Andy is Wealthfront’s co-founder and CEO. He serves as chairman of the UPenn endowment investment committee and teaches technology entrepreneurship at Stanford GSB. Previously, Andy co-founded and was general partner of Benchmark Capital.
Wealthfront – Get data-driven, actionable finance advise.
3 Value Bombs
1) Not every business is meant to be mission-driven. If you build a commodity product, it’s hard to be mission-driven. You have to have an element of changing the world to be mission-driven.
2) You don’t find the idea. They find you from your authenticity to the opportunity because you will recognize that inflection point well before someone else might.
3) Don’t focus on the percentage of times that you’re right. Focus on the magnitude of when you are.
Klaviyo: Customers want more from brands. Delivering more means owning the customer experience. Klaviyo calls this “owned marketing” and they believe it’s the best path to growth. For more, visit Klaviyo.com/fire!
**Click the time stamp to jump directly to that point in the episode.
Today’s Audio MASTERCLASS: From Legendary Investor to Entrepreneur: Wealthfront’s CEO Andy Rachleff
[1:32] – Andy shares something he believes about becoming successful that most people disagree with.
- You’ll learn more from success than you will from failure – professionally and personally.
[2:03] – Andy talks about his inspiration to create Benchmark Capital, and then became an entrepreneur himself.
- They were united by the desire to build the best firm in the business. They didn’t believe that they could do it with their previous franchise, even though both were in the top 5 in the business. They thought they needed to do something radically different to rise to the top.
[4:20] – What can entrepreneurs learn from a venture capitalist?
- Venture capitalists enable companies that require capital to succeed.
- Most companies that gain their advantage from intellectual property require the capital to build that intellectual property. They can’t bootstrap themselves into the development of the software.
- The only people who have the capital and the appetite for the risks are the venture capitalists.
- What differentiates the venture capitalist is their network, their ability to help with the recruiting, and most importantly, their perspective on issues entrepreneurs are going to face in their life.
[6:26] – What can venture capitalists learn from an entrepreneur?
- None of the skills that one develops to become a good leader or run a company are relevant to venture capital.
[8:00] – The meaning of product market fit and how you know that you have it.
- If you find product market fit, you can screw up almost everything you do and still succeed.
- If you don’t find product market fit, even if you are the best manager in the world, you’re going to fail.
- One should apply the scientific method to business. The two key hypotheses that one needs to test are the Value Hypothesis and the Growth Hypothesis.
- The Value Hypothesis answers what you’re going to build, for whom it is relevant, and the business model you’re going to apply to attract customers.
- After proving Value Hypothesis is the Growth Hypothesis, which you use to identify the ways to cost effectively acquire customers.
- If you have exponential organic growth, then paid growth is of no value.
- At the point that a company’s sales team generates a contribution margin greater than the cost to fuel the team, you’ve found product market fit. That ratio is called the sales yield.
[17:11] – Building a mission-driven business is of utmost importance. How can Fire Nation build a mission-driven business?
- Not every business is meant to be mission-driven. If you build a commodity product, it’s hard to be mission-driven. You have to have an element of changing the world to be mission-driven.
- Most people who write about entrepreneurship lead you to believe that companies are started by analyzing the market, finding problems, and developing solutions.
- You don’t find the idea. They find you from your authenticity to the opportunity because you will recognize that inflection point well before someone else might.
[20:52] – Competing with behemoth legacy companies – is it possible?
- If you’re riding consensus, no. If not, then you have a chance, because then you’re serving a different audience.
- Every company revises history after they have succeeded. Consumers buy from companies that always intended to serve them.
[23:18] – Specific leadership principles that are crucial for success.
- Selflessness, empathy, transparency, and candidness.
[24:01] – Andy’s key takeaway and call to action for Fire Nation.
- Don’t focus on the percentage of times that you’re right. Focus on the magnitude of when you are.
- Wealthfront – Get data-driven, actionable finance advise!
Boom, shake the room, fire nation JLD here and welcome to entrepreneurs on fire brought to you by the HubSpot podcast network with great shows like business infrastructure. Today, we'll be focusing on how the CEO of a wealth front went from legendary investor to entrepreneur to drop these value bonds. I have brought that CEO, Andy Rachleff into EOFire studios. Andy is Wealthfront co-founder and CEO, and he serves as chairman of the U Penn endowment investment committee and teaches technology entrepreneurship at Stanford GSB previously, Andy co-founded and was general partner of benchmark capital.
And today for our nation, we'll talk about what entrepreneurs can learn from venture capitalists. And vice-a-versa, we'll talk about what the heck is product market fit and how do you know when you have it and how do you fire nation build a mission driven business and so much more. When we get back from thanking our sponsors, customers want more from brands delivering more means owning the customer experience, taking control over data acquisition analysis, creative and delivery, Klaviyo calls, this owned marketing, and they believe it's the best path to growth for more visit klaviyo.com/fire. That's K L A V I Y o.com/fire. What if you can run an e-commerce business with no tech experience or employees and generate 10 K or more each month today's sponsor launched.
0 (1m 25s):
My biz is doing just that launchmybiz.com guarantees your success and revenue with complete end to end training and support apply today at launchmybiz.com that's launchmybiz.com and say, what's up to fire nation and share something that you believe about becoming successful that most people disagree with.
1 (1m 48s):
I think you learn more from success than you do from failure professionally. I think you learn more from failure personally,
0 (1m 57s):
And I've told you all about Andy in the introduction. I've teased the bullet points. We're going to be talking about today, how Andy went from a legendary investor to an entrepreneur. So I want to talk about benchmark capital and wealth front to start because Andy, they are two very, very different businesses. So what inspired you first and foremost to create benchmark and then eventually become an entrepreneur? Well, I was one of five
1 (2m 23s):
People who co-founded benchmark. So it wasn't I who did it. It was a group of us, the inspiration for doing it was my previous venture capital firm, which was one of the top five firms called Merrill Pickerd Anderson. And I R was going through a generational transition. Two of the partners were retiring, which left the remaining three of us to decide, did we want to take the franchise forward or did we want to become free agents and do something different at the same time, another one of the top five venture capital firms was going through this same sort of generational transition where the founding partner wanted to retire.
1 (3m 2s):
And that firm's name was TVI. My partner, Bob Kagel came from TVI. Bruce Dunley VNI came from Merrill Pickerd. Kevin Harvey was an entrepreneur that we had backed at Merrill Pickerd. And so what United, the four of us, there was a fifth person, but he didn't last very long, but what United, the four of us was a desire to build the best firm in the business. We didn't believe that we could do that with our previous franchises, even though both were probably in the top five in the business, we thought we needed to do something radically different in order to rise to the top.
1 (3m 44s):
And so given that each of Merrill Pickerd and TVI had decided not to raise a new fund and just to wind down their operations, that allowed us to become free agents to start something new.
0 (3m 58s):
So fire nation, the evolution of people that are going into the world of entrepreneurship is always a fascinating one because there's a lot of decisions that go in to that process. And that's what I would love to kind of talk about next. Andy, because fire nation is mostly made up of entrepreneurs, small business owners, and you know, the world of venture capitalists are kind of foreign to most of us. So let's just kind of break down what we fire nation entrepreneurs in general can learn from venture capitalists, but I'd also would love to flip it around as well. And have you share with us what you think venture capitalists can actually learn from entrepreneurs?
1 (4m 38s):
Biggest thing that venture capitalists enable is companies that require capital to succeed. Most companies that gain their advantage from intellectual property require the capital to build that intellectual property. They can't bootstrap themselves into the development of it, into the development of the software. So they need outside capital in order to pay for the engineers that they need to attract. And the only people who have the capital and the appetite for the risk are the venture capitalists. So it is a necessary requirement.
1 (5m 20s):
If you want to try to build something large, if you want to build something small that you bootstrap and you sell for 10 or $20 million, you absolutely don't need venture capital. If you want to try to build a business that has a chance to build, to generate 5,000, a billion dollars of revenue. In that case, you need venture capital and the what differentiates the venture capitalists really is number one, their network, number two, their ability to help you with recruiting. But most importantly, and this is probably the least valued capability going into relationship, but the most valued capability at the end of the relationship, if the company succeeds is perspective on issues, the entrepreneur is going to face once in his or her life.
1 (6m 10s):
But the venture capitalist has seen a hundred times. Not because they're so good, but because they've been around a lot of successful companies and they can share what other companies have done, not tell the entrepreneur what to do, but share the context. So the entrepreneur can make a better decision. And I've seen that actually make an enormous impact on businesses.
0 (6m 32s):
And on the flip side, what have you seen venture capitalists learn from entrepreneur?
1 (6m 36s):
The skill sets for the two professions are completely different. I remember for the last 15 years, I've been teaching a variety of technology, entrepreneurship courses at Stanford graduate school of business. And one of the courses I co-teach with a very successful entrepreneur named mark Leslie, who founded and ran a company called Veritas software that he built into our billion dollar revenue software business. And he was never fond of venture capitalists and was so excited when I started an operating company. And he said, boy, you're going to be, you said you would be such a better venture capitalists. Now as a result of having started the company.
1 (7m 16s):
And I said, mark, I couldn't agree with you less because none of the skills that one develops to become a good leader or to run a company are relevant to venture capital. It makes you a better board member because I think you're more empathetic to the, the trials and tribulations of the entrepreneur, but in terms of deciding which company to pursue and which investments to make nothing about entrepreneurship
0 (7m 44s):
Helps with that talk about product market fit. Because that's one thing that I know as a venture capitalist, you've had to sit down and identify does this product, does this service, does this vision that this entrepreneur have at least have a chance for product market fit. So break it down for fire nation who maybe is in that stage right now, what is product market fit and how do you know when you have it? Well, it's actually
1 (8m 11s):
A term that I coined well. So I've, I'm the person who created that concept or that the term, not the concept. And I've been teaching a course on it for the last 13 years. So I've really made a study of it. And my view is that at least in among technology companies, if you find product market fit, you can screw up almost everything you do and still succeed. Conversely, if you don't find product market fit and you're the world's best manager you're going to fail. So you really, the only thing that matters in the early stages of a technology startup are finding product market fit.
1 (8m 52s):
The, the best definition that I can give to you is on the lean startup methodology, which was popularized by Eric Reese in his book, the lean startup, which was really a successor to what Eric had learned from a fellow named Steve blank, who had written the first book on applying the scientific method to business called the four steps to the epiphany. So both Eric and Steve believe that one should apply the scientific method to business. Amazingly, this was a radical insight about 15 years ago. And what they mean by that is just like in third grade, when we used to have science projects in elementary school, you have to develop a set of hypotheses that you need to, to test and prove iterate and move on.
1 (9m 43s):
And so the two key hypotheses that one needs to test are one's value, hypothesis and growth hypothesis, and they should be done in that order value first, then growth. The value hypothesis is the, what the who, and the, how, what are you going to build for whom is it relevant? And the, how is the business model that you're going to apply to attract customers? The growth hypothesis, which is pursued after you've proven your value hypothesis are ways that you can cost effectively acquire customers. Product market fit happens when you have proven your value hypothesis. In other words, customers really buy into your value proposition and almost grab the product out of your hands.
1 (10m 32s):
And so you might ask how do you know if you have it? Well, there are three heuristics that I recommend to companies. One for consumer focused companies and two for enterprise companies. Would you like me to share those with you? Please do. Okay. Great. Well, on the, on the consumer side, you know, that you have found, you have proven your value hypothesis. If you have exponential organic growth, paid growth is of no value. It you're fooling yourself. If you think that you have built a great business because you paid through advertising to acquire it, the only thing that proves that you really have customers who are crazy about your product is if you build word of mouth, such that your customers buy more products and tell their friends to buy the products.
1 (11m 24s):
And when you have word of mouth, that's the only way you can drive exponential organic growth. So unless you do that, you really haven't found product market fit because you might buy customers. But if they don't tell other people about it, it's ultimately going to implode on you. When you stop spending all of that money. On the enterprise side, there are two, two heuristics that I use. One I learned from a great venture capitalist named Doug Leoni from capital Doug, who was a great salesperson before he became a venture capitalist advises entrepreneurs in the enterprise space that whenever you do a trial and almost every startup has to do a proof of concept trial to get new customers, to buy their product, you need to pull the trial out of the customer's hands after 30 days.
1 (12m 17s):
So in order to qualify, customers, companies typically require that they sign a contract that says if the product does everything that we say that it will do, you'll buy it after 30 days. But very few companies are actually willing to do that. What Doug found is that unless you're willing to pay after 30 days, you're never going to pay anyway. You're just not desperate. And unless you're desperate, you're not going to buy from a startup. If there's a good enough alternative for a customer, they're going to go with a good enough alternative because it's lower risk. So at the end of the 30 days, you pull the trial. If the customer screams, you say, well, pay me.
1 (12m 57s):
And if they pay you, you know, you have fit. And if they don't pay you, you don't, it's really, as simple as that, the second heuristic, I learned again from mark, Leslie, who I mentioned earlier, and he wrote an amazing article in Harvard business review that anyone can download with a Stanford professor named Chuck hallway called the sales learning curve. And what they found is that at the point that accompanies sales teams generate contribution margin greater than the cost to field the team you found product market fit. So that that ratio is known as the sales yield.
1 (13m 37s):
So imagine it costs on the order of five or $600,000 to field a direct sales team, meaning a sales person, including all of their expenses and commissions, a systems engineer to do the technical part of the sale, a fraction of an inside sales rep, who does some prospecting and then the management overhead. So the total cost of that for a sales team is typically five or $600,000 until a sales team is able to generate gross margin in excess of five or $600,000. You haven't found the recipe to sell and you haven't found the fit. Interestingly, once you get above that, that sales yield ratio of one, the ratio actually takes off and explodes.
1 (14m 25s):
So that's a really good test for enterprise
0 (14m 28s):
Fire nation. A lots of value here. The one that I want to focus on is consumer because I found that super fascinating and it probably most relevant for most of our listeners, which is exponential organic growth, keyword being organic. We're not talking about paid growth because paid growth is of no value. Word of mouth is everything. Are your users, are your consumers talking about your product, recommending it being evangelists? Are you growing through word of mouth? And wow, we have a lot more value that we're going to be dropping. When we get back from thanking our sponsors, are you working around the clock to build the business? You always imagined. Do you want to communicate with your fast growing list of customers in a personalized way, but also in a way that gives you time to work on the rest of your business?
0 (15m 15s):
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0 (15m 55s):
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0 (16m 35s):
How LMB provides comprehensive training and support a dedicated full-time partner, success manager, proven profitable, and guaranteed results in so much more. If you're ready to acquire a real business, that guarantee success and 10 K in monthly revenue apply to become a launch. My business partner today, the launch, my best partner program is not for everyone to see if you qualify, visit launch my biz.com and click the apply button. If you qualify at launch, my biz, we'll reach out with next steps. That's launchmybiz.com. So Andy, for a lot of people building a mission driven business is of utmost importance. How can fire nation our listeners here today build a mission driven business. I don't think every
1 (17m 16s):
Business is meant to be mission-driven. If you're building a commodity product, it's hard to be mission-driven. You have to have an element of changing the world to be mission driven, at least in my opinion.
0 (17m 29s):
So for those people that do want to build that mission-driven business, that is their goal in their hearts desire. Where were they?
1 (17m 37s):
I don't think you can. So forgive me for throwing cold water on this, but this is actually something I talk about in my class. I think that most people who write about entrepreneurship lead, you believe that companies are started by analyzing a market finding problems and developing solutions. That seldom leads to a big outcome. And I'll explain why in a second, when you look at really successful tech companies, almost all of them have actually been the result of an engineer, noticing an inflection point in technology, figuring that they can, that enables them to build a particular kind of product, and then they have to find a market for that product.
1 (18m 26s):
So it's the exact opposite of what people think. So if you're sitting in your office trying to dream up ideas that you can pursue, that's very unlikely to turn into a big business. And let me, let me give you a framework for why may I please do? Okay. Well, it's actually something that I learned from my investment idol, a fellow named Howard marks from Oak tree capital. Who's probably the premier distress debt investor in the United States. And he's probably as well known for his quarterly letters to his investors as he is his great returns. And all of his letters are based on the same framework. And basically it is that investing can be described with a two by two matrix on one dimension.
1 (19m 9s):
You can be right or wrong. And on the other dimension, you can be consensus or non-consensus now, obviously if you're wrong, you don't make money. But what most people don't realize is if you're right in consensus, you don't make money because all the returns get arbitraged away. The only way to make big returns is to be right. And non-consensus the problem is, you know, you're non-consensus, but you don't know that you're right. So it is a challenging way to make money. I think the same framework applies to entrepreneurship. Starting with the market in developing solutions is something that just about anybody can do. So that's an example of the right in consensus quadrant, which seldom leads to big success.
1 (19m 52s):
Whereas starting with an inflection point in technology, remember without change, they're seldom opportunity, which allows you to create a product and then finding a market. That's an example of being non-consensus and hopefully you're right. The mission driven companies tend to be in that, right? And non-consensus quadrant and those ideas, you don't find those ideas. They find you from your authenticity to the opportunity because you will recognize that inflection point because well, before someone else might. So that's really, really hard to do. And I'm not sure I can advise your listeners to how to do that.
0 (20m 35s):
So a lot of people in our audience are those small business owners, those solo preneurs, the little guys and the little gals are we able to compete with these behemoths legacy? Is that even possible? If you are
1 (20m 49s):
Writing consensus? No. And what if you're not? Well, then you have a chance because then you're serving a different audience. The people that you're serving are desperate because they haven't been served by the incumbent.
0 (21m 2s):
So you're essentially saying if you're identifying a big idea, but then you're saying, okay, within that big idea, there's a lot of competition, obviously, because this is a big idea for a reason. And a lot of people trying to solve it. Let me try to identify the void in the marketplace, the underserved problem. That's not being solved and going all in on that.
1 (21m 22s):
Again, you're starting with the market. I don't believe you can build a big business that way. Now what's frustrating about this is that every company revises history after it has succeeded and they change the story to make you believe that they did what you just described because because consumers prefer to buy from companies that always intended to serve them. And so everyone changes their story. Here's a great example, Airbnb. So, well, it didn't start with inflection point technology necessarily. They were just trying to solve their own problem.
1 (22m 2s):
One of their roommates had moved out and they needed money. And a design conference came to town and they rented out one of their rooms. And they were really shocked to find that multiple people would rent that room. So they tried to build a business around that and, but it was focused on events. So it was the wrong market. They didn't change the product. They changed the market. And ultimately what they determined was that professionally photographed rooms on their site converted at three X, the rate that non-professionally photograph rooms. So they ran an experiment and started offering professionally photograph rooms for free.
1 (22m 46s):
And the business took off. Now, later on, they, they positioned their brand is living local. That's not what they started to do, but that's what they tell everybody they started to do. Now they're not liars, they're revisionists. And every great company is a revision,
0 (23m 3s):
Revisionist history, fire nation. So Andy, what specific leadership principles are crucial for success?
1 (23m 12s):
Selflessness, number one, great leaders put their people ahead of themselves. That's why people follow them. They're empathetic, they're transparent. And they're candid,
0 (23m 26s):
Selflessness, empathetic, transparent, candid foundation. Think about it. How many of these principles are you living? Are you acting within every single day? So Andy, we've talked about a lot of things today and I think a lot of them are interesting because it's going to give fire nation a lot of food, for thoughts, some contrarian thoughts, and some really interesting ways of approaching things. What is the one thing of everything that we talked about that you really want to make sure our listeners really get from this conversation, then share the best ways that we can connect with you and maybe consume more of your contents. And then we'll say goodbye. The best
1 (24m 6s):
Advice that I can give entrepreneurs is don't focus on the percentage of times that you're right. Focus on the magnitude of when you are. So I would rather be right, one or two times out of 10, but have really big magnitude from those decisions. Then I would be nine out of 10 with small magnitude. It's a very, very different way
0 (24m 31s):
Of thinking. Is there any place fire nation could consume more of your contents? Anything you want to share there
1 (24m 37s):
Thought about entrepreneurship, but if they want to consume my content about investing a wealth front has a blog that is unique in that we provide data-driven actionable personal finance advice. Most personal finance advice is based on old wives, tales and rules of thumb that the data actually proves to be incorrect. And so we, we basically show the fallacies of a bunch of those things. And as a result that builds trust for our, our service, we integrate investing in banking to make it delightfully, easy to grow your net worth.
1 (25m 19s):
So if you want to consume my content, my content focuses on wealth from
0 (25m 23s):
Wealth, front fire nation. Cause you know, this, you're the average of the five people you spend the most time with. And you've been hanging out with Andy and myself today. So let's keep up that heat. And if you want to check out the show notes page, head over to eofire.com type Andy in the search bar, the show notes page will pop up with the links timestamps you name. It will all be there and make sure you do go check out wealth front for all the reasons Andy to share it. And Andy, I want to say thank you for sharing your truth, your knowledge, your value with fire nation today, for that we salute you and we will catch you on the flip side. Hey, fire nation today's value bound content was brought to you by Andy ans fire nation. If you've ever thought about creating a podcast of your own, the podcast journal is for you.
0 (26m 7s):
It is a gorgeous, full other journal that will guide you step-by-step and the creation and launch of your podcast. And 50 days visits the podcast journal.com use promo code podcast for a $15 discount. And thank you for listening to my podcast and I will catch you there, or I'll catch you on the flip side. Customers want more from brands delivering more means owning the customer experience, taking control over data acquisition analysis, creative and delivery, Klaviyo calls, this owned marketing, and they believe it's the best path to growth for more visit Klaviyo.com/fire That's K L A V I Y O.com/fire. What if you can run an e-commerce business with no tech experience or employees and generate 10K or more each month today's sponsor Launch My biz is doing just that launchmybiz.com guarantees your success and revenue with complete end to end training and support apply today at launchmybiz.com that's launchmybiz.com.
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