above other things to a reasonably surprising level i would say there is a small minority of people that are like you know these the card point kind of people right like they're like have seven cards and they're like optimizing this like but that is not the normal the normal people have one card and they're just like, I'm going to use this card and I don't want to think about it.

42:18And that's true for most types of services, like banks as well. So, you know, once you get big enough as a company and like Mercury's there, we have like a maybe five person finance team. And yeah, there is enough people there that care about optimizing things and, you know, that's their job. And then you will make sure you're maximizing yield, putting in treasury, like seeking safety, etc. But that's like a reasonable scale. So as an individual consumer, or as like a business without a finance team, which is like most businesses, less than 50 people, you're not doing all of these like sub optimization, you mostly like, hey, I have a very busy life, I have a very complicated business to run, I'm going to put my money here.

43:07And yeah, maybe if I get some yield on it, that's great. but I'm not going to think about it too much. So that's the second aspect. And the third aspect is the incentives of banks is not to give you access to treasuries. It's not to give you access to more FDIC insurance even. The incentive is to actually try to put, Chase's incentive is to have as many customers as possible in 0.1 % in deposits. Then they can do what they want with the deposits. They can lend them out, and they can get a pretty big spread. and in the zero point there which is an interesting one is that banks don't make much money on these other products they make more money on it sitting in deposits oh yeah i mean the the difference especially in this higher interest rate environment is like ridiculous right like if you put money in like especially if you take your money out of the bank and put in u.s government devils the banks are not making anything but even if they like facilitate it through sweep networks or whatever, they mostly just give the whole yield to you.

44:06So that's a very different dynamic. So banks historically have made all of that stuff quite hard. You have to call someone up. You have to go into a bank branch. I actually tried it on my consumer account because Mercury sadly does not do consumer accounts right now. And I tried it. I was just like, I just want T-bill sweep or just money market sweep. Just give me the product. And they were just like, here's a really long PDF on how I don't have time to read this. Eventually, I just went on E-Trade and bought some T-Bills myself. But I was obviously educated to do it. But most people just like banks make it hard enough and provide enough friction.

44:43And most people just don't bother with it. Yeah, I think those are like three aspects that play into it. And also, lastly, actually, in the zero interest rate environment, it just didn't matter that much. So like you didn't have the monetary upside, really. Like whether it was deposits in your bank with zero interest rate or in T-bills and zero interest rate didn't matter too much. So the dynamic is I kind of knew that there is an alternative where you can get yield and safety. You alluded to teams under 50 don't have finance departments. And I would say that non-venture backed startups probably do have finance departments at that scale-ish or people in finance that maybe are thinking about that.

45:29Well, probably not. Like an SMB or something like that? I mean, they'll have someone paying the bills and checking, but I don't think they have sophisticated people that are thinking about risk and yield. But certainly at the scale during that period of time of 2020, 2021, as it relates to SVB and probably your business as well, a lot of venture backed companies that were getting decent sums of money in short periods of time. And their success or failure was not going to be predicated on the yield optimization or lack thereof or the downside protection of those dollars. Right. It's similar to my job.

46:12You don't make a lot of money. There's so many things that can go wrong in a startup that is on the path going forward that optimizing the downside or the risk just isn't top of mind for founders. right or wrong we can talk about svb which i i do want to but like uh clearly wrong in that instance but that was at least the mindset and so i uh i don't blame the venture ecosystem in totality for not encouraging people to uh think more proactively about this clearly in retrospect it was a mistake but i mean was it though like i know everyone panning for four days, but the US backstopped the deposits.

46:56So like, do you think they should have? Do you think the government should have? I think so. Yeah. Why? I mean, ASVB was a big bank. And so this is 200 billion. So it's not a small bank. I would say the bank generally didn't do super high risk things. And it was like heavily monitored. So that, you know, I mean, you could talk about moral hazard, but like really the government could have stopped them. Yeah. Implicitly, the government signed off on their behavior. Like it wasn't secret, I would say. And I just don't think like forcing everyone to go, okay, which banks is the government willing to bail out on or not?

47:34I mean, which willing to backstop or not? And I think that would have caused every like the thing that I talked about earlier about like this last bucket of regional banks, I think everyone would have left at least all uninsured deposits would have been heavily incentivized to leave instantly. And that would have put a massive burden on, like, way more banks would have failed. So I don't think there was, like, a choice not to do it. And it's not clear to me that that is a moral hazard. Like, who is a moral hazard? Like, are depositors really going to check bank health? Like, how will they do that if the regulator is already signing off on it?

48:07So, like, it's just a, it's a weird, like, I do understand, like, the abstract point that, like, hey, you know, if, like a bank management team doesn't have to worry about depositors, then maybe they'll make worse decisions. But like in practicality, like I just think the alternative is everyone goes to either like people like Mercury or the GSIBs. Yeah, I agree that there needs to be, there's this weird middle, this ambiguity that exists right now beyond, there's a small community banks that can definitely just go under and the government won't step in, then there's the too big to fail that are protected.

48:48And I agree, there's this weird middle bucket that exists that needs some change or oversight. And I think community banking in general has been fantastic for the economy in the US. I the the contagion risk of in the world of social media and and at that acute because of what SVB had done or not done and their behavior. I do think that the contagion risk was very real. And you saw what ended up happening with First Republic. But also on that Monday, I mean, their stock was even still super volatile after SVB was all. And so I do think the contagion risk was real. I wonder at what point should banks fail?

49:37Because it used to be a pretty common occurrence, right? And I don't know. I'm sure people have the data on this now. But at this point, it probably would have been$0.90 on the dollar, something like that,$0.80? 80 to 90 cents on the dollar so it wasn't like in probably some time duration thing and it so 80 cents is i mean it's a lot right it was what 150 billion in deposits 200 billion in deposits yeah 200 so it was about 20 billion yeah so it was going to be a lot a lot of money to not step in and i think the contagion risk would have been the bigger concern in my mind yeah i don't know what the like end answer is it's just like the internet has just changed all of these things right like it was previously yes there was a regional bank that would fail but there'd be another regional bank you'd go to next door whereas now like you can just go on the internet and you can go to like every the top four banks have like something close to most people um so if we want a world where like the top four ish banks like suck up like most uh most banking and all of these regional banks fail then like maybe that's a good world but also we can't have that instantly like we can't it would be too much of a shock to the system to move to that too quickly you guys do a great job on your website of outlining all the kind of stuff we did and so we could probably uh direct people there if they want to understand all the the different products and how this stuff works and that's um it's impressive to see you guys are very upfront and transparent uh and it i was wondering because i was trying to figure out when you like when did all these interactive things kind of get built out and you guys have been doing it for for a while i I thought like, hey, maybe this is a reaction to SVB, and it wasn't.

51:18It looked like it was September, October of last year that you guys really built out and were very, very clear and explicit on that. Was there an impetus? Like, what was the impetus for it in being so clear? Was there someone that said, hey, you guys have to be more explicit about this stuff? Or was it getting out in front of all the stuff that we're now talking about? Well, I would say as like just high level cultural principle, we've always had this view that one of the problems in banking is a lack of transparency, whether it's fees or whether it's just like explaining how it works, etc. So as a cultural principle, transparency has always been important.

51:55And the other thing that like I think is a bit nuanced is like, how do you deliver power user features and understanding while still being simple? That was the second kind of cultural principle, though. I can probably state it a little better, maybe. But yeah, I think one of the reasons that other people have not done as well is they've tried to be simplicity without the functionality. We've tried to be simple but fully featured, which is like a hard balance. You lead people to the answers as well. If they want to go below, it's like, hey, if what you care about, which I'm sure is 95 % of your customers, here's the products we offer.

52:32if what you care about is all the details. You actually help explain this to all the people, which I think is really impressive. Yeah, so those two cultural principles, I think, have always guided us. We did get in trouble. This was a few years ago. But our Twitter handle used to be Bank Mercury. I want to say like one and a half years ago. But anyway, so like the California DFBI, they got mad about us having that Twitter handle because you cannot have anything that implies it's a bank. And I was like, I was using it as a verb. Anyway, they didn't appreciate my Twitter handle, which is reasonable.

53:11So we actually had to go get the Mercury Twitter handle, which I obviously prefer to bank Mercury anyway. But, you know, it made us like, okay, you know, we have to be really thoughtful about like how we use the word and like express what we do and be clear about it. So that was something else. And, you know, from relatively early on, And I've always thought about compliance and risk as the thing I don't get. So I've always over-invested in it. We've had a compliance and risk team from very early on. A lot of them are from banks and off in techs. But anyway, so we've always had that muscle of trying to be very correct about things.

53:55Is compliance and risk, by the way, and if people are still listening to financial service, all this, then I appreciate them bearing with me on this. But the compliance and risk elements of this, are you guys like, are you vetting? Is it for your own covering your ass on stuff like that? Or are you actually doing the KYC on behalf of the banks? How does that work? Yeah, we do the KYC and KYB, like know your business. So, the bank base, I mean, it wasn't always like this, but nowadays, the bank looks at our process and signs off on it. We still have to report everything to them, but it's not like every customer that signs up does not need to be signed off by the bank partner.

54:40How do you think about FDIC insurance? You landed, you were originally at, I don't know what you were originally at. Most recently, you were at a million. Now, you're at five. Yeah. The genesis for our conversation, the crux of my questioning, I guess. How do you think about it? We've sort of touched on it in different ways. But how did you land on five? How do you go about getting that? How do you think about that? Okay. So practically speaking, how it works is, let's say you have$5 million, you send it to one of our partner banks. So it goes to the partner bank. but they, in order to provide the 5 million FDIC insurance, they have to distribute it to at least 19 other banks to get the 250K each.

55:22Most of the time, this is always true, most of the time people use a sweep network. So, you know, going back to your layers of indirection, there's like a few of these, the biggest and oldest one is called Intrify. There's another one called TBS that we work with. There's a few other ones. But anyway, these people have existed for a long time, and they basically go talk to banks. And the underlying problem that they're solving for banks is there's some banks that have too many deposits, and there's some banks that have too many loans. So to go back to the earliest thing about banks, like, bundling these two things together, like, there's no reason that's, like, perfectly balanced.

56:03and in the world that it is often imbalanced in, like these sweep networks arose to go like, hey, you need more deposits or you need a slightly cheaper deposit. So whatever, like you can buy them off another bank that has too many deposits. So that's like the underlying reason the sweep network exists. Do you know the origin of it? Yeah, there's a, this company Intrafi was previously called Promontory. I think in 2002, they like kicked it off. And this person who started it was like a pretty high up regulator, I think. I don't know the whole story. I'm sure before they even started, like banks were doing this one-on-one.

56:44It was almost certainly like a long-term existing thing, but it was just like a one-on-one. So almost every sponsor bank has to live on a sweep network because if you think about a normal bank, It's regional. They kind of have like deposits, et cetera. And like, it's all quite understandable. But if you're a sponsor bank, your deposit inflows can be really big, right? Like Mercury has grown a lot. And like we've delivered billions of dollars of deposits to our sponsor banks. And these sponsor banks inherently tend to be small because like the whole point of a sponsor bank is like they're not a huge lending institution.

57:22They're, you know, helping with payments or deposits. Like that's, it's just a very different model. So almost all the sponsor banks are less than$10 million in deposits. And there's also this Durbin Amendment, which kind of forces them to be less than$10 billion in assets. So you have this interesting aspect where every sponsor bank has always had a sweep network, almost everyone that's done this. But what was the case when we launched in 2019 especially is people didn't – they were like, oh, you're FDIC insurance. That's all they cared about. It wasn't like, how much is the FDIC insurance? So only 250 came at it.

58:00So even though the sweep networks existed, not that many people were optimizing for FDIC insurance. And you get a little bit more flexibility if you don't have to optimize for FDIC insurance. Okay, I'll sweep it, but I don't have to make sure 5 million goes across 20 banks. That requires a little bit more coordination and work. But over time, we'd started growing the FDIC insurance. And for a while, we were at 500K. That was relatively easy because that's just two banks. And then this SVB thing happened, and I was like, okay, how do we get this up to$5 million? The reason I was targeting$5 million is – so we also have this other product, Mercury Treasury, so you can get U.S.

58:45government, T-bill, mutual funds. And my view was like most people ship with excess deposits in that. Like that's – to come back to your earlier point, that's like the rational thing to do. It's yield bearing and nothing safer. So like if you think about it, 5 million, you know, basically like one to two months burn would be like the 5 million in operational accounts and the rest would be QS common T-bill. So, you know, there's not that many startups. Hopefully they're burning 5 million, one to two months. Definitely the really, really huge ones are. And they can even move money quicker if they need to.

59:20So I was like 5 million covers like most people. And if we can market that, we'll be good. So, you know, SVB happened and like basically Friday happened, right? Like that's Friday was the day where like the FDIC went in. And yeah, everyone was freaking out. We were freaking out a little bit as well because like we were like, you know, maybe the deposits won't be backstopped. And the big worry we had was all the VCs will say, put all your money in the big banks, right? Like that was our big worry. So we didn't want to be like, you know, net, net, we turned out to be a winner here, but it could have very easily been the case that we would have been a loser through this uh so we were like okay you know how do we go and then people would email me and i was talking to customers all day long basically on that friday and people were like okay this happened to svb why wouldn't it happen to mercury uh and i would say to them hey we have one million ftse insurance put your money there put the rest in u.s government t-bills then you don't have to trust me uh obviously you just have to trust me a little bit but like you don't have to take my word for it right like you can have this kind of confidence about where your money is.

1:00:27So on that Saturday, we were like, okay, you know, how do we make this email that I keep sending people and I had a copy paste, I was sending it into like a product and we launched Mercury Vault, but also we were like, okay, 1 million is good, but how do we get this up to 5 million, which would cover like way more startups that were using Mercury. And then, yeah, I had to basically like spend the whole weekend talking to both Evolve and Choice CEOs going like, okay, how do we make this happen? And we managed to, by Monday, get up to 3 million. And then by the end of the week, it was up to 5 million.

1:00:59But that was mostly a coordination effort, because we had all the systems in place. They were already sweeping. We already had sweep disclosures. And obviously, going from 1 million to 5 million is only positive. There's no downside to that. So it was like, you didn't have to get customer sign-off or something. Was IntraFi able to do that or did you have to find a different way? Well, we don't work with IntraFi. We work with this other one called TBS on one side and our other partner bank has their own kind of sweep arrangement. But funnily, in both cases, there were 20 banks involved. It was just making sure the right amount of money was in the right place.

1:01:42like it was mostly about that rather than like bringing up a bunch of like new banking partnerships and things like that these networks actually go like pretty deep like you can get it up to so with our network like it goes up to like 50 million intrafi so claims 120 million

1:02:02but yeah like i think beyond 5 million like i don't think it's super necessary and at least you know our partner banks like try to look at like each of the banks in the network and like you know even if it's fdic insured you still want like a sensible stable bank and all of that kind of stuff so like having hundreds and hundreds of them is like i don't think that could very necessary thing so my understanding and correct me if i'm wrong is fdic insurance is paid out uh or is paid by the network of banks right um and it's done i think it was based on total deposits at one point and now maybe it's total liabilities is how it gets assessed and so My only question in this, and as I've learned more and more about the banking sector, the answer is all this stuff is kind of kind of convoluted misincentive misincentive overlap.

1:02:55mind and all that. But is it fair to say that just based on that, that this whole process of sweeps in FDIs here insurance of$5 million or$15 million or$1 million or whatever, anything above $250K, I guess anything including$250K, is any uninsured deposits are unduly or inequitably paid out by big banks to cover that insurance amount because it's based on total. It's not on FDIC insured amounts, right? But instead it's on total deposits or total liabilities, as is the case today. The actual maths is actually even more complicated. It's actually like, it's not just liabilities. It's like where, so there's liabilities of deposits and assets and loans in banking.

1:03:49And it's like, actually, what are the assets and what are the liabilities? So So the maths is actually like a percentage weighted thing. I guess no one should be sympathetic to big banks. I'm just sort of asking. I'm not 100 % sure it is unfair to the big banks because they probably have, as a percentage, they probably have less uninsured deposits than the small banks to some extent. Because the biggest people at big banks is consumers. Almost every consumer is less than 250K, apart from some edge cases. Whereas people like SVB and a lot of the regional banks are much more business focused just because businesses are the ones that need agriculture loans or commercial loans that big banks might not do.

1:04:30And they often are more uninsured deposits. So, yeah, I'm trying to – I think the math works out. You think so? You think it's fairly assessed? Okay. I'd be interested to see why it would not work out. Well, I'm just sort of thinking like if Walmart banks with JP Morgan, for example, and they have, let's say they're operating cash flow on a given day is whatever,$50 million or$100 million or$500 million or something. then then uh they're going to basically as as the percentage of insured deposits that are being opened in like multiple banks and small banks and all of that as that continues to rise i assume what you guys are doing is enabling uh the number of insured deposits to go up now we could argue that jp morgan in general is an insured deposit uh yeah there's the issues but In practice, what is being assessed to pay for that insurance product that is being spread out among 19 banks is going up through what you guys are able to do through the sweep network.

1:05:46And so therefore, I assume if more and more people have insured deposits, then the premiums are being paid out on total amounts, which would – I see what you're saying. there's there's some aspect of that but if a bank is relying on uh sweep network deposits to lend out those are considered brokered deposits um so the fdic would have a more they would charge them more anyway for it uh so yeah i don't think that like it creates like uh weird incentives yeah i think it's probably okay and i think the you know the other point is like fdic is insurance so it's all about like what is the risk of that situation and if you're a you know if one bank like you know take svb has a very large uninsured deposits and it can do things like buy a 10-year mbs with them like that's just like an inherent risk associated but there's a risk of like the bank run because so many people are in the uninsured bucket.

1:06:54And there's the other risk of like that you're concentrated in one bank's decision making. So if you take the same 5 million distribution across 20 banks, A, you have much more insurance, so there's less likely to be a bank run and less likely for insurance to be needed. And B, you have like 20 banks making decisions. So like, it's not like a concentrated risk kind of factor. So I think it works out to be like a pretty reasonable thing for insurance to want uh but it's kind of an interesting thing like insurance is kind of like interesting phenomena in general crazy i mean all this stuff comes to psychological yeah uh human behaviors and do you think five billion is the right number for fdic insurance i because i i think when people criticize uh svb i think they didn't offer or the startups that banked with svb i think you needed at least three million or whatever to even get access to the treasury products right different levels different levels that you can get access to it so should it be in should there be fdic insurance up to the level that then you can access treasury uh amounts um well that was just an arbitrary thing to go back to our previous point that like banks just don't want you to like sure yeah your money are not in deposits but it's finally in the right number i guess i think it depends on like which group of customers that you're targeting, right?

1:08:11So I think 5 million is a pretty reasonable number. Like, you know, if you only have 2 million in Mercury, you don't, like, we don't distribute it to more banks than necessary, right? So 2 million, like, the less money you have, the less of the 5 million that you need, right? So yeah, I don't know. I mean, I think like you could - I assume the big banks are, I mean, the big banks are quasi - Covered, yeah. covered anyway right and so we're mostly talking about these regional yeah i think the i think they should split it between consumer versus business deposits like i think that's a little weird that like a consumer would have 250k and a business would have 250k not even the most lavish persons operating cash flow whereas it doesn't take much for a business to be no it doesn't if you have 10 employees that's like 200 more than 250k often uh so that split is obvious Whether it's$1 million or$5 million or$10 million, I think the jump from$250 ,000 to$5 million would be hard for Congress to do.

1:09:12But I don't know. Someone has the exact maths on this. They can work out exactly what percentage gets insured beyond it. Yeah,$1 million seems like a minimal jump. $5 million or$10 million would be better. But we'll see. We talked about a bunch of convoluted and sort of esoteric things in the U.S. banking system. Right. And as you alluded to in your accent entails, you're not originally from the United States. If I could give you a magic wand to change a thing in this overall system and just make the banking system better and more pragmatic so we don't necessarily need all these different levels of traction.

1:09:53Or maybe that's a feature and not a bug of the system. Is there something you alluded to, like a startup bank license that the UK, I guess, has earlier? Is there something that if I gave you a magic wand, you feel like it would make us actually have a better financial service ecosystem? I mean, it's hard to not be self-serving here. I think the most obvious and useful thing to us would be like if we had a startup banking license. And, you know, the way many of these startup banking licenses work is they you can take deposits, but you can't lend against them, which solves most of the problem with like why banking is tricky.

1:10:25If you can't lend against the deposit, I think in the UK, you literally hold the deposits at the Bank of England. You can do all the payments, you can take deposits, you just can't lend against them. Maybe explain why lending is how we end up in this very circular, problematic state. I mean, lending is the thing that you need to regulate the most. When you take deposits and you do something risky with them, like lend them out, you just need a ton of rules for that. because if you make a mistake there and you lose 5 % of those loans, then... Global financial crisis or SVB or whatever. Every crisis that happens in banking is because of a certain placement of the deposits, whether it's lending or buying treasuries or buying...

1:11:10I guess the global banking crisis was lending to these underwater risky mortgages. It's wild, by the way, just as a sense of irony that we went from very risky home loan lending that brought down the banking system in 2008, and now it's like buying treasuries or whatever. What SVB did was one of the big... No, they also bought MBS. They bought mortgage-backed securities. It was always mortgages. They bought mortgage-backed securities, but that were fully backed by the US government, right? Not risky subprime stuff. That's true, that's true. It's always mortgages, though, I guess. That's kind of funny.

1:11:52But yeah, so if you can't lend, it's just like you just don't need as much infrastructure and risk controls and compliance and things like that. So that's one method, and I think it would create a lot of innovation, and it would be good for the U.S. consumer. And all this workaround stuff that we've talked about. Maybe the FDIC insurance. Yeah, you could just say, hey, this is hell that the U.S. government, you don't need to worry about T-bills or FDIC insurance. It'd be good for your business too. I assume you have to split some revenue with your sponsor banks as well. Yeah, I mean, that's not even that bad.

1:12:27It would be mostly about flexibility and once you're chartered, you can potentially do other things and go deeper. So that's one thing. Let's see. I mean, this magic wand seems powerful. I feel like I should use it for something else that's useful. But when you're very deep in a system, it's hard to see how to fix it. I mean, I'm sure anyone listening to this that isn't deep in this just sounds like, gosh, this is a fucked up Frankenstein-ish system that we've kind of landed in because of just outgrowths of things. I mean, one thing that I think we're almost there. But, you know, in the UK and EU and like India, like the government tends to like come in and just go like, hey, this is a new payment system.

1:13:20It's going to be real time. It's going to be instant and everyone has to adopt it. In the US, there's like the Fed now is almost there. But even then, there's this element of not forcing people to just go use X, which I think you could say is a good thing that, oh, we're not forcing anything. But sometimes it's just nice to go, hey, everyone's going to be on this system. Otherwise, you end up with a little bit of a tragedy of commons where there's competing systems. Sometimes I wish the regulators would just do that. Everyone's on this system. It's real time. It's done. which is like what most other countries have done by this stage that care about like innovating on this stuff.

1:14:01So that's something else that seems obvious. But like maybe FedNow will like solve it and it's supposed to go soon anyway. So maybe that'd be a non-issue. Oh, I have one more actually. The weirdest thing in the US system is account numbers and routing numbers have to be secure. Like that doesn't happen in most countries. Like encrypted or? No, like if you give me your account number and routing number, I can pull money from your bank account. Yes. I can write a check against your account number. Um, that's just not true in other countries. So like you end up with like this kind of, that's why like Venmo exists.

1:14:33Like, and you know, like you can't give me your kind of rooting number, but you can give me your Venmo username and I can like, how does it work in other banking systems? Uh, this, the whole like account number it's in the UK, which is what I understand the most. You can just give me, like, I have my, all my family's account number and rooting number equivalent. Uh, and I just can't pull money from the bank account. I can just send them money. So it's just purely like you want to spread it far and wide because that's how you receive money. And if some business wants to pull money from you, there's a separate rails for that.

1:15:06It's called direct debit or something like that. It's just like in the US, they're just like, hey. It's like the same thing they do with social security numbers. It's just like this is a secure thing, but you have to give it to everyone. It's just like so silly. It kills me. The social security number also doesn't exist in most countries. And I found that so funny when I moved. I was like, OK, so it's a kill, but I have to give it to everyone. Yes, you have to write it down casually and just give it to people that you've never met before at the hospitals or whatever. The day SVB played out, I guess, to shift gears now that we've spent enough time on, I think, the financial service industry.

1:15:42Where where were you? Like what? I mean, there have been rumors of a while. I'm sure you were paying attention to this fact. And then they raised two billion dollars or announced they were going to raise two billion dollars. and shit hit the fan. So where were you when all this was going on? Yeah, I mean, the rumors started in like December last year, right? There was like some tweets. Someone wrote a really good blog post that just like literally played out this whole situation. And most people just ignored them. But some people took it seriously. And then it was a Wednesday when the earnings report, was it earnings report?

1:16:15Like they released this news that they were like doing this capital raise. I think it was outside earnings report, but there was like an aftermarket release. And yeah, I was at home. I work from home mostly. We have an office where, you know, I'm in my bedroom and I read the news and, you know, I'm like, okay, you know, what's going on here? And like some people, it was quiet-ish on the Wednesday. and then Thursday morning like all hell breaks loose where like you know just I try to be like available to customers whether it's on Twitter or email like my email is extremely obvious and and just like the amount of like I need a bank account today like and like all like VCs and investors saying like hey how do I get portfolio companies to get a bank account like how can you get it like today like so I was just like oh my god what's happening and like I was like this is bonanza you know from like at that perspective yeah you're like this is great everyone's reaching out to me yeah i'm like okay you know i have like literally like yeah this sequoia company this flower company like it's like the kind of thing that like you know we have a whole sales team that tries to get these people so it was mostly like a positive thing but at the same time i was you know i don't want to like take advantage of them or like spread rumors so we were very like i think i tweeted one thing that was just like hey if you want a bank account for mercury DM me and I'll try to prioritize you that's all I said, I was like I don't want to get involved in whatever's going on but mostly it was SBB had been around for 40 years I wasn't thinking hey this is going to be a real big deal I just thought it was people freaking out some people would sign up and we would get more users Over the course of the day how did it escalate from hey this Sequoia company is reaching out to me to at what point was it like oh my gosh this is uh this is i mean i would say it wasn't until the ftic walked in and shut it down that i thought it was next morning it was friday morning yeah because you know you have no idea how many deposits are leaving and you know but i mean i i think they've now they've said down it was 45 billion dollars of outflow and so i i assume jp morgan got the lion's share of plenty of that yeah but we didn't get like 40 billion i would have been like oh fuck yeah we're done yeah uh but but as a person i mean you know yeah it was significant it was a good day uh it was a great day uh and you know we we ended up with a backlog at the end of the day like we're trying to like you know we were working through the evening to try to process all the applications and answer everyone's questions and things like that so it's a friday where i was like okay you know like this is serious and you know it's not all positive either right like what was your feeling when it went into receivership i'm sure that was like probably the best moment in company history in terms of just like opportunity and inflow, but also a pretty dark time for the ecosystem.

1:19:09I don't think it was, it was, I never, like that Thursday, I would say like it was a positive time, but Friday was a very negative time. Dark, somber. Even though that might've been the best day. Well, it's just like, you know, as a, as a startup founder, you want like some level of uncertainty that you can take advantage of but you don't want too much uncertainty either and like it just left a ton of questions right it's like okay you know a there was this whole thing about like you know will people trust small banks at all like will they trust mercury was the data that you were seeing at that point oh and also all the deposits had stopped so from 2 p.m on that thursday uh because they cut off it was after the wire cut off and And then on Friday, they didn't process any money.

1:19:53So you actually weren't getting. So in retrospect, the FDIC receivership was a boon for the business. But at that moment in time, you couldn't tell that that was going to be the case. And there's people saying like startups are going to die on mass. Like the startup ecosystem is hurt. Like that's obviously bad for us. And that's like 80 % of our deposits. Yeah. Startup ecosystem. Anyway, so yeah, it was a very, I would say like we were freaking out. as well yeah and yeah but because there's an existential question why why would anyone not only your customers could be hurt or future customers could be hurt because i'm sure you had some people banking with both right uh but then also there's a question of why would you bank with uh anyone but jp morgan or city or whatever so what's changed for mercury in the aftermath of all this stuff like all this has played out subs no more first republics no more what's different now for you guys?

1:20:52Yeah, one thing that's like, it's kind of a weird thing for like, we only launched four years ago, right? So our main competitor disappeared. And yeah, we were doing pretty well, I'd say like SVB and us had like, probably 50 to 60 % of like the early stage startup market. So but it's just weird to go from like, the underdog to like, at least for the startup banking space, we're kind of the incumbent now. So that's kind of like psychologically strange for me as an entrepreneur have always been the underdog, right? So that's a little bit of a shift. Practically speaking, not that much change. We were actually on board thousands of customers a month, and we tend to have a much broader aperture than SVB would.

1:21:37Any business really can bank with us, and 30 % of our business is e-commerce. We have all sorts of categories that are outside the startup space as well. So not that much change. Like volume is definitely higher and continues to be higher. I think the future opportunity is like kind of interesting. I think, you know, there are ideas that I have that are like only make sense when you're like a significant percentage of the market share. So like if you, yeah, we haven't built this, but like if you think about like payments and like businesses, right? Like if you wanted to do like a Venmo type experience, and there's lots of levels to that with businesses because they have invoices, they have all these things.

1:22:19Once you have a critical amount of market share, you can build some of these experiences out. Similarly with some partnerships and platform-type things you can do. So I've always, you know, maybe this is a little bit of hubris, but the reason Mercury was a fun idea for me is that banks are kind of like this fun intersection where every business needs it. If you think about things that every single business needs, there's only three or four. It's payroll, banking, bookkeeping. Maybe that's, I guess, website. Those four. So that's kind of cool. And then all your money's there. And it's one of the first things you need.

1:22:56So you lead to a lot of interesting things you can do. And those things actually get a lot more interesting when you have a critical level of market share. Because when you're small, it's not worth building a bunch of things that require that network effect. So I think that's something interesting. and we're thinking about how do we build a few kind of products that experiment with this. Apart from that, let's see other things. There's a few industries that previously we did not matter too much to. So take the VC industry. Between First Republic and SVB, I thought it was pretty well served, whereas we had a ton of sign-ups from them, and now no one's quite serving their needs.

1:23:40So we're building some stuff around that. Life sciences as well. That's another industry. There's a big void to sponsor ski trips to Tahoe. Yeah, I don't want to get into that. But we are starting doing a lot more events. So any VCs listening out there, if you want to do a dinner and you need a sponsor, hit me up. So yeah, we're doing a little bit. But we don't want to just copy those models or fill in all the gaps. Have you hired ex-SUB or First Republic people? We're about to. I mean, we have some previous ones. We didn't do the whole, like, let's go try to put your team kind of thing. The HSBC, probably.

1:24:17Yeah, we didn't do that. But there's definitely going to be a couple we'll end up having. So I guess going back to the origin, how do you actually land on the idea for Mercury and think that this was a good thing to go after? You know, one thing that's kind of interesting about Mercury, which wasn't true about all my other startups, so this is my fourth startup. Other startups, like, you know, I did this whole, like, oh, let's do a brainstorm of ideas. And, like, oh, this is my favorite. And I was going, I was like, okay, let's just do it. This one, like, really fermented for years and years in my mind, which is, and normally, you know, I get bored of ideas.

1:24:52I'm like, oh, this is a good idea. And then I get bored of it. So the fact that it fermented was, like, quite a good signal for me. There's a few things that led to it. So, A, moving from the U.K. to the U.S. and going, okay, you know, banks were a lot better in the U.K., which was a real surprise to me because I'm always like, I'm moving to Silicon Valley. This is the future, but you end up going there. And it's like a bunch of things are still pretty backwards, which is kind of funny. So that was one thing. Number two, as an entrepreneur, it was really hard to run a company in 2006. So there was no Stripe.

1:25:21I once did authorize.net, which is like a real old school way to try to do card processing. There was no, yeah, we used ADP for payroll. And like a person came in our apartment block. There was like two of us. We could barely afford anything. They came with a flip board to set up payroll. I was like, what is this person doing? Why can't I just go to a website to do this? And there was no slack. So anyway, everything was hard. So the fact that banking was hard was not a big deal because you're like, okay, it's just hard to do anything as an entrepreneur and I have to use kind of crappy products to do everything.

1:25:55And then everything kept improving. So by 2012 or 2013 or whatever, I was like, okay, you know, pretty much everything is like modern products now, apart from banking. So that was like, you know, it was just one of these things. And I'm pretty good friends with the Gusto co-founders. So I was like there when they fixed payroll, in my opinion, at least. Like, you know, it went from like ADP, unusual website, to like these weird onboarding processes to like a really nice product. I was like, okay, you know, payroll checkbox. It's like banking was just obvious, like cross. So that was one aspect of it.

1:26:28And then, and this guy probably doesn't even know this. And I don't know if I've even said this on a podcast, but there was this guy, his name is Kai. He was a, he did this company called Trulink and it went through YC around 2013. And they were giving like these debit cards to seniors. And, you know, there's, there's something powerful about being in Silicon Valley and being in YC because you see all of these people and you're just like, these are normal people, right? That's not like, you know, when I was in London, I was like, they were like, you know, YC, Like all of these people are like these weird gods of startup, right?

1:27:00Whereas you meet these normal people and you're like, okay, you know, this person, completely normal person, like managed to issue a MasterCard, right, to seniors. I was like, wow, if he can issue a MasterCard to seniors, why can't I do it for startups, right? Obviously, it's not as simple. And, you know, I think he's still working on it. But that made me go, okay, you know, I had this idea for a while and now I could see someone had done it. And generally speaking, if I meet someone and they can do it, then I'm like, I could probably figure it out too. So all of those things kind of came together.

1:27:34And then in 2017, I was like, okay, what can I do that I could really do for like 10, 20 years? And I had this idea for a long time. And actually, the crystallizing thing that really was like a gaming conference to do is this kind of platform kind of concept. I was like, I really want to do something that's not just one feature and I'm like kind of done. I wanted to do something where like in five years time, if I was at least slightly successful, then I could do even more interesting things on top of it. So yeah, it came kind of together. It's like, yeah, it's a combination of those factors. Let's say the startup bank license never ends up happening.

1:28:08Do you think ultimately you become a bank in the future? Yeah, at some scale, I think it'll be a little bit of a no brainer. Yeah, Square did it when they were about 20 billion in valuation. And they've done it in like a nice way where it's like a, you know, it doesn't disrupt their normal business and it's like a separate thing that they call it square capital i think uh like that kind of way of doing it like is we basically every year i have someone at the team go like oh can you go look at like can we do this and then every year they're like yeah it's probably not a good idea so one year they'll come back and say yeah let's do it and then we'll do it i guess 2010 paul graham said ahmad is one of the best at fundraising of all the alumni so whatever he has to say about the topic is worth listening to.

1:28:47What fundraising or advice or strategy do you have for founders? Honestly, I didn't think I was even that good in 2010. I think I'm much better now. That's actually the biggest thing that I never understood back in 2010. I think a lot of founders miss out on is, you know, when you get a VC or an angel, a lot of the aspect of it is like, I'm going to know this person for 10 years. I invest quite a lot since 2016. And I talk to someone. I'm like, okay, when I invest in something, I'm basically making an implicit promise that if they email me or they want a meeting or something, I will talk to them.

1:29:28Obviously, if I'm busy, it's different. But that's a big commitment to make to someone. When you invest, you're probably like, I'm on the board for 10 years. So that's a huge commitment. So there's all of this kind of rational, like, does the market size make sense? is the distribution model. But the other side that I think a lot of people miss is this kind of emotional human connection side. People think of it as like, it's a transaction, I'm going to get this deal done, and I'm going to move on, like, how quickly can I close it? And then like, they just miss out on like, actually, like, you should just spend some time like making sure that you like the person, because if you like them, they'll like you, right?

1:30:01Like, there's this like obvious relationship building things that, at least as an early entrepreneur, I had no idea that that was like in the mix. I mean, now it seems obvious to me and maybe it seems obvious to most people, but just spend a bit of time going like, who is this person? Like, you know, why would they like me? And like, you know, not dame it, like be authentic about it. So I would say that's like the biggest, biggest step. I think the, the second thing that I think is, I mean, it's kind of related to this. I mean, I'm an engineer, right? So like I try to, my base instinct is to be very rational and like give the facts and walk away.

1:30:35So like a lot of my learnings from fundraising are like trying to unlearn my engineering instinct. And the second thing is just like how much the story matters. And it's like, how do you weave the emotional story? It's like, okay, you know, like even these questions about like, what's the origin story? And like, what is your motivation? And like, you know, how are you going to like go from like, I mean, if you think about like, startup investing at early stages, it's kind of crazy, right? Like I talked to some person, they have nothing. They're generally actually quite inexperienced in that space.

1:31:11And now they're telling me a promise that they're going to in 10 years time sell a billion dollar company, right? It's a crazy kind of bet that people are making. And there's no amount of logic that gets you to, I'm going to be doing 100 million in revenue from zero today. Like the actual thing that gets you there is a story and the emotion around the stories. Like, you know, how passionate do they get about it? And like some of it is like performative for investors, but also like they need to sell the same story to employees. They need to sell the same story to their customers. So if they can't weave a good investor story, they're not probably not going to succeed.

1:31:44I mean, I'm sure there's exceptions to everything, but so that's like the other part to it. Would you start with the answer in some ways? I mean, think through what's actually true and like your motivations or your vision or the origin stories or all of those things. think through what's true and then try to hold that together in a holistic manner and yeah i mean like it has to be like sometimes i hear origin stories i'm like you just made that up like i mean it has to be like somewhat authentic and true to the person right uh but i think i think it's tempting to like not think about like the story arc so i'm always like you know early stage founders i'm like oh what's your story arc i'm like okay you know firstly you start with yourself, like set that up as a story and then like twist into, oh, how did you end up in this idea?

1:32:32And then twist into, oh, actually you found out it was a huge market. And then like, oh, you've already built the product. And oh, you already have like initial customers. You want to make this, oh, kind of thing, which makes like a really nice, like complete picture. But each part of it is like, should be interesting and like very authentic and convincing. I know you believe we were talking before and the nuance of advice is very specific to each uh each situation but are there are there broad-based things or advice that gets given that you're like listen i just think that's wrong in how broadly that gets communicated right like sure maybe it's true for a couple percentage points of the population but it's been overly extrapolated and i just don't think that's a good holistic piece of advice to have hanging out there in the technology or startup ecosystem.

1:33:25And this happened, especially in like the 2021 bubble, but like, I think we haven't really shared it. There's this like belief that like more money equals more growth. Like, I think the Valley kind of got obsessed with this idea and like, VCs kind of pushed it to some extent, but you know, created like, and this is probably like fairly controversial, but it created these huge companies that have some companies with billions of dollars in revenue that can't just be cash flow positive. I just find it a little weird. I'm like, hey, we're building software businesses. The whole point is we don't have humans doing things.

1:34:02Why can't we just build cash flow positive businesses? If you look at the previous set of businesses, Facebook, Google, Microsoft, etc., those throw off cash flow. Sometimes people are like, oh, but Amazon is an example of this. But actually, Amazon is not a good example of this because like, A, they were always very cash flow, like, positive to some extent, right? Even when they were burning money, they always had a ton of, like, cash flow from the way their business was constructed. And B, they're dealing with, like, real things moving. Like, that's an expensive business when you have warehouses.

1:34:31Like, fine, there's some exceptions to that. But, like, these software businesses that just can't make money, I just find them really weird. Like, I think that's probably, I just think we ended up in this weird mindset where, like, everyone was like, grow, grow, grow, spend as much money as possible. And I think there's just a lot of like bloat in there. And I don't think the logic makes sense as much as people think it does. You tweeted recently. And it started, I mean, I think you got hit with the Keith or boy wrong. Oh, yeah, that was amazing. That was my first bad advice. Yeah, I think that's what he said.

1:35:05Friend of the pod, Keith. Early founders who are not already wealthy should probably take early acquisition offers. My last startup, we started in 2009 and could have sold in 2011. Instead, we decided to go for a home run. Took us another five grueling years to get to only a 2x bigger exit. I don't know if Keith made it to the third tweet in that tweet thread, which I appreciate those tweet threads are annoying. There is a big disclaimer. If you have product market fit and it's smashing your head in with product market fit, I think when people have had that, they know that feeling. and you're in a big market, there's no way you're going to get an acquirer to give you a reasonable valuation.

1:35:43And that's a big disclaimer. But I would say, I talk to entrepreneurs all the time that are like, oh, I'm considering this exit. And 99 % of the time, they do not have that strong product market fit. They have some sales. It's not an unsuccessful product, but they're very far away from like, this is going to be 10x bigger in two years and I'm pretty sure of it. And in that situation, if you're poor, especially, and not everyone is like this, but it's not like I was like poverty, but I never had money. And most of the time I've done a startup, I've had zero in my bank account when I started it, and I funded it using credit card debt or whatever.

1:36:27So in that situation, you're actually kind of risk averse a little bit. The ideas that you think about aren't as big. until basically 2016 when I sold my startup, I was always like, my bank account was basically zero all the time. I would only pay enough salary to just basically survive. So that first money really makes a difference. I don't think I would have tried it. I have two kids now, but I had one kid when I guess I was thinking about Mercury. I don't think I would have tried to do something like Mercury if I didn't have money in the bank. I would have been like, okay, maybe I should take a job or do something that's a little bit more obvious.

1:37:08I do think it's a little bit of a place where VCs and founders have unaligned incentives. Diverging interests. Diverging. Because I had a conversation and I kind of felt bad for this person because they were so happy. They were like, hey, I'm going to give you 10x your money as an investor. So I was investing in this guy's company. He's like, I'm going to give you 10x your money. I was like, hey, man, I'm really happy for you. You've made a home run for you. You're set for life. And I didn't want to say it, but I was thinking, you know, 10x is not like it barely pays off my other 10, 9 investments.

1:37:44Like if you were doing well, like let's go for 100x, right? And that's just the seed investor mentality is 100x. Like maybe Series A is like more like 30x makes them happy. But it's just a very different like misaligned incentive. So I do think there's three ways that having your first money makes a big difference. Like A, the difference between your life, between like$0 in your bank and a million dollars is like way bigger than a million to 10 million, right? Because like you just go from like, I don't have to worry about money every day to, yeah, it's very different. B, that first money is much easier to get.

1:38:24like selling a business for 10 million is more than 10x easier than selling for 100 million because it's just like there's just less people out there that can buy business for 100 million 10 million is like a yeah i mean like for google it's not even a bet like they just have to like you and then have a vague kind of idea of where work and they can spend 10 million on it uh anyway there's just so many factors where that 1 million is often the right choice for people and I just see it often where people just like have this like mentality and like you kind of have to have like this crazy thing like I'm going to keep going like the perseverance like there's all of these like entrepreneurial antibodies to keep giving up and it feels like you're giving up on yourself or like an exit that only gets you like a million instead of a home run but yeah I mean if you saw a few VCs were like oh this is not good advice and then all the founders were like I wish I'd done this and like actually 2021 has left people feeling like pretty pretty bad about not doing it because you know i had one company that sold like right at the peak and i was like good for you guys but a lot of people had opportunities to sell they didn't sell and now they're looking at this relatively bleak future where like they have overvalued companies probably no option to sell for a long time maybe like you know it was growing because of like you know everyone was spending a lot of money and they're not growing anymore and you know it's a difficult time for people.

1:39:46So I think that's why that tweet really resonated with people thinking they'd made some bad decisions. You had two very different launches in ways of finding product market fit. For Mercury, we've touched on a little bit of it, but I do want to ask specifically about the launch where you guys kind of came out like gangbusters, I feel like. But Hayzap, your prior company, finding product market fit was very different, right? And how you about that how do you think about finding product market fit for for that business and how did you knock off the the different ways to the getting to that point yeah yeah every time so my previous company hayes app we did four full pivots uh and every time we tried to do one of these pivots we like always made noise we got a tech crunch article but like nothing ever happened right like you can do all this thing and then you're like okay well you know for a couple of weeks is like slightly exciting.

1:40:38And then you have to like get, figure out like distribution and product and things like that. Mercury was quite different in that we launched and it just like kind of worked. In the case of Haze app, you know, we ended up in this like relatively niche thing where like you could really only end up with it through this like weird idea maze walk we'd done. We launched a social network for mobile gamers in like 2011. And then that didn't work, but we started showing ads within the network. And we were like, oh, you know, why don't we just take these advertisers? Like there was an advertiser, there was a Japanese company.

1:41:14I forget, it starts with D. Anyway, they gave us like a 60K check and they were like, give us installs. That was the first money that company ever made. I was like, Jesus, they just gave us 60K for this? Like, it was like, it was a wild west back then of like ad attribution and all this stuff. So we're like, okay, you know, if you can get 60K from a few other people, why don't we just show ads in other people's games and apps rather than just in our own one. So we launched an ad network and we were like one of the first like nice looking ad networks on Android. So we did that for a bit and then we were like, okay, you know, it's really hard selling ads and like we don't really like doing the, like ad networks are just all a sales game.

1:41:53Like most ad networks are like 90 % salespeople and 10 % like product and engineering. And we're like, that's not the kind of company we want. Like that's not even our main differentiation, but there's this like technology called mobile mediation which like basically if you are a app developer you want to plug in five different ad networks and like you want to show this one in turkey this one in england you know you want to do all of these optimizations and most of the indie app developers don't have time for these optimizations so they end up doing something dumb like that just put one ad network in uh so like hey why and there was a few players in this space actually the biggest one was this company called mopub that twitter had acquired but like They were like enterprise players.

1:42:33They were not like developer-friendly players. So then we were like, why don't we just build this thing? So even getting to the idea was like a real idea maze kind of thing that outside this space you would never even think this idea exists, but you could kind of get to it from there. So we built it, and then we had a few users, but it wasn't that good. And then what we did is we did have a smaller sales team that was like five of us, And actually, my current co-founder was the best of them. And he, I mean, they were all, but he was the real driver on the product side. He would go out there and say, okay, I talked to these many people.

1:43:11They said if this existed, that they would sign up. And we would basically write down every single feature that we could build. And it was very practical. It was like we would talk to someone and they'd say, oh, the thing we really need is, it's good that you do video ads, but we really need banner ads. or it's good that you're doing this optimization, but we need to see what the hell you're doing. So you need to visualize what the reporting and all that kind of dashboard is. So we wrote down all this list and we're like, okay, we would only care, to some extent, we care about the ones that had these hit apps that were the biggest ones.

1:43:49And we'd say, okay, what gets us the most number of these hit apps? And in this world, and actually it's true for most world, Like, it's very shocking if, like, someone asks for something and then you deliver it. Like, that doesn't actually happen that much in, like, product development. And, you know, in this world, like, none of the other companies were really product companies. They were, like, much more of this kind of sales archetype. So, yeah, we just, like, made this list and we were just, like, do the top one. And then we were, like, okay. Sometimes they would buy, sometimes they won't.

1:44:19And we just did this for, like, nine months straight. And it just, there was one day where it just, like, flipped. And the flip was literally like, we just woke up one day and like the top game on iOS or maybe Android, I can't remember which, was using Haze app. And we hadn't sold to them. Like they'd literally come to us and they signed up and they just like ended up using it. And we were like, whoa, how'd that happen? Because like everything up to then was like us like really trying to like sell this thing to death. And that's such a good feeling where it's like, you know, the distribution becomes like great.

1:44:55And you just kind of got the fullness of feature set. Fullness of feature set and then started building up a reputation where people were like, okay, this actually works, they deliver. And all of these ecosystems have networks underneath them, right? So like an app developer would use some contractor and the contractor would interact with his app. And then that person would go to the next app or game that they were working on. and they'd be like, okay, this worked really well. Why don't we just use that? And you'd end up with this distribution. I really think, to come back to the previous point we made about why it costs so much to build software, it's like distribution is a real problem.

1:45:32And actually, product market fit is often just the product's good enough that it distributes itself. That's really what product market fit often means, I think. You just want to be so good that you're the winner in that space. And one thing that people always think about product market fit is binary. But I do think you can be product market fit in a niche. If you were a huge app company and you wanted all of these complicated, you had three or four people that were doing ad optimization at your company. Maybe it would work for you, but it wasn't the thing that we had product market fit. We had product market fit as you couldn't afford an ad optimization person and you didn't want to think about it and you just wanted to integrate it and it was done kind of thing.

1:46:16But yeah, that was a great feeling. The last one before I'll let you hop, but you've had a big network of investors. And it seems like you've built good relationships with a lot of different people. How have you used that to your advantage? Why has that been important in Mercury's success? Yeah. So in our seed round, we had 60 investors. 6-0. 6-0. And in the Series A, I think at 40. And the idea that I had, which I think played out quite well, is like, A, this kind of earlier point about brand and building trust. I wanted to have as many people that people respected. And a variety of them. I had fintech investors.

1:46:55I had prolific seed investors. And then I had a few big kind of funds. So that was one aspect. The second aspect was like, I don't know where I'm going to get distribution. But maybe if I have lots of investors and they have lots of companies. portfolio companies, they will push it and sell us to their portfolio companies. The key to getting this many is actually slightly ironic, is to first get a lead investor. So in both the cases, I first got the lead. It's much easier to go, especially to someone you don't know, if you go to an angel investor, and you're like, hey, Andreessen Horowitz are already funding my company, and I think you will be a great person to invest in it.

1:47:37So like then you can go to pretty successful people and like say that. And if someone sends me an email like that, I'm like, well, that's like it's already been vetted. Someone did all the work. Like I'll still talk to them to like make sure I like it. But like it's just so much easier to get through the door when you and you can even call me. So that's what I did in both cases. Like I had a few investors before the lead. Then I got the lead. And then I filled out the round with like small checks. But it's just nice. I mean, you know, I used to send very I've stopped for various reasons. I used to send very detailed investor updates every two months.

1:48:07And I always had to ask at the start. And it's just surprising. You'd have an investor that you haven't spoken to for 12 months. And you'd say, hey, I'm looking for a designer or a VP of marketing or whatever. And they'd be like, oh, I know a friend. And they'd introduce me. And I'd be like, OK, you gave me money for this investment. But you also gave me value added. Totally. And oftentimes, the smallest checks are the ones that work the hardest, right? Yeah. On an ROI basis, it's amazing. Yeah. Yeah. Well, that's great. Well, thanks for doing this. I appreciate you making the time and answering all my questions.

1:48:37This was fun. Yeah, this is really good. I love going deep on this stuff. Yeah, awesome.