Bill Cilluffo:

You're listening to the FinTech Thought Leaders podcast from QED Investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. QED is a global venture capital firm focused on investing in FinTech companies all the way from pre-seed to IPO. FinTech Thought Leaders brings together the most talented entrepreneurs tackling today's biggest problems. If you're looking to learn more about what motivates our founders and team members to succeed, you're in the right place.

Hello and welcome to the FinTech Thought Leaders podcast. I'm Bill Cilluffo, the head of early stage investments at QED Investors. Today on the podcast, I'm excited to be joined by Collective CEO, Hooman Radfar. Hooman, welcome to the podcast.

Hooman Radfar:

Hey, good to see you, Bill.

Bill Cilluffo:

Hey, I'm really excited about the episode that we have lined up today, but before we really kick off, I wonder if you could do a little bit of a commercial for the listeners and share a little bit about what Collective is and what you guys are all about.

Hooman Radfar:

Sure. So Collective is designed for what we call businesses of one. So think freelancers, consultants, professionals. All of us have friends that are those types of folks, whether they're freelance web designers or even realtors. And what we do for those folks is we built the first online back office for them. It handles all of the things that they spend too much time on, formation, accounting and tax. And basically with our all-in-one solution, it's an easy subscription, you don't have to worry about all these transaction fees you usually pay, it's a one-stop shop and we'll save you about $10,000 on average on your taxes.

Bill Cilluffo:

You're saying that the designer doesn't really want to spend their time on company formation?

Hooman Radfar:

So far, no. My co-founder is a designer by trade, so that was not what he wanted to spend time doing.

Bill Cilluffo:

No, that's great. I know you have a bunch of things in store for where that may go next. We'll certainly dive into that as we get going. But look, I'd love to rewind all the way back to the beginning. You were born to Persian parents in London, but didn't stay in London very long. Moved when you were very young. Wondered if you can give us the quick synopsis of your early years.

Hooman Radfar:

As you mentioned, my parents immigrated, so there was a revolution for those of you all that don't know, '79 to '80. I asked my dad, "Did you know it was happening?" And he says, "You don't really know. It was like a revolution until after the fact," or at least that's what I got out of it. I was born in London on the way over, so I'm actually British, believe it or not. I'm often fond of saying you don't hear a cool accent because I was raised in Pennsylvania, so I have the Pittsburgh accent for better or for worse.

Bill Cilluffo:

Wow. So that means your mom was highly pregnant when they had to flee the country. That had to be incredibly traumatic.

Hooman Radfar:

Yeah, it was tough. I think if you've ever seen the movie Argo, there's a scene where they're rushing on the US Embassy, is a very famous scene, that was I think about a week before they left, roughly a week or two before they left. So it was a pretty intense time to be living there.

Bill Cilluffo:

Holy cow. I'm sure they have plenty of stories that I'm guessing they don't probably love telling too many of them, but I'm glad they were able to get you out and having your dual passport has to come in handy from time to time. So look, just sticking with your mom who obviously went through a crazy situation, we understand she basically worked seven days a week her entire life, played a huge role in your upbringing and I know that you've described her as a huge influence in terms of your work ethic and what you learned from that. I wonder if you can talk a little bit about your mom and how you got inspired by her.

Hooman Radfar:

So both of my parents ran their own offices and I think they both contributed to different things. My dad is a more steady mechanical guy, I often think that in some version of the multiverse he was an engineer because that's the way he thinks. Both of them are psychiatrists. So let the jokes start now. But my mom, she's kind of a firebrand. She's always had this iron will, she works really hard. So when my parents got divorced, she turned it up quite a bit and that's when that I would say seven-day approach occurred. But she really loved what she did. I don't think she viewed her work as work. In fact, I think being retired is probably one of the toughest things that she's ever gone through, to be honest with you. I learned a lot actually from that as well. That work is critical, but it's really important to have some other things in your life because the balance of things that you go after changes.

It's funny, because I never thought of my parents as founders, but people often ask me, "How did you get into starting a company?" And I realized, I think I got used to the fact that my parents called the shots for themselves and I didn't really give credit to that until I realized that was intrinsic to my DNA at a certain point. And it's funny that now again with Collective, both of my parents actually solopreneurs, both of my parents could have used this product. In fact, my dad is still practicing and he like jokes around with me. He's like, "Should I sign up?" My brother signed up. I'm actually a member as well. So it's really come 360 back to my parents.

Bill Cilluffo:

That's cool. We're going to get into the founding story in more depth of Collective, but did that play any sort of role in the thought process or was that a happy accident that you realized later?

Hooman Radfar:

At least for me. I know some people have these really interesting sharp moments or at least the ones that they tell in hindsight about why they founded something. For me, I think this has just been a culmination of so many factors. It feels so natural to me. But when I was considering starting the company, co-founding the company with my friends and going full time, frankly leaving venture, which as you know is a very different workday, very different process, they were definitely in my mind. And so was my whole family.

I started realizing, there was this awakening that when I was at Expa and I was helping founders leading investments there, I loved it. I'm sure you guys feel the same way. I talked to Frank and Nigel and the whole crew. That inspires you guys and me as well. But I missed having a platform. I missed the level of scale. Could I help a million founders? Talking to people, I started realizing, the people that I wanted to serve were all around me really. In my parents, my cousins and all of those other folks who don't get the same assistance that venture-backed founders do.

Bill Cilluffo:

Yeah, no, that makes a lot of sense. Now, you've described yourself growing up as a good kid with bad grades. I can certainly relate to being a relatively lazy one until later in life, learning the work ethic. But it sounds like you were inspired by your mom. Maybe it took a little while to get that. Do you recall when work ethic started to kick in for you or again, more of a gradual type thing?

Hooman Radfar:

There were moments. I would say this because I think my parents would kill me. I think I had good grades, but not good enough for my parents. I was not valedictorian. I had two B's in high school. But honestly, all joking aside, I think for me in particular, after my parents got divorced and you're going through the teenage stuff, I was trying to play it to the edge. It's like, "How many classes can I miss? How close can I get to 90% so I can get the A?" And I was trying to almost master the art of doing just the bare minimum. And I was getting rewarded for it in some sense because I was doing it, it was working.

And I think for me, the turning point was right when I graduated from high school, I didn't really put in a lot of effort into applying to college. I never actually sat down and said... Go through that whole process. "What do I want to do and what college can take me there?" Some of my friends were more advanced than that. Some of them were not. Let's be real. What kid really knows what they want to do? I think it's almost unrealistic. But I'll put myself, if there's a spectrum, like a hundred being like "I know I'm going to be a doctor since I was a kid" and I don't know, I was way on the I-don't-know side, but that was self-imposed and I realized that I didn't end up being where I wanted to be, knowing what I wanted to do. And it was really scary.

So that was like the turning point for me. I actually, believe it or not, I ended up... My first year was in medical, I was pre-med, just because I was following the playbook. My parents were doctors. I was good at math and science and I hadn't had a lot of exposure to anything else frankly because my parents are immigrants. So it's either the best thing to do is be a profession like a doctor or lawyer, engineer. But, my family, being a doctor was it. And I was miserable. I love the classes, I really enjoyed the coursework, but I knew what that life was like. I grew up in hospitals and I'm just like, "Oh my God, every day's going to be the same." But I didn't put the thought into seeing what I was going to do otherwise.

And so that was a turning point for me where I realized if I don't put the effort into my own life, if I don't invest. I'm going to get what I pay for basically.

Bill Cilluffo:

Yeah, I can relate to that story. I'm sitting here wearing a Michigan shirt and went to Michigan because my dad went to Michigan and I was a huge Michigan football fan and went to Michigan to root for the football team and didn't figure out until probably honestly in the process of graduating and finding a job what I wanted to do. So it's funny how some people have a plan from very early on and some have to weave their way through it. But now from pre-med, if I'm not mistaken, you got attracted to coding and computers. I don't know if you were a major in computer science or it was more just a hobby, but what about it attracted you to that particular field? And at the time it certainly wasn't considered a very sexy, fun career path. I think the reputation of coding and computer science is much different today than it was then. What drew you to that?

Hooman Radfar:

Yeah, so I'd been actually coding since I was like 12. My younger brother, Cyrus, who worked with me AddThis, who I think Nigel knows as well, he was coding since he was like six, seven. And so for us, it's just been something that we picked up. It was something that we were messing around with. I like to joke around and say everything that I did was super uncool at the time that I did it, but now it's pretty mainstream. So it was coding, Dungeons Dragons and comic books, believe it or not. Frank Rotman is also a comic book collector. Sorry Frank, for calling you out there. So I don't feel alone there. So the things that I like to do on my own, I've been drawing since I was younger. I never knew how to translate it. It wasn't something that could be like a profession. Being an artist to me, just based on the feedback from my parents and unintentional as it was, was like "Not, don't do that." Doing computers, it's like, oh, something you learn just for fun.

And the first step was my dad and I spoke and he said something to me. He said, "If you don't know what you want, just walk towards the things that you like and walk away from things that you don't like and try to recalibrate dynamically, so to speak, as you're going along." And so when I was thinking about what I would do, I was like, "I really enjoy computers." And what it was that attracted me to them, and this might sound hokey, is it was the closest thing to magic you could imagine. You're a little kid and you have this machine and you could sit down and make it do whatever you want.

The first program I wrote, dorky as it was, was we would play Dungeons and Dragons, we used to write down with pen and paper the characters, roll dice. It would take us an hour or two, people want to get into fist fights over, "Did you roll the dice right?" And I just wrote a program in BASIC that connected to the printer, which had to figure out what printer driver was and all that. And my dot matrix printer with that, remember those little holes in the side or whatever?

Bill Cilluffo:

Definitely.

Hooman Radfar:

And I could print it out and so I could get it done in just a few minutes. And I just felt amazing. So I thought, "Wow, there's a lot here." And then obviously as I got older, you started to see with the internet. And the internet was what caught fire for me. I was just like, "Oh my God," it just made total sense to me.

Bill Cilluffo:

So I'm a little older than you, but my version of that same story was a couple buddies in high school. We wanted to do fantasy basketball league and it's just complicated to do. But we were taking a FORTRAN programming class. My buddy wrote up some way too long program and I used to go to his house every afternoon on Tuesday when the USA Today would publish the basketball stats and we would do data entry in so his program could run it. And there was this big eureka moment at the end. I never actually went into programming because I was terrible at the couple attempts I had at it. But I can relate to the magic in finding some attachment to something that you really feel passionate about. It was a great way to get folks started. That's really neat.

So let me ask about this drawing for a minute. Computer programming and drawing, there's probably some commonality in terms of the magic that you articulated, but that's also not a very common connection. What drew you to art and did you think about going down the art path for a while?

Hooman Radfar:

I think everyone in high school thought I was going to be an artist. Everyone was shocked when I ended up being an engineer, no one even knew I coded. So it wasn't something you go around advertising in Western Pennsylvania, it's just not the cool thing to do. I wasn't embarrassed about it, I just didn't see any reason to let anyone into that world. Because there's no one I could really even talk to about it. My friends weren't into that. It was a very small community that was into it. And so my mom saw that I was drawing a lot and she got me an art teacher from like, I think I was in fourth grade, and I actually ended up getting an offer to draw from Marvel at the end of high school. I was even thinking applying to RISD or something like that.

So you asked what the commonality is to it. I think in hindsight when I look at all the things that I'm attracted to, they have one common theme, which is like you take an idea in your head and you output some creative results. So in art's case, I can have a picture and there's something there. I actually played guitar since I was like 15, 16 years old. So now I'm pretty old. So what is that? 27 years, almost 30 years. That has an output and then programming has an output. And actually I look at business as the same thing. They're just different mediums. The cool thing about building a business though is so if you write a program, this is changing, but it's kind of done. You've created a product, you shipped it, it's over. When you create a business and you ship that, it's like a living, breathing organism.

So that active creativity, if you're successful. Look at Apple, it's not like they're the Macintosh company, they're not the iPod company. They redefine themselves. But that artifact that Steve Jobs left behind is still having impact. It's like a product that creates products. And so I find that to be pretty fascinating and one of those ultimate forms of creativity. It's painful, but it's really fun.

Bill Cilluffo:

One of the common sort of mashups between art and computer science would be the world of design. Do you find yourself getting very involved in design activities in the companies that you've started?

Hooman Radfar:

I did more in my first company, maybe to the detriment of my team. I was fairly obsessed with it. I've learned over the years, and sometimes I make a mistake both ways to, you have to play at the right level abstraction. Because really talented people, if you're over their shoulder, you inhibit their creativity and you turn them into doers. And so at best, the company is limited by your own creativity. So if you can enhance that through collaboration, then you can unleash them. And so I'm trying to be more involved. This company is very different, the product is much larger, it's FinTech, it's involved, there's regulatory implications, all kinds of privacy implications. So I try to be involved at the right level. But I love it. I love the design part of it and I'd like to be more and more involved, to the level that my team will not rebel.

Bill Cilluffo:

That makes a lot of sense. Look, now you've referenced here AddThis. Let me jump to the professional career a bit. We've had the good fortune at QED to have worked with you now either formally or informally for, I don't know, a couple decades at this point, over many paths. So I'd love to hear a little bit about AddThis. What got you to start that? How did that journey go? I know you had a really nice first exit at the end of that process. Love to just hear a brief synopsis of that journey.

Hooman Radfar:

AddThis was, now that I know and I've invested a few things, it was a very classic at a school story. So I was at Carnegie Mellon, I was finishing my masters, I was in the engineering department. And my office mate and I both were fairly excited about the internet. But as you may recall, in 2002, it was not a great time to want to be an entrepreneur building a web company. You had the dotcom fallout. I think people, there was a certain population that was like, "See, this was fake." I remember articles saying the internet was like, "This was a fad." Really that's that crazy. And so we were both... I think because we're coding, because we're in it, we're at a top tier research institution, we saw it was coming back and we wanted to be part of it.

And so I think we were committed to starting something, even if there we didn't know what it was. So that was one part of it. But I think what we ended up finding was there was a good confluence between our two research areas from an academic perspective. So he was looking at how you could use web services. So think of it like the web was just a magazine. You remember this. It was just everyone published a reading thing and it was an application platform. You weren't really going and doing things and accomplishing tasks on the web. Moreover, developers couldn't really build anything. There were no APIs. So he was researching how the web was going to become more of a platform and all the implications around that. Some of his research actually applies a lot to what's happening with AI and these now software agents.

My research was about how you can leverage, this is really esoteric, but graph theory. So there's this idea of graphs, nodes, and edges to represent human relationships in software. And when I looked at that, I was like, "Wow, this is going to be big." And this was at the time when the beginning of social networking, almost like the Precambrian days. You had ... coming out in tribe and things that were like the precursors to what you now know of the giants. And so we thought, "Wow, this could be a real good starting point." And we were playing around with different concepts and one of them ended up sticking, which was this idea of the social web was starting.

There was all these social networks coming up. You could go participate in that battle, which obviously created some very, very large players. Or if you believed that there were going to be large social networks, then you could help be an enabling platform to let other players benefit from their growth. And so that was the genesis of AddThis. We were going to be the Switzerland, if you will. And so that's what ended up getting us started. We wanted to build that enabling platform, work with website developers, build tools that made it easy for them to take advantage of it. And so we built the first embedded services platforms for marketers. So it was add some code to your site and all of a sudden low code, no code. Now that's cool and embedded. Now that's cool. You can go ahead and make your site social.

And so we started with one plugin, ended up having a couple, but that freemium platform was our growth engine, which ultimately we had 15 million customers. And I think we tracked 2 billion unique users through those customers. At a point I think we had a trillion page views per year of data that we processed. It was absurd the amount of things that we saw. And so yeah, that was the basis for AddThis.

Bill Cilluffo:

That's super cool. I mean, it's great to be at the very early stages of big, big trends and then be able to wake up later and see what happened to. It probably sounds odd to the listeners that QED was a backer of AddThis given who QED is now. But in the early days of QED, we were half FinTech, half ad tech building off some of the skills that Capital One was known for.

Hooman Radfar:

Actually, it's funny you mentioned that. So the first QED CEO Summit I think was at 311 Cameron, which was the office that Nigel had originally had, and it was in the basement. I think there was I think like eight to 10 of us. And the only FinTech person I remember there, and maybe there was another one, so I apologize whoever that is, but it was Ken from Credit Karma.

Bill Cilluffo:

That's a pretty illustrious first, yeah.

Hooman Radfar:

It was all ad tech. But I think the idea that we had heard, and this was when Nigel was on boards and that's the principles that he had learned at Capital One for that, like how do you create a data-driven business? Applied. We would learn quickly. And so we were really benefiting from that. And honestly, it was part of the reason that when I started to think about Collective, it was a no-brainer because I was like, "Wait a minute. Not only do I get that type of methodology, that type of thinking." Frankly it's how I built thee business. Now I can't think another way because that was the way I did it. But plus that FinTech experience, which I didn't get to benefit from the first time.

Bill Cilluffo:

So that room must have been fascinating. You got six ad tech CEOs, you got Ken Lin from Credit Karma and then Ben Sabloff doing propane delivery-

Hooman Radfar:

Oh, that's right. That's right. That's right. Propane Taxi, that's right.

Bill Cilluffo:

Back in the very early days of QED. So it's funny how things evolve.

Now, you had the chance to exit AddThis, and then went to the second phase of your career with Expa, kind of a serial venture builder, venture capital firm. What made you decide to go down that route versus jumping directly into your next startup? Obviously you eventually decided to go back, but interested to hear how you went about that journey.

Hooman Radfar:

One of the things that I think is tough when you're a first-time entrepreneur, but also it's your first job, there's a class of folks that that happens. So the out-of-school entrepreneur is what do you do after that? I mean, your first gig is being a CEO. It's a little bit odd. Your options are limited in a sense. It's not like Google's going to go hire you to be the CEO. Unless you have a crazy exit or something like that. I was seeking. And actually I remember I sat down with Nigel and he was like, "Don't do anything for like a year." Which was absurd to me. I had been going hard for years. And Caribou who'd also been working with us had told me the same thing.

And so I took some time off and once I'd loosened up, I realized I needed to have something like a dramatic change. I wanted to build like a different skillset set, but I didn't know exactly what to do. So I opened up my aperture actually. So Ron Conway, who was also one of our investors and some others, introduced me to a bunch of folks. So I actually looked at three or four different types of paths. The main ones were venture, so traditional. So I talked to the classics, Andreessen, NGCs and whatnot, because they were all building out at that time. I talked to the Squares, the Airbnbs, Pinterest because they were ramping, and they actually were fairly excited about getting folks that had been founders to be significant executives at those companies.

And then I also thought about starting a company and I explored some concepts. I didn't have an idea that I was passionate about. And I think the thing that I had promised myself after the first one was that when you read in school about business cycles, it's one thing. When you have to experience it. In 2008, I had to do layoffs and crazy stuff. I felt so terribly for everyone who has to go through that now. I think people don't understand the emotional just strain that a CEO who cares goes through. And of course everyone doesn't like it. It's a no-win situation. And so I thought, "Listen, if I'm going to do this again. I have to have a mission that can hold me through that, that I have to really care about."

And so my friend Garrett Camp had started StumbleUpon and I kept in touch. One of the assets that I built through the first companies, we integrated with 300 social networks. And it turns out a lot of those people had done quite well or become quite influential who had started those networks. And Garrett had started Uber and he wanted to build a company to build more Ubers, which at that point in history was not this absurd idea. It was much smaller at that point. I thought, "I'll hang out here for a while." We were talking, he's like, "Oh, maybe you can help me out. Maybe I'll invest in something." And it was very like a non offer. It wasn't a role. He's like, "Come hang out. You can do whatever you want."

And so I sat there for a while and the next thing you know I was sucked in and I would... I'm still affiliated with the firm as a venture partners I've been working with them for nearly 10 years. So that was how I got into it. But why I stayed was I loved helping founders, I liked learning from them. And selfishly it was interesting to see how they went about building their businesses. I learned a lot from them.

Bill Cilluffo:

So Nigel gave me the same advice on, "Yeah, don't do anything, don't work." And then six months later, I'm sitting there at QED. Funny how poor I was at listening, but certainly wouldn't take that back. I do think, by the way, it's quite good generic advice to take some time away and really decompress.

How did you find the transition back? Just my own personal example, 20 years at Capital One. So I was never a founder, but certainly an operator. Came to QED thinking, "Hey, I'll learn a lot. It'll be a lot of fun. Maybe I'll want to go back and be an operator. Maybe I'll want to go start something. I don't know." Now that I've been here, I've been eight and a half years. But even a couple years in, it was clear to me it's just a very different pace, different lifestyle, different strengths, different weaknesses. But it'd be really hard for me to go back at this point. You've obviously toyed around with staying. You ultimately chose to go back. What was it for you that independent of the specifics of Collective, or maybe that was the reason, but what made you decide to go back to the entrepreneur life?

Hooman Radfar:

I think the mission was compelling. I felt like there was more to learn. So one of the things that I realized, I enjoy tremendously helping folks, but there was an amount that I had learned in my operating career. And I think it was a good amount for where I was in my life, but it wasn't complete. I hadn't taken the company public, I hadn't done a lot of things. I hadn't scaled past a certain point and I'd only had frankly, one experience. And so there was a lot of learning that I felt that I'd left on the table. I personally wanted to learn it, but I also felt like if I learned that I could be a better partner to founders down the road. So it was this nice double win. And so it was like an itch. That's the best way I can describe it. It was bothering me. It got worse and worse and worse.

And then there was again, this perfect storm where I really, really started realizing that that was missing for me. I still felt like I had something left to play and then started thinking about this concept. And then I met my co-founder and it catalyzed the whole process and there we are. And being at Expa, what's great about Expa is it's a group of folks that when we started, everyone was a founder. A lot of us were immigrants, Garrett's an immigrant. And so the idea of going and operating a company, it's a very fluid construct, which I think QED is in part adopted cause you guys do the de novo companies now as well. But for us it was like, it wasn't even a controversial discussion that I would do that, it was just, "Okay, cool. How do we make this happen? How much we put into the company? How do we make sure that..." We just figured out logistics? It was so easy. So it was really a blessing to be there.

Bill Cilluffo:

Let's jump into Collective, great context from the background. How did Collective come to be formed? And I guess what was the original kernel of the idea? Almost no business three years in exactly matches what the original idea was. Even though there's probably some commonality. I'd love to hear the journey from initial inception to how you're thinking about it now.

Hooman Radfar:

So my co-founders and I had some slightly different points of view with respect to the starting point, but that's very common. But the endpoint was the same. So I'll give you an analogy that may date me and also make me seem even dorkier than I've already purported to be. When I was setting up my company, you had to set up data centers. So you had to go and figure out, "I'm going to work with what data centers, where am I going to lease my machines from?" Cost. It was just a really tough exercise. "What's the operating system? What security?" You had to have DevOps. DevOps was probably the worst job in the world. Because machines are crashing. I think we still had 2000 machines in two data centers. And that skillset, while important and interesting at that time, I would say for 95% of application developers is now not relevant because you have AWS, you have Azure, you have Google Cloud.

So when you start your business, you probably pick one of those unless you're in an AI-intensive application, high input output application where you want to control the chipset, and you want to control input output, which is again, you're talking about a few companies. Maybe OpenAI and Stable Diffusion. Any companies that we would work with, they would use that. So why is that possible? Because Amazon said, "I'm going to abstract away the operational complexity. I'm going to turn something that you have to have this up upfront, huge investment into a variable cost investment. I'm going to take the risk and I'm going to simplify it to you."

I thought to myself, "Why can't we do something similar for all these really small businesses?" So many of these services that they need to run the business are operationally complex and they're necessary, but they're not sufficient. Like my mom, does she really care about her books? Is that going to make her business 10X if she does that right is or taxes 10X, insurance, there's this whole stack of paperwork. And I thought "This is going to be gone. I can't see a future that in 10 years people care about this stuff with everything moving into the cloud and everything moving into APIs.

To me there was this future where there's an all-in-one platform, they can point and click their way through it and they could focus on what they're good at. So if my mom is a psychiatrist, great. If you're a developer, great. And then there's someone else who takes... Just like Amazon abstract the way. And I thought also like this business is a big business. And when I started digging into it, I realized how large it was. And it was also again, underneath me. I'd invest in Uber, I'd invest in a lot of companies that had benefited from ... Convoy. The majority of these truckers are solopreneurs. It's a huge business, $800 billion TAM in the US. And so 36% of people were self-employed. So I was like, "Whoa." Then I started looking at the time they spent on the stuff that was this financed and operations, one out of four hours.

Bill Cilluffo:

That's a pretty stunning statistic there. The thing that has nothing to do with why they got into that business, it's that high a percent.

Hooman Radfar:

And that's an average. So averages are dangerous obviously, but it's still too much. If it was even a 10th, it's too much. The yields you're getting on an ROI basis, it doesn't make sense. And I thought, "Wow, wait a minute, this is crazy. So if I can take this away in a cost-effective way and enable them to do that, that's a great world to live in. And it's a massive hill." And so you could build a $10, 20 billion company, and Intuit, Square, all these other folks were just not looking at it. So that's what got me excited, was big hill. No one wants to touch it. Everyone's afraid of it. And it can go into why it's reasonable. I understand now why they didn't go after it. We believe you have to have very specific strategy on how you can do it easily. They're not that many paths to take the hill. Yeah, that's what got us excited. And then we started talking to founders and they were in pain and we just started building.

Bill Cilluffo:

Cool. Now building on what you just said, sounds like there's been some challenging parts of that journey, just reading between the lines on what you said. What have you found to be much harder than what you thought it would be? And is there anything that you found, hey, this really worked exactly the way we thought it would work, or easier? Talk about how you found the journey relative to where you were at the start.

Hooman Radfar:

We had this vision, again, there was one place you go and you have all of these different services all online. That's huge. That's going to take forever. So the question is where do you start? I credit my co-founder for at least some of these insights because he did the first interviews with a lot of these freelancers. And in particular what we found was the pain point was around taxes. When you look at the segmentation, there's two insights that really drove our go-to market and our current strategy. Number one is there's this huge group of people that are doing really well. Their income level is from a hundred K to a million, roughly. They're large enough that their like revenue per hour is high so that they don't want to go do a bunch of DIY solutions. That's prohibitive to them. If you were to do that hour out of four hours in exercise, that's prohibitive.

My parents, for example, if you're a psychiatrist, you're making a couple hundred bucks per hour. So they have enough money to pay a service provider, but the software solutions were all DIY and point solutions. And so it would take domain knowledge to string them together. So they end up working with hyperlocal service providers. And so that's where we're like, "Wait a minute, that's a segment, they're willing to pay. They have great credit scores, they're not going out of business." My mom ran her business 30 years. My dad ran his business 30 years, never went out of business. There's a lot of these really good quality businesses.

And the second insight was around tax, which is they were in pain. They felt like they were getting ripped off. They're making enough money that they thought, "Wait a minute, I'm not doing this right." And so the insight we saw, which I'm sure you're familiar with is there's an S selection option when you create an entity. So if you create an LLC or C-corp, you can S select it and it gives you this tremendous ability to save money on taxes. Happy to discuss how that works, but punchline is if you're making a hundred K in income on a $250,000 revenue business, you could probably save 10 grand a year. That's real money. When you do that over 10 years, 20 years, you're talking about college funds, braces.

Bill Cilluffo:

And that's literally just a box you check on an incorporation set of paperwork?

Hooman Radfar:

Effectively, for the formation side, it's not hard. And so I thought to myself, "Why doesn't everyone do this?" Because I'd never done an S selection. I'd had LLCs for different entities that I'd had for investing purposes. And what I realized was the administrative part, it was quite hard. And I actually spoke with my parents about this, and I'll tell you about a story that fired me up and what keeps me motivated here, but the compliance path is totally different. So you have to have a business banking account because you have to have payroll. And it's really weird. I'm one person, why do I have payroll? Well, it turns out the way that you pay yourself is how you save money on taxes. So you can pay yourself as a W2 of your own company, and then you get a K-1 for what's called a distribution. That distribution, you save about 15% on what's called FICA taxes. You don't have to pay them.

So basically the game is how much can I distribute to myself as a profit sharing, maximize that without triggering an IRS audit? Because it turns out you have to pay yourself a reasonable income, which is undefined. They don't put tables out. You can't just say, "Here's what I had." You have to figure that out. And so you're playing chicken with the government. So that's where we come in where we can help you run that compliance. And so you have to do a bunch of things that you wouldn't do if you just had LLC, which is why most people say, "I'm not sure, I'm not going to do it." Unless your income's really, really high and you just are... It's so pressing. So we thought if we commoditize that, there are millions of people that have this issue, and that's a good starting point.

Bill Cilluffo:

And is that relevant to folks if they already have a company? So are you able to only help new company formations or you're able to help existing?

Hooman Radfar:

No, no, no, that's a great point. So the hurdle for us actually enable... You have to apply for Collective. So a lot of people apply and the majority of them we don't let in. A lot of them, their income is too low. So we don't think an S selection is good for them. We won't let them in. Our growth would be insane if we had a lower tier product because so many people are just below that threshold, but they want an entity, like an LLC for legal protection. They want some services like bookkeeping and tax, but not the complex version that you need for an S selected company. And so you asked was, "Hey, what's hard about this?" The hard thing is, to get the savings for an S selection, you have to have an formed entity. You have to set up the system or record, which are the books and that payroll. You have to run those properly and then you can do the taxes.

So we actually, as a company, we're almost like an ERP that we're building over time. And so we have to have these different modules. To build each of those modules has a different level of domain expertise, like a payroll person on the ops side, payroll PM, and a payroll engineer. So it's taken us a number of years to build that expertise in the workflows so that we understand how to build this seamless system. And then also from an automation perspective, our thesis is super simple. You have a transaction-based business which are like tax and accounting, typically you pay per hour and it's usually bespoke. You just have these point solutions. I'm saying, "No, I'm going to give you one subscription price. I'm going to turn it from transaction to subscription and I'm going to do it all at one place," but that means I have to learn a lot of stuff to do that for you.

And that's been really hard, but I think that's the competitive advantage because we understand all the workflows and we built a huge proprietary dataset where we can use machine learning, AI to basically take something that looked like 20% gross margin business on a transaction basis and turn into something that's like a SaaS-like Business with a subscription and that's the disruption if you look at it from an economic perspective.

Bill Cilluffo:

So when you were getting started, how did you go about attracting your first handful of customers? When you're starting with an idea that no entrepreneurs waking up thinking about should I be an S corp? So how did you get started with figuring out how to market, how to attract customers, et cetera?

Hooman Radfar:

My co-founder Ugur and I think we started with was we did a bunch of tests. I'm really fond, I tell a lot of the entrepreneurs this, you can do a lot of smoke tests and demand side tests to figure out if they're there before you build the product. So before we even built the product, what we did was we started to test value propositions in two ways. One, we did R&D, so we called about like I say on the magnitude of 150, 200 different freelancers. So we put up Craigslist type ads and just talked to them and validated what we thought were the pain points. So we had a hypothesis around the product, and we thought tax was the pain point. And so then we had to figure out what we'd build.

And then we started smoke testing messaging around that with Facebook, because the beauty of Facebook and Instagram is you can set up a landing page and run ads on the cheap. You don't have to spend a million dollars. So you could spend thousands, single digits. And so we tested that. I don't remember even how many combinations, but what we ended up finding was the hook was save X on taxes, like do you want to save X on taxes? It hit a nerve for people, because I think they felt like they were missing out and that got them on the phone. And then we could then test and say, "What if we do this for you?" And we started actually almost sell... It's like a BD, enterprise value. You just start selling it on the phone and we figured out, "We're going to need to do these things to deliver on it."

And we partnered actually with a small firm in Texas and they were our initial advisor and we actually farmed the business out to them for the initial MVP in beta. And so we wanted to see could we originate the demand, was it cost-effective? Let's run people through it so we can understand the workflow. And then the next year we built out the workflow manually and we took it over and launched Collective basically in September of 2020.

Bill Cilluffo:

Nice, nice. It's a very go-go like of a marketing message. That makes a ton of sense. What's one or two things that you guys are working to solve and crack right now? To standing between you've had some really nice success over the last couple years, there's a huge vision out there in the future. What's the couple things that you guys still have mountains to climb or things left to crack?

Hooman Radfar:

I think the biggest one, if I was to just boil it down to first principles, as I mentioned, the concept here, again from an investor perspective is take a transaction-based business that's characterized by low margins and turn into a subscription business that's characterized by higher margin. We're like right in between. We're not a service business, but we're not a SaaS business. And the diff between those two we can see it. We know what to build. And so the good news for us is a couple of different things have enabled our business to exist. Number one, the transition to embedded service providers. So actually ironically, the stuff that I did to AddThis has become like fintech's wave. Everyone's doing embedded, embedded insurance, embedded payroll, embedded whatever, and we've benefit from that. So that had to be true actually for us to succeed. And it is and it's accelerating.

The second thing is, our hypothesis was that if we pick a bounded use case, so we say businesses of one, cash-based accounting, pretty homogenous population, they're all within a pretty constrained level of income. We could automate that very, very easily with RPA, machine learning, OCR, all of those different techniques. So we actually from the get-go, assumed that we would have some level of AI and we would have to build that, but we would build the process layer, the dataset, and then we would be able to do the machine learning. We'd had some early tests indicate why that would work. Now we're building all that stuff out.

And so it's so weird though that this AI creates has come up right now and we laugh because I talked to investors, "What are you going to do about AI?" I'm like, "I am throwing a party because this stuff, we needed it. We've been using it. I've been on GPT since GPT-3." It didn't work actually for us, at all. It didn't work. So we were using Google ML. We're using a bunch of different classifiers for different... We have a couple different problems. Again, we have different workflows. But like expense categorization, bank reconciliation, document ingestion. These are some big things that we have to do a lot of. And now with the toolset, we're just building out. But we have our own proprietary dataset, tons of records on these things, and we've run books thousands and thousands of times. So we just know how to automate it.

That's the biggest opportunity and challenge because I think that's what remaining between us looking and fulfilling that thesis from an investor perspective. I think once we do that, I have so many other challenges, we could spend hours, but what that does for us is now we're at scale. We're the largest player in our space. I think we're the only one who's like about to hit scale. And so we'll see. I think hopefully that makes us very distinguished and we've accomplished most of the mission. But it's hard.

Bill Cilluffo:

It's funny how timing matters in this. So the advent of API for X winds up being a huge asset for you. The going from the rudimentary versions of AI to more advanced versions is another tailwind. So it sounds like the timing of this business, again, whether intentional or accidental is really working in your favor with the advent of all sorts of capabilities in the ecosystem.

Hooman Radfar:

It's so many things, honestly. I'm a very data-driven person. I'm an engineer of a background, but there's some level of just awe that I have spiritually when I look at it. My co-founder's name Ugur means good luck in Turkish. And we joke because every year something breaks that we need it to in a good way, breaking in our favor. For example, we started the business, we were really bare bones. I told you, the first version we were outsourcing and working with a partner just to do the beta. Then we wanted to build our own workflow, but we were cobbling together products. We had QuickBooks, Gusto, all these things. They were not API-driven, they were just like, we literally cobbling this together. So just completely standalone products. But our thesis was if we get really, really big and we're at scale, they'll open up the APIs or there'll be competition in the APIs because we have enough scale.

It worked. So I remember Gusto was at $40 per unit. We're charging 2.99 a month. On the economic side, you can tell that's like a lot for me. QuickBooks was $40 a unit. So much of my cost was just two providers. And Gusto came back, opened up their APIs, and we had a great deal and we dropped the cost a ton, a ton. And so it happened to be that at the time when those embedded providers came out, like Check and everyone else Gusto responded. So we could stick with the partner. And now you look at it, we're going to have everything in one app, basically the super app for the financial services for them. But that's because all those things stair stepped.

Even COVID as terrible as it has been for so many ways, it ended up working out in our favor. It enforced us to move to Manila faster in terms of bookkeeping. Everyone was online and comfortable, so they had to do their taxes online. So we've been counter cyclical, to be honest with you. A lot of SaaS businesses are cutting budgets and outlooks. We're fine. We haven't seen any change in our structural churn.

Bill Cilluffo:

Especially if businesses think they're going through a more challenged in environment, they're probably looking for cost savings anywhere they can get. And if they can save 10 grand on their taxes, that's a pretty nice cost-cutting move. Right?

Hooman Radfar:

That's true, yeah.

Bill Cilluffo:

For our closing segment here, I'd love to dive maybe into whom in the executive and leader, and we had a chance to talk to a handful of folks at Collective, who all said very nice things, but I'd like to dive into a couple of those. First of all, we spoke to Jeff, your VP of operations. He described how you're really talented at operating at different levels. On one hand you're a technologist, but you can drive product or operations. You bring the investment background and that helps you in discussions. How do you think about playing different roles at different times, when to jump deep versus when to stay at a higher level? We explored that a little bit in the context of your passion for design. How do you think about when to jump in, when to play different roles and how to move back and forth?

Hooman Radfar:

I think one of the things that I learned painfully in my first route was I think the intuition of an engineer is to understand everything at the highest level of revolution up and then hand it off. And that's just not possible when you're scaling very quickly. And so what you have to do is when I look at, hey, this year to go from A to B, if I want to go to my next round of funding, what are the major first principles blockers to that? And then what are the highest risks? And then understanding where those areas are and then looking at who do I have on the bench that can help me with those areas and where are my skillset layups? And so when I look at something, I say, "If there's something that's super critical to our success," like I just told you in this case, we are really focused on ramping up our automation and AI investments in accordance with our long-term plan. It has a huge financial impact, it's one of my blockers. Then I spend more time on that and I go deeper.

But if I have people who are really, really good at that and outperform me or not makes a difference, so I just look at that stuff. How critical is it? Who do I have on the bench? And am I even good at it? So that's a really humbling thing to say because honestly, you're probably not that good at most things. So sometimes I want to be in there because I think I can do better, but the person there is much better than me and I try to just make sure I have the right level of check-in. It's a pretty algorithmic process for me.

Bill Cilluffo:

Yeah, that makes tons of sense. Where can you have the impact? Where is the business impacts? It's an interesting third access of can I actually add any value or not? Which not everybody has the humility to admit, so I think that's fantastic.

We spoke to Roberto, someone who's known you a long time all the way back to Penn and then Expa. And as someone you've worked with as long as anyone. He said one thing he really respects about you is you don't have a lemming mentality. Honestly, so many in our industry are all about following the trends and following the herds. And he said you're exceptional at making up your own mind, asking your own questions, not necessarily following the herd. How do you go about learning a new topic, diving yourself into this? How do you learn from what the trends are, but not be overly influenced by what everyone thinks?

Hooman Radfar:

I'm a little flattered by that. I hope that's true, but I think stems from my father. You don't understand the impact your parents have on you until you're older, or at least I didn't. And my dad loves to learn and I read a book a week and what I try to do, and I'm a big fan of stoicism, for example, and just ripping things down to... If you can start with a beginner's mind and assume you know nothing and examine every problem on... They call it first principles basis. So in physics and engineering, you do that. You tend to actually have a cleaner view. Even in an area where I have high domain knowledge, it's tempting to just go on pattern recognition. And so when I look at something, I just try to say, "What are the most important questions that I can ask?"

And so I've learned over my career... Venture is an awesome place to go by the way to do this because you have a time-bound problem set. You're like, "I have X amount of time." About two years ago it was X was very short. Where I have to basically break down and say, "Do I want to invest? Yes or no?" There's an output. So I have to figure out what are the least amount of questions I can ask to minimize my risk to decide if I want to play. And then you have to win the battle, which again is another battle. And I think honestly, I credit venture a lot with training me to rip things apart and break it down faster. Because operations, you have to do that a lot. But venture can be brutally fast. I don't think people understand. Particular when you're early stage like seed or even series A, you have to really, really figure out what's the most important question. Because you can't go through complete diligence cycle. There's not the information there, nor do you have the time.

And so I think I do that and I'll basically say, "Here, these are the 10 questions I have to ask." Then I look at the time constraint and I'm like, "I actually only have time to ask four." So I rank order them and then the rest of them I have to wing.

Bill Cilluffo:

That's impressive. I've found it one of the most challenging things in venture. At some level, if you're totally counter to the herd, then you worry about, "Hey, if this thing works, is anyone going to be there to fund it?" If you're totally with the herd, then you really have no point in being in the industry and no way of winning. How do you find the right elements of those? It's a really tough one.

Hooman Radfar:

I would just add to that on the venture side for what it's worth. So I like to have two opposing frameworks. I like to understand what my bet is. To your point, when you're a seed investor, which is where we focus preseed and seed, your goal is actually not to fund someone to profitability. Your goal is to fund someone to the series A. And so I would look and study the receiving end as much as I would study the business. So I want to understand the business on a thesis basis. I have my own thesis for how my business works as a result of that, but I need to know if the people at the receiving end care.

Sometimes you have to know. For example, if you're in food tech that was hot, cold, hot, cold. FinTech, even though it's had its waves, it's still a pretty consistent roar. You may be seeing interest based businesses leading to, I would say almost like a perverse pullback overall in the sector, but I think that's an overcorrection and it'll quickly bounce back. Whereas some of these other sectors, you just have to know what game you're playing, to your point. And so I look to understand where everyone's going and understand where the pack is going because you have to play in that game. They're the receiving end. But that's part of my analysis as well.

Bill Cilluffo:

Yeah, it's interesting. Even within FinTech, there's probably literally nobody in the industry asking that question in the middle of 2021. And there's lots of people asking those questions today, just as the market has pulled back. Again, some sectors, some geographies, you have high confidence. Some sectors, some geographies, you have less confidence. And really knowing where that's going is critical.

Hooman Radfar:

That's where firms like yours and others who have deep domain expertise, multiple cycles, operating bench, you can look at a business at the core and say, "Wait a minute, we know that things will fluctuate." And so you basically have a really unique opportunity now, I'm an investor in the fund, just full disclosure, but I do believe that people will over-correct. They just do. And so a lot of people like to look at Warren Buffet a lot, and I think the thing that I admire most about him is he's not about getting into everything. He's like, "I want to get in the right thing." And he's okay missing something because he doesn't have to get into every right thing. He just is getting a few right things. And I think that is the advantage of studying a domain and being in it.

And that's the same reason why I love being a founder right now. I think now after four years almost, and I'm almost... I'll be at four years in almost a year. I know enough now to start being dangerous because my goal is to run a public company. And so you have to be a student of something for a very long time, in my opinion, to have anything worth saying. I kind of get it.

Bill Cilluffo:

For sure. I think many people don't worry about being an expert before they start jumping up and down and saying stuff. So I'm glad that you're focused there.

So look, we're running way long. This may turn out to be our longest episode ever. I've found the conversation fascinating. So we're going to unfortunately skip a couple topics that I would love to still dive into. So maybe there'll be a part two in our future.

Hooman Radfar:

I'm in.

Bill Cilluffo:

But there's probably two more things I'd love to end with. One I think is something you referenced way at the beginning, which is realizing that you just can't focus a hundred percent of your energy on work. You need to have other hobbies, both for work-life balance at the time. But I think your example was, "Hey, once you stop the current job or once you stop working, having hobbies, having interests is really helpful." What do you do to think about work-life balance? I know you talked about many of your hobbies as a kid. What keeps you grounded and sane as you're in the middle of a really challenging business to go build?

Hooman Radfar:

I think in the first round of my company building and in particular the culture that was there, there's this idea of work hard, play hard, which actually the result of that is an ulcer. I can tell you that physically. You can't do both for an extended period of time. Your age catches up with you. And so the harsh lesson I learned from that, I'll give you a quote, one of my investors who Nigel knows and... Because co-invest with, Phil Bronner, who you may know as well. He told me once and stuck with me. I had violated this advice at the time was "Being an entrepreneur, being an athlete, you have to take care of yourself. You have to be top your game." And I think he was not just referring to being a student of your space, you're trying to compete physically. You have to be there.

And so one of the constraints I set up is I think work-life balance is a dynamic concept. So it's not a static thing. So for example, the work-life balance you need when you're going from pre-seed to series A is very different than A to B and B to C and so on and so forth. And you have to just be conscious of that. And that can't be the same. So you can't have three people starting a company and assume that you're going to work the same amount that you would work at Google. It's not true. But there have to be rails. That's for me at least, but there have to be rails because you have to have some sustainability because you're a physical being.

So what I look at are there's certain things that are immutable for me. I have to have a certain amount of sleep and I have to work out a certain amount and I have to take care of my mental health a certain amount, and those are my rails. And so I have a routine, I actually wrote it down. I've evolved it over the years, but I work out every day for the most part, meditate every day. I sleep every night. And I can within reason, if I have a sprint and I have to define that sprint, say maybe for two weeks, three weeks, whatever that period is, violate it a little bit, but I have to have an end date. I put it in my calendar. If I go past that, then it's not actually sprint, it's a new routine and I can't do that. So that's how I maintain it.

And then every quarter, every year I revisit and say, "Do I want to change that?" Because ultimately, I work six days a week. I only take off on Saturdays, and sometimes I don't. But so it's a pretty big cycle. And at some point my wife's going to be like, "No, that's not going to work out."

Bill Cilluffo:

I'm impressed by the rigor and discipline around that. Everyone has different approaches to this and finding different ways to work for them. I think there's some great lessons in terms of planning out and being that conscious about how you do it. And I'm sure it evolves over time and I'm sure you'll learn. But great advice for folks.

Last question, I think we always wrap up with this. Hopefully we have a number of aspiring entrepreneurs listening to this. You're now in your second version of the journey and obviously have worked with countless other entrepreneurs as advisors. What's one key tip or one piece of advice that you would give entrepreneurs as they think about starting a business?

Hooman Radfar:

I would say assume you know nothing. Your experience can be a tool, and it's tempting sometimes to use that experience. But what I've seen, for example, with a lot of entrepreneurs is they're so bright and sometimes they speak with so much conviction that you can't tell if they're really, really deep in something or they're just really good at selling one inch. And what's better is to just say like, "I'm going to go do a fundraise. Let's start from scratch. What's the best principles? Reread everything." Your worst thing that happens to you when you start from scratch. I'm not suggesting you have to do every step from there, but if you start, you actually can see some new techniques. You can be inspired by that. And also you won't get swiped as easily.

So Andy Grove had a book, Only the Paranoid Survive. I don't like the fear factor and the cortisol level that might put in you, but that concept behind it is the same is if you're not willing to just say like, "Hey, even if my business is winning, we have to take this principle. We could be wrong." You will get disrupted. It's a hundred percent. As an individual, if you're not evolving, there is somebody out there who's coming for you if you want to play in the game. And so yeah, just start with that beginner's mind and always be improving. And if you can do those two things, you're hard to beat.

Bill Cilluffo:

I love that piece of advice and I've absolutely loved our conversation here. One of QED's favorites over a very long period of time and really excited that we get to continue to work with you and hopefully play a small piece in helping on all the things that you're building. So really appreciate you spending the time with us today.

Hooman Radfar:

Thanks for having me, Bill and I definitely will be down for another version of this. It was fun.

Bill Cilluffo:

Love it, love it. Thanks to all of our listeners for listening, and we will see you next time.

This has been the FinTech Thought Leaders podcast, your window into the world of venture capital and financial services. With today's digital disruptors. QED is proud to provide the best FinTech advice you can get. To learn more or to read the full show notes from today's episode, check out qedinvestors.com. And be sure to also follow QED on Twitter and LinkedIn at QED Investors. Thanks for listening.