Tim Chen was working at a long/short equity hedge fund in New York, and on Christmas Day he had no thoughts of a career change. But it was late 2008, in the middle of the nation’s worst financial crisis since the Great Depression, and Chen was one of those who lost his job. It might have been good timing.
During his career disruption, Chen was able to delve into a problem facing his sister—she asked for his help to choose a credit card. He was dismayed to find how hard it was to find reliable comparative data. He ferreted out information from 10 major banks, created a credit card spreadsheet, and saw the much-forwarded file spread out beyond his family circle. Chen realized its potential as a Web app, and in 2009 he founded a company, San Francisco-based NerdWallet, with sweat equity and less than $1,000.
It was a good time to switch from high finance to personal financial advice, a field that has burgeoned online and drawn growing investor interest. At the time, it was also getting easier to run a very lean startup. Cheap tools were available, like cloud storage and pay-as-you-go software subscriptions.
Seed funding? “I never needed it,” Chen says.
NerdWallet became profitable as a consumer resource that matched credit card customers with banks, which pay the company fees for successful sign-ups. So NerdWallet hopscotched over some typical startup fundraising milestones before it finally took money from venture capital firms.
The company’s first funding round, announced this month, was an outsized $64 million Series A, augmented by a $33 million loan facility from Silicon Valley Bank.
“We didn’t really need that much,” Chen says. But Chen wanted maneuvering room to execute on an ambitious plan—to become the go-to site for information about 45 major financial decisions families typically make, such as selecting among mortgage loans, credit cards, college savings accounts, retirement investments, and the increasingly complex options for medical insurance. NerdWallet drew close to 30 million consumers to the site in 2014, and aims to maintain its rapid growth rate.
Counting its cash reserves, NerdWallet now has more than $100 million on hand as it tries to establish a dominant position in a field now crowded with competitors jostling to provide personal finance advice and services. They include big players such as Bankrate (NYSE: RATE) and San Francisco-based Credit Karma, as well as a host of specialty startups such as Newport Beach, CA-based Acorns, which is trying to get millennials hooked on investing.
Florida-based Bankrate, which offers interactive searches for financial products and licenses its editorial content to hundreds of newspapers, has completed a string of recent acquisitions, including Detroit-based Quizzle, Pasadena, CA-based Wallaby Financial, and San Francisco-based Caring.com. Bankrate paid $54 million for Caring.com, which provides resources for people supporting their aging parents. Meanwhile, Credit Karma, which offers free credit scores and advice, raised $75 million in September, bringing its valuation to about $1 billion.
To take a place among such rivals, NerdWallet is building a bigger product team to expand the website’s features and broaden its information resources, which include backgrounder papers and consumer-focused articles. To augment this content, NerdWallet is hiring journalists from major media outlets including the New York Times, Bloomberg, CNN, ABC News, and the San Francisco Chronicle. Chen says the NerdWallet staff of roughly 200 will increase to about 300 by the end of the year, and continue to grow after that.
While NerdWallet’s big fundraising round may help attract talent, Chen says that wasn’t the main reason for lining up so much capital.
“We wanted the confidence to attack the product problem,” Chen says. The company now has the option to run less profitably for a while, or to make an acquisition that would round out its services, he says. Under terms of the financing round, NerdWallet has a valuation estimated by some observers at $500 million. Chen says that estimate isn’t exact, but it’s “in the ballpark.” The Series A round was led by Institutional Venture Partners, and was joined by RRE Ventures, iGlobe Partners, and angel investors.
Chen says NerdWallet’s website design is skewed somewhat to attract millennials. As the site appears today, it seems tailored for the consumer who has a specific question in mind, rather than a desire to start by studying up on financial products in detail. Clicking on the link for credit cards, for example, leads straight to an interactive table where visitors can compare rankings for nearly 1,700 cards. “Apply” buttons take users straight to the banks’ application forms.
Chen says NerdWallet saves time and simplifies choices by asking users for a few key bits of information, such as their home state and the type of card they want. For example, some visitors are looking for the lowest interest rate, while others want the best deals on rewards such as airline miles or cash back on purchases.
“There are usually only two or three things that matter,” Chen says. Knowing those factors narrows the choices down considerably, he says.
Funneling consumers to the cards that suit them best is also valuable to the banks, Chen says, because banks only make money if the card is actually used frequently. Otherwise, the bank is just paying costs to administer the account, he says. NerdWallet gets a fee when a customer applies successfully for a card, and its banking partners send feedback when the matchmaking process misses the mark, Chen says.
NerdWallet has partnerships with eight financial institutions: American Express, Bank of America, Barclaycard, Capital One, J.P. Morgan Chase, Citibank, Discover, and U.S. Bank. The limited advertising on the site includes “featured offers” from some of these partners.
In addition to credit cards, NerdWallet rates checking and savings accounts, mortgage loans, online stock trading sites, and auto, life, and health insurance policies. Its NerdScholar section offers guidance on college loans and other financial decisions faced by young people starting their careers.
NerdWallet visitors can also type in specific questions, which are answered free by experts such as CPAs. The experts, in turn, can showcase their skills, and NerdWallet offers links in case visitors want to get in touch with them.
At this point, users are not required to register on the site, and NerdWallet doesn’t collect data about them, Chen says.
“We should give users as good an answer as possible without [personal] data,” Chen says. Answers can be more precise, though, if the visitor shares some details, he says. “People can interact as deeply as they want to.”
Visitors looking for bargains can go to NerdWallet’s Dealfinder page, where merchants display sale items such kitchen appliances, cameras, and consumer electronics.
What this all adds up to is a lively e-commerce site as well. But Chen is hoping to set NerdWallet apart in the personal finance sector as a service that puts the consumer’s best interests first. The mission stems from what he learned back in early 2009, when he was researching credit cards for his sister.
The companies selling financial products such as mortgages and car insurance would rather launch a sales pitch than offer up detailed information for objective comparisons, Chen says.
“Once you start informing people, you start making much less money per person,” Chen says. To get data for product comparisons, NerdWallet mines databases such as company filings with regulators to gather information that companies don’t share more widely.
“Our ethos is to be the source of clarity for all of life’s financial decisions,” Chen says.
In its advertising disclosures, NerdWallet says it ranks credit cards based on “objective quantitative and qualitative analysis” that is unaffected by the compensation it receives from its banking partners. But compensation may influence some of NerdWallet’s practices, including the choice of cards featured in its articles and reviews, and the order of products shown on the site, the company says.
Not unlike many news publications these days, NerdWallet is consciously grappling with the balance between the independence of its editorial content and the needs of the business side of the house.
NerdWallet has organized its staff of experienced writers and editors within a traditional newsroom structure, which includes rigorous copyediting and adherence to journalistic ethics, Chen says. But this content organization also works in collaboration with business staffers whose priority is to make NerdWallet profitable. This wouldn’t usually happen at a traditional newspaper, where the advertising staff can’t select or modify news stories, for example. But those lines can now be blurred even at legacy news outlets as they seek to replace traditional revenue sources that have eroded in the online publishing era.
Chen says there’s an ongoing in-house discussion about NerdWallet’s mission to put consumers first and maintain their trust. To act on this goal, the company might choose to take lower fees from a bank in the short term if it means consumers will keep coming back.
“You’re optimizing for the short term if you’re selling consumers something that’s not good for them,” Chen says. “Our strategy is to become reputable so that people refer others to our site.”