Hi, I’m Lori Rosenkopf. I’m the Vice Dean and Director of Wharton’s Undergraduate Program and a professor in the management department. We’re here today for the entrepreneurship specialization and my guest is Andy Rachleff. Who’s the executive chairman at Wealthfront. He’s a co-founder of Benchmark Capital.
He’s a trustee at the University of Pennsylvania. So a man of many hats. Andy as a entrepreneur, as an investor, can you talk generally about the role of venture creation in society?
>> Well I’d like to think that it’s a social good in that it provides capital for people to create new industries, and new businesses, and to therefore create a lot of new jobs.
>> Maybe you can talk a little bit about your own personal impact, along those lines, in your many different roles. Have you ever tried to quantify it or set any goals for yourself around it? >> I think you get in a lot of trouble, when you start calculating your own returns or your own impact.
I just hope that we’ve made an impact on the landscape here at Silicon Valley and Silicon Valley seems to have had a big impact nation wide. >> Let’s talk about entrepreneurial opportunities and recognizing them. How did you see the opportunity for Wealthfront and once you saw it, what did you need to do to test it, to figure out if you had a good idea. Did you have to pivot along the way? >> Well, I’m a big believer that great ideas find you, you don’t find them. I think that there’s a tremendous misperception in the community at large that successful entrepreneurs sit in a room and try to figure out what it is they want to go build. Or that they look at a market, look for the problems and come up with a solution. That usually leads to very mundane outcomes. In fact, if you look at the most successful companies in Silicon Valley, what you’ll find is they almost all resulted from an entrepreneur recognizing an inflection point in technology, which allowed them to build a new kind of product. And then the question was, what market cared about the product? So you start with the product and find the market. You don’t start with the market and find the product, which is what most people think happens. Now it’s not surprising because without change there isn’t opportunity.
And what’s frustrating about this entire process is if you start with a product and look for a market the initial market that you think wants your product is seldom the one that actually does. And you have to pivot markets, you don’t pivot products. So for me, I was sitting in a Penn endowment meeting one day, listening to a presentation from the investment team on how they’re able to generate the tremendous returns that they do. And it struck me that they were doing it in a very antiquated way with spreadsheets. And that if we could implement what they do in software and take advantage of some new application programming interfaces that had been made available through brokerage firms, that it was possible to democratize access to sophisticated investment management. That traditionally the best investment products and services are only available to the very wealthy. But it struck me that through software we could actually take what tremendously sophisticated endowments like Penn do and deliver it to normal people. Now, over the years I had recruited a lot of people to my portfolio companies who had gone on to financial success, and they would often come to me for investment advice. The problem was, I could never tell them to do what I do, because I was in the unbelievably fortunate position to be able to afford access to the best investment products and services. And even with their financial success they still couldn’t, which really struck me as wrong. So I was sitting in this room, the endowment committee meeting room, listening to this thinking God, this is a way to solve this problem and actually provide a social good. And it led me to want to start a business even though I had no desire to be an entrepreneur. But I felt like I needed to do it for the social good and over time, we had to pivot quite a bit until we found the business that actually worked.
>> Was it similar when you founded Benchmark Capital?
>> Not at all. >> Okay. >> Financial entrepreneuring, I think, is a very different thing. Because I had been in the venture capital business for a dozen years. I was fortunate to have a pretty good track record. I knew the investors in venture capital funds very well through their investment in my firm. And so starting a new firm wasn’t nearly as difficult as starting Wealthfront, because I was doing exactly the same thing. It was almost as though just the deck chairs had been rearranged. >> Mm-hm. >> Now, if I tried to do it without a track record, then I think it would have been much, much more difficult. But I co-founded the firm with two other guys who had tremendous track records, one who had worked with me for many years. Another person who had been an entrepreneur that we had backed and then a fifth person who had an interesting new twist to what we were going to do. So it never seemed like an entrepreneurial endeavor, it just seemed inevitable. >> You’re about people who you’ve worked with in the past and how important your networks are.
You’ve mentored and advised so many people over your career. If you look back, who was the best mentor or advisor that you ever had and why?
>> My best mentor was actually a classmate of mine from business school who I recruited to be my partner at the firm that preceded Benchmark Capital. His name is Bruce Dunlevie. And he has the best judgement of anyone I’ve ever met. And is the best ability to influence people of anyone I’ve ever met. And he’s my exact opposite. [LAUGH] Which I think is really valuable in a relationship. I think that’s true in my marriage, my wife and I are very different. She’s had a tremendous impact on me. But watching the way that Bruce was able to influence people had an enormous impact on me and made me realize how much better I could be if I could influence in a way that didn’t feel like there was a lot of overhead or push.
And I can’t tell you how much better that made me. How much more confident it made me in what I do. I owe a tremendous amount of my success to someone who’s my peer in terms of age. He’s only two years older than I. But he’s the best mentor anyone could ever have.
>> Let’s talk a little bit about more established firms. Some people say that there’s a phenomenon called intrapreneurship or entrepreneurial management that established firms can be innovative and entrepreneurial. In you experience is this so, why or why not? >> I wouldn’t have had a living if large companies were entrepreneurial. [LAUGH] The reason that venture capital exits, is because it’s so hard for large and successful companies to pursue new ideas. I think Clay Christiansen did an amazing job with his innovator’s dilemma explaining the dynamics behind why it’s so hard for large companies to innovate. And thankfully they don’t so that I had the career that I did in venture capital.
>> What qualities do you think make a good entrepreneur? You’ve dealt with so many over the years, you’ve been one. What qualities do you believe are most important? Well I can only speak to technology entrepreneurs, because that’s the only area, with which I’m familiar. And I don’t know whether or not it extends to other areas. But technology is very particular in that I believe, it’s the quality of the insight that matters more than anything else. Remember, earlier I said that great companies are created as a result of an appreciation for an inflection point in technology that enables a new kind of product, and then you have to find a market. Well, you have to be able to recognize that inflection point a lot earlier than anybody else has, and they’re not obvious. So what makes a tremendous entrepreneur is one, the ability, the technical expertise, and the command of their subject that allows them to recognize that inflection point well before anyone else has. And then the flexibility to be willing to try a number of different markets to figure out which market actually wants that product.
You notice I didn’t say anything about management skill because I don’t think that has anything to do with it. >> Well, how important are people to the success of a venture? And hiring by the founders, the early team members, how important is that? What sorts of mistakes do you see teams making? >> Well, I’m a big believer that success is a function of the quality of a company’s product market fit. If the dogs don’t want to eat the dog food, it doesn’t matter how capable you are as an executive. You’re going to fail. Conversely, if the dogs want to eat the dog food, it doesn’t matter how bad you are, you’re going to succeed. And, one of the really shocking lessons that I learned, having started Wealthfront was that it’s almost impossible to hire really good people between founding and product market fit. Because think about it, if you’re a successful executive or someone who’s successful in their career, then you’re probably highly sought after. Why would you come to a company where you don’t know whether or not they’re going to succeed, when you can pick and choose the best opportunity for you? So, until you can prove product market fit you have to take what you can get. Every once in a while you’re going to find a needle in a haystack if somebody turns out to be fantastic, but I think that’s more luck than anything. Once you achieve the product market fit, then you can command a much higher quality of person to come join your company. >> How much do your personal networks or anyone’s personal networks matter in this process, in terms of acquiring funding, talent, endorsements, inspiration? >> I think they help tremendously, but again, if I’m not getting traction no matter what my reputation, people aren’t going to give me money and they’re not going to come and join my company.
So first and foremost, I have to get traction in the market. So reputation helps, it doesn’t assure you of success. >> How about serial entrepreneurs? People who’ve done it before and do it again and do it again. Are they usually successful repeatedly? >> They’re not usually successful to a large degree if they’ve already been successful. The odds of being successful in technology are really, really low and it’s a function of having an amazing insight as I said earlier. Unfortunately once someone becomes really successful they usually think that the reason for their success was their skill and not their insight. So they think, I can do this again and I’ll be just as successful. Well, if the idea isn’t as good, it’s seldom going to be as successful. Great example, Steve Jobs, people think of him as perhaps the greatest entrepreneur in the history of the United States. Well everyone forgets that he failed with his startup after Apple. Next computer was a complete and utter failure. Because he relied on his network and his skill, his management skill and entrepreneurial skill to succeed when he really didn’t have a very compelling product.
And so it’s not about your network, it’s not about what you’ve accomplished in the past, it’s about the idea. And I can count on less than two hands, the number of entrepreneurs in technology who have built more than one company with an excess of 100 million of revenue.
So yeah you can start little things that you can flip, but here in Silicon Valley, we don’t care about those companies and we don’t really value those companies. All that matters is building a great enterprise and changing an industry. >> How important are networks in the venture capital business? >> Networks in venture capital are imperative. Think about it, if you and I are of equal investment skill and equal judgement and you have a better network than I am, then in fact you’re fishing in a better pond, you’re going to catch a lot more fish. So you’re going to do a lot better. So I would argue that perhaps one of the most important things to the success of a venture capitalist, is the quality of her network.
And that’s why venture capitalists try to choose people
with backgrounds that will attract a really big network. One of the most common misperceptions about venture capital is that they hire people with operating backgrounds for their operating skill. Nothing could be further from the truth. You don’t want people to exercise their operating skill because then you’re not letting the entrepreneur make the decisions. That’s the worse thing that could possibly happen. The reason venture capitalists often like to recruit people with operating skill, is that, if you were really successful in your career, your operating career, then the odds are that you were very highly recruited. Which built your network, people thought very highly of you. And also, it’s highly likely that you were sought after for your advice. Because people would want to learn from you and how you were so successful. Well those are unbelievable proxies for network. And if you can bring that over with you, you’re going to see on average, better opportunities, better entrepreneurs than I will, if I don’t have that same kind of network.