Building an entirely new infrastructure for investing: An interview with Chris Püllen from Naro

Introduction

In today’s edition, I invite you to sit down with Chris Püllen, a first-time founder who is writing a new rulebook for investing with his startup – Naro.

We delve into his journey from a student to a fintech founder, uncovering the inspiration that struck during an unexpected and soul-searching Covid lockdown experience in Geneva.

As we explore the current landscape of investing, we gain insights into the challenges faced by financial institutions, brokers, and consumers today and the gaps in the existing infrastructure.

Chris provides us with a glimpse into his team's mission and how they aim to transform the way we approach long-term investments.

Together, we'll uncover the potential impact of this new venture on the future of investing and gain a deeper understanding of the changes that lie ahead in the financial technology landscape.

Hello, Chris. Could you start by explaining a bit about your background and how you got to where you are at right now founding your new venture called Naro?

Thank you so much for having me. I'm originally from Western Germany and I have a banking background. I did my apprenticeship as a bank clerk and then went and did my bachelor studies in Dusseldorf in classic business administration. That’s actually where I met my co-founder. So we've been friends now for eight years and were friends before we became founders. I’ve always had a passion for the stock market and investments thanks to my grandma. Starting at 12 or 13, I was building my first portfolios by hand and I was very interested in all things related to numbers next to my studies. I just started with different internships, working studentships, and first jobs at local German portfolio managers, but also big investment Banks like HSBC and then went to Geneva at the beginning of 2020 - and then COVID hit. I was living in the French part of Geneva. There was a 23-hour ban for going outside at the beginning so I wasn't even able to go to Switzerland to work without a governmental permit and I had to be inside for 23 hours on the weekend for example. It was pretty tough and as I became an uncle just a year earlier, I was starting to question a few things. What am I going to do with my life? Do I want to make rich people richer all day? What is it that I want to do? In combination with a severe back injury, I kind of went over pieces and said okay, I want to do something else. That’s when I decided to do my Masters in Finance in Cologne. It was during my Master's studies when the idea for Naro was developed.

It was a very tough time for a lot of people. Interestingly, it led you to think about yourself and where you wanted to be. The concept behind Naro is quite abstract and something that hasn't been done before. So, how did you get the idea to do this in the first place?

It’s developed quite a lot over the years. In the beginning of 2021 when the whole GameStop hype was going on with the stock, my co-founder and I realized that there were so many people among our friends and family that were interested in stock trading and investing. So suddenly people knew why to buy - Zero interest rate, important pensions - and where to buy, with the rise of the neobrokers, but the question of what to buy wasn’t answered for all of them. We thought, okay, if we make this process easier and more customizable that could help people start with investing. And so we bootstrapped a b2c platform, “Yahoo Finance in Modern” on government grants with a little support from some angels and reached more than 6,000 users with a marketing budget of less than €1,000. So it was quite successful overall, but we had no influence on the real investment behavior as we did not manage the transactions. And people just didn’t want to have two investing apps on their phones. So I would say about 18 months ago we realized that either we build a broker ourselves or we sell our algorithms & portfolio ideas to brokers.

The brokerage landscape was already quite crowded. Also based on the USP that we have in our algorithms, we decided to partner with brokers rather than build one. And this is where we then actually got to know the real problem that we're tackling right now, which was then kind of the birth for Naro as it is now.

So you want to be like eToro or one of these other apps but actually, give people suggestions as to where to put their money?

No, we don’t do any B2C business. The main thing we realized was that trading platforms don't want to help people with what to buy in the long term because if people know what to buy they will do fewer trades.

And the whole monetization model of brokers is based on transactions. The problem is that the number of transactions is negatively correlated with AUM and wealth for private investors. If you look at the big financial behemoths in the US like Charles Schwab, they have their own investment products. But in Europe, it is not so easy to build an asset manager next to a bank regulatory-wise, which is why huge banks like Commerzbank or ING don’t have their own asset management business, while the Deutsche Bank has to act via their exchange-listed subsidiary DWS. So, overall the process of building a regulated fund management company and a bank next to each other in one structure is close to impossible out of compliance reasons, especially if you're not very well suited with multi-billions of market capitalization.

And so we thought okay, but there needs to be someone that supports all of these brokers and financial platforms with their investment products because it’s only when they have their own investment products, that they can start earning on those heavily AuM-based and not only transaction-based. Which is a lot better for the interest of the end customer.

This is the main reason we started Naro. So for example, if you invest in the iShares MSCI World ETF right now, the broker gets a one-time off fee from iShares. So if you now hold this investment for five years, you're a great client for iShares and it's great for your wealth, but it's bad for the broker because the broker earns once in the beginning and then doesn't earn again for five years.. This is why brokers always try to persuade people to buy different investment products. But if we build those investment products for them, they could become their own iShares and their own asset manager, while we build the operational and regulatory fund infrastructure. We would enable them to be not just dependent on the transactions but on the assets under management.

So you’re bringing the two worlds together. Is it then in a dual income model for you? Are you going to be getting commissions from brokers and then commissions from users?

So there's no B2C contact from us with users and no commissions from users, it's rather that we are building the investment products for the platforms and we share the management fee with the platform. Let’s say that there's a huge cake that is divided up. Right now 90% of the cake goes to asset managers and 10% goes to the platforms and we want to split this in half because this half of the cake is still very big. Big enough for everyone in our company and also our investors to eat. We believe that the power and the earnings share of asset managers are way too big for what they're doing on the distribution side when most of the platforms are doing the heavy lifting.

So you don't have a front end at the moment. It's all kind of going on behind the scenes.

Maybe I should explain it in the way that I always explain it to my mom which is probably the best way. We're kind of like the own brand factory for the supermarket. If you have a supermarket, you have Pringles and Hershey's and Philadelphia cream cheese, what you want to do is make your own cream cheese, your own chocolate, your own chips because you get a better margin on it or because those products better suit your client base. Why should you sell only those branded products if you don't earn much money on them? So potentially let's move some of this out of the way and let's replace it with our own offering. What you do as a supermarket is you just put the labels on the packaging and put it on top of the shelf, but you're not doing all of the stuff in the back. Naro is doing all of the stuff in the back. So we manage all of the ingredients, the logistics, the machines, the recipes, etc., so we help supermarkets aka the financial platforms to build their products instead of selling external products. We help them build their own ETFs and funds in our case without any operational or regulatory burden.

Finance is a heavily regulated business. The regulations extend throughout the different parts of the value chain. So what we do is we are initiating the fund with our own investment company. But you have to have various regulated functions in place and for now we have decided not to do all the regulation, as we would have needed to build for three years without making any revenue and without having any clients. What we are doing is forging strategic partnerships with different partners while also building one part of the regulatory value chain from the beginning. Therefore we will be able to build a trustful, highly compliant product with experienced partners and offer our clients a quick go-to market.

And you have quite a big focus on sustainability, right?

Yes, I would say that, but it’s more about our focus on customizability. The main topic is that platforms know their users best, and we don’t offer one-size-fits-all approaches. So if you're a client at Tomorrow – the sustainable bank or you're at N26, or you're at some local Bank in Germany your investment profile and also your personal profile will differ a lot. It says a lot about you. Right now, all of these people have to buy the same investment products because these companies cannot create their investment products based on their own user groups. And so this is very interesting because we allow them to do this and offer a high degree of customizability which does feed into sustainability as well. It means that people have a choice about where they want to invest their money, and can decide if they want to have oil, weapons, or nuclear energy inside their portfolio. It could also bring together bonds and equities or have thematic or geographical focuses. It is really about customizability, not sustainability per se. But sustainability is a part of it.

So, your customers can build their own portfolios?

Exactly, our customers, which are companies, can build their own ETFs or funds. It enables them to get a higher share of the management fees. So we save on marketing spend, they save on operations and regulatory efforts because we do all of this and so this is a strategic alignment between us.

What puts you in a position to be able to build these funds for these bigger companies and banks?

I think there are two things. Number one, this whole infrastructure area is very analog and it's not very digitized yet. If you look at the fintech landscape, a whole part of wealth infrastructure has not been disrupted.

I also think that if you look into banking, ?payment, and brokerage, a lot has been done, but still, the wealth management industry and the asset management industry are so big and nearly untouched on the infrastructure side. I think what brings us to this position is that we know this area from our personal background. So my co-founder spent time at the university in Dusseldorf, Western Germany. He was responsible there particularly for sustainable finance, understanding fund management processes and how sustainability is part of fund management processes. I on the other hand spent time at financial portfolio managers, but also at capital management companies that are doing regulatory stuff in the back so we kind of knew the little nitty-gritty stuff that is not so easy for people to grasp.

So we can combine the unique startup tech savvy-ness with industry background. Number two is that we focus on creating partnerships and creating a company that is uniquely suited in different kinds of aspects. So we have a managing director in place, not one of the founders, who runs our investment company and he’s in his 40s. And so it's just a different thing than this classical start-up set-up that there are three guys in the bedroom building tech, but with 33 as the average age in our team, we’re a group of experts who want to disrupt finance reliably.

How is it for you to navigate the financial landscape in Germany? Has there been much resistance to what you’re trying to do?

To answer the question about the financial landscape in Germany, I think what we're doing here is creating a new market. Right now many of the companies we're targeting just don’t know that this possibility, of building your own fund, exists. So for us, it's not only about bringing up Naro as something new but also about bringing up the topic of customizable fund structure. We’re partnering with a branding agency to help us really understand how we should structure things and how we should approach markets. And they said that the best comparison is EV Mobility. So it is still a car and it still brings you from A to B. And there are already cars out there, just like there are funds and ETFs out there. But still electric cars are very different in manufacturing, regarding the “fuel” and comparably our approach is different as well. Tesla is also bringing EVs to the forefront so 50% of all of the sales pitches of Tesla is why it's better for you to get an EV, not only why it is good to buy a Tesla.

And so for us, it's kind of the same thing. It's about bringing our approach to the forefront. We’re saying “Hey, you should build your own funds instead of buying existing ones because it's better for your clients, it’s better for your margin and you have more control over the assets.” That means it is 50% about bringing Naro upfront, but 50% about bringing up the topic and our new way of fund structure upfront.

Regarding Germany overall. It’s not as bad as people always say it is. We don't have those horror stories to share yet. I think the main difference is that if you talk to German regulators and other authorities, they see themselves as policemen. Other regulators and their authorities see themselves as consultants who want to make things happen for their “customers” in the best possible way. This makes it more challenging to operate in Germany, which is why we're doing our investment company in Luxembourg, by the way.

Although you are quite a young startup, you said your average age is about 33… What have you achieved so far with Naro and what do you need to do in the short term to get it to where you need it to be?

I think what we've achieved so far is securing capital from investors. That's already a great sense of responsibility. But also the trust is there for us to build something that matters. It's always with infrastructure that you have to build something first and you have to invest first to get something back. We are focused as founders and we are a very focused company. It’s not possible to build high-quality infrastructure in a way that you make revenue from day one.

So we want to capture market share and scale this business. So this first step for us as first-time founders, to raise three million dollars in capital in our pre-seed round is really something, especially in 2023 where pre-seed fintech investment was close to death. We saw a lot of insolvencies and so this was a huge accomplishment for our whole team. Then afterward signing our future managing director was the best thing that happened so far in 2023 because he's a great guy and he’s very very well-connected. He's even more competent than he is well-connected, so he’s a great fit.

For us to have a 23-year-old developer with a 48-year-old managing director playing beer pong next to each other, it’s not something that happens in other companies very often. And so we very much cherish this and we're very very happy. This is also how we choose who's part of the team. Also now having all of the strategic partnerships aligned and being able to make a fund set up work. This is another thing that we're very proud of.

You said earlier that you're doing some branding work, So what does that involve and how close are you to announcing more about what you're doing?

We’re doing a fundraising announcement this week. We need to put Naro on the map. And so what we’ve done in terms of branding is bringing us forward, but also bringing our fund infrastructure forward and doing it in a boutique way. We don't want to have this Stripe developer image, because that's not what people in this sector want. People search for serious companies. They don't care that much how we structure fund processes in a better way using tech in the back. They just want to have the best possible user experience. This is why we decided not to go for tech-savvy branding but rather for boutique investment branding. We’re very very happy with the outcome.

It’s about making people realize how important what we're doing is. And so our brand statement is Money Matters. That's such a bold thing and It's also kind of arrogant as it evokes a “live fast die young” vibe but it's the truth. No matter what you say, money matters a lot. It's about your health. It's about insurance. It's about sustainability. It's about your job. All of those matter and it's always about money somehow in the end.

One of the biggest topics in the German parliament is pensions and the fact that so many of the people who live in Germany aren't saving for their future. Also, the people who have the resources to do so are not saving for their future. There's a big push within Germany now, so how are you going to align this product with this push towards people saving more for their futures?

I think there are a few different interesting things. Out of the German federal budget, every fifth euro goes into supporting the pension system because it's broken already. I don't know the exact numbers, but I think it's around 400 billion, so there's 80 billion going to pensions. In 25 years, it's going to be 50%, so 200 billion. So, not every fifth euro but every second euro is to be invested into a broken pension system.

When you are old, if you don't do anything and rely on your state pension, poverty will be the single biggest problem. And this is a driver of populism from the right and populism from the left. We have people in our society who are fighting for a better planet, for sustainability, and for NetZero, which I think is a super important topic. But still just coming from a statistically significant kind of perspective the possibility that our children will grow up in a world that is autocratic rather than democratic is way higher than a broken planet. And wealth inequality as the biggest statistically significant driver of populism from the left and the right is therefore an important issue for us all to address.

This topic is even more complex than getting to net zero. And we want to change that. We don't just think that it needs to be changed by another cool app or another social media platform. We have to fix what's broken on the inside of the system to do that. And that's the nitty gritty work that nobody enjoys, but it still needs to be done. This is how we are bringing a better product with lower fees for people because we decrease those fees, we increase the interest for the distribution platforms and they therefore can give it to their clients. So we're really about fixing that broken infrastructure in the back and making products more suitable.

It's about more than just a technological solution. You are trying to fix and change the infrastructure.

I think nobody, even the good founders that I know, want to get up at 6:00 am and go to bed at 11:00 PM and do this again for the 37th quick grocery delivery start-up. It’s not about getting rich quick, this is not the time for wannabe founders.

This is very much about people working on making society a little better. Not in an altruistic way because I think the monetary incentive needs to be there for everyone, for the platforms, for investors, for our partners.

Are you going to be building this infrastructure for the next two years?

I would say kind of, the important thing is: We are open for business. It is planned that our first funds will go live in Q4 of this year. After our financing round that we did in September, we planned a 15-month time frame.

But in the process, we're not doing everything at once. That is to say, it's not that we have everything regulatory in place already on our own, but this infrastructure will need some time. So to develop fully there are a few regulatory steps on the way, but with our strategic partnerships, we have a fully compliant set-up already. For us, it's an advantage to have strong regulatory partners because you can say that these are Institutions that have been on the market for 100+ years and have billions and trillions of assets under management. It's also again the example of this “own brand Factory” kind of thing. So if you're asking me, in Q4 we will be able to deliver your own cream cheese, but of course, we're not owning ingredients and recipes and logistics and machines all at once just yet.

It's one thing at a time?

It's not just one thing at a time. In fintech, some points always stay external. In terms of the regulatory scope, you're not allowed to do some things at a certain point, and at some point, you also have to decide compliance-wise what makes sense for you. Look at BlackRock ETFs for example. We have Blackrock in that process. You have an index provider like MSCI and you have a custodian like State Street in that process. So there's these financial behemoths that are worth 300, 400, 500 billion dollars and still they partner a lot and so it's not integrating into every part of the value chain that's necessary. But rather owning the important things.

So you’ve raised the funds. What is the plan for those funds? What are you using this money to do?

So we raised in the summer, and we had our notary in September so six months from now. And many people said why don't you announce and I said because we have nothing to announce yet. I don't think raising all that money is an accomplishment in itself, It's rather supporting you on the way to reach new accomplishments.

And now we’ve raised the money, and starting this week we’re open for business. This is an accomplishment and we're proud of that. What we need this money for is to build the state-of-the-art infrastructure. It's about obtaining regulatory requirements and it's about forging those strategic partnerships because those partners will stay with us for a long time. It’s definitely helpful to have three million dollars in the bank account and strong investor names backing you in that process.

How many are you on the team now?

10

Tell me, what is your vision five years from now? And what is the greater vision beyond that?

For us, it's all about assets under management. It's all about getting the biggest possible sum of money into novel products because we believe they're superior products. And so the vision in five years is really to have established a European fund ecosystem that every company knows about whether it's insurers or brokers or whatever. Our innovative infrastructure provides a unique investment setup, eliminating reliance on generic approaches and enabling companies to grab their fair share of the fund market - resulting in lower fees, higher interest, and more suitable products for the end user. That's what we want to achieve, because in the end: Money Matters.

Thank you very much, I wish you and the team all the best.

Thank you.