Woman 1: From the campus of the Wharton School in San Francisco, this is Startup School Radio. Here is Y combinator partner, Aaron Harris.
Aaron: Good morning and welcome to Startup School Radio on Sirius XM Business Radio powered by the Wharton School. I'm your host, Aaron Harris. I'm a partner at Y Combinator, where we fund early stage companies. You've heard of some of the companies we've founded, Airbnb and Dropbox. Others, you haven't heard of yet, but you'll hear of some of them right here on the air over the next weeks and months. Every year at YC, we put on a conference we call Startup School, where we get really great founders to come and tell their stories. How they started, the challenges they faced, the challenges they overcame, and what they've built.
Startup School Radio, where we broadcast every week, we are going to do the same thing. We are going to bring great founders in here to tell you their stories, tell you about their screw ups, what went well, what went poorly. So that, if you're thinking of starting a company, or just wondering about startups in general, you'll be able to hear about it right here. We are going to be broadcasting every Wednesday at 1:00 p.m. Eastern, 10:00 a.m. pacific, from Wharton's campus in San Francisco.
Today, we have a pair of really incredible guests to get us started. The first guest is Alexis Ohanian. Alexis was the co-founder of Reddit, and currently serves as the Executive Chair. He's also the man sometimes referred to as the mayor of the internet, though if you know Alexis as well as I do, the idea of him holding elected office is a little bit funny. After that, we'll be talking to Kaz Nejatian. Kaz is a founder of a mobile payments startup called Kash. He went through Y Combinator just this past summer and is doing really incredible things. So, without any further introduction, let's turn it over to Alexis. Alexis, thanks so much for joining us today.
Alexis: Thank you for having me, Aaron. Does this mean you're not going to be running my campaign?
Aaron: You'd have to pay me a lot to do it, and I can't promise any success, but...
Alexis: Can I at least get your vote? It sounds like that's not happening.
Aaron: Yeah, you can get my vote. I'll vote as many times as I can for you. Is like five or six in most elections you get to...
Alexis: Yeah, give or take. Those are Chicago style rules.
Aaron: Right, well, Windy City had some peculiar election rules back in the day. As we are talking here today, if you have any question, or you want to ask of me or of Alexis, you can give us a call at 844-Wharton. That's 844-942-7866. You can also tweet at us @bizradio111 or at me personally at @harris and you can follow Alexis at @alexisohanian, though most people know that already.
Alexis: I need a punchier name.
Aaron: Well, you went from @nothing.
Alexis: I know, that's only for the Redditors.
Aaron: Right.
Alexis: But @harris, that's a winner man.
Aaron: I originally didn't have it, I originally had @aaronkharrison and, with a little finagling, I managed to get @harris. It was one of the proudest moments of my life.
Alexis: That's a good and this coming from the new father, this is a big deal.
Aaron: Well, my daughter is probably a better thing than having a particular twitter handle. But Alexis, I want go a little bit back in time and talk about starting Reddit. Right now, people know Reddit as this massive community online, 200 million uniques?
Alexis: Ish...
Aaron: Ish? Something like that?
Alexis: Who's counting?
Aaron: Pretty much everyone, but a top 10 website, the home of so much of community on the internet. Something that really define the way that internet communities work over the last, I think, 10 to 15 years. But way back when, when you started in 2005, there really wasn't anything there, so where did Reddit come from?
Alexis: Yeah, there really was nothing there. So, Reddit today has over 900,000 active communities. Whether you are into, the NFL community was quite abuzz yesterday with all the free agencies noise, or if you want to drill down to your particular team or location, there's a community for everything.
Aaron: Who starts the communities?
Alexis: Random people. For what twitter is to individuals, Reddit is to comminutes. Now, it takes a lot more work to create a subReddit than it does to create a twitter account, because you need a whole community of people submitting content.
Aaron: Do you help people actually start the communities or is it all on their own?
Alexis: It is entirely organic. That's actually one of the big things that I'm hoping we can improve in the coming year. We've started launching some mod tools to help onboard someone, because it is...
Aaron: Sorry, what are mod tools?
Alexis: Okay. So, moderators are the equivalent of, let's you wanted to start a blog, right? You're job as a writer on that blog is to pick content, publish it and sometimes deal with users, but you spend the majority of your time creating content. Moderating a subReddit is basically the inverse of that. You spend almost all of your time being a community manager and you're a volunteer. You're just doing it because you love corgis and you want to create the corgi subReddit. It's an amazing subReddit.
Aaron: How big is the corgi subReddit?
Alexis: I should check. I think it's our most popular dog species subReddit. And I know that's going to upset a lot of Dachshund owners, but the corgi is actually the most popular dog breed on Reddit.
Aaron: Have you had any members of the royal family on that subReddit?
Alexis: I know for a fact the Queen is one of our most avid Reddit--, I don't know that. That is not true. I would love her to do an AMA, incidentally. But the point is, it's all a volunteer, and we're doing more now to help onboard someone and to help teach them the best practices and lessons for running an online community. Everything from changing the SCC so it looks prettier, to encouraging people to submit great content, because the first two people who used Reddit were me and my co-founder Steve. And we were the entire community, because there was just one, and there was just us and so we submitted all the content. And we just had about two dozen user names each, and submitted the content as though it were more than two people.
There weren't comments yet, so it's not like we were talking to each other being like, "Great comment, Alexis." That would have been really sad.
Aaron: So do you each have 100 million user names now and that [inaudible 00:06:04] number or there are actually more people running around inside?
Alexis: There is, thankfully, there are far more people using it. That was the pivotal movement when we knew we weren't wasting our time, because, for the first month and a half, we were building on this hunch. We launched rather quickly. We launched within about three weeks. We had basically no code written when we showed up at YC June 1st.
Aaron: Let's go back to that moment and time. There is a lot that happens there, from don't have anything to showing up at YC to having this idea. So, at the time, YC didn't really exist.
Alexis: No, the Summer Founders Program.
Aaron: The Summer Founders Program, which it was what it was originally called. So, how did you hear about it? Why did you start a company, did you always know you wanted to start an internet community or a company even?
Alexis: No. Well, I was going to be a lawyer. I was a good history major at the University of Virginia. And, like any good history major looking at job prospects, I thought, "Ah, the law!" and I was really excited. I was going to be an immigration lawyer. And at sophomore year, I was just doing practice LSTAT, one of those God awful Saturday mornings you spend in a room for three hours, simulating an LSTAT. And I walked out with my buddy Jack and we got waffles. And it was at a Waffle House on Route 29 in Charlottesville that I realized I don't really like this. I don't want to do this for the next three years and spend a lot of money to be a lawyer if I don't really want to. And then it was just a matter of what else could I do with my life. And I had a very smart friend in Steve, we would, am I allowed to curse? Yeah, take that FCC. We'd [bleep] all the time like over--
Aaron: People [inaudible 00:07:37] cursing on Sirius, Howard Stone might have [inaudible 00:07:39].
Alexis: Well, that's a valid point. Oh, great. It seemed like he was this smart dude. We talk about new technology all the time and I figured well, why not? At the very least, we can just sustain our college lifestyle. You don't need a ton of money to be happy in college. If we could just live like college students for the 10 years, and just be working on stuff we loved, that was great.
Aaron: So, this might sound normal to people now, but we are talking 2005, right? There is no internet startup scene, really. Facebook is just getting rolling at Harvard, the internet crash, the dot com crash is five years in the past. What the hell were you guys thinking? You were saying, "Oh if we could work on stuff." How did you explain this to family that you were going to walk away from law school or your plans at law school and just, something, something, something internet?
Alexis: Yeah, I lucked out. It was much harder for Steve. I can't speak for him, but I know a lucked out because my parents were just like, go for it, we believe in you. So, thanks Mom and Dad. But there was no real sense, today starting a startup is like starting a band. Everyone is doing it. right? It's the cool thing. But back then, there was just this lone nerd Paul Graham, who was writing these essays online about starting startups. He had succeeded during the first boom with VIAWeb, which he sold to Yahoo and did well, and became this internet pundit that Steve really respected. He read all of his stuff. He was writing about Lisp, this pretty obscure programming language that Steve loved. This is all serendipity, really. By our senior years, I'd convinced Steve to not take a job at a software company and work on something with me. We had this other--
Aaron: Where was he going to go work?
Alexis: It was a company called Image Matters and it was a software company. It was a startup but it was a startup in Virginia. It was a software company that was making, I don't know what kind of software, but he'd work there every summer. They loved him. It was just that formality that he graduate. They were ready to him anyway. And I promised him the chance to live in near poverty for an indefinite period of time with me, eating pizza all the time, and he said, "Yes, yes. There is nothing more than..." I'm a good salesman.
Aaron: Either you're an incredible good sale person or Steve has a couple of screws loose, the fact that he listened to you.
Alexis: I should ask him why he did because that was silly. But it all worked out, especially because he had heard that Paul was giving this talk. This was now our senior year spring break. Spring break is coming, it's senior year, it's UVA. UVA has a bit of reputation as party school or frat school. Obviously. Steve and I were not part of that, but everyone was going to the beach. It's your senior year, spring break, right? Steve heard that Paul was giving a talk up in Cambridge at Harvard and we both looked at each, and we're like "Well, obviously, we're going to go to this talk in Harvard instead of to the each, because there is no Wi-Fi there. There's Wi-Fi at this talk." And we heard him speak...
Aaron: Do you remember in 2005, so, to get Wi-Fi on your laptop, you had to have that card that you stuck into the slot...
Alexis: Yeah, the giant [inaudible 00:10:40]. Yeah, it was...
Aaron: And your laptop, by the way, weighed about 15 pounds and...
Alexis: Massive. My Dell. I love my Dell Inspiron. Yeah, oh man. But that was the random thing, and we just heard this dude give a talk and we met him afterwards. I talked him into getting a drink with us or coffee. We pitched him this idea...
Aaron: I was going to say getting Paul to have...I've convinced him to come to a [inaudible 00:11:04] once in the last...
Alexis: Let's do shots, shots, shots. You should, PG, when he gets going with the pickle backs, that's he's secret.
Aaron: And what's pickle backs, because we got him afterwards...
Alexis: No, I shouldn't be spreading rumors like this.
Aaron: Yeah, I was going to say, I think, at most, he'd had a glass of wine. We got him out to Kettle of Fish out in the West Village, after a YC event at New York City one time, and he had to good time there. But if don't think he actually had any beers with us. I think he just sat around and talked to us about Computer Science.
Alexis: Yeah, see, he doesn't need alcohol to have a good time. I do, but we got coffee, and we pitched him this idea. It was for a way to order, basically skip lines by ordering food from your phone. It was going to be called My Mobile Menu.
Aaron: MMM...
Alexis: MMM...Yep, yep. That was going to be the brand, like Mmmm. Anyway, he loved it, he really did and he gave us a ton of encouragement. And a couple of weeks later, he announced that this thing, the Summer Founders Program, was going to start and if you were looking to work on a startup, you could spend three months in the summer. Back then, it was like 12 grand, 6 K per founder, and just live up in Boston and then come to these weekly dinners and he and his partners, Jessica Robert and Trevor, would just give you advice at these weekly dinners.
And I don't know what we would have done if we hadn't applied and then eventually gotten it. We would have stuck around in Charlottesville, Virginia, which is a lovely place, probably consulted web development on the side, probably would have been working on MMM for another four years and then smart phones would have finally happened, if we had survived that long. we wouldn't be talking right now.
Aaron: Right.
Alexis: I would probably would have gone back to immigration.
Aaron: So, what is it about that program that actually got you started? Is he fact that he gave you a little bit of money, a little bit of head cover, or was there something more and also how did MMM become Reddit?
Alexis: Both Steve and I had done well enough in school that we generally felt, if we applied to ourselves to something, we would get it. That was the thing that we had seen. We were lucky enough. And so YC was the thing where we thought, "Okay, we already met Paul, he liked our idea. We're going to in there, give the best interview of our lives, and then we are going to get in." Because obviously, yeah. And we gave the best interview of our lives and we came out of there feeling awesome. So, we go out drinking because, yeah, checking the boxes.
Aaron: Also, spring break. Was it still spring break or?
Alexis: It was still spring break.
Aaron: Yeah, so, at least you had something.
Alexis: So, we had a little bit of respite from working. And we got the call that night and PG was like, "Hey, so, we're going to reject you." And it was good though that we were drinking, because then we could go from celebratory drinking to misery drinking. And that was hard. It sucked. He basically just said, "You know what? It's too early for mobile." The smartest phone back then was like a Treo or a Blackberry.
Aaron: I was at my mother and father in law's house the other day, and I looked in a drawer in my father in law's desk and I found the Palm VX. I was like, "Holy cow."
Alexis: VX?
Aaron: Yeah, the 5X or whatever.
Alexis: Did it have the stylus?
Aaron: It had the stylus.
Alexis: Was this is the one that pioneered? I had the 650.
Aaron: I don't remember which type but this was one of the last, I think, of the elite Palms. And I looked at it. I remember how amazing it was when my dad had gotten his. And he had to learn this language, and I was just like, "Holy cow!" and I remember the killer app from my dad, my dad's a doctor, was this thing called the PDR, the Physician's Desk Reference. Instead of carrying around this massive book to his office every time he needed to check how two drugs interacted with one another, he could do it on his Palm Pilot. And he used to be like, "Look at this amazing piece of technology." And I looked at that, and it's about the same size and shape as an iPhone 6. It's a little bit bigger but roughly the same and you look at the difference between these two things, and its' mind boggling how far we've come.
Alexis: It is and I am so grateful that they rejected us though, because trying to do what we were doing in 2005, we would have had a very bad time.
Aaron: We are going to hear a little bit more about how that seemingly ahead of its time idea became Reddit in just a second. If you're just joining us, I'm Aaron Harris, and this Startup School Radio on Business Radio powered by the Wharton School on Sirius XM. If you're just joining us, we are talking to Alexis Ohanian, co-founder of Reddit and the current Executive Chair. If you have any questions for Alexis about starting startups, about Reddit, about being the presumptive mayor of the internet, you could reach us at 844-942-7866. So Alexis...
Alexis: That's Forbes headline, it sticks. It really stuck.
Aaron: Is that was it, a Forbes headline?
Alexis: Yeah. I'm obviously flattered about it. I don't mind. It's more that the nature of the internet is flat. The internet works so well because there is no hierarchy. And so the idea of electing a mayor or any kind of leadership position to it is kind of silly.
Aaron: I want to come back to that in a little bit, because there is something interesting in there and it's a flat hierarchy but yet you have moderators of sub-reddits, which are critically important to the way those sub-reddits work. Without them, you'd have chaos.
Alexis: True.
Aaron: You still sometimes do have chaos but creative chaos that does interesting things. All right, so rejects you from and you guys get on the train to go home.
Alexis: Yes, hangover. And the other part of the story, that I don't usually talk about, there were a couple of dudes there that night at the bar who were a little cocky. I think they may have been Harvard men.
Aaron: So, some of my classmates, all right.
Alexis: They were in finance and they were like, "Yeah, so what do guys doing?" And I had this moment, I'm not terrible proud of this, but I said, "Oh my buddy and I just got in to this program called Y Combinator." I lied to them because I was so embarrassed, and I could tell how much better of a night they were having. And I felt like such a tool as soon as those words came out of my mouth. And then those guys were like, "Oh yeah, well, we got jobs at Lehman Brothers and..."
Aaron: That probably didn't work out so well.
Alexis: I don't know how that worked out for them, yeah. But the next morning, like I said, this was something we had really, really wanted. And to get rejected like that was shitty. But we resolved, that next morning, to say, "All rright, we are going to prove them wrong." We did our best to say, "All right, we're going to prove them wrong." We got back on that train going down to Virginia and then we got the call from PG who basically said, "Listen, we still hate your idea, but we like you two. So, if you and Steve are willing to just kill MMM and work on anything else, work on something that solves your problem in a browser, not on a mobile device, we'll let you in."
And it turned out Jessica Livingstone, one of the other partners at YC, she was the one who made the call. She woke up the next morning and said, "I can't believe we rejected those two. We need them back in." And the other partners, including Paul, were like, "Eh, I don't know." But Jessica fought for us. Make a note of that, history books, because if Jessica doesn't bang the table for Reddit to be a part of YC, that's YC's first launch, first exit, except for the eBay sale of Kiko, which is a great story.
Aaron: Justin is going to be on next week, so we'll get the story of how he sold his first startup on eBay.
Alexis: And although Reddit has not been, there are some amazing multi-billion dollar companies that come out of it, it was, I would say, I think the first one to really legitimized YC as a thing. And that was all because of Jessica. Because then we showed back up at YC, and PG was like, "All right, so what are you guys going to build that's not on a phone?" And we just talked about what we used. He asked us, "So what do you do every morning?" And Steve used Slashdot, and I'd I open a bunch of, tabs was a new thing in Firefox, so I'd open a bunch of tabs.
Aaron: I don't even know if anybody knows what Slashdot is anymore.
Alexis: It's an institution, well. it was an institution.
Aaron: It was.
Alexis: We cribbed so many things from them.
Aaron: [inaudible 00:19:15] was around, right?
Alexis: Yeah, there was a bit of [inaudible 00:19:18] influence there. The really stand out thing is the commenting system, and the voting system that Steve engineered, which we drew heavily from Slashdot influence on that, just this idea of having community self-regulated voting on content, and comments. And he just said, "All right, well, solve that problem. Find the best way to just inform yourself every morning." And we're going back and forth with ideas. And then he's just like, "Listen, just build the front page of the internet." Steve and I looked at each other and we are like, "Uh, this guy wants to give us money to build the front page of the internet? All right, sucker."
Aaron: So, that's actually really interesting, because Paul sold his company at Yahoo. He worked at Yahoo for a while, and a lot of ways, in the late 90's and early 2000's, Yahoo was the front page of the internet. There was no such thing as a search engine, really, when Yahoo started. It was an aggregation of useful links.
Alexis: Yes.
Aaron: Do you think that's part of where that came from?
Alexis: We should have pitched Reddit as Yahoo 2.0. Probably. I distinctively remember, this is the thing. Paul has terrible ideas. Let's be clear. Paul get lionized for a lot of good reasons, but he is human. I always personally I had a chip on my shoulder, because he hated our mascot and our name, which I took a lot of pride in and obviously has turned out pretty well. But what Paul is really, really good at is asking these kinds of questions of founders that really get to the real meat of problems. He can carve through so much bullshit to really help advise. And, with us, I still remember the session, because we kept dilly-dallying around this idea of, what it means to have this front page here, and he was like, "Look, the news of record, the most important news of the day for the 20th century was essentially the stuff that made it arguably to the front page of like the New York Times." Some other newspapers might differ, but for the 21st century, front page of the New York Times meant this is the news.
Online, you have to be content agnostic. Even in 2005, it was clear that the most important relevant news of the day couldn't possibly come from just one source. The best way to get to that would be having a bunch of random people all over the world submitting suggestions for what that might be.
Aaron: Effectively, crowd sourcing the news, right?
Alexis Ohanian: Yeah
Aaron: But crowd sourcing wasn't a term back then, really, was it?
Alexis: No. Delicious was the best example for what would happen if you, and that was bookmarking, right? So, Delicious was a good example because, as people selfishly bookmarked content, they would, as a byproduct, have, it was Delicious/Popular as a byproduct of people selfishly bookmarking. I want to save this for later. You would see kind of what was popular, but the intent was different. I bookmark an Ajax tutorial or a 10 Best Beaches in Hawaii thing, because I want to look at it later, not because this is news and I want to share it with the world, like a cat photo, or a video of something cool.
Aaron: And so, from the beginning, Reddit's purpose was essentially, I want other people in the world to know about this thing?
Alexis: Yes.
Aaron: I think this is not just important, but worth sharing and worth telling people about.
Alexis: Exactly, and now it has become such a force that it really dictates so much of the online discussion. What ends up front paging on Reddit, seriously, go to RNBA today, look at it this morning, well, RNFL is probably a better one right now.
Aaron: That's Reddit slash R.
Alexis: Oh yes, Slash r, slash NFL or nfl.Reddit.com. We've got to work on that, too. But what's there, what's popular on the front page there that morning is going to be repurposed and aggregated by every blog all the way up to ESPN by the end of the day. And that's all happening because a bunch of random people are just saying "Hey, this is interesting."
Aaron: It's a pretty cool feedback loop, right? All of these blogs, all the newspapers, they basically want to do everything they can to find viewership, readers and what Reddit is essentially telling at this point, given its scope, is that, "Hey this is already popular." So, if you write about it, people are going to come see it and come want to use it.
Alexis: Yeah, and it's mind blowing for me that it has come to set the agenda like this. And it wasn't until I got back in a full time role a couple of months ago, and I started really looking in to this, but even if you look at an imperfect system like Alexa, which ranks top websites, the largest media site on that list in the US is Reddit, at I think number 9 or 10 of all US websites. The next largest media site is CNN at 27, 26. You can check this. But that's the scope and size of it now and impact of it now. So, being on the front page of Reddit really has become the news of the day. And, in a lot of ways, 10 years later, we managed to actually fulfill what PG had hoped that we create, but I tell you, oh man, it's been a hell of a 10 years.
Aaron: And it's a really interesting thing. Unfortunately, we won't have enough time to get into the whole story today, so you're going to have to come back. A lot happened in that 10 years. You sold the company.
Alexis: Yeah.
Aaron: And you and Steve stepped down from your full time roles after a while, and then, I think this is a tribute to the power of the idea of Reddit. No one was really working on it in the way that the founders had been working on it. All of a sudden, it started picking up steam.
Alexis: Yeah. Reddit has literally doubled every year since we started. And it never exploded in the Instagram sense of things, but it just grew and grew and yeah. We're now trying to modernize some things. We're now trying to do some of the work that we probably should have done over the last 10 years, but so many other people who became stewards of the site after Steve and I left were just busy keeping up with growth and didn't necessarily get all the resources they would have liked when they were at Combay. Now that it's independent though, which still have to correct reporters on, now that it's an independent company, it's been recapitalized, it has funding, it's autonomous. It really is operating like a start up again. Just a start up that is 10 years old, has tremendous influence and clout, but still has so much room grow. Every day, I come into work and it's like, "All right, what are the 10 things we are going to do to improve Reddit today?" Because they are all doable, and they are pretty low hanging fruit.
Aaron: How different is your experience coming back 10 years later as Executive Chairman versus what you were at the beginning, as co-founder? Is there any simple way to--
Alexis Ohanian: Yeah, so I have a beard now, which is a difference.
Aaron: Okay, it's a nice beard.
Alexis: Thank you, nice beard as well. I think the biggest thing for me is this is a much larger company. When I left it, there was 6 people. Now, there's 71. There's a lot of operational stuff I'm still doing right now. In theory, this role is a lot more strategic vision based, but there's a lot of operational stuff I'm still trying out like work through, and build up, and get right. But I'll say the most exciting thing is we have processes now, and a lot of this, really frankly, for the last three months, I've had the privilege and pleasure of working with Ellen Pao, who is our interim CEO. A lot of this just comes from being paired with someone who just gets stuff done and we've been able, in just three months, to build a ton of processes internally in the company, shipping product improvement, shipping policy improvements. It's been really, really cool.
And I want more than anything else now to see that all those people who work at Reddit get to do amazing things. And, frankly, the mindset when we were still that scrappy little start up with five people when I left, was just, oh my God, oh my God, I need to do a million things today. And now it's just, how can I help these 71 people do their jobs as awesomely as possible? It's definitely a mind job. It's a different perspective, but it's an exciting one.
Aaron: That's an incredible answer and it sounds like an incredible challenge, and hopefully you can share some of that advice with Kaz when we come back from the break. For the last half hour, I've been talking to Alexis Ohanian, co-founded Reddit, is now the Executive Chair and, when we come back, we've got Kaz Nejatian, who is founder of a really awesome company called Kash. Thanks so much for tuning in and we'll be back shortly.
Woman: You're listening to start Up School Radio, powered by the Wharton School. Here again is Aaron Harris.
Aaron: Welcome back to Startup School Radio on Business Radio powered by the Wharton School, Sirius XM channel 111. I'm your host, Aaron Harris. I'm a partner at Y Combinator and we've been speaking with Alexis Ohanian, who is a co-founder and current Executive Chair at Reddit. Alexis, thanks so much for sticking around.
Alexis: Sure thing.
Aaron: I'm also really excited to welcome our next guest, Kaz Nejatian. Kaz is the CEO of the mobile payments startup Kash and is a Y combinator alum. Kaz, welcome to the show,
Kaz: Thanks for having me.
Aaron: Thanks for joining us. If you're thinking about starting a company or interested in startups, you should give us a call and ask any question you want of these guys. Our number is 844-Wharton. That's 844-942-7866 and we actually have a caller, just to get started with the top of the half hour. We have Rick from Washington. Rick, you're on the air.
Rick: Hey, how are you? Thanks for taking my call.
Aaron: I'm doing great.
Rick: I had a question for Alexis. I'm a big of Reddit and the community is amazing. What you've done with them is just incredible and even the most recent thing you guys launched, Uploaded, which is great. I hope I can hear it on Sirius someday too.
Alexis: Thanks.
Rick: The thing that I wonder though about is in like building community and people that are on who are so invested in it, and how do you balance that in keeping us happy with the business side of it, knowing that those two things don't always probably align?
Alexis: That is a very good question and I've got to know, Rick, which Washington are you in, the district or the state?
Rick: I know you're a Redskin fan and I am in DC.
Alexis: Alright, okay. Well, then we can continue this discussion. Dude, it's a challenge. It's going to be something that is going to have to always be, the decision we always make, whether it's about product, or about business is, are we doing right by users? And that is the guiding principle. And we are going to figure out a way to grow Reddit into a very successful business that actually works with its users, doesn't hurt them. And I feel like, for so many of our peers, the answer is a really simple like harvest as much data as you can and show them as many ads as you can. To me, that feels lazy. It's going to be harder, but every decision we make we know has been made with our users in mind, because, as Aaron mentioned a little earlier, we have nothing without them. All of those 9,000 communities do not exist.
They do not set the agenda for media without a ton of volunteers, just people making great stuff. So, that's the guiding principle, and I can't say we had it all figured out, but I think things like Reddit Gold, and the way we've handled advertising by respecting user privacy and being really, really tactful with it, is an indication of where we are headed.
Aaron: Sounds like a really tough balance to strike, and I think it's one that's going to continue to be a challenge for a long time.
Alexis: Yes, yeah, but here's what is going for me, and I think the thing that is really exciting is more and more brands and companies are realizing that, I know authenticity gets thrown around all the time. It's one of those buzz word bingo words, but people succeed, even businesses succeed on Reddit when they are being authentic, when they come correctly as humans. For some reason, every other social media platform has trained people to be dicks. You would never walk into a room and just start shouting like, "Hey, try out my service." No one would do that in real life and yet everyone does that all over the internet. The one place you can't really do that and succeed is Reddit.
And if we can help train brands to be smarter, and more authentic, and if they buy ads, make them interesting and, when people comment on them, even if they're bashing on your ad, join in the discussion like a human being and talk it out. Those are the companies we see doing extremely well, and I hope it can have just even a bigger impact on how companies think about branding themselves and marketing themselves.
Aaron: Got it, thanks and thanks Rick for that question. Now, I want to turn to Kaz, and, Alexis, I hope you'll be able to stay with us for the rest of the time.
Alexis: Oh yes, I'm not going to miss this.
Aaron: Pepper Kaz with questions. You are both Armenian, so at least Kaz...
Alexis: I'm taking credit for him.
Aaron: There you goes.
Kaz: He's more Armenian than I am but yeah...
Aaron: We are not drawing lines of who's more and who's not.
Alexis: We need as many people on our team as possible.
Aaron: But that actually brings me to the first thing I actulally want to talk about and Kaz, well, first Kaz, I'll let you say a little bit about what it is that Kash does because it's a pretty powerful idea around how people pay for things at stores. Right now, there's basically cash and there's credit cards, but you guys are Kash with a K. So, what are we talking about here?
Kaz: So, the way people pay for things really hasn't changed much since the early 1900's. When you pay with a credit card, the system works almost exactly the same as it did when the credit cards were first invented in a diner club in New York.
Aaron: Is that where the first credit card was, diners club, actually in a diner club?
Kaz: So, even if you pay with Apple Pay, the system is literally identical to what it used to be. The entire system is built basically like a telegraph system was. Someone calls someone else, someone calls someone else, the credit card transaction takes 13 or 14 steps.
Aaron: Wait 13 or 14 steps from the time you swipe a card?
Kaz: At least.
Alexis: That seems silly.
Kaz: Yeah, that's why there's so much fraud and so, it costs so much. In any transaction, if you have more people in it, it gets more expensive, because there's more middlemen.
Aaron: So, I'm trying to understand why there are so many steps in there. If I pay for something with a check, that's a direct draw on my account, so why isn't that simple?
Kaz: Yeah, because when credit cards were invented, you couldn't just call up your bank account and know if you had money or not, because there was no way to identify you as who you are. There was no way to check your bank account. So, they ended up creating this massive network of hub and spokes. So, when the retailers swipe your card, there's a reason why a credit card has 20 digits. It's 16 numbers plus the expiry code. That's all it is. All the other stuff is just fake.
Alexis: Even the secret little code?
Kaz: Yeah, it's all fake. You can have your card stolen and money spent on it without the code for 90% of the transactions. So, that's why credit card fraud is so high.
Aaron: That's why they have these massive breaches, because those credit card numbers themselves matter.
Kaz: Yeah, numbers matter. If you have $100 bill in your hand, and I noted the number under the bill, that bill isn't mine, right? If you have a credit card in your hand, and I know the 20 numbers, that credit card is now mine. That's just a stupid way of doing things.
Aaron: Doesn't sound terribly secure.
Alexis: How much do the chips make a difference?
Kaz: The chip and pin make actually a difference because it's two factor authentication.
Alexis: So, it's [inaudible 00:34:45], yeah.
Aaron: Sorry, two factor authentication, what is that?
Kaz: So, it's something you know and it's something you have, is two factor authentication, in the broadest sense. So, you have a credit card and you know the pin, essentially. It's not really two factor but it's close. It's multi-factor. But chip and pin will never be broadly available in the US, because banks don't want it to be available in the US.
Alexis: Why don't banks want us to be secure?
Kaz: Usually, the third or fourth highest revenue source for any bank is credit cards. So, they love credit card fees. So, the average person in the United States is literally $400 a year poorer, because of Visa as a company.
Alexis: Wow, they should start putting that on billboards.
Aaron: That's a great ad. What you are basically paying for is the convenience of having credit extended to you.
Kaz: No, not really because most credit transactions aren't credit transactions. Most people pay their bills. So there's no actual credit...
Aaron: No one really cares if it's 30 days out. That's not a material difference.
Kaz: Yeah, that's a material difference in your income. What you are paying for is the convenience of not carrying bills, and you are not paying for it. The retailer is paying for it.
Aaron: So, when you say the average person is $400...
Kaz: Because everything is more expensive. Everything is more expensive, so you're less well off. So, the example I like to use is Burger King. I think in 2013, Burger King in Illinois had a net margin of 2.5%. Their transaction fees were 2.8%. Literally, credit card companies made more money off Burger King than Burger King franchisees made off of Burger King.
Aaron: Wow.
Kaz: No one would design a system like this if they were designing it today. It is a monopoly that will just, for sure, collapse. And we, at Kash with a K, are the people who are going to destroy it.
Aaron: How? Everywhere you go, pretty much, they accept credit cards. Though, if you are in the Bay area, no one takes that Amex. You can use credit cards everywhere. It's a default method that most people use to pay. How do you break that cycle?
Kaz: So, it turns out most retailers hate credit card companies and that's not unreasonable. I grew up behind a cash register. My family has been in retail. And I remember, if you walked into my store with an American Express, I would pretend the credit card machine was broken.
Alexis: I've had that happen to me before.
Kaz: I would just pretend, "Oh, sorry, the machine went down." If that happens to you in a store, it's because you have credit card people hate. You are costing people money by using that credit card.
Aaron: That's why you also see these signs in stores that say "Credit card limit minimum $10," which they can't actually do that.
Kaz: That violates Visa's terms in a lot of ways. So, merchants are literally breaking laws or breaking regulations in order to get you to do something else.
Aaron: I know you gave the Burger King example, but what percentage of a retail stores margin is eaten up by credit card fees?
Kaz: So, I'll give you quick serve. Quick serve restaurants are cafes, fast food, any place you could pick up food. It's a big industry. The net margin across the entire chain of the US [inaudible 00:37:58] was like 3.5% last year. Transaction fees were about 2.5%.
Aaron: Holy cow.
Alexis: Yikes.
Kaz: We have our first store outside San Francisco. It's a store in Oregon call Stackhouse Coffee. They do about 30% of their transactions through Kash with a K, out product. Before us, they had 80% of--
Aaron: 30% of all transactions?
Kaz: All transactions through us.
Aaron: Every dollar that passes through this door, a third of that dollar is you?
Kaz: Yeah.
Aaron: That's incredible.
Alexis: How long have you been there?
Kaz: About a couple of weeks, two weeks.
Alexis: How, in two weeks, were you able to get a third of all their customers, in a state you don't even live in, to use your products?
Kaz: It's our first store outside of San Francisco. This is what happens. You walk into a store that has Kash. The retailer will tell you, "Hey, we prefer if you pay with this app instead of your credit card and, because we prefer this, we'll give you Kash back. We will give you loyalty points to use Kash instead of a credit card."
Aaron: So, we're talking about, I don't know, two-thirds of their margin that they have to play with?
Kaz: Yeah. So, a retailer can give you significant cash back. So, if you go to a Kash store, you'll get five5%, 10% cash back to avoid paying with the credit card. So, it's good for you and it's good for a retailer and it creates a real community between you and the retailer, as opposed to you and your bank and the retailer's bank, and all the middlemen in between.
Aaron: A lot of people are talking about Apple Pay. They released it six months ago. Now the iWatch is coming out and people are talking about Apple Pay again. You said that Apple Pay is essentially just a credit card, but you're just talking about an app that lets you pay. What's the difference here? What are you doing that's so revolutionary that store really want you this badly?
Kaz: So, we don't use a credit card network. When you pay with Kash, we withdraw the money directly from the bank account and give it to the retailer and because we avoid the 13 or 14 middlemen between, we can cut costs down by a lot. So, we change retailers a flat fee of 50 basis points, so 0.5% compared to 3%, 3.5%, 4% for credit cards.
Aaron: It's huge savings.
Alexis: Wow.
Kaz: So, stores that use us literally see their margins go up by 40%, 50%, 60%.
Alexis: Here's the thing though. You're basically counting on these retailers to sell you to their customers.
Kaz: Yeah.
Alexis: Now there are, I'm thinking back. So, I made that comment about My Mobile Menu, which was my MMM, which was my ill-fated way to skip lines at fast food restaurants. In trying to imagine getting a restaurant to hustle someone else's products, especially software, that's a huge ask. So, at the end of the day, when you have this meeting are you like, "Hey, look, all those fees, they're gone now." Are they so excited about this purely because they know how much money they're saving and how much that means for their bottom line?
Kaz: Yeah. Let me give you an example. We have a store. It's two things, to be honest with you. One is the structure of the credit card system. So, we have a store, where I was talking to her three weeks ago. It's a local coffees shop and I won't name it, because the story is really sad. The lady who ran the store is on the verge of closing it because of her credit card fees. She has such high credit card fees that she is literally losing money running the store every day. So, the last time I spoke to her, she was on the verge of tears, because of her fees. The second thing is, the people who usually sell credit card fees, because Visa isn't a big company and banks don't actually sell credit cards fees. They hire a whole bunch of people who are--
Aaron: What do you mean Visa isn't a big company?
Kaz: Visa is just a router. Visa are actually the people who just does the hand off. Visa doesn't sell credit cards processing to customers.
Aaron: So, there's not a ton of employees. They don't have reach?
Kaz: It's a $120 company, but it doesn't have--
Aaron: Which is pretty big, by the way.
Kaz: Yeah, well, it's not big as Reddit's going to be soon.
Alexis: Nice. Or Kash will be one day.
Kaz: Hopefully. So, the people who sell it have an incentive to increase your fees. The guy who comes to a retailer and says to you, "I will give you credit card processing," is on commission. So, they have an incentive to increase your fees, which happens all over the place. So, they have hidden fees. No retailer can tell you what their fees are.
Aaron: It doesn't just look like, hey, I've signed this contract. Every X percent of sales goes to this person?
Kaz: No, because when you walk in to a retail store, they can't tell what the charge on your credit card is. Visa has, I think, 25 or 30 different charge buckets and all the banks have different fees. So, when you have a credit card that has 2% cash back, someone is paying for that, and, indirectly, it's you. You're paying for it yourself.
Aaron: So, let's talk about, basically, this massive tax on small business owners.
Kaz: Yeah.
Aaron: People who probably don't have the time or even the in-depth legal understanding necessary to parse these contracts to see what they are actually paying?
Kaz: Yeah, exactly.
Aaron: And so, that's pretty crappy.
Alexis: There has been so much advancement on the consumer side between Apple Pay, Square. I get to feel a wizard whenever I buy a latte now, but it's all been happening on the consumer side and so what you're saying is, on the back end, the guts of it that actually affects the merchants, still sucks just as badly as it did before?
Kaz: Yeah. It hasn't changed in any significant way. They now run better modems, but it hasn't changed. The structure is still the same as it was when credit cards first came out. It hasn't changed in 70, 80 years. And that's why you have these massive breaches, right? So, TJX, which was the largest credit card breach in history, before Target was the largest credit card breach in history, before Home Depot was the largest--
Aaron: It just keeps going up and up because it's such a big [inaudible 00:43:38].
Kaz: Yeah and you keep trying to make better doors, but they don't have walls. So, you can make it as good as you want, and as [inaudible 00:43:49] as you want.
Aaron: It's a crazy metaphor.
Kaz: The problem is that there's massive loops, massive holes that cannot be fixed. They are not fixable. So, the whole system will collapse on its own weight.
Aaron: So, we'll talk a little bit about more of how bad the credit card processing system is and how Kash is going to save the world of retail in just a second but, if you're just tuning in, I want to say thank you for tuning in and welcome to Startups School Radio. I'm your Host Aaron Harris, broadcasting live on the Business Radio Channel powered by Wharton on Sirius XM. If you're just joining us, we're talking to Alexis Ohanian, the co-founder and current Executive Chair of Reddit, and Kaz Nejatian, the co-founder and CEO of Kash.
We were just talking about the tax that credit cards systems impose on retailers and, effectively, on every American because pricing goes up when this tax exists. And Kaz has built a system that eliminates those fees. So, you were saying that you basically just directly debit from people accounts. So, you were just talking about credit card breaches, these massive breaches where hackers are stealing, I think it was some 50 million credit cards record from Home Depot or something like that?
Kaz: Yeah.
Aaron: So, one of the reasons that credit cards have prevalence is that they talk about anti-fraud. You mentioned that it's not really the [inaudible 00:45:09] the number, but what are you doing? How do you stop fraud, because it could be a massive problem?
Kaz: Yeah. Because we use the smartest computer that has ever existed, that's your mobile phone, and it's on you all the time, we can do things that credit card companies just can't. For example, any token we use to pay for a transaction is only good for less than 50 seconds. So, even if you managed to steal a token, you can only use it for 50 seconds at the location that the token was stolen.
Aaron: So, when you were talking about multi-factor authentication before, you have the number, another number, which are both static, here you have this incredibly timed boxed and location boxed sets of data that have to match up, otherwise nothing.
Kaz: Yeah, and because we know who you are and where you are, we can protect you in a way that a credit card company can't. Because credit cards are so insecure, they have to create regulations to make sure credit cards can't be easily stolen. So, when you swipe your credit cards, the person that the company who first gets it doesn't know who you are. They have no idea who you are. All they see is a bunch of numbers that they pass along. We know where you are, we know who you are, we know what you're buying and, because of those things, we can make a very secure system. And we don't allow for transactions to clear, where there's doubt. We haven't had a single case of in the entire time the company has been up and running.
Aaron: So, how long have you been up and running? When did you start the company?
Kaz: So we started the company a couple of years but went live in July.
Aaron: What did you do for those years before you went live?
Kaz: So, we thought the best way to build a system that would beat the credit card companies was to build a Point of Sale. So, we built a Point of Sale Company, and sold it to lots of people.
Aaron: Sorry, what is a Point of Sale?
Kaz: A Point of Sale is actually a smart cash register that would allow, so we sold it to a bunch of people. There's hundreds of stores using it. We were looking at the numbers and it turned out no one was actually using it as cash register. Everyone who was using it was using it a way to avoid credit card fees. So, we said well, the Point Of Sale business is a fairly crappy business to be in. There are just a lot of people who are doing it better than us, but no one was doing payments better than us. So, we applied to Y Combinator and said, "Look, we do this thing well. We are going to do this thing only." So, we launched in July in San Francisco and we're going to be leaving San Francisco in two weeks. We are going to do our first market outside San Francisco.
Aaron: Wow what's your next, well, you already have that store in Oregon.
Kaz: Because we're following customers around, literally. So, when customers reach out to Kash, we follow them around. So, we have lots of stores that have reached out from Portland, so we are going to Portland next.
Aaron: Is that how you spread, that one retailer tells their friends, like the other guys in the mall?
Kaz: Yeah, our retailers are our best advocates. We don't have a big sales team. The retailers tell their friends and tell each other and they come to us because they all know how, the average Mom and Pop or average store that has 19, 20 locations feels really powerless against the big bank. So, they feel the pain. So, as soon as they find a solution, they tell other people.
Aaron: It sounds like you're doing something that I would say is Alexis's model, which is make something people love, which is similar to YC's model, which is make something people want.
Alexis: I just remixed it.
Aaron: You just remixed it. But the idea that you had this company for a couple of years, making this thing that you thought was the right answer, and then you saw, wait a second, they're using this for something we did not expect them to do. How do you have the confidence to make that change after investing years of your life in something, to say, "Screw the business that we had, we're going to do this whole new thing and we are going to just put all the chips on the table and do that." How do you do that?
Kaz: Well, Alexis was building a mobile ordering company before he built Reddit, right? I think there are times when it feels weird. It feels completely unnatural that you've written I don't know how many tens of thousands of lines of code we had written that we threw out, but it feels like you're kind of jumping off a bridge, hoping you'll build a parachute before you hit the ground. But that's what we did, because we knew we were not going to change the system that we hated so much by not being really good at this. We knew we couldn't everything else required to do it and we knew that this was one thing we had latched onto.
So, it was a choice of building a company that was mediocre, that made some money, but end up not affecting world in a massive, significant way or saying, "We are going to give up the revenue we had, we are going to give up this path to profitability that would get us there, and, instead, we are going to go do this thing we are really passionate about." Everyone that works at our company is really passionate about hating the system, as it exists. We think the system will collapse. Even if it's not us doing, someone else will do it. This system is a bad system for the world. So, we feel passionate about it. So, it was easier that way.
Alexis: I know what companies I'm shorting after this. The thing that really stirs my cocoa is we see a lot of founders. We advise a lot of founders. It is hard. We develop these egos around our creations, and I think the vast majority of founders would probably still be working on that Point of Sale device. The thing that I'm still trying to wrap my head around is if this was so egregiously bad, and I believe that it's this reviled and this terrible and this insecure, how has it taken this long? Smart phones have been around for a minute. How has it taken this long for Kash to exist or for something like it to exist?
Kaz: It's a couple of things. One, there is a lot of money behind the existing system. A lot of people profit from this bad system existing. It's almost like net neutrality, right? A lot of people, a lot of big companies had a lot of lobbyists who made a lot of money and a lot of lawyers made a lot of money. I say this as a lawyer but they made a lot of money making a bad system exist and that's true. That's been the case. Every time someone has tried to make their payments system better, banks have tried to stop it.
Aaron: [inaudible 00:51:27]
Kaz: Paypal was sued [inaudible 00:51:28] by banks. So, I think it is the matter of being an independent company that is not attached to the existing system and that's why we can beat it.
Aaron: One of the things I wonder about when I talk you to you, Kaz, about this fight against injustice, unfortunately, we're not going to have enough time to go in to it here, but you grew up in Tyron [SP], right?
Kaz: Yeah.
Aaron: Under a pretty oppressive regime, and you left when you were a teenager. Do you think that that's part of the inspiration? You see this massive injustice and you want to fight it? Do you think it has anything to do with it?
Kaz: I think so. I think it's that and growing up in a family of people who said, "You know what? If something is not right, go fix it." And we don't think this is right. We think it's bad for the world.
Aaron: Thank you for doing something good for the world, and I'm not saying lawyers don't do good things. My wife is a lawyer, but they are huge things that you're tackling, and it's inspiring to hear you talking about it. I want to thank both of you for joining us on the inaugural Startup School broadcast. This was a really, really great conversation. We'll get you both back here because there's depths that we haven't even talked about and a lot of stories I know are out there that our readers would love.
Thank you all for tuning in to Startup School Radio. I'm your host, Aaron Harris. We've been broadcasting live from San Francisco, California from Wharton's Campus on Business School Radio, powered by Sirius XM. Be sure to tune in next week, where we'll be joined by Justin Conn and Matilda Conn from Front. I'd also like to thank my senior producer Lisa Montagneo and associate producer and engineer Dion Simkins. Again, this is Aaron Harris. I'm a partner at Y Combinator and this has been Startup School Radio. Thank you all and have a great week.
