David Klein set out for the Wharton School of the University of Pennsylvania with a plan — just not an idea. He knew he wanted to launch a start-up but wasn't sure how he'd do it, who he'd partner with, or which industry to target.
Drawing on examples set for him decades earlier, Klein took aim at a target few could even see at the time.
His start-up wasn't exploring a new industry; it focused on one of the oldest businesses in finance — lending. Klein and his co-founders took the start-up that would become CommonBond into the budding financial technology industry to challenge other banks, as well as other online lenders. But it worked. Now, his company has 96 employees and is on track to surpass $1 billion in total loans funded later this year.
Klein, 35, talked to CNBC.com about the difficulty of launching into an established industry, the pain of rejection as a start-up founder, and pitching investors. (This Q&A has been edited for clarity.)
CNBC.com: You went into business school thinking it's not about becoming a banker or a lawyer, but you didn't know how you would launch a new business — what was that like?
Klein: I went back to business school knowing I wanted to start a company and run it before graduating. The reason I stumbled upon the idea for CommonBond is precisely because I went back to business school. I had to pay my way 100 percent with student loans. I realized a few things: The process is clunky, the speed of getting a loan is nonexistent, the customer service is really poor and the cost of capital is higher than it needs to be. We decided we're going to do consumer engagement much better. In hindsight this is what happened: The emerging fintech folks are becoming the new front-end of finance and traditional finance is becoming the back end. Four years ago, what you really only had was the promise. You had to believe, given what you saw, that this is where things were going. And we did.
What did you need in co-founders, how did you find them, what was the pitch?
I met with a friend as I was getting the company off the ground and I told her all about my idea for CommonBond. And she said, "I have a really good friend who I worked with at JPMorgan in Hong Kong, who's looking to work for a start-up with a strong legal and regulatory aspect to it. Do you mind if I invite her to dinner tonight? "
And it was Jessup [Shean]. Jessup and I sat next to each other and really hit it off talking about the business, and within a few weeks I offered her to be co-founder. With Mike [Taormina], in a similar fashion, I was doing everything entrepreneurship on campus. We had an event for start-ups, and there were 30 people there and everyone talked about what they were working on. I talked about CommonBond and at the end of it Mike came up to me and said, "Hey, that's a really cool idea." At the time he was working on a separate start-up. We started talking shop for a number of weeks and I ultimately asked him if he wanted to join.
Who did you look to as a mentor?
I come from a family of entrepreneurs; it's in my DNA and it's the reason I wanted to start a business. My grandfather is the patriarch of our family. He came to the U.S. after World War II and became a self-made man. He started off in Bakersfield, California, as an assistant shoe salesman, then a shoe salesman, then an assistant manager, then a manager. … He had an insane worth ethic. He saved enough that he then bought his own store, and he kept working and saving. It was then a second shoe store, and a third shoe store, and a fourth shoe store, then he bought property, and more property, and then started buying property in Los Angeles.
He was a huge influence and it was not until March of 2011, when he passed away, did I start to realize how much of an influence he really was on me. I'm sure he faced a lot of this stuff, in the U.S. launching businesses, and even worse, in Europe in World War II. I thought, what I've got to go through is peanuts compared to what he's gone through. Maybe I've got a higher tolerance for pain because of that. Next to him, I thought whatever rejection or disappointment I was going through was nothing. I do feel like I draw on him a lot, and I don't know if you'd call that a mentor. Only because he wasn't here for me to talk to while we were launching the business. But I draw from his experience and what I observed he built.
Talk about raising capital from investors. What did you take away from that?
We were pitching for funding relatively early on. Our business needs capital to fund the business and lending capital to fund the loans. The first one was probably early 2012, and it was probably more for perspective than for money. We spoke to a couple hundred investors before we got our first 'yes.' We got so many questions and were able to refine the answers, and refine the model, by the time we got to (venture capitalists) it was really clean. I started speaking to VCs in September 2012, and we ended getting up a couple of term sheets the next month. But it didn't happen over two months; it happened over a full year. It started with applying to the Wharton Business Plan competition and getting rejected, applying to TechStars and getting rejected, DreamIt rejection, [Tiger] and getting rejected, and then talking to 200 individual investors before we got one "yes."
I have to imagine there are times you threw your hands up at times and said, "This isn't going to work." How do you get around that?
Klein: It's very easy to go there; I think that everyone does. One of the few things that separates entrepreneurs that go on to build something and folks who don't are those who keep at it. It's not like you're banging your head against the wall, it's using feedback as fuel. You're not necessarily discouraged by feedback. It's fuel to shift a business model you think will work, and fuel for yourself to go out there, again and again, until everything clicks. I consider those character building times. It's really easy in these environments to be discouraged, to doubt the idea, to doubt yourself, to be discouraged and to leave.
Why did you pick New York City?
Klein: We were discussing Philadelphia, California and New York. And at the end of the day, New York City was kind of a no-brainer. And the reason for that is because this is where we were on the East Coast. The East Coast has a critical mass of both investors and consumers. This is New York City; this is the capital of capital, globally. For us, to speak with institutions we take a subway ride, not a plane. The final thing is, from a talent perspective, we've been very lucky in having a great pool of talent to draw from here.