Andy Rachleff on 35 years in Silicon Valley, Wealthfront and telling stories
startuplessonslearned.com
startuplessonslearned.com
But I decided to stick it out for one more class...and then one more.
By the end of the course I came to the realization it was one of the most profound quarters I experienced. He was brash, strict, and a bit arrogant. But he knew his stuff. He pushed me to think about the world in an entirely different way.
I still disagree with him on a number of startup related issues (talk about arrogance on my part!), but he did what the best teachers do - forced me to take a hard look at preconceived notions and challenged my view of reality.
2+ years later, I still reflect on his lessons and the insights from the founders he introduced us to. A truly remarkable guy.
(And hi, Ben!! Your awesome holiday card is still up on our fridge. :)
I think Andy’s teaching style, when distilled, tends to come across as quite trite and simplistic. In class and the following lunches, that manifests as more nuanced as students challenge his theses for appearing that way. To give you a sense, try reading this Medium summary of the class: https://medium.com/parsa-vc/7-lessons-from-andy-rachleff-on-...
It doesn’t come across as particularly profound.
The best notes from the class that I’ve found are actually from Andy himself. He’s posted what I can only imagine are proto-class notes on the Wealthfront blog which over the years have come to encompass many of the main points from his coursework. Here are some selections that I recall echoing points he made in class:
On recovering a career from failure: https://blog.wealthfront.com/silicon-valley-career-path-succ...
VC businesses needing to not just be right, but also non-consensus: https://blog.wealthfront.com/venture-capital-economics/
Value and growth hypotheses, why software is a good fit for VC: https://blog.wealthfront.com/venture-capital-economics-part-...
Product market fit: https://blog.wealthfront.com/demystifying-venture-capital-ec...
Quickly testing value hypotheses (class syllabus is Lean Startup, Crossing the Chasm, Innovator’s Dilemma and Solution): https://blog.wealthfront.com/software-based-companies-judged...
Evaluating product market fit, and the right type of salespeople to hire for different phases in the business lifecycle: https://blog.wealthfront.com/recognize-when-your-company-is-...
Growing from small markets to large ones: https://blog.wealthfront.com/venture-capital-economics-part-...
On strategic investments: https://blog.wealthfront.com/venture-capital-economics-part-...
Etc etc.
I think what is enlightening for the class is Andy’s framework for evaluating and structuring a startup. If I had to distill it from memory, it is something like:
Technology companies are special. Unlike market driven companies, technologists can often invent something new and be confident that a market exists that can take advantage of this innovation. After hearing constant denigration of the “build it and they will come approach”, one may find this unintuitive. However, finding a customer who can’t live without your technology is possible and can be done in a structured manner. Once you do find such a customer, it is also possible to grow use cases until you have not just an essential business but also a large one. Success to Andy is $100m in ARR.
The first step in this process is identifying a compelling technological opportunity. How does one go about doing this? In particular, do you find good ideas or do good ideas come to you? Andy believes that the right answer here is expertise in a technology and authenticity to a market/use case.
Once you have identified a technological opportunity, hypothesize who may find it useful. Go lean startup and build an MVP to see if they do. Remember that product market fit means that a customer will be dying to use a subpar product. MVP, at the same time, means different things in different circumstances: Qualcomm’s MVP might require a lot more investment than Airbnb’s. As customers use your product, improve what’s working; don’t focus on fixing what’s broken. If your initial hypothesis fails, try to think of new customers. This is called a pivot (as opposed to when you change the underlying technology, which is more of a restart). In this phase, keep cash burn low so you can test as many value hypotheses as possible. Don’t outsource engineering, it is better to optimize rate of iteration than cost per.
Once you have found a customer, you enter the growth phase. Here it is all about analyzing the types of customers in the market (large incumbents, other startups, etc.) and sequencing how you sell to them. You have to have the right sales org composition for each step of the sequence. In this phase, you need to prove as quickly as possible that there is a path to growth with positive economics. This part of the course focused a lot on types of businesses markets, ways to structure partnerships, and how to understand growth models. The Facebook network effects case is important. In this growth phase, you may need to fire your initial adopters.
This is all from memory and I will try to build on the comment as I have a chance to access my notes. Hope that’s an interesting start...
I think what Rachleff deep down knows -- but didn't want to say -- is that putting money into a very early-stage software startup is a time-intensive proposition. The founders are groping their way, and their odds of getting it right depend, to a large extent, on the quality of never-ending advice and contacts that they get.
The best angels have the patience and the hands-on knowledge to provide this guidance. They also make a ton of money selling their expertise in the form of repeated consults-over-coffee.
For every venture capitalist that's willing to put in the work at the beginning, there are dozens who would much rather live large, work short hours, bicker with their partners and concentrate hard on raising the next fund.
For that group, everything else that Rachleff says is quite true. Mainstream VCs are very comfortable providing capital (and public promotion!) for 10x companies going to 500x, or for 100x companies going to 5,000x. It takes a rare blend of nerve and cheery enthusiasm to pull it off, but it also is much easier work.
“Because people, human beings, by their nature, are risk-averse. If I hear that you didn't build the product for me and that you did it accidentally, I'm going to have less confidence that buying your product is the right thing to do. Look how Apple revised history of the iPod and the iPhone. They said they were Steve Jobs's inventions. They weren't. He had nothing to do with them. The Apple marketing machine made you believe it, because it made you feel better about buying them. The true creator of the iPod was a guy named Tony Fadell, who went on to start Nest as well. He recognized the value of iTunes. There were a lot of MP3 players back then, but he realized that iTunes on the Mac, where you could rip your songs, was the ideal tool to deliver a better digital music experience, and that syncing to iTunes was the key. That's what he pitched Jobs on, and Jobs funded him to do it, like a venture capitalist. That's not the story that was told.”
I’m curious if that’s the complete story. Is there more to this?
I wonder if Andy came in when they pivoted.
Part of it also came from his exposure to the Ivy investing method through his role on the endowment investment committee at UPenn.