Meet the Brooklyn Startup that Raised 100 Million Dollars

04/08/2014 03:29 pm 15:29:44 | Updated Jun 08, 2014

When Brooklyn-based startup CommonBond launched in November 2011, promising to reinvent the broken school loan system - the platform connects students with alumni investors to offer easier, cheaper loans - the idea quickly caught the attention of the press and the markets.

But it was when the 11-person company managed to raise $100 million in September of last year, that CommonBond quickly became an all-star in the New York tech scene.

We sat down with cofounders David Klein and Mike Taormina to talk about company culture, that $100 million round, and a lot more.

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Wakefield: You both founded CommonBond in November 2011, during your first semester of Wharton - that seems like an incredibly short timeframe to start a company.

David Klein: The idea actually started before that. In July of 2011, I finally decided to get my finances in order and I realized "How the hell am I going to pay for this?" I needed to figure out a way through student loans, and the idea started incubating.

Mike and I both had to pay our way 100% with student loans to go to school. And we discovered two things about the market that we thought pretty much stunk. One, fixed rate interest rates were way too high.

Mike Taormina: It's insane - especially if you've proven yourself and you have positive prospects.

DK: The second part was that it was unnecessarily complex. So you have this market that is fragmented, or at least information sources are fragmented, and no one is going to help you out.

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W: When did you enter Wharton's incubator program?

DK: In September I applied for the program and got rejected - the idea wasn't thought through enough, and I didn't have a team at the time. I met Mike and [cofounder] Jessup [Shean] for the first time in October, and our backgrounds were perfectly complementary. So we all came together as a founding team in November 2011.

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W: So many of the startups finding success today are tackling very specific, but fairly small problems. But the magnitude of what you guys were tackling as first year grad students is enormous - that had to be a daunting prospect.

MT: How many people said no to us for exactly those reasons? A lot. We're in a world where the startup mentality says get something out for $99. And we're telling investors, "In our second year we're going to have to raise $100 million." And, by the way, we're also still in school.

DK: There is an element - it's funny, we've never talked about this before - but you have to suspend disbelief. And the fact of the matter is, Mike and I are in the equivalent of our dorm rooms, right? We're running the models, we're looking at the numbers, and we're just letting our bottom-up analysis dictate how much we should raise, and it's basically telling us a 100 million dollars for the first year. So there's this suspension of disbelief, to believe that it's actually going to happen and you just need to just put one footstep in front of the other to do it.

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W: But it's obviously more than just a matter of wishing on a star and hoping for the best.

DK: The first step was not raising $100 million. It was baby steps. The first was to launch one pilot in one school in this well scoped-out part of capital. One to two million for one degree program - if we could pull that off, then we're in the position to pull off the next one, and then we're in the position to pull off the next one. And that's frankly what it's been the whole time.

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W: So how do you raise $100 million?

DK: It's funny, the honest answer really is, I don't know. But if I'm forced to give an answer, I think it operates at two different levels. There's a metaphysical answer, and then there's a tactical answer. The metaphysical answer has everything to do with the psychology of the entrepreneur, and how you manage that - how do you manage self limitations while at the same time, demonstrating and communicating the belief in your products and yourself and your team to go out and do this thing?

MT: Which is crucial. Because a lot of people start a company because they really want to start a company. When it's incredibly difficult to do.

DK: Not from a work perspective, that's hard enough. But from a mental perspective, it is extremely difficult because you need to be ready - you literally need to be ready to go broke to make it happen.

MT: I think, in part, that's due to have all of these stories in the press, and it's so much good news... This company is getting acquired, and this startup raised all this money... And we really don't speak too much about all of the failed ventures.

DK: As for the tactical, I'll tell you exactly what we did, we got our story down. By the time we went to raise funding, we had spent a year, every day, building our story.

Running the analysis, having hundreds and hundreds of conversations with some of the brightest minds on earth and potential investors who were just throwing question after question after question, to the point where we had answers for everything.

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W: For such a massively funded company, the team is still really small. You have 11 employees, right?

DK: And we plan to be at 21 within the next 2 to 3 months.

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W: So as much as you're prepared to answer questions about your business plan, there's suddenly the matter of dealing with employees. Is that a difficult transition?

DK: A year and half ago, Mike and I and a few people who were helping, we were in all our own spaces, working virtually all day, everyday. And it's an environment that allows you to be super efficient, and align your own personal style to the way you want to work.

Then you raise money, you grow, you hire your team. Now you have an office. Now people come in. Now people need to pull you in a million different directions because you're one of the founders, and you need to keep pushing, and folks need direction. And it becomes a very difficult experience. You know, I get my work done late nights and weekends, or the work that I used to do. There's a new kind of work now, and it's about the team.

And that's a morph that no one ever teaches you, or gives you a heads-up about. You basically have to stumble your way through.

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W: Now that you're on this hiring spree, have you developed a formal process for hiring?

DK: From the beginning we've always known the type of person we've want, but it's really only recently that we've put a process in place. You have to have strategic acumen, you have to be able to execute, you have to be committed to what we do, and you have to be a good person.

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W: What is the plan for 2014 then?

DK: The focus will remain on lending money to grad school students. That's the space that we understand really well, and we think that we can help a lot of people out in that subsection of the overall student borrowing experience. So law, medical, engineering - that's always been something we've wanted to introduce. I'd look for that in the first half of this year.

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W: CommonBond came out of the same Wharton incubator program as Warby Parker, and both of your companies have a strong commitment to social responsibility - Warby's Buy a Pair, Give a Pair and your 1-for-1. They're not teaching you that at Wharton, right?

DK: It comes from a very deep-rooted and personal philosophy that Mike and I both share. Toms Shoes and Warby had inspired me for a long time, because, in my opinion, they have found the Holy Grail of business.

The Holy Grail of business is how you organize a for-profit company where the more profit you make, the more good you do.

This interview has been condensed and slightly edited for clarity.

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