Speaker 1: Carnegie Mellon is an excellent university, but it is a stressful place. People aren't happy. They're just kind of just it's not good. It's not a happy place. One of the things that Severin and I decided early on when we were starting a company is like, look, whatever happens, you know, our company should be a happy place.

Speaker 2: By the time Luis Van On turned 24, he was already a millionaire several times over. The 43-year-old may not be a household name, but I'm willing to bet you're one of the hundreds of millions of people who uses technology every day. Luis isn't your average unicorn tech founder. He actually pays his drivers to give feedback on their interactions with potential executive level hires on their way to and from the airport to weed out toxic personalities. All right, Luis, thank you so much for taking some time out. I appreciate it. Yeah, of course. There are three numbers to look out for in Luis's story. Forty two thousand, the amount he made each week digitizing copies of The New York Times, 183 million, the total amount of outside investment he raised, and six and a half billion, the total valuation after Duolingo went public in June 2021. Here's how Luis Van On built Duolingo, one of the most popular educational apps in the world, while managing to keep it free for almost everyone who uses it. For CNBC Make It, I'm Nate Skid. This is Founder Effect. Luis grew up far from the Ivy Leagues in Guatemala. His mother was a doctor and made sure he learned English at a younger age. For many people, that can be the difference between a life of struggle and one of opportunity. How big of a deal do you think it was to go to an English program in terms of setting on the path that you ended up that you ended up on?

Speaker 1: I think it was a huge deal. In Guatemala, for example, you probably double your income potential by just the fact that you know English, but you don't have to know anything else.

Speaker 2: There were two formative moments in Luis's young life. The first was witnessing the tension in his family's candy business between the owners and their workers.

Speaker 1: Different people in my family would, you know, a lot of times just have this vision that it's like kind of us versus them.

Speaker 2: The second was a visit from a recruiter from Duke University who was scouring Central America for undiscovered academic talent.

Speaker 1: And she essentially kind of, she didn't quite fill out the application for me, but she almost filled out the application for me.

Speaker 2: In 1996, Luis moved to the United States to attend Duke University with no money to his name. Yet he still managed to graduate at the top of his class with the goal of becoming a math professor. But that dream didn't last long.

Speaker 1: I realized that all the professors that were in math were doing research on problems that hadn't been solved for 500 years or whatever.

Speaker 2: Luis wanted to spend his time and energy tackling new challenges. In 2000, he was accepted to a computer science Ph.D. program at Carnegie Mellon. But it didn't take long for him to develop a knack for creating profitable businesses. In 2003, he created a simple game pairing two players and showed them each the same image. If their descriptions matched, they moved on to the next one.

Speaker 1: What they were doing is basically just telling Google what's in these images. And so that really, you know, kind of improved image search, etc.

Speaker 2: Luis says Google bought the game in 2003 for a couple million dollars. In 2006, Luis landed on his next big idea after listening to a talk by Yahoo's chief scientist. The problem was that spammers were writing code to steal millions of email addresses and flood those inboxes with junk mail. Luis's answer was called.

Speaker 1: This thing called a captcha, which is these distorted characters that you have to type, you know, all over the Internet whenever you're buying tickets on Ticketmaster or whatever. You just, you know, you get this image of messed up characters. So we came up with that. That was our idea.

Speaker 2: About 200 million people take 10 seconds out of their day to fill out a captcha. And while some would sit in amazement at their impact on humanity, Luis suffered from pains of guilt, which led to his next big idea.

Speaker 1: And so if you multiply 10 seconds by 200 million, I started thinking, OK, that's that turns out to be 500,000 hours every day. I started thinking, OK, can we can we make good use of these 500,000 hours gave to this rise to this kind of next project, which was called recapture. So it's like a redoing of captcha, where the idea was that as people were going to were typing these, you know, over the Internet, not only would they be authenticating themselves as humans, but they were helping us to digitize books.

Speaker 2: Word of the new tech reached The New York Times, which was in the process of digitizing about 150 years worth of old newspapers. Luis charged The Times $42,000 for every year of content he digitized.

Speaker 1: We could digitize an entire year of content in about a week. So pretty quickly, we started getting checks for $42,000, like, you know, about one a week.

Speaker 2: Luis founded ReCaptcha in 2006 and sold it to Google in 2009 for an undisclosed sum. But he said it was in the tens of millions of dollars. In 2006, Luis was awarded the MacArthur Fellowship, also known as the Genius Grant, that came with $500,000 and no strings attached.

Speaker 1: It's not like you apply for it or anything. Just one day you get a phone call and they just ask if you're. Fortunately, I picked up the phone because, you know, nowadays if I get a random phone call, I do not pick up the phone.

Speaker 2: So what did you do with the $500,000?

Speaker 1: Put it in the bank account. Honestly, I probably spent it mostly on a little seed funding for this ReCaptcha.

Speaker 2: So where did the aha moment for a language service come about? Where did this happen?

Speaker 1: Yeah, that was around 2009, 2010. I had sold ReCaptcha to Google. I had a PhD student named Severin Hacker, who is my co-founder at Duolingo. At the time, we hadn't started anything. One of the insights was, you know, computers are getting much smarter and we could make it so that computers really could teach everybody as opposed to teachers having to teach everybody. That was kind of the idea.

Speaker 2: Now that they knew they wanted to teach, they just needed to agree on a subject.

Speaker 1: Eventually, we settled on teaching languages. And the reason for that was because both of us have, you know, both of us learned English. So we thought, OK, let's do something to teach English. The other thing that we really wanted to do was we really saw technology as a way to to be able to really democratize education. The beautiful thing with technology is that it doesn't cost you that much more to teach more people than just to teach one person. So we thought, OK, well, we teach everybody and we could teach them for free.

Speaker 2: And just like that, Duolingo was born. Well, sort of. So how do you come up with the name Duolingo?

Speaker 1: We looked at a lot of names. One of the ones was F-L-O-O-N-T, which should sound kind of like fluent, but it more sounded like flunt. And then, you know, my friend said, oh, that sounds like I flunted all over the floor. Like it's like not good. So we had we had a bunch of names. Eventually we came up with not Duolingo, but Monolingo. And that sounded like like an illness, like you have monolingo. And at some point, it just Duolingo made a lot of sense.

Speaker 2: Now that they had a name and a mascot, it was time to turn their idea into a business. Instead of applying for a grant through Carnegie Mellon, in 2012, Lewis reached out to Union Square investors and secured three million dollars in seed funding.

Speaker 1: They had just invested in like Twitter and Tumblr and they were like the biggest thing out there. And Foursquare was also the biggest thing out there. And so Union Square Ventures was like, oh, my God, like amazing.

Speaker 2: OK, so can you tell me the amount that Series A from Union Square was?

Speaker 1: Yeah. I mean, one thing that is important to mention is Series A back then, this is the year 2012, were very different than Series A today, which today is massive. So in 2012, a very nice Series A that you were happy with was three million dollars. Three million dollars. Today, that's not even called a Series A, today it's like seed funding.

Speaker 2: Around that time, Lewis gave a TED talk and at the end he made mention of this really cool new application focusing on language that he was working on. Well, that talk went viral and soon Duolingo, which at the time was just a landing page with a place to put an email address, had a waiting list with over 300,000 names on it.

Speaker 1: At the time, the other thing that was going on at the time was there wasn't really a good way to learn a language on the computer. I mean, the thing that there was was Rosetta Stone and it was like super expensive, was like a thousand bucks. And so there was this thing that just that you can learn a language here and it's entirely for free. And so a lot of people were like, yeah, sure, I'll give you my my email. And so that worked out pretty well.

Speaker 2: The instantaneous interest in Duolingo and his proven track record helped Lewis raise even more capital, 183 million in all. He used almost all of that early investment money to build out a team. And for the next three years, he focused solely on growing his user base. He didn't even think about monetization.

Speaker 1: Up until 2017-ish, Duolingo was making no money. This was not our finances were very simple. Simply we spent money on mainly people's salaries. And that was at that point, though, we decided it's probably time to make Duolingo be a self-sustaining business. And we started actually monetizing and it has worked out very well.

Speaker 2: By now, Lewis says Duolingo had about 10 million active users and was the number one education app in the world. Now they just had to figure out how to make money while keeping the app free.

Speaker 1: We didn't just want to say, you know, turn around and say, oh, just kidding. Now you got to pay. So what we ended up doing is we ended up coming up with a business model that ends up being pretty similar to, say, what Spotify does or what the dating apps do, which is you can use Duolingo as much as you want for free. But if you don't pay us, you have to see some ads at the end of a lesson. And then if you want to turn off the ads, you can pay us to subscribe and then we turn off the ads and we may give you other kind of premium features. So that combo of ads and subscription worked out really well. And so we ended up making, you know, every year since then we've made more and more money.

Speaker 2: A full 94 percent of Duolingo's active monthly users opt for the free version, which includes some ads. But the company makes most of its revenue from the other six percent of its users who are paying subscribers.

Speaker 1: Six percent of our users give us the majority of our money by now.

Speaker 2: There are more people in the U.S. learning languages on Duolingo than there are students learning languages in all U.S. high schools combined. And one of the reasons for Duolingo's success is that it feels like a game. In fact, the app keeps track of how many consecutive days a user logs in. Skip a day and it goes to zero.

Speaker 1: We have over by now, I mean, we haven't quite released the figure, but we have released this one, which is we have over a million daily active users who have a streak longer than 365. So we have more than that. They haven't missed a single day in the last year.

Speaker 2: What day did you IPO? What was it like for you personally? Were you nervous? Do you remember the moment?

Speaker 1: It was extremely exciting and a big milestone for the company and for everybody who has been working on this. I mean, Duolingo has really good employee retention, as in like people really rarely leave Duolingo. So most of the original team is still here. And so there's been all these people that have been at this for, you know, the last, I don't know, eight, nine years. So it was pretty transformative. What happened to the share price? Our share price was one hundred and two dollars. It went it went really high. I mean, the first trade was one hundred and forty, I don't know, maybe one hundred and forty one or something like that. So I don't know the exact number, but it's around one hundred and forty and then it just kept going up. It's around. You don't know.

Speaker 2: That would be like plastered on my wall is like a big memory.

Speaker 1: You know, share price is I was told by a lot of CEOs of publicly traded companies not to pay too much attention to share price. And I've been doing that. And it's actually really good feedback. Here's basically what your share price moves randomly with like basically no connection to what's going on with the company.

Speaker 2: What was the biggest money mistake you've made along the way with Duolingo?

Speaker 1: I don't feel bad about anything we've done. By the time we went public, we still had one hundred and some million dollars in the bank account, meaning we had only really spent eighty million. Of course, we had been making some revenue the last few years, et cetera. But basically, we could have raised a lot less money. And by raising a lot less money, you know, I think us employees, me and the rest of the employees would have owned a larger fraction of the company.

Speaker 2: When I was talking to the management team about interviewing you, one of the other senior producers said that she had gotten very far in the in the interview process at Duolingo. You guys flew her out to Pittsburgh. You put her up and she said that even though she didn't get the position, the culture and the vibe at Duolingo stayed with her. And she was like, Nate, you have to ask about that culture. And so it dawned on me when you were telling me about this candy factory that you watched and then hearing about the culture that you created. And I'm wondering if you can kind of sew that up for me, like what you learned there and what you apply now.

Speaker 1: Most tech companies, there's a lot of employee churn, meaning like people leave the company, et cetera. Very few people leave Duolingo because it's a good workplace. And I think that there's two reasons for that. I think the you know, what I what I saw with with my family and this is not it's not that my family is doing anything bad or anything. It's just in a country like Guatemala, there really is kind of a boss versus employee, like us versus them kind of thing. And I saw that that really didn't work. I mean, it's much better when when everybody is much more egalitarian culture. So Duolingo has, you know, in as much as possible, a very egalitarian culture. That's one thing. The other thing is, you know, when when we were at Carnegie Mellon, Carnegie Mellon is an excellent university. I have nothing bad to say about it. It is really an excellent university, excellent for artificial intelligence, excellent for all kinds of things. But it is a stressful place. And people when you enter the buildings there, you people aren't happy. They're just kind of just it's not good. It's not a happy place. And, you know, one of the things that Severin and I decided early on when we were starting a company is like, look, whatever happens, you know, our company should be a happy place.

Speaker 2: Lewis has a unique way of weeding out potentially toxic employees.

Speaker 1: I'll tell you some of the things we've done, by the way, even for executives. Whenever we fly an executive for an interview or not just for a lot of people, whenever we fly them, we have a driver come pick them up in the airport and we have a set of drivers that are the same everywhere. We actually that's part of your interview and people don't know it. It is how you treat them. And so we get feedback from the drivers about how well they were treated. And so now normally that most people are just perfectly fine. Like just like that. But we have we have not made offers to very, very qualified, competent people because they were nasty to our driver. And we're like, oh, we don't like that because that just means you're going to you know, you're going to be nasty to the little people and we don't want that. And so so, yeah, I think that that type of stuff has really helped.

Speaker 2: Lewis's businesses have been incredibly successful, and yet they all seem to serve a greater purpose. The picture matching game had the added benefit of generating SEO terms. CAPTCHA helped Yahoo and many, many other digital businesses decipher between humans and robots. And reCAPTCHA is helping to digitize the world's books. These ideas have made Lewis incredibly wealthy, but he's most proud of the culture he created at Duolingo.

Speaker 1: A lot of the people that come work at Duolingo do so because they love this mission of developing the best education in the world and making it universally available.