Ryan Graciano, Co-Founder & CTO Credit Karma chats with Amit Somani, Managing Partner Prime Venture Partners .

Listen to the podcast to learn about:

02:00 - Founding story of Credit Karma

08:20 - Acquiring first 100k customers

12:25 - Attach your message to something that is organically out there

14:00 - The Thin-File Problem

16:00 - The life of a fintech user on the internet

22:00 - Financial Product as your Personal Financial Advisor

23:45 - Monetisation journey of Credit Karma

27:20 - How entrepreneurs should think about exits

32:40 - Credit Karma’s future plans

Read the complete transcript below

Amit Somani 0:13

Welcome to the Prime Venture Partners podcast. Today we have with us Ryan Graciano, Co founder and CTO of Credit Karma. Welcome to the show, Ryan.

Ryan Graciano 0:23

Thanks for having me. I’m happy to be here.

Amit somani 0:26

Ryan, what a journey it has been. You guys started the company in 2007, 2008 timeframe, I was just looking it up on your website. And a lot of people argue that some of the best companies have started since sort of economic downturns. Can you talk to us a little bit about the founding journey of Credit Karma. And if you may, also the name, where did the name come from?

Ryan Graciano 0:48

Good question. Well, maybe I should start right before that. Before that I was with a small company called Venetica. And we were humming along with our 60 people before Amit came along and bought it. That’s how we met.

Amit Somani 1:02

That’s right. The fun Venetica days in Charlotte, North Carolina. Absolutely.

Ryan Graciano 1:06

That’s right. So I joined IBM, and we were 330,000 I belive people at the time, and I was looking for something that was more consumer oriented, and had a bigger impact for me personally, and I got introduced to Ken, who’s our CEO. And he had this idea that the credit information at the time was given out by the three credit bureaus here in America, and they were charging for it at the consumer level. So they would, you would sign up for a free credit score and they bill you like $20 a month, and his vision was, one, this data is really valuable, everyone should have access to it. And eventually, regulators are going to make sure that everyone has access to it so that $20 a month thing can’t last forever.

And two, it seems very possible to connect the standard kind of internet advertising model to this data. So we thought at the time, we could market things like cell phones and other credit based products based on your credit information, because we’d be able to target prime consumers with display ads, which was kind of how it worked back in 2007, 2006 of course, we started right at the top of the of the peak, 2007 was right when everybody was raining VC funds on companies and everything is up into the right. And we pretty quickly ran into hurdles.

Amit somani 2:42

Indeed, so how about the name Credit Karma, I’m very curious how that came about and what was the gist of it.

Ryan Graciano 2:52

Our now Head of Marketing, Greg Lull, actually he’s how I got introduced to Credit Karma through our respective wives, they were friends and roommates in college, he had worked with Ken on a prior company, a search engine marketing company, and they were looking for a name at the time, that would really resonate on the SEO SEM front. So they wanted credit to be in the name, that was a big push for them. And they had just kicked around a bunch of different names in the alliteration of Credit Karma. And the concept that by putting something good out there, you would get something good in return, was actually central to our early product, we were building all these different ideas for point systems where you could build on top of your credit score with credit earned points.

And we had a whole social system, because back in 2007, if you wanted to be funded, you had to use the word social. That was in our business plan. And we actually had a karma score that not many people, remember, because it never really saw the light of day it was sort of buried on our site. And it’s one of those things that you pivot away from early when you realise it’s not really going to work, but there was a whole thing there that just never really panned out.

Amit Somani 4:18

Understood, very fascinating. So, how aware were US consumers, of course, the various credit bureaus were there, but about wanting credit reports and perhaps wanting them for free, because I know that was your biggest growth hack, even from back in the day. So how aware were people that they wanted this because otherwise you’d have to go and tell people like, Hey, you should look at your credit score. And then, when others were charging for it, and you guys came about and said, Look, we’ll make it free.

Ryan Graciano 4:51

There’s some interesting history there, because consumers were only tangentially aware of the credit score, prior to the credit bureaus, selling it to consumers. So banks use it for underwriting and it was very much sold to the banks and for consumers it's just very confusing thing. And what happened at the Bureau’s is they figured out that they could create a second revenue stream with the credit score by selling it to consumers. And so what they did was they built awareness, they actually went out and talked about how your credit score was so important, and advertised it on television, and spent, I’m sure billions of dollars creating that awareness. And then they just didn’t really evolve the model, so they built this bridge, I always say, between credit scores and consumers, and then they let other companies kind of walk across it, because they weren’t really willing to move past that direct to consumer charging model that $20 a month breakage model that they had, which makes sense they are not really generally consumer companies, they’re b2b companies, and they work off of that kind of subscription revenue.

So to build a completely different type of, ad based business, which is what we had at the time, we don’t really work that way now, it was a little foreign to them. And so it was interesting, because that phase of the whole revolution in credit was necessary for disruptors to come along. And if we had come along before that, it actually might have been really difficult because we would have had to spend a lot of money just driving awareness. Why is this thing important? Why do you care about this?

Amit somani 6:35

Absolutely, and as we invest in early stage startups, we often ask founders that are you going to have to “create” the market in terms of educating the customers or consumers or even businesses because it’s a very expensive proposition. Whereas if the consumer is already aware, then you just need to come up with a better mousetrap, and they’re willing to consume. So let me double click on two things here. One is the so called ad supported model, or the advertising kind of inspired model, if I may, and the other is, getting to your first few hundred thousand customers, or even a million customers. So what was that just SEO? Or were there other things that you were doing to get people to come to this? Or was it just people who were not willing to pay these $20 a month, kind of things that were automatically discovering Credit Karma and coming?

Ryan Graciano 7:24

We were basically drafting off of the Bureau’s success in those early days. So when consumers broke that $20 a month relationship, they would look for ways to get their credit score, in a cheaper free fashion. And we would be there on the blogs, on the forums, everywhere, we could essentially get our message out on the cheap, because we really couldn’t raise money. I mean, back in 2007, it looks, everything looks rosy. Our beta came out in 2008, we achieved pretty quick success, I think we had 30,000 members in our first two or three months. And the world kind of blew up. I mean, we had a model where we were advertising loans. And there’s a public conversation about bailing out the banks.

And imagine pitching a VC in 2008, we make money on bank revenue, essentially and that they just saw what happened to Bear Stearns, it's a tough sell, we went to 40 something different VCs, and got no's from every single one of them. So we just didn’t have the money to advertise in any kind of traditional way. And we had to be really lean about how we did everything.

Amit Somani 8:50

And I’m sure that served you well, all through even when you did get funding and all that, because your channels of acquisition, I’m assuming are very organic, and not really paid marketing.

Ryan Graciano 9:02

It did serve as well, it built a discipline for how we run the company, which I think is a little undervalued, but it really created in us that value, that feeling for the value of the dollar, and each dollar is necessary for your survival. And that DNA, I think persisted to this day. So that was key and then learning to market on the cheap, effectively find channels, where you can build interesting viral mechanisms in your product, what can you do to create person to person recommendations and person to person interactions? And are there communities you can create? We were really active on Slickdeals and Reddit, in the early days, because we were trying to generate some excitement around our product. And what we would do is we were trying to get people in the forum to become champions for us, not paid of course, that kind of thing we wouldn’t do but just creating some excitement amongst the experts in the community so that you can end up in their FAQ or whatever. Really, those kinds of things really helped us.

Amit Somani 10:13

Understood, let me take a tangential kind of route here a little bit. When I think about the markets, emerging markets like India, where the consumers are not quite fully aware everybody has a credit score, it’s called CIBIL score, etc. But they’re not really clamouring for this. There is no concept of reports. Of course, all the bureau companies in the US are also in India, and there are some local ones as well. How do you think one should think about that? Even if you’re an entrepreneur or a VC in the Indian context.

Ryan Graciano 10:45

It’s a really interesting problem, because we came into this, of course, with the Bureau’s having created awareness. And we’ve had discussions around other metrics in America. And how would we create some awareness that these other metrics are important, because there’s a number of things that are really key to consumer financial progress, that people don’t really, totally understand how they work and what the merits are. And the conclusion we’ve really come to is that it’s generally not worth trying to go after building broad based awareness for something because the cost it takes to do that requires such a large war chest, but if you can attach your message to something that is already organically out there, that can be a very successful way to proceed.

And so for something like credit score, if there’s a conversation about homeownership, and I don’t know the market in India in this respect, but if there’s any kind of revolution that would be connected to credit in any way, I would be trying to use that, because then you can piggyback off of all the media that’s already organically out there, and try to make sure that people are connecting your product with the thing that’s happening. That’s just generally a lot easier than trying to convince somebody that this thing is important.

Amit Somani 12:15

So that makes a lot of sense. And obviously, for a consumer like your example, things like loans, homeownership, automobile, two wheeler, vehicle ownership, etc. These are places where credit gets invoked, and everybody will run their own models. In some cases, they may use a credit score, like a CIBIL or they might have something else. There’s another interesting problem Ryan, for India and we will come back to the US in just a second here, which is that we have this problem called the thin file problem.

So there are so many, new to credit customers, who’ve never even been a part of the formal financial economy. And those are some of the companies we look for funding here at prime ventures. But what do you think about that? When you have a thin file, I don’t even know if that necessarily was the case in the US because it has been a very credit driven society for many, many decades. But this notion of thin file, where you don’t have a lot to go with.

Ryan Graciano 13:09

Yeah we have thin files, of course, but not nearly the volume that you’re talking about, or that scale of that problem. And I know that there are many people have considered alternative mechanisms, alternative data, I’m sure it’s something that the audience has thought about, and probably read about income is one of the best if you can get connected income data, so connection to payroll or proof of steady income, then you can really get a lot more confidence in consumer credit, because that’s actually just one of the most common issues, the ability to pay may be there, but may not be consistently there.

And so if there’s some way to do that, and some services have come out that do things like income smoothing, or kind of predict like, based on your last 90 days of income history, what will the next 30 look like? Those types of things can be really helpful, if you can’t quite get access to the willingness to pay data, which is typically the credit data.

Amit Somani 14:13

Great. So coming back to the US, at Google, we used to talk about something called the life of an internet user, which is to say that, look, people come on the internet, initially for communication or back in the day, social networking or news or entertainment. And then from there they graduate. And of course, now there’s the whole world from Instagram to Snapchat to all kinds of various things, sports, eSports, what have you. Do you think about something? I mean, Credit Karma is probably arguably one of the oldest FinTech, modern kind of FinTech, financial services companies. Is there a life of a FinTech user on the internet? So if you were to model saying typically a new, already existing on the internet kind of user comes on but starts playing with FinTech products like credit scores like Credit Karma like getting their first credit card? Can you think about the stages of the evolution of a US consumer from a FinTech perspective?

Ryan Graciano 15:09

That’s interesting. Yeah, I do think that there is something there. I mean, how people typically start is with offline products. So they might go to college and get connected to their first bank, and they go to the actual bank branch. And what’s happening, I think, in this newer generation, in Gen Z, is that people are starting more and more with online banks. And so that’s really changing the way that the evolution is typically gone because typically, it’s gone like you have your offline bank. And then you start to get connected to some digital products, like maybe you lose these the online bank service, and then you start to realise that there are other online loan products that you can access or services like ours, and there are personal finance management products depending on how deep you want to go.

And so you kind of discover all these tools, and go down this rabbit hole, starting offline.

And I think what’s happening now, actually, is you’re gonna see more and more digital banks, and the digital banks are gonna incorporate a lot of those tools. And all of these features are going to be baked into one product. And so that’s going to change things quite a bit. Whereas I think that a lot of the previous kind of internet, lifecycle or how that worked was you jump from product to product, I’m wondering how much consolidation there will be in fintech?

Amit Somani 16:38

Absolutely, again it comes back to the cost of acquisition and it’s probably also a very sticky customer. Once you get them on their property, the lifetime value might be quite significant for them to stay on.

Ryan Graciano 16:50

Exactly, that’s exactly right. And acquiring someone for any financial product is fantastically expensive. I mean, if you’re trying to sell somebody insurance or get that, give them a checking account, or whatever it is, you can pretty much be assured that that’s going to be one of the most expensive internet terms to bid on. And so if you’re already an established FinTech brand, it really makes sense to try to go adjacent and say, Okay, well is there opportunity for us to try to pick up some traffic and insurance or mortgages or whatever.

And for us what we’ve done is, we’ve tried to say, Okay, well, we know that as a single bank, we’re not going to be able to give everyone the best price. So what we’re going to do is actually try to be a place that aggregates all banks, and gives you the best price by connecting the consumer to the best thing. And so our model is to go adjacent, but not provide the product to actually connect people to the best product and provide a lot of the services on our platform. And that also makes the actual implementation a bit easier. Because we don’t necessarily have to build every single thing, we can rely on some of these external third parties to stand up those businesses.

Amit Somani 18:13

Absolutely. Fair enough. Ryan, how about the other side of the house? So one of course, the credit side, and insurance and mortgage and loans, and loan origination and so forth, has things happened on the investment side of the house where people want to start investing earlier. Just curious about that.

Ryan Graciano 18:41

I’m sure folks online will know of Robinhood, and what they’ve done for stock trading and stock investing. So that’s definitely happening. And if you’re active in any of the personal finance communities, I know that they’re, what they push are the standard, kind of ETF type things like Vanguard, and so on. And then there’s this whole sector of groups online that are very focused on cryptocurrency, alternative currencies, etc. And I think what’s interesting now is that products are starting to bring these things together. And just saying, okay there are these waves of internet consumers that are very interested, and their communities are pushing each of these different kinds of concepts and ways of investing.

And so we’re gonna build products that resonate directly with those groups. And then what happens is they get this really great viral traction through those communities, because those communities that are pushing these ways of managing your money in the modern age are saying, and here’s the app that does it all. And so I think that’s a really interesting kind of way to do it and pairing. It’s very different from the traditional model where you have your financial advisor, and your advisor says, do these three things or these five things, and you talk to them every now and then. Now, it’s much more like, the consumer is connected to this community. And the community is saying, here are the right things to do. And these are the apps to do them on. And they’re just kind of creating a direct path from one to the other. And that’s just a very different way of operating, kind of pre social media, a lot of this is happening because of the way that social media works.

Amit Somani 20:36

Actually I would go a step further and say, just like Credit Karma enabled people to take charge of the credit scores and understand it and see the options, and so on and so forth. People should figure out how to improve their financial literacy, working through a platform, whether it’s on mobile, or social, or on the web, or what have you. And sort of go up that journey. Because Robinhood is the end game. You go and buy ETFs, or stocks or S&P 500, what have you. But you really want to say, hey, look, start saving something, start investing, start drip investing, etc. And you want to see that kind of journey, as opposed to once you’re already on the credit side. But anyway, maybe a conversation for another day?

Ryan Graciano 21:18

No, no, I like that. I like that note, actually now you’re hitting, you’re touching on where I actually think that the market is going. So whereas pre 2015 or so, it was really like, Hey, you use these individual tools and these individual tools, you have to really understand how to use them and to what end are you using them? So in my long term and my short term, what am I trying to accomplish? I think as these things start to consolidate, the products will blend more. And you might see things like, hey, I just need this amount of money in this timeframe, or I need the most amount of money I can get in this timeframe. And the product will automatically be thinking like, Okay, this needs to go into a long term savings account, this needs to go into a mutual fund, this needs to go into stock, it will start to blend the offerings, and give you options based on what you’re trying to accomplish, and what the tax benefits are, and so on.

And so it’s a very different way of thinking, it’s much more like it was when you talked to your financial advisor, and you said like, Well I’m planning for my retirement fund. And this is how likely I am to need access to that money and how willing I am to weather a downturn, the products will do that for you blending all of the offerings in the same way your financial advisor would have recommended that you do, which is different than how that traditional tools operate, where there each one is just a vertical and you have to understand all the ins and outs of the vertical to really know what to do with it.

Amit Somani 22:52

Absolutely, Ryan maybe just a quick word before we get towards the kind of tail end of the show here, on the monetization journey at Credit Karma, earlier you said you started with an advertising type of model in mind, and then things evolved. So maybe talk us through a little bit about some of those decisions, what worked, what didn’t?

Ryan Graciano 23:13

Yeah, so we knew, of course, that eventually what we wanted to do is connect folks to credit cards and loans and products, that credit was directly connected to what was challenging in the early days was, when you’re that small, none of those companies want to talk to you. And we hadn’t quite figured out exactly the details of how it would all work. And our initial kind of naive idea was we’ll have banners and ads, and the banners and ads will be targeted based on your credit score, in a very simple fashion. And those companies will tell us which products basically to advertise with which credit score, which is really simple, because your credit score is a distillation of all the other information. It’s not a perfect representation.

And so what we figured out pretty quickly, is if we were to actually just use the entire credit report and all the data we had on you and are applying machine learning to understand both which products will be approved for and which products you would actually interact with and respond to that we could create a much better conversion rate and and that unlock and getting that system right, which was pretty complicated to put off to bring off the ground, created a much better customer LTV for us. And so when we were able to start cracking that customer LTV, we were able to start nudging the flywheel and put more money back into marketing and what we figured out back in 2010, or 2011 is we found channels like television to actually be LTV positive when we figured out this monetization model.

And back at the time, it was pre 2011 or so, you had to go through an agency and do your media buy and it was painful. But then Google TV came out and made it so that you could buy ads online, basically, in real time, ad space. And so what we were doing was we were in real time buying these offline ads and connecting them to your internal metrics and measuring and basically, we would run an ad and measure right away, how much engagement should we create from that ad? How much monetization? Did our LTV play out the way we thought it would?

And we’re able to get that flywheel working. And once we were able to put $1 in and get a $1, in one cent out, it was just a matter of how far can we scale this thing, and optimization from there, but it was a long road to get there. I mean, we had been around since 2007. And I don’t think we really got the flywheel going until around 2011, 2012, as we tuned that model. So you had to be really patient, as you’re hunting for that, both pushing the monetization up and pushing the cost of the acquisition down.

Amit Somani 26:25

Wonderful, very helpful. So Ryan, of course, big news that came out recently is that you guys are being acquired by Intuit, and you were on the path. And a lot of us were rooting for you guys to go IPO, potentially, and so forth, and a large successful independent company, talk to us a little bit about this decision, and how entrepreneurs think about it and how you guys thought about it.

Ryan Graciano 26:52

Yeah, we’re very well, essentially, we’ve been talking to Intuit, of course, for a long time, as we have some shared mutual vision of where the market should go, and how we think that finance could operate for consumers, we think that the financial experience for people could be much more transparent, and aligned with consumer interests and Intuit has been building towards this with their platform for many years. And when we spoke with them, what we discovered was, one, that we have this kind of shared vision, and two, there’s a lot of capabilities that our companies have built on their own, which are useful, but together could be much more powerful.

Intuit, actually does a lot of payroll, people forget, because I think TurboTax is probably the most popular consumer brand, but they built a pretty sophisticated financial platform, behind the scenes that can do things like money movement, and predict fraud risk, and provide for real time lending and some really interesting things that really jive with what our business is trying to do. And when we started to look at how much further we would catapult our end goal by connecting with Intuit, it started to look really good. And once our respective teams met we discovered actually, our cultures are a lot more similar than they are different.

And it seems like it we really could make this a better company combined than we are separate, things just started to start to roll from there. And that was, most of the motivation was, we think we’ve created a big consumer brand, that’s really changing FinTech and we want to make sure that whatever we take that next step on would be as beneficial to that vision as possible. And that in the tricky part of IPOing is, it’s just, it’s very distracting to IPO, it changes the way that your company operates and changes the focus of the company a lot. And we thought that with the Intuit acquisition and the synergies that we could get from that, on the platform and consumer side that actually would maybe do the reverse a little bit, keep us a little bit more focused on what we’re trying to do for customers.

Amit Somani 29:16

So one of the questions, we talk about entrepreneurs and other companies we invest in and you may or may not be able to answer this is that, these things don’t happen accidentally, like you said, you were working with Intuit and you had a shared vision and perhaps even a partnership prior to this. How do you cultivate these things? And I’m sure this was not the first acquisition offer that you guys got and there must have been other suitors and we don’t have to name them. But just thinking more for the entrepreneurs on the podcast here. How do you cultivate some of these relationships and so forth? Because obviously as an entrepreneur, your dream is to build a large independent company, but at the same time acquisitions don’t just happen accidentally.

Ryan Graciano 29:56

They don’t happen accidentally. That’s true. Especially ones as large as ours, I think that a lot of it is building connections, and just having conversations, so it wasn’t like we were out, we were definitely not out like shopping a company or looking for buyers or anything like that that’s not not at all how it went down. Sometimes companies do get acquired that way, and they basically put themselves for sale, and there’s a banker and the bankers out there, and they’re getting the competitive bids. And you’re talking to Goldman or whoever. And that is a very common scenario.

But in our case and probably in a lot of companies like ours, it was much more like we had just been talking to leaders of other companies that we’re aligned with and networking, connecting, and board members, and folks would reach out and Ken our CEO had, for many years been talking to I think, Scott Cook and some folks in Intuit, about where we were going and where they were going. And it kind of just evolves, you keep in touch, and you keep talking and when it starts to feel like, maybe there’s something here, the conversation starts to get increasingly serious. And so that was about how we had managed, it was not very directed like, Hey, we have to do this and we’re gonna find the right person type of thing. It was much more like it just happened to work out. It’s meeting someone in a coffee shop versus using Tinder.

Amit Somani 31:36

Fascinating. No, I completely agree with you, the best companies are bought, not sold. And I do agree with your point that you got to build these relationships, and people have to know you much sooner than you kind of get to this point and this is a common theme that one hears across a lot of other companies also. So wonderful Ryan, it’s been great. Maybe just as a quick wrap up congratulations on all the success, right from, as I always like to say, 10 years to overnight success, or in your case, 13 years to overnight success. Maybe just a quick parting thought on what’s next at Credit Karma? What are some of the things you guys are thinking about?

Ryan Graciano 32:14

It’s pretty exciting right here. What we’re doing right now is we’re actually moving out of the debt side, not out, but we’re adding the asset side of the balance sheet. So what we’re doing is we’re launching, we’ve a checking product on top of the success of our recent savings product. And the idea is that yeah, if we’re going to become a place that can become your financial hub, if we’re able to create more opportunities to automate money movements, across your different financial services, we can create a much more compelling and interesting consumer experience. So we recently announced our private beta for our checking product and the public launch will be right around the corner.

Amit Somani 32:59

Wonderful, Ryan, congrats again, and thank you for being on the prime Venture Partners podcast.

Ryan Graciano 33:06

Thanks for having me. This was a lot of fun.

 

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