Barely 8 years since its life began in 2011, TransferWise, the UK-based money transfer startup launched by Kristo Käärmann and Taavet Hinrikus with headquarters in London and offices in a number of cities including Tallinn, New York, and Singapore, recently reached a $3.5bn valuation, making it Europe’s most valuable startup. Good news for the startup, but for the co-founder and CEO of Europe’s most valuable startup Kristo Käärmann, it takes one thing to start a business but a lot to get it going.

TransferWise, his brainchild has today has gone from bootstrapping to saving users over $1 billion a year when transferring money. The startup did this by tackling a common problem and taking action on it. Käärmann and his co-founder, Taavet Hinrikus, have gone from zero to a multi-billion dollar business in just a few years.

Here are a few insights about how he took the startup from zero to monumental success. 

Originally from Estonia, and armed with a college degree in Mathematics and Computer Science and a Masters Degree in Microbiology, and job stunts at PwC and Deloitte, Kaarmann said his experience as a consultant in one of the Big-Fours in London took a new turn when he discovered he was billed so much for sending money back home to the new newly independent country —  Estonia.

‘‘I had a great salary in the UK at my new job,’’ he said. ‘‘But my savings account was still back in Estonia. I was regularly moving pounds into that savings account. When I did a larger transaction, I found out that less money arrived my Estonian account — And when I say a lot less, it was like 500 euros less. I started looking into this and found out that each time I made a transfer to my Estonian account, HSBC, my bank in the UK used an exchange rate that was 5% less than what I see on Reuters or Bloomberg. The message out there was that they were saving cost and were only charging 12 pounds transaction fee at the time.

What really happened was that in addition to these 12 pounds, the banks hid some fees into the exchange rate. This way, they made money. So when I was first hit by the loss of 500 euros, I was so angry and sad.’’

Kaarmann said he found a solution when he met his co-founder, Taavet Hinrikus who had similar issues. Taavet was moving money from Estonia to London and was being charged excessively. Although he was still paid in euros from his Estonian bank account, Taavet was literally living on expenses. Meeting Taavet was a bit of luck because it appeared both of them were from Estonia and faced with the same problems.

‘‘We’re both Estonians. Estonia is a nation of about 900,000 people. That means that every year, about 200 dudes are born and about 200 girls. We’re one of the 200. And we both moved to London. It’s almost impossible not to meet. This is to give you an idea of how small a nation we are. So if there are people your age and they end up in London, roughly both interested in the same things, discussions may begin from there,’’ he said.

‘’I think a lot of startups start on a hypothesis’’

Kaarmann said TransferWise took shape from the hypothesis he formed with his co-founder.

‘‘We started on a hypothesis. We thought this transfer problem was not just Estonians in London’s problem. We thought it would probably apply to the Spanish in London, or maybe to the Romanians in London, maybe the Americans in London and then maybe also to Australians in Brazil. So it was really a hypothesis. I think a lot of startups start on a hypothesis. It’s something that is needed,’’ he said.

Kaarmann said they also raised questions on how they would handle trust especially since they were about to deal with other people’s money. This was 2011 when the term Fintech did not really exist.

They also raised questions on whether people would trust the service that they were providing.

‘‘And lastly,’’ he said, ‘‘are we going to make it work? It may work between a couple of people, but can we make it work for hundreds, thousands, and after that, millions of people?’’

‘‘From the very beginning, it was pretty clear that this challenge is bigger than just the two of us.’’

Kaarmann said on the 24th of January, 2011, TransferWise launched with a simple blog post on a startup website.

‘‘On the same day, I got so many emails from people around the world who reached out to me,’’ Kaarmann said. ‘‘Most of them said they had exactly a similar idea with their friends back in the university. But they never really did anything about it; they never really built it into a product. It was pretty cool to see that it’s not just us. The problem is that there are lots of others out there with similar challenges and a lot of them had actually come to a similar solution informally between themselves.’’

Kaarmann said with that confidence, he searched through his phone contact that first day to find someone they could hire. They immediately followed that up in the same month with a few more people.

‘‘So we started hiring pretty quickly realizing that this is something that people need. We realized that after the launch people are trusting us with their money. The real transactions were happening on the first day,’’ he said

On whom they hired precisely, Kaarmann said their bait caught software engineers who would help them build the startup.

‘‘We hired in the operations department as we are increasingly dealing with large amounts of money. We needed people who would help us run the shop. So, we had someone join us as an operations lead. Then we started out building out a team of payment operators and treasurers. We were also convinced from day one that we needed to support our customers. We were at a time when it was quite common for tech companies to get asked if they do have any support at all. We had a phone number on the front page of our website from the very beginning. We also needed people to handle the queries and help folks get used to this new way of moving money between countries,’’ he said.

‘‘Almost everything is a challenge’’

Kaarman said almost everything is a challenge in running a business such as his startup.

‘‘If you’re at this stage,’ he said, ‘‘imagine how you’d feel when the code or the system you had built hoping it would last for as long as six months because you had 50 times the volume of transactions now, suddenly get overwhelmed with amounts of more volumes coming in. The challenge is mostly from the operational side because the startup was still trying to comprehend what growth meant. On the other side, there is the challenge of people who were looking for a transfer solution, when they suddenly stumbled upon transferWise. Till date, we still have a majority of people, business owners and CFOs who don’t really know about those hidden fees charged by banks.

They believe that banks charge 25 bucks for a wire. The problem is real; I’ve experienced it myself many times,’’ he said.

‘‘Let’s make sure that we have plenty of cash to operate…that’s the approach that we’ve taken.’’

For the 8 years-old startups, staying afloat is the deal. Kaarmann said so much is done tracking the startup’s finance to ensure it doesn’t run aground. To that effect, the startup is constantly raising funds to keep the business afloat.

‘‘Let’s not run out of money. Let’s make sure that we have plenty of cash to operate with and to keep growing so that we don’t run out of money. That kind of worked well for us,’’ he said. ‘‘That’s the approach that we’ve taken. As we started, and as we got going, we realized that actually the size of the problem depended on the size of both international transfers in the first place and on the hidden fees. Those transfers are really enormous.

I think over time, we started to realize how many problems we were really beginning to solve. We have been able to put about a billion pounds a year back into our customers’ pockets because when they use TransferWise, they avoid those bad exchange rates with banks and the wire fees. Roughly, we have been able to save about 1 billion pounds a year for our customers compared to their bank.’’

However, when we look at what banks still make globally from people in businesses making cross border transfers, it’s around 200 billion. If you put that into the context, we’ve really only come about 0.5% success in the way do. We haven’t really gotten anywhere.’’

Today, TransferWise Is So Competitive

Kaarmann said the best way to consider TransferWise’s success is to look at it in multiple different ways.

‘‘The easiest way to look at it is in the number of dollars or pounds that TransferWise got put back into our customer’s pockets,’’ he said. ‘‘That’s competitive. It can also be looked at from our people who are now 1,500 in number, working from different offices around the world, due to the nature of the business. There are now 71 nationalities working in TransferWise. This is so because we have to support everyone who is using passwords. They do that in their own language. There are lots of transfers in currencies to underpin all of that volume.’’

‘‘People Don’t Shut Down Their Business Because They Run Out of Cash.’’

Although already successful, TransferWise did not come to this point without putting up a fight.

‘‘I’m probably quite lucky that we haven’t run aground. The closest we got to was actually before we raised our first funds. That was in late 2011,when we had bootstrapped the company together with Taavet.

Then, we were paying the salaries for our earlier employees from our own salaries and from our own savings. We even got to the point where we could not go any further unless we raised some funds. Raising money in Europe was possible in theory, but not a lot of people were doing that, especially for a new sector that didn’t exist. We wasted more time on this than we had wanted. Eventually, we flew to New York where we raised some funds from small fund ventures in New York. They gave us the seed round and helped us put it together. That was probably the closest we thought would probably be the end of us. We would have had to drastically rethink how we’re going to build the startup if we hadn’t fund-raised around that.’’

Kaarmann said people don’t shut down their business because they run out of cash.

‘‘They do so because they run out of energy. Those moments really take a lot out of out of you,’’ he said.

‘‘Many times we just want to have the perfect product, but at the end of the day, there is nothing like having it on the market’’

Kaarmann said looking at his young self at Deloitte, where he first worked today, he probably would have advised him that there is no shortcut.

‘‘No short cut. Even with what we went through, it’s quite hard to imagine that there would have been a magical shortcut to avoid.

 I think in the early days during Deloitte times, we probably spent six months deliberating on the idea whether to launch this thing that we had devised. The time we spent on polishing version one probably was about six months too long.

For someone who has never done this before, I would definitely advise them not to over-think their idea in the beginning. Many times we just want to have the perfect product, but at the end of the day, there is nothing like having it on the market and being able to listen to your customers and optimize as you go.’’

Will Digital Currencies Disrupt TransferWise?

Kaarmann said it is not probable that digital currencies such as cryptocurrencies or libra would drive him out of business

‘‘I don’t know if the governments would be willing to give up anytime [on fiat currency] soon,’’ he said. ‘‘I think the most interesting thing that’s happening with currencies is its actually Eurozone. It is very incredible how a group of countries have decided to give up their national currencies and unite under a common euro. This hasn’t been easy. It has brought problems that European countries and their central bankers have to work through. But it is very incredible. We’ve seen that in recent years as well. I think Latvia and Lithuania joined. I joined quite recently.

I can’t think of any other examples other than eurozone. There are not a lot of other currency unions out there. And it’s very hard to see where that would be going in the short term.’’

‘‘I’d love to see more focus on building the product’’

Kaarmann has some advice for young entrepreneurs.

‘‘When some young entrepreneurs reached out to me, they asked me about fundraising. I found that really awkward. I mean from my perspective, it looks like they really seem to be thinking about the next funding when especially in the early days you should be thinking about how to build a product that customers want and that customers are willing to pay for. Once you have that, I think investors are going to be to running to you.

I still see, perhaps, a little too much focus on fundraising from early founders. I’d love to see more focus on building the product, putting it out there and getting customers 100%. I think there is nothing like product market fit. With that everything will fall into place.’’

What ended up being the business model of transferwise?

Kaarmann described how TransferWise works:

‘‘We help people and now businesses to move money across borders. The traditional way of doing this is by going to your bank and then making an international wire. In Europe we call them international transfers. And in the US, they’re called wires and it usually means typing the destination account number in a different country and then the bank makes the currency conversion. Here is the thing: they usually do two things: they charge you for a wire and that costs 25 bucks, 35 bucks, 50 bucks.

But where they are really making money is through a terrible exchange rate which includes their margin for converting the currency. So whenever you use your bank to convert currency, you usually lose something between 3 to 5% or in some cases even more. We started with the idea that when we send dollars to Europe from US in euros, there are going to be lots of people who also send money from Europe to the US. So rather than sailing with bags of cash across the ocean, we could use the euros that are being sent from the Europe to pay out recipients in US.’’

In the same vein, we use the dollars that we’re collecting in the US to pay out to the recipients those Europeans who are sending money to the US. By doing this, we almost remove the need for moving the money. We just reroute the money locally. So that’s how we really started operating in Europe. We collect money in the eurozone. When we collect such money in the UK, we use the funds that we collect to pay out in the right currency.’’

Charles Rapulu Udoh

Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.

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