The Longest View with Dez Fleming

[Desmond Fleming] (0:00 - 0:07)
Well, I guess to really kick things off. First of all, thank you for, for coming here, Jonathan. I appreciate it.

Thanks for having me. Yeah, of course.

[Jonathan Birnbaum] (0:07 - 0:08)
Amazing podcast studio.

[Desmond Fleming] (0:08 - 0:13)
Yeah. Yeah. It's, uh, we got the good lighting.

We've got some good gear. We're, we're ready to go.

[Jonathan Birnbaum] (0:13 - 0:22)
Beats my, I did the podcast in the office last week and literal jackhammers right outside the window. These are, these are soundproof. I can tell it's peaceful.

[Desmond Fleming] (0:22 - 0:37)
Uh, so we won't have to worry about that, but maybe, maybe to start things off, I think, uh, uh, interesting place to start would be to not start with the founding story of open yield, but maybe start off, uh, where you began your career, was it at Morgan Stanley? Am I remembering that correctly?

[Jonathan Birnbaum] (0:37 - 1:19)
Yeah. Started my career in Morgan Stanley. Even running a little bit more.

I was at MIT undergrad, studied computer science and finance. And, you know, there's a boom on wall street while I was an undergrad. So, you know, first summer internship actually was between semesters at MIT.

I interned in investment banking and got a taste for the pace of investment banking quickly realized it wasn't for me. So my next internship, I really wanted to check out sales and trading. So I did that as a summer analyst between, and was this pre or post financial crisis?

This was the summer of 2007. Okay. So it was a boom.

Yeah. There was a sign on the Morgan Stanley trading floor. When you left that said, did you make money today?

[Desmond Fleming] (1:20 - 1:20)
Yeah.

[Jonathan Birnbaum] (1:21 - 1:35)
When the crisis happened, they took down that sign. It's too depressing. Um, but I had a blast that summer, got an offer and, you know, had a blast senior year and went back and started my career as an analyst as part of the fixed income program, Morgan Stanley.

[Desmond Fleming] (1:35 - 1:47)
When you think back to that time and kind of contrast it to where markets are, and we'll, we'll start to talk more about open yield, but what do you think has changed, especially within fixed income trading over the past 15 years or so?

[Jonathan Birnbaum] (1:47 - 3:02)
So when I landed on the desk, so this was 2008, Morgan Stanley is a massive trading floor in the middle of Times Square. It's the whole, it's like a square city block. Um, you had all sorts of different products next to each other.

Interacting. You had an FX desk adjacent to emerging markets where I started and yet spot FX traders and salespeople yelling throughout the day. And I would get in the morning as you know, the bottom of the totem pole at 6 00 AM on the desk.

And I would hear over the squawk brokers in London, just repeatedly quoting where the Aussie dollar was or dollar yen was just shouting at it. And I, you know, I could even tell, I was like, this is kind of crazy that this is how things work. Cause a lot of technology was happening outside of it, just in the general world as a consumer.

Like Facebook was out, I remember when the newsfeed started and on the trading floor, you know, we still had a lot of these legacy processes of people communicating by shouting. And you know, one of the things that I spent a lot of time thinking about earlier on was it would be great if we just had systems to connect all the data that the trading floor was experiencing to help people be more efficient with their jobs. And so I always had this interest in building out products and technology to facilitate more efficient capital markets.

And this product that Morgan Stanley is called sales link.

[Desmond Fleming] (3:03 - 3:07)
And was that a Morgan Stanley created product or built on top of like trade web or market access?

[Jonathan Birnbaum] (3:07 - 4:27)
Completely internal to Morgan Stanley. It was like born in my frustration as a trader and my peers, where every single time we had an ax and needed to buy or sell something, I'd have to pull together data and kind of present it to salesperson or somebody else and say, here's all the things that happened. This is why you should call this client.

And so the idea is like, we should just have systems that take data to automate and optimize. And so it was very clear that there are all sorts of ways that, you know, existing technology could help the business, but just broadly looking at it on the trading floor, you had a lot of traditional yelling to communicate going back and forth. A lot of fixing home was, you know, it's called a voice driven business.

And even going over Bloomberg and chatting, that's still considered voice trading because you'd have a ton of Bloomberg chats and you chat with everybody. And we saw the earliest inklings at that time of electronic trading too. I would get pop-up tickets on my computer from the various ECNs or, you know, Bloomberg, all Q RFQ platforms, and, you know, I'd click accept, accept, accept, and, you know, trades would go through.

It'd be pretty small, but over the years they kind of grew. And so one of the things that we always watched was what percent of volumes are happening over these platforms versus voice. And I thought in 2008 and 2009, maybe in a year or two, it's going to be a hundred percent electronic and this will go away because that's what was happening in equities, right?

[Desmond Fleming] (4:27 - 4:30)
Like people were consolidated into automated trading.

[Jonathan Birnbaum] (4:30 - 4:52)
Yeah. And very fast moving markets, you know, are usually lend themselves to automation the soonest. But I had a lack of appreciation for, you know, the paths of institutional change.

What actually truly changed things because you have, you know, tens of thousands of people at different organizations where the vast majority are pretty reluctant to change anything. They have great jobs.

[Desmond Fleming] (4:52 - 4:53)
Yeah.

[Jonathan Birnbaum] (4:53 - 5:16)
They have great relationships. A lot of the business was about worrying about being disintermediated. Like, oh, that's my client.

And now I'm going to bring them with me over here. You have to trade with me and then I could charge you X, Y, and Z. It's a totally different philosophy of let's just connect people and have people trade cheaply.

Yeah. It was all about, you know, preserving relationships, monetizing relationships. That was a lot, a large part of the business.

[Desmond Fleming] (5:16 - 5:33)
Yep. Did you, was there a moment when you kind of, in maybe the younger years, the analyst years where you had that aha moment of, oh man, my MD's job is to make sure that X, Y, Z client always comes to us, that it wasn't necessarily about let's make it more efficient of a process.

[Jonathan Birnbaum] (5:33 - 6:37)
I had a realization, you know, relatively early on in my career that, and I looked around the trading floor and I saw the more senior people and what they were doing and the satisfaction with their careers. And by and large, I, I didn't really identify and say like, that's, that's what I want to be doing 10 to 20 years from now, I was always thinking about how could I take the skillset that I'm learning and do something more. And I've always had this entrepreneurial flair.

So it's always been about, how do I eventually get to the stage of founding my own company? But the path to get there is completely unclear. And to be fair, I really didn't think too much about it during most of my twenties because the career was really great.

Yeah. You know, you get into these roles at, after college and you're succeeding, get paid really great. You really enjoy it.

You don't, you're not really forced to be like, okay, what's next. And for me, you know, the first transition point in my career came after I, I went to Columbia business school as part of the executive program, I graduated. It was really surprisingly intellectually stimulating.

And coming back to the job, I was like, I I'm ready for my next thing after that.

[Desmond Fleming] (6:37 - 6:57)
So you had that, uh, kind of inflection point in your career. So, well, let's, let's talk about, uh, uh, Open Yield. What was the founding moment?

So your post, uh, Columbia business school, you also went on to domain money as well. So take us from here to there. Uh, and as well as tell us the founding story of, of Open Yield.

[Jonathan Birnbaum] (6:58 - 7:18)
Yeah. So there were a couple of quick stops after Morgan Stanley, but before Open Yield, I, I tried my hand at a few very early stage ideas at the Morgan Stanley and then joined Bridgewater actually. It was a really interesting role to run the fixed income execution trading desk.

And that was like a completely different perspective on the market for Morgan Stanley.

[Desmond Fleming] (7:18 - 7:19)
Yeah.

[Jonathan Birnbaum] (7:19 - 8:01)
So I was there for under two years. And then again, very interested in FinTech spent time at SoFi and then domain money building out retail brokerage off offerings. Domain was very crypto exposed.

We pivoted the company. I left and I was thinking through what I want to do next. And I was really thinking a lot about the fixing markets where I spent most of my career, and I had this unique perspective from being on the sell side, being on the buy side, and then also understanding what's happening with FinTechs building out retail brokerages and advisory platforms and formulate the thesis that I thought there was actually a very timely opportunity to launch a bond marketplace focused on this segment.

[Desmond Fleming] (8:01 - 8:27)
What was kind of, what underpinned that thesis? Like, was it you having conversations with all the players in the market, seeing the shift of, or the amount of power that's aggregated by RIAs as well as the coming kind of wealth transfer, or was it saying, Hey, now there's additional infrastructure that makes it easier for me to plug into these end distribution points. Kind of what was that core, core insight?

Was it more qualitatively driven or more quantitatively driven?

[Jonathan Birnbaum] (8:27 - 9:07)
Both. It was a confluence of, I like to point to three crucial catalysts in the market that allowed me to kind of establish like, why now was the right time to take the bet? And the first is that interest rates weren't zero anymore.

Like if you really look at it, we had a decade where interest rates were zero. It really made no sense to buy bonds for yield. Like, why would you do that?

That was really a distortion of where fixed fair values for fixing markets. And now we're back in a more normal time where there's, there's yield. So demand and appetite for yield had returned, which, you know, in and of itself, isn't the sole thing, but it allows you to have lots of conversations with organizations who now want to build.

[Desmond Fleming] (9:07 - 9:13)
And it drives and retail investor interests who are incredibly yield focused or just absolute return focused.

[Jonathan Birnbaum] (9:13 - 10:28)
A hundred percent. A really important catalyst outside that macro catalyst is where the ball was in terms of the investment in automation for market makers, and this is really crucial to the story because if you go back in time, 10 years ago, and even if yields weren't zero and you really want to build an equity like marketplace, it would have been really hard because the liquidity provision wasn't there. And so an investment in, you know, in the credit space really started around the time I left Morgan Stanley around 2015 and 16 to start building out, you know, the algos and these have gotten much better with time and I would hear from my peers in the market who I periodically catch up with the, you know, algos can now quote 500 bonds, two side algos can now do 2000 in the IG space, 500 K up.

Hey, you know, that algo at that bank can now do 10,000 bonds. So I saw how this was progressing. And then the third change was all the new infrastructure that's being developed to support retail brokerage businesses, wealth management businesses, you know, they're entering the market and the surface area for them to get into the bond market is this legacy stack that would be tougher for them to play with.

So I saw a distinct opportunity to get a toehold with a lot of these new players in the market to build a modern forward-thinking offer.

[Desmond Fleming] (10:29 - 11:10)
Part of what your job is, is to make fixed income investing cool and accessible to people where they're like, Hey, should I invest, you know, X amount of dollars, a thousand bucks into Microsoft, or should I invest a thousand dollars into whatever Microsoft's available available paper is at any given point in time. Um, and that's also one thing that when I was kind of prepping for this interview, like I've actually never truly thought about, Hey, should I invest in IG credit? I honestly don't even know where to find that paper, at least through like my, uh, brokerages, which are largely, uh, Vanguard and Robin hood.

And then even here at work, I'm like, well, I have cap IQ. Presumably I should be able to find it. But I'm like, eh, too much friction.

Don't care.

[Jonathan Birnbaum] (11:10 - 12:19)
There's a, there, there's definitely a lot of confusion around access and, and product delivery that there's a lot of efforts in the market to now bridge the gap. So to take a step back, the way I like to think about this high level is now every single investor has some type of like target portfolio allocation, like classically it's like 60, 40 equity bonds, but now it's more complicated with like crypto and alternate support, but there's a real, uh, sleeve there for fixed income. Yeah.

So then the next logical question is how do I gain exposure to that sleeve? And so you have a short menu of options. Like traditionally it was you buy a mutual fund.

Now in the last 10 to 15 years, ETFs have been developed that make it even easier. So you don't even need to buy a mutual fund. You buy an ETF, you could, you could trade them.

The product that's playing out most rapidly now is the rise of SMAs, separately managed accounts. So, you know, the same asset managers who have issued mutual funds and ETFs are now building out systems to allow individuals to buy, you know, their own portfolio bonds and have it be managed. And the advantage there is they're customizable and more tax efficient.

[Desmond Fleming] (12:20 - 12:28)
But our SMA is largely distributed through wealth managers or is, um, or individual retail has access to SMA.

[Jonathan Birnbaum] (12:28 - 14:26)
It's distributed through advisory platforms and directly through the asset manager themselves. So there's a third party channel and there's a direct channel. But if you think about as a retail investor, like how you're going to invest, there's the do it yourself option, which for the most part, people usually have a small pocket and it's more for like gambling or speculation and mess around.

And whenever they have like a, you know, enough wealth, they say, okay, I'm going to hand it off to somebody else and like, let them deal with it. So a lot of retail investors are really done by an advisor on behalf of like the end customer. And so there's some advisors who will buy bonds for you and they specialize that and they have a platform and they, you know, they might be very good at it.

Um, and there's some who'll, you know, toss the keys to an asset manager and say, okay, I'm going to put you into, you know, an SMA managed by, you know, name your favorite asset manager. Yeah. So both those are very popular.

The way I think about how we're enabling this ecosystem is we're building a marketplace to make it cheap and easy for anybody to buy and sell bonds. And at a certain level, we're somewhat agnostic between who's doing it, whether you were doing it yourself through the brokerages you mentioned, or it's your advisor doing it or the asset manager doing it, because no matter what those bonds need to get traded and the best place to trade them is through a venue in a system that provides them the fastest, best, cheapest liquidity. Yeah.

And so that's what we're just laser focused on building out and making it as easy as possible for any of those end participants to, to get that liquidity. Now though, you know, you contrasted it to stock for Microsoft. There's been such a significant investment in the end retail experience to trade equities.

There's platforms everywhere. Data is ubiquitous. Analytics is ubiquitous.

In fixed income, it's not the case at all. Like it would be hard for you to just like go on the internet and find the price of that Microsoft bond, or even see what's called reference data, which is the basic facts of the bond, what's the maturity, what's the coupon rate. And if you do, there's, there's not that many sites that have it.

[Desmond Fleming] (14:27 - 14:35)
Does that data get originated by, obviously it originates with Microsoft at some point, but who like really warehouses and aggregates all of that reference data?

[Jonathan Birnbaum] (14:35 - 15:18)
The large data providers out there, Refinitiv, IDES, you know, there's a bunch of them, but it comes from the filings. Yeah. You know, if you go to the SEC aggregate database, like you could poll the document for that bond and you could see it on there.

And so to create reference data, you basically have to scrape these documents and there's some structure for them, but a lot of it's unstructured, especially in the media market and structure it onto a database and then make that available and you know, there's, there's fees involved with that. What's really interesting there though, is, you know, these very large data providers, they have teams of people overseas who key in stuff from documents and they have like a double, triple check system that then gets into their database instead of what AI could do.

[Desmond Fleming] (15:18 - 15:20)
Yeah. But it's also probably still wrong.

[Jonathan Birnbaum] (15:20 - 16:22)
It creates mistakes. So there's like a real nice tail end here of AI massively changing the costs of originating this data and maintaining it. So we're really excited about that trend.

But just like any of these, you know, mega trends, what we're doing as a marketplace is we're making liquidity easily available and ultimately as the market becomes electronic, you're going to be able to create tons of products on top of this liquidity that makes it incredibly easy for investors like yourself to go to your brokerage, go to Robinhood and click a button and say, no, I want to invest for two years in high grade paper and you click a button and it's originated. You know, public has been out there kind of pushing the envelope here with their bond account. And that's basically what they did.

It's like a great proof of concept where you could click, I want a bond account. They have a portfolio of bonds. You click, okay, I want to buy them.

And there you go. Now there's all sorts of white space around that to help customize and make tax efficient, introduce munis and all the brokerages are going to do that. But we're at the earliest stages of that's beginning to happen.

[Desmond Fleming] (16:23 - 16:48)
Yeah. So if we think about, you know, call it the hero's journey, call it the startup journey. You know, what would you succinctly describe the mission of OpenYield as?

Right. If you're talking to the 20 year old version of yourself, fresh out of MIT and they still may have that option, right? Hey, you want to go trade derivatives or, or, or emerging market credit at Morgan Stanley, or do you want to come join OpenYield?

Like what's, what are you telling that person?

[Jonathan Birnbaum] (16:49 - 18:00)
Yeah, there's a couple of angles there. Like I, I now like to say we're, we're disrupting the bond market. We're taking a lot of the existing structures and through a combination of technology and, and partnerships, we are creating a better, faster, cheaper way to access the bond market and try to do it as the lowest cost with as much automation as possible.

Like there was a time where I think automation was a bad word and it was, and it was a threat and it meant that, you know, you're not doing your job anymore because like you would, you would take this and put it here and you'd do this all day and you'd make money and you'd have a, have a P&L and like, we have a pretty simple philosophy. We, we want to automate as much as we can and leverage technology as much as we can, because that means in return, we could provide an experience that's extremely low cost and makes it much easier for participants across the board to access the bond market. And it could be direct through brokerage or it could be indirect through various ways to have portfolios manufactured for you.

And so, you know, we're obsessed about the cost structure of this industry and figuring out ways that we could eliminate costs.

[Desmond Fleming] (18:01 - 18:07)
Where have you kind of recruited people to start the business? Is it from prior companies or just going out into the market?

[Jonathan Birnbaum] (18:07 - 19:03)
The first work, a combination, but the first and most critical recruitment was when I hatched the thesis and needed to find a co-founder who would credibly be able to build the platform. I just started talking to as many people in the market as possible saying, now I'm going to build OpenYield. I'm looking for a technical co-founder.

Do you know anybody? And it was very fortunate to ultimately have been introduced to Hilton, who's like the perfect co-founder because he knew exactly what I was talking about and how to build it. Recruited the first employee from my former employer, Domain Money, that's Alan Rood.

And then, you know, the rest of the staff, like, you know, we posted JDs out there, their referrals. You know, one of the more recent juniors emailed me direct and who's in the market is in the media market. And he said, I absolutely love what you guys are doing or you're hiring.

And it was serendipitous because we were actually looking for somebody with this exact background. And so that's when Eric joined us.

[Desmond Fleming] (19:03 - 19:33)
Yeah. One in a lot of these interviews I've done just over the past few years, you know, serendipity is something that always comes up, even as investors, we talk about it, how sometimes you just got to go out there and be out in the market, see what happens, and you're going to have that serendipity. So I'm curious about how you could call it serendipity, you could call it luck, how that's played a role or factor in your careers where maybe you went to an event or maybe you went to an office hours or whatever, and actually had a marketed impact on your life and the decisions you've made.

[Jonathan Birnbaum] (19:33 - 21:08)
I don't have a case ready to pull out of my pocket and be like, that was serendipity. I think just broadly speaking, it's absolutely everywhere. Like there's, there's so many elements of talking to the right person and having them at the same time have, you know, in markets where fixing, when you say having, have the acts, like have the want to do the thing that you're asking them to do to make something happen.

Like as a founder, especially early stage, you're basically in the business of just like trying to get in front of as many people, asking them for feedback, to use your product, to join your team, to, you know, reduce your contract cost. Like you're always just trying to get in front of people and you're asking, asking, asking, and you kind of realize that the people who actually you end up transacting with are the people who already really wanted to do that kind of business to begin with and the other people will politely listen, they'll shake hands with you at a conference. I like to say they blow smoke up your ass.

Cause like, then you go back to them and they're like, are we going to do business? And it's like, ah, yeah, this quarter, maybe next quarter. And like, there's so much of that.

So it's every single time you you're actually able to get in front of somebody who has the opposite need, like that it's serendipity, like, cause they don't wear it as a sign. Everybody has a sign in front of them that like, you know, their head of innovation, this, or like, I'm going to e-markets that. It doesn't mean it's going to result in any collaborative behavior.

They can be like, somebody's job title could be like, I want to partner with like innovative bond marketplaces. And I can be like, hi, we're an innovative bond marketplace. And it'd be like, there's nothing to do.

It's like, because like, you're not actually in a position to do anything.

[Desmond Fleming] (21:08 - 21:08)
Yeah.

[Jonathan Birnbaum] (21:08 - 22:03)
Yeah. Yeah. So, so much serendipity.

And that's why like the, you know, the common sense thing you can do as a founder is maximize your surface area to that kind of stuff. Like take a lot of meetings, send out lots of emails. Don't be shy.

And the good things then start to come back. Like one of my favorite examples here is like, we've had a terrific partnership with a TD automated trading. Terrific.

And then people, I sometimes get asked like, oh, how'd you get introduced to like, you know, Marty Mannion over there? Like, I love Marty. He's great in the market.

I had emailed his, the contact form on, on his old firm saying like, I'm building a bond marketplace. Can we have a conversation about providing liquidity? And I went to his email and it was completely cold.

Yeah. Yeah. So, you know, I, I used to spend a lot of time trying to maneuver to find like intros to the right person, but like, you know, reaching out to the cold, to the person who actually has an aligned view for what you want to do.

Works.

[Desmond Fleming] (22:04 - 22:22)
Yeah. Yeah. And it's, it's kind of counterintuitive where it's like, should I like have the best intro path in the world or should I just send the cold email and you kind of compare it to like, like golf as an activity where you're like thinking about, Hey, like what's my approach and should I do it?

Like, no, just go, go up and hit the ball. See what happens. What I found is you do both.

[Jonathan Birnbaum] (22:22 - 22:37)
Yeah. You know, there's no like rules of the game here. Like you should be polite.

You should have common sense on how to not be annoying, but like it's free and takes like 30 seconds to rattle off a message and then ask somebody else, like, by the way, like I'm trying to get this person's attention if you need an introduction.

[Desmond Fleming] (22:38 - 22:42)
And lots of people's lives depend on them checking email diligently.

[Jonathan Birnbaum] (22:42 - 23:00)
Totally. And I'd say there's a caveat here, which is you'll speak to people who, who will say like, I got this huge Rolodex, I could be like extraordinarily helpful for that. In the beginning I was like, Oh, well, this guy has a big Rolodex, like that could be really helpful.

And I almost write that down to zero today.

[Desmond Fleming] (23:00 - 23:00)
Yeah.

[Jonathan Birnbaum] (23:00 - 23:02)
I was like, it doesn't really matter.

[Desmond Fleming] (23:02 - 23:04)
If someone leads with saying, Hey, I've got this huge, huge Rolodex. Yeah.

[Jonathan Birnbaum] (23:04 - 23:14)
Like the Rolodex really doesn't matter because like at the end of the day, the people at the end of the Rolodex need to, again, have this axe and you could probably get to them if they have it.

[Desmond Fleming] (23:14 - 23:25)
Yeah. And it's also to use your terminology, uh, the axe changes at points in time, right? Like there's probably, you largely sell it.

Who, who, who are the people you sell it to today?

[Jonathan Birnbaum] (23:25 - 25:01)
It's completely a temporal thing. Like you got to catch them at the right time because people have a lot of stuff going on. And, you know, when you think about it, like who, who are our buyers of open yield, it depends on the segment, but you know, if you're a retail brokerage, they usually have professionals who are in charge of, you know, fixing them, liquidity, expansion, and technology.

So like, that's who we talk to. Um, if we're speaking to an asset manager, you know, we're speaking to portfolio managers because they, they differ resources we're speaking to the sell side, it's a combination of, you know, desk head and usually they have support through like an e-markets type specialist, but there's, you know, there's all sorts of different sellers out there depending on the organization. And it's also different from, you know, who the champion is going to be, because the champion is not necessarily the decider.

And so, you know, you have to have this framework of, okay, who's going to, you know, push it internally. How do we give that person what they need to support the business case? Um, and it, it is really varies like how you get that in front of people.

And so one of the things that we've learned that's just critically important and a no regrets type of thing is, you know, we want to make a lot of noise. So I'm here doing a podcast, like we want to produce content. Um, we want, we, I think we have a decent amount to say about the market and we're at this unique position where we could bring together all sorts of disparate participants and put things out there.

So, you know, our head of business development, Mark started a podcast last month too.

[Desmond Fleming] (25:01 - 25:04)
Yep. And he, he interviewed the TD guys, right?

[Jonathan Birnbaum] (25:04 - 25:26)
Yeah. That was, that was the first one. And we just dropped the second one today.

And I, you know, I'd be remiss not to mention, like we recruited Mark because I'd worked with him at Morgan Stanley too. And I went to business school with him. So the people early in your journey are going to be the people who usually like, you know, know you and have relationship with you.

And if you can't get them to like potentially join your firm or use your product, like it's going to be harder with strangers.

[Desmond Fleming] (25:26 - 25:30)
Yep. Yep. Yep.

Yep. Uh, you can't skip trust, uh, as a vector.

[Jonathan Birnbaum] (25:30 - 25:31)
Yeah.

[Desmond Fleming] (25:31 - 26:01)
So let me, let me ask you this question. What do people not understand about bond markets generally? Like again, and also when you think about the incremental demand that's going to be coming on to or using open yields infrastructure, right?

They may never interact with you directly, but through their broker or on their sell side desk, you know, is the incremental demand coming from institutions who want better pricing, more transparency, better speed, or is it incremental demand coming from retail or is it a combination of both?

[Jonathan Birnbaum] (26:01 - 27:25)
It, it's both. Like the fixing markets and aggregate, you know, continue to rise. Yep.

There's always going to be more issuers issuing more debt governments issuing more debt for better, for worse. And so I, you know, I, I view the world like, yeah, you have the existing flows of participants, asset managers, et cetera, that we want to be a part of and help improve. And then you have this objective of originating new business and bringing on new brokerages for the first time.

And, you know, the international opportunity here is huge too. There's tons of, tons of demand to hold yield bearing dollar assets. The dollar is still as of right now, the reserve currency of the world.

And so, you know, people want to earn yield now that there's a world with, with yield. And so, you know, as given what the distribution networks are domestical, you could just imagine, you know, the cost structures involved internationally or, you know, take some person in APAC and have them buy a T-bill and like, you know, what's the aggregate markup going to be? It's just data.

It's just a database getting updated. Like there doesn't need to be that many markups. And so we're excited about, you know, all that kind of activity.

And the first part of your question is like, what do people not know about fixing? Yeah. A surprising, it's surprisingly intimidating.

Like the bond market, like how's it work? Who has it all connected? And people often think that equities are pretty simplistic.

They're like, oh, it trades on exchange. I see a price.

[Desmond Fleming] (27:25 - 27:29)
But, but, but they feel tangible, right? Like I'm buying a share of Microsoft.

[Jonathan Birnbaum] (27:29 - 29:04)
Correct. I'm buying a share of Microsoft. But in that experience feels like easy.

And they mistake that experience for thinking like everything's just traded on a central exchange when the reality is you have this whole vast fragmented network of ATSs and exchange and wholesalers that are really on the other side of your order flow, it's just been wired together in such a proficient way that it feels like it's being solved by a single centralized venue. And so that centralization I think is often misstated. And the fixing of markets also clearly not centralized.

You know, it's an OTC market. There's not an exchange, but there are venues that do coalesce liquidity. There are platforms that coalesce liquidity.

So the transacting experience, you know, as far as it goes on open yield looks and feels just like it does on an equity marketplace. You have limit orders, you have market orders, instant fills you're executing off top of the book. But I think the gaps are more around what you mentioned before with the Microsoft bond, like, you know, what are you even supposed to buy?

Like, you know, how do you get involved in structure portfolio, even if you had all these instruments available? And I think it's naive to assume that, you know, retail is going to become, you know, a fixing a portfolio manager. It doesn't make sense.

There's actually a lot of complexity as you try to get more and more sophisticated, but there's not a lot of complexity in putting in some basic goals and having your brokerage or advisor generate like a bond ladder for you and earning yield. And that's actually like a very efficient product for earning yield. And so that's, that's a layer that really needs to get resolved before there's, there's a lot of participation.

[Desmond Fleming] (29:04 - 29:11)
And this is, this is one market question. Again, I should look this up. Where does even AAA rated paper, like what does it yield today?

[Jonathan Birnbaum] (29:12 - 29:48)
You're, you're hitting me on the spot, but you know, AAA rated paper incorporates means that it trades at a very small spread to treasuries. So you could take the U S treasury curve where most bonds are, you know, four and a half percent roughly. And you add some spread on top of that.

Um, you know, the most AAA is extremely rare. The United States isn't even AAA, but you have like Johnson Johnson, which was the first bond I traded on a platform. The trader made a joke that I only want AAA.

Um, and so it'll, it'll trade at a small spread, you know, less than. I don't know, 50 basis points sometimes.

[Desmond Fleming] (29:48 - 30:11)
Yeah. But the reason why I bring this up and it's, it's educational for me is like, even if I think about, you know, the next class there's like double B rate or like goes to AA, but then triple B, double B, et cetera, even that like kind of lower segment of the B rated bonds, like presumably it's still not as much risk as investing in equities, right. You're investing in a bond.

[Jonathan Birnbaum] (30:11 - 31:18)
Yeah. You're making a great point. And I love just calling out, oh, is you're more senior in the capital structure.

When you hold fixed income. So what that means is when companies issue equity, common equity is the last to get paid out in the event of a bankruptcy. Every time you issue a bond, you're, you're senior to equity.

So if Microsoft went bankrupt, which would be a very long time before that ever happens. Um, what usually happens if you hold equity, that that could zero it out. And if you hold bonds and you have a claim on the assets, if you look at the data, if you look at investment grade paper, like the preponderance of defaults, it is so little, it's less than 1% a year.

Yeah. It's less than half a percent a year. And when that happens, it's not like it goes to zero.

Like what usually happens with equities. There's usually a pretty significant recover because the company usually has assets if it's in the market issuing investment grade bonds. So recoveries are usually, you know, well north of 60%.

You know, when you factor into things, it's like for you to buy investment grade paper and lose money, holding to maturity. It's actually really hard to do.

[Desmond Fleming] (31:18 - 31:18)
Yeah.

[Jonathan Birnbaum] (31:18 - 32:05)
Yeah, yeah. And you don't need to diversify yourselves that much. Consequently, you don't need to hold like thousands of bonds to get an index type of return because in bonds, you're worried about downside.

There's, there's, you know, there's limited upside. It's just getting your full proceeds back. Whereas with equities, you actually need to hold all these different underliers because the index return is driven from the very few.

The very, very few. Like if you didn't hold the Amazon and you tried to replicate the Nasdaq, you would have missed out on a lot of return. And then in video last year.

So trying to replicate, you know, getting an index with equity is actually really complicated. You have to hold lots of stuff to tax those harvests and work coupling, but you can hold a bond portfolio and actually very easily beat some index by holding higher yield.

[Desmond Fleming] (32:05 - 32:23)
Yeah. And then if I think of, let's say the average return of the S&P or the Nasdaq over the past 20, 30 years is roughly six to 8%, right? Going back to your point of a yields have risen now above zero.

Yeah. There's certainly triple B or double B paper. That's right around six or 7%.

And you're locking that in.

[Jonathan Birnbaum] (32:23 - 33:18)
The last page of my very first pitch deck for open yield was a quote by Howard Marks. It was, he came out with a paper called sea change in December of 2022. And he said, he said, now that credit has, has normalized, he's like, you could earn equity like returns by owning credit.

And I see no reason to take the risk of owning equities. Yeah. Title says as well, it's a sea change.

You can really rethink like, you know, what's your risk and return. And if you could earn high single digit percent, the bond portfolio, which is stable income, you know, your senior in the capital structure, I have some friends on a, on a text where I had yesterday because of this recent market volatility being like, what's going on. And I was just joking around.

Like, I suggest you guys consider bonds for stability. And it's where this whole conversation, just like where you said, like, how do I buy bonds? Like, should I buy an ETF like this and that?

And you know, I'll go through my spiel, but the, the access points, there's a lot to be done.

[Desmond Fleming] (33:18 - 33:55)
Yeah. Yeah. I think, I think one, one of the questions I would be curious to ask you is, you know, do you think there's a, do you think there's a cultural change within the, again, I'm speaking on the retail investing side.

Do you think there's a cultural change that's needed to help retail investors think more actively about like, Hey, yeah. Why am I just fully levered to like seven companies right now? Like maybe I'm a little uncomfortable with that.

Um, do you think that's a cultural change or do you think that's needed? Or do you think open yield can kind of manufacture that by having these conversations actively and into the market and in a ton of different places?

[Jonathan Birnbaum] (33:56 - 34:26)
We're not trying to directly impact or change retail perception of fixing them at this juncture. We're just very focused on being this horizontal layer for the brokerages that retail is connected to or the advisory platforms to enable them to offer a much better product experience. Retail itself.

It's a great question. Cause I, you know, I've been following the story very closely. You know, when I was at SoFi, that's when the GameStop thing happened.

And you know, what the zeitgeist is of retail investing and Reddit and WallStreetBets.

[Desmond Fleming] (34:27 - 34:40)
And the amount of trading volume done by retail from 2019 to 2020, I don't have the numbers off the top of my head, but there's just a clear and market increase that has been sustained as well, which I find pretty fascinating.

[Jonathan Birnbaum] (34:41 - 34:53)
So the products that have by far the most retail adoption and the most focused by platform servicing retail who are highly commercial are focusing on highly leveraged instruments.

[Desmond Fleming] (34:53 - 34:53)
Yeah.

[Jonathan Birnbaum] (34:53 - 35:48)
So if you look at everybody's roadmap in the brokerage industry going back several years ago, like everyone's like, we got to get options. Yeah. We got to get margin.

We got to get options. Oh, we got to get futures. We got to get zero day options.

These are the most high, like they're not investing products. Yeah. Like it's really gambling.

And then, you know, when crypto was banging off, like, Oh, we got to get crypto. We got to add Dogecoin now. Yeah.

Um, so there, there's this element of like mixing together, like speculation, trading, and then investing. And like, you know, bonds for the most part, it's more of an investing category for like, you know, your real adult money, not like where you're pulling out your app to speculate. We do think we can help enable a real speculative market for like high yield corporates and like special situations.

Like that stuff could be really interesting. Like the best crypto yield in the world that going back a couple of years ago was we're like Coinbase bonds. Like they are yielding and like high double digits.

Like you didn't need to do any sort of stable coin play.

[Desmond Fleming] (35:48 - 35:49)
We just buy that.

[Jonathan Birnbaum] (35:50 - 35:53)
Um, but retail, like, you know, they weren't talking about bonds.

[Desmond Fleming] (35:53 - 36:46)
But again, think like, I'm, I'm here thinking like, damn, why didn't I think of that? Like, that's great. Uh, because I, I don't know.

I just don't think it's super top of mind. I want to read off a stat to you that I thought was fascinating. Um, so in 2023 US equity issuance across IPO, secondaries and preferred was 139 billion.

Uh, US fixed income issuance across treasuries, MBS, corporates, munis, agency, and ABS 8.3 trillion. Yeah. And I, I process that information and it kind of boggles the mind in terms of just how much larger the market is on the fixed income side.

But then here I am thinking like, oh, I've never thought about, oh, I could own Coinbase's paper. And, and like, what is, what is driving that kind of asymmetry? So I'm just curious about your reaction to that data point.

[Jonathan Birnbaum] (36:46 - 37:38)
Yeah, I think, you know, fixed income captures a lot of different product segments as like a cash all term. But if you're just thinking about capital markets, which involves like trading all financial products, you have common equity, you have preferred, you have convertibles, fixed income, you have government debt, you have municipal debt, you have corporate debt, you have international EM debt. Then you also have mortgage-backed securities.

Obviously the mortgage market is absolutely massive. You have agencies. So you have a lot of different categories within fixed income as a side point, like fixing them also means immature.

So there's always the cycle of maturity, reissue, and maturity, reissue. And so, you know, the net number is going to be below that eight something trillion, but it's big. And this, if you think about how institutions invest, like equity is, is a more of a speculative sleeve for stable institutions who are in focus on growth, who want capital preservation.

[Desmond Fleming] (37:39 - 37:41)
Yeah. New York Life wants to know their money's coming back.

[Jonathan Birnbaum] (37:41 - 38:51)
Yeah. And so a lot of the, you know, think about asset liabilities, you have, you know, pensions and insurance providers where they're just, you know, they're soaking up fixing a paper because that's what they need. Yeah.

That's what matches their investment bandaid. Their latest greatest thinking by portfolio allocators to think through what do people need throughout their life cycle of investing, you know, you have some type of curve that says individuals should, you know, in the beginnings of their career, own less, but assuming you want growth, but as you get closer and closer to retirement, you want more and more fixed income because you care more about that stability. And that's, that's a worthwhile trade-off and we're living longer. Yep.

Retiring later. Yep. And there's just gonna be more and more appetite for fixed income.

So, you know, I think the whole story of like, how do we take all these securities, package them up officially and deliver them to that investor is something that, you know, we're super interested in. Um, and ultimately all that eight something trillion, it might be owned by institutions, but it's people underneath it that have that claim. Like institutions aren't alive.

Like they're, they're stakeholders. Um, so yeah, it's interesting to, it's really interesting to think about and people don't realize just how large and important the market ultimately is.

[Desmond Fleming] (38:51 - 39:02)
What's the thing you want people to understand, uh, about open yield at this current point in time? Like you've, you've got the microphone, you've got the stage. Like what's the one thing you want people to take away from this conversation?

[Jonathan Birnbaum] (39:02 - 40:02)
We're in the market with a terrific product. We're live with corporates, munis and treasuries. The liquidity is great.

The technology is great. And we're speaking to firms across all these different types of segments of participation. The retail brokerages, the advisory platforms, the asset managers.

We're focused on one thing right now, which is growing the participation on the platform. You know, for us, it's really important to get our name out there. You know, I hear there's like a muni conference two weeks ago in California where, you know, big ass manager who were speaking with, you know, gave us a plug.

He's like, Hey, by the way, a lot of people might reach out to you because they've never heard of you. I'm like, I'm like, I'm doing these podcasts. I'm posting on LinkedIn.

How have they never heard? There's, there's a big world out there. And so we're trying to figure out how we could, you know, leverage the limited resources we have to get our name out there and sign people up.

So we're here, you know, we're live and we'd love to talk to anybody in the market who's interested in joining the marketplace.

[Desmond Fleming] (40:02 - 40:30)
Yeah, totally. One of the things that I love about the tech industry, entrepreneurial industry is that, you know, I think there's a default toward giving back and sharing the lessons you're learning along the way. So I'm curious in terms of, you know, your experience as an entrepreneur thus far, you know, what was one of the expectations that you've had that maybe didn't match the reality that you're experiencing kind of day to day?

[Jonathan Birnbaum] (40:30 - 41:57)
Yeah. So my first foray into trying to do something was back in 2016 after I left Morgan Stanley. I worked on two projects.

One was this play to allow apartment owners in New York, like share equity upside with investors. Another was a way to leverage plaid to allow friends to share credit card transactions with their friends. I just had this bug where I, you know, I want to build something.

Now I'm reading the forums. I'm like reading, seeing YC videos. I'm like, I want to start a company.

All right. I can do that. I want to do that.

I had no idea what I was doing. My partner said no idea. We were just figuring things out and sometimes that works.

But I learned so much more after that, like the experience of, you know, being at SoFi and like, you know, that there's really, it was not for an organization, but a later stage and then domain where, you know, I got to work with Adam Dell at the earliest stages and really be, you know, helping drive things for the first time with an organization under me. Like I, I soaked in and learned a lot. So I think it's, it's tough to dismiss like that learning experience of understanding how different organizations work, how to actually get stuff done.

And so when I took the dive, took the plunge and, and started OpenYield, I, I kind of knew how to start an organization at that point. Um, and be, or a lot of things, you don't know a lot of things, but how to quickly figure it out and make decisions and keep going and keep going and recruit people and keep going.

[Desmond Fleming] (41:57 - 42:05)
Can you just, can you just double click on the keep going part that there's a lot of persistence that's required, uh, in a role like yours? Yeah.

[Jonathan Birnbaum] (42:05 - 42:46)
I love the quote, the most important thing is, is not forget the most important thing is the most important thing. And so, you know, Adam Dell used to like saying startups don't lose for a lack of ambition, it's, it's lack of focus, you know, and you really got to focus on the thing is that you're building. Cause every time you have a lot of these conversations, you get, you know, you learn about, you get pulled in this direction, pulled in this direction.

Um, but you can't just be clay and get, but you got to actually think about, you know, where you're going and carry a vision and not be stubborn about it and striking that balance between being an ideologue and being incredibly open-minded to feedback. I find that to be the most important thing because we have a vision, but we have to be really practical too, as we execute on the vision.

[Desmond Fleming] (42:47 - 42:56)
Does that answer the question? That, that, that fully answers it for me. The comment I was going to make is that you might be ahead of the market, which is why you need to be open, uh, toward that feedback.

Completely.

[Jonathan Birnbaum] (42:58 - 44:18)
Um, reflecting a lot, thinking like, does this actually change our thinking as, as, as things come out, like, are you carrying the vision? Yeah. Everything that we've learned so far in this journey has actually been supportive of the thesis.

And, you know, I like to say like, my confidence has never been higher in the thing that we're doing. Like in the very beginning, we've been like, oh, it'd be great if we had like a better bond marketplace. Yeah.

Like, oh, wouldn't it be cool if like bonds trade like equities, let's just do it. But I, before starting, I, I was really cautious cause I had been at Morgan Stanley turning away marketplaces from coming to us and be like, let's trade with Morgan Stanley, I'd be like, we don't care. We'll listen to you when our clients tell us to sign up.

Yeah. And that was at Bridgewater where we're really focused about using technology chamber of trading and a platform had come in and they want us to adopt it and potentially invest in them. And I brought it to like a decision committee and colleagues were like, you know, we have these clear ROI projects that we need to invest in.

Why would we spend time on this? Where it's a gamble and I couldn't get it done. Yeah.

And so I had so much skepticism around what it would take. And to me, that was also part of the opportunity. There's been a lot of scorned entrance to the space.

Um, so there's been a lot of discouragement, but we had the thesis we built and we keep talking about it and getting feedback and, you know, there's a there there and we're executing it.

[Desmond Fleming] (44:18 - 44:49)
And you're going after it. On another angle of feedback, uh, you've raised a $7 million, I think seed round from Canopy, Fin, uh, Clocktower and TD as well. So a great panel of FinTech focused funds.

Um, coming back to my comment of, you know, uh, sharing what you learn as you go along the way. Can you talk a little bit about what worked in that fundraise? What didn't work, what you learned?

Uh, mostly in the context of speaking to other kind of FinTech entrepreneurs that may be coming up behind you.

[Jonathan Birnbaum] (44:50 - 45:42)
Yeah, sure. So that $7 million number is an aggregate from a pre-seed round and then a separate seed round with Canopy. Raising capital is so hard.

You know, everyone's distorted by the bias of seeing the announcements of fundraisers. They don't realize like the path it took for those founders to get there and get it over the line, sign the term sheet, have the cash hit the bank, et cetera. You gotta be able to concisely tell your story.

What is the thing you were building? How is this helping solve a problem? I used to get so irked talking to folks called crypto founders, especially who were building something and especially being a domain where we were trying to solve something.

Crypto I was like, what is the problem that you're trying to solve? And they're like, well, if somebody uses this and then if they like this and if they like this, then maybe this product, I was like, it's too contingent.

[Desmond Fleming] (45:43 - 45:43)
Yeah.

[Jonathan Birnbaum] (45:43 - 47:37)
Like there were actual problems today that you could go solve. Yeah. Like this isn't some fictitious hypothetical path dependent, like there's problems everywhere.

And once you kind of, you know, the light gets turned on for you as an entrepreneur, you start to see problems everywhere that you could go ahead and be like, and solve. It is really, really hard. And this is the thing I really took away from Domain Money the most, the previous startup.

How hard it is to put a product out there and have somebody use it. You got the world's flooded by with products to get somebody's attention and have them use it is no small feat. And I find that there's a mistake people sometimes make or who have never done that.

They're like, oh, maybe if I did this or I put up a site, like tons of people, like nobody's ever going to care. You don't realize how hard it is to get people to care about things. So for, you know, first time founders or, you know, repeat founders looking to raise money.

Like you gotta have, like, what's the problem you're trying to solve? Why are you the person here to solve a problem? Like founder product fit, founder market fit is one of the most important lenses that early stage investors will look like.

Cause they have no idea what they're going to be like, is this a big market? Is this the right founder to attack the market? That's what they're placing the bet on.

Cause that product's most likely going to change after the pre-seed, seed stage. Like cultivating the network, getting your story straight. And you know, one of our investors, when we were going out to raise the seed round was like, hey, you should pitch your tier three investors first.

Get the story right. And you know, there's a certain element of, you know, crafting the story, being really right. And you realize too, investors, they have limited information.

You know more about the market than they do. And you could also tell by the quality of their questions, what's the likelihood that they're going to be your partner? Like I talked to some investors, FinTech investors, and they're like, so who buys bonds, I'm like, if this is where we're starting, it's going to be so hard for you to get there.

Yeah. Um, what is ice?

[Desmond Fleming] (47:37 - 48:12)
Like, um, okay, cool. Well, I think, um, the last question and you did bring it up a little bit earlier. You talked about how AI is potentially a lever and automation writ large is a lever in kind of pulling more adoption into this market, curious about how you're using tools, uh, today, whether you're using tools like a cursor or loveable, and even thinking about, uh, Hey, what could AI mean for how we build open yield as a business?

This is going to give you more leverage in terms of how you're building the product overall.

[Jonathan Birnbaum] (48:13 - 50:26)
So we've naturally been early adopters of anything AI out there that could assist with our workflows. You know, the whole team's on GBT when deep research was released a couple of weeks ago, like we kind of went to town on it and quickly maxed out, but amazing research, like just blown away by the leverage it's given us on, on the business side, on the technology side. My co-founder has been pretty skeptical of the AI GBTs being able to like generate code that was at the production level for what we need as a, as a marketplace with security concerns and all that.

But we, we have this conversation literally every week about the newest tools and he keeps testing them. And they're just about there where they could start doing a lot of things that he needs them to do. It's great for like subroutines or, you know, he'd take this, but, you know, we're writing our marketplace in C++ and Rust and there, there's not as much of a robust library and like GitHub that these folks have trained off of for the security needs that we need.

So he, he's pretty cautious in adopting those tools. I think the more interesting conversation is around how can AI actually enhance our underlying core product? And this is what we're going to be transitioning into.

And we're really excited about some of the products we're going to build leveraging these tools going into the year, because if you think about it, we have this live marketplace, tons of data coming in, orders and executions, reference data, bonds, and so much of the fixing of the world is around, you know, people either cleaning narratives of what's happening in the market, which AI could really do, do good at now.

And, and also in the bond space, there is always this back and forth between like, oh, is this bond similar to this bond? Or I want to buy, you know, this group of bonds and, you know, in munis, like I want to do housing bonds in New York. And so there's a lot of natural language input and output that we could start to embed into our core protocol and take what used to be just CUSIP matching and do much more interesting things.

So, you know, more, more to come on that, but we're, we're really excited about the tools and, and the fact that, you know, it's all just happening and we could adopt stuff pretty cheaply and embed it into our product.

[Desmond Fleming] (50:27 - 50:38)
Super cool. Well, Donathan, thanks so much for, for coming by and chatting out all things Open Yield. I really appreciate it.

And we'll make sure we get this out to the people.

[Jonathan Birnbaum] (50:38 - 50:42)
Desmond, thanks for having me. Great conversation. Love the questions.

Happy to do it again.

[Desmond Fleming] (50:43 - 50:44)
Thank you. Yeah, let's do it.