a16z Podcast - a16z Podcast: From Teaching Leadership to Being a Leader

Episode Date: March 26, 2018

Few operators become VCs, and even fewer go back to leading companies... so how does these perspectives change how one leads? Obviously, it's a lot easier to think of a solution than execute on one... but then how does a leader empower one's team to do the right thing without micromanaging or without being frustrated when they're not getting what they wanted? (Hint: it has to do with providing context). In this episode of the a16z Podcast, Andy Rachleff (president and CEO of Wealthfront and alum of Benchmark) shares his thoughts on leadership, as well as his own journey as an entrepreneur in a particular vertical, in conversation with Bethany Coates, founder and CEO of BreakLine, which helps vets transition into tech. (The discussion took place during one of BreakLine's programs, co-designed and hosted at a16z). And since both are/were also teachers at Stanford's Graduate School of Business (where Rachleff still lectures, and where Coates served as Assistant Dean for their Global Innovation Programs) -- how does teaching make one a more authentic leader, given all the styles of leadership out there? All this and more in this episode.

Hi, and welcome to the A16Z podcast. This conversation between Bethany Coates, CEO and founder of Breakline and Andy Rackleff, co-founder and executive chairman of Wealthfront and also co-founder of Benchmark Capital, is based on an event at the Breakline Tech Program for Military Veterans, which was hosted at Andreessen Horowitz. In it, Coates and Rackleff talk about what it's like to go from being an investor to a CEO, the enduring importance of product market fit, and other key elements of good leadership as an entrepreneur. So, Andy, one of the things that I've reflected on quite a bit about your journey is that you invested in many promising companies over many, many years.

You could have ridden off into the sunset 12 years ago and just put your feet up. And instead, you decided to co-found wealth front. And so you went from being an investor now to being an entrepreneur and a CEO. Yeah. You have said many times that if you had known how difficult it would be to start and build wealth front and to run it, you wouldn't have done it. What has been so hard about it? Oh, God. People are difficult. You've all led people, and you all know how challenging that can be. It's a lot easier to think of the solution than to actually execute it.

And I think that perhaps is the most difficult part of the entire process. Has it been difficult in different ways as you build the company? So basically what we're trying to do is take the financial services that are delivered to the very wealthy through people called private wealth managers, automate those services and software so we can deliver it for account minimums of as low as $500 and deliver better outcomes than what Goldman Sachs gives you with a $15 million account. because almost everything in investing that's good practice is really routine and computers are a lot better at routine things than people.

So one of the challenges is that the industry is totally, the investment or financial industry is totally stacked against the individual. No one cares about clients, they only care about how much money they make. And I know that sounds weird coming from me, but I'm an idealist, and it just really bothers me. And all of the systems, all of the protocols, everything is stacked against innovation, even the regulations, which are put there for a good reason. So we're regulated by two entities, the SEC and FINRA, which regulates broker-dealers. Well, one of the most challenging restrictions is that you can't use testimonials to build

your business. Now, every startup that I know of has been built through testimonials where someone says, I love your service. Now the reason is that's how you do a Ponzi scheme. So the SEC forbids you from using testimonials, but what it means, it really limits innovation because you're at a tremendous disadvantage to the incumbent. So there are all these things, the infrastructure, unless you have tens of millions of dollars, you can't get access to it. The banks, in order to electronically transfer money, do a creditors.

credit check on the company, even though it has nothing to do with the company, the money is just going to transfer. So there are all these dumb things along the way that you have to deal with. You've said that entrepreneurs should keep in mind that the market is always right and that it's much more important than you and your idea. And why is that the key insight? And do you see people getting it wrong? Absolutely.

So a lot of entrepreneurs are often very bright and they think they're right. And when the dogs don't want to eat their dog food, it must be the dog's fault. So let me find some new dogs. And then they just keep going and going and going, and they don't want to listen to that feedback. Unfortunately, the people who do that almost never succeed. So the fact that you can run at 100 miles an hour into that wall isn't going to make you successful. You're just going to die. So what matters more is your ability to navigate to try to figure out which dogs actually

want your dog food, if any, and then how do you deliver to them in a better way. And so that's what I mean by the market is always right. If the market doesn't want to buy your product, it doesn't matter how smart you are or what a great idea logically your idea is. All that matters is whether or not someone has a burning. problem, a desperate problem that needs to be solved. And so does that mean that the most famous companies that we think of today, when they were at the business plan stage...

They all changed. None of their original ideas were the ideas on which they succeeded. So Apple, Google, you name the company, Salesforce, Hewlett-Packard, none of them succeeded at their original idea, if you can believe that. but they all revise history to make it seem like they did because you want to buy products from a company that intended to sell to you. And so the mark of a great marketer is they're a great revisionist.

And so I don't look ill upon it. I just understand it and respect it because that's what consumers want to hear. So now that you're a CEO of your own company and you've had to navigate these things as well. That's the other thing that's hard is that the dogs don't want to eat your dog food. And you have to go home at night thinking, oh, shit, what am I going to do? As you look back, the experience of being a CEO, would that change the advice and counsel

that you would give entrepreneurs at this stage? Mark Leslie and I used to teach together. And I learned a tremendous amount about being a CEO for Mark. Now, Mark hates venture capitalists because the company that he grew to be a billion-dollar business actually was very, very hard to finance. And I think 60 venture capitalists, including myself, turned him down. So he does not have a high opinion of venture capitalists. So we got off to a rocky start.

But I'll never forget after I started the company, which was, I think, three years into our teaching, he said, oh, you would be such a better venture capitalist now for having help. had this experience. And I said, Mark, I couldn't disagree with you more. And he said, why? And I said, because the skills that you develop as an operating executive have nothing to do with identifying which company might succeed.

I think I'm a better board member because I talk less now. Because you have a greater appreciation for how the sausage is made, and it's ugly. It's really, really ugly. And so now, if I go into a board meeting, I'm going to ask fewer questions and focus a lot more on do I think the management team knows what to do? Because if they do, I'm going to trust they're going to know what to do better than I will. It's not my job to find issue with any of the particular things that they do.

They're closer to the business than I. It's my job to determine, one, do they have product market fit, to hold a mirror up to them so they can be intellectually honest about their product market fit. Or in general, do they seem to know what to do, or are they grasping at straws? And I think before I was an executive, I might have engaged sooner. But I don't think the advice that I give is terribly different. You've said that embracing your love of teaching has made you a better, more authentic leader. And here again, it's this, I think, new different skill set or a type of skill set that you weren't necessarily using on a day-to-day basis. as an investor or a CEO, but then you found a way to weave it in as you're running wealth front.

What is it about teaching that makes you more effective? Well, I think, look, all of you have been leaders, and I'm sure you all experimented with different styles of leadership. You might have first tried your commanding officer, and then you might have looked to see who else was more authentic to me. And it takes a while to figure that out. As a venture capitalist, I didn't really have to lead. I didn't lead a team of investors.

I sometimes would lead the entrepreneur, but only when they felt like they were lost. And that was a bad situation to be in anyway. You seldom give out of those. But I didn't have to lead people. And so I never really had, I knew what some of the important characteristics were, but I hadn't figured out an authentic form of leadership. So I got the company started and ran it, and then I never saw myself as an executive, so I brought in a CEO who had more experience.

He ran it for three years, and then I came back about 17 months ago. And so when I came back, I made a number of changes. We have weekly product reviews for products that are in development to make sure that the project team is getting the input of the executive staff. They don't have to act on that input. just providing some perspective. And this one afternoon we had two terrible meetings where each of the project teams had ignored many of the basic principles on which we build products to the point that we started to

codify all of these things so that it doesn't happen anymore. And I got very frustrated and I started asking really tough questions and in and in and intimidating fashion, which didn't help matters at all. And so after the meeting, someone who was two levels below me, a director level person, pulled me aside and he sort of had the intervention. And he said, Andy, you're much better when you teach us or you provide context so that we can make our own decision than when you tell us what to do or get frustrated with us for not having paid attention to the context and it's sort of like the light bulb went off and I realized what a horrible job I had I knew the

meetings went poorly but that really helped me understand what a poor job I had done and so I went home that night and I thought a lot about it and it was a very emotional meeting too for everyone who was involved and I went home that night and I committed to spending a lot more time providing context and a lot less time providing details detailed feedback and the team reacted incredibly well we started shipping products a lot faster and the growth of the business has accelerated so knock on wood yeah did that with you you have two favorite pieces of advice for entrepreneurs and folks in general um so the first is put the gun in the other person's hand.

That actually learned from one of my partners. And the second is always create a fear of loss. Yes. Can you talk to us about what those two pieces of advice mean? Sure. So I'm a really big believer in the Golden Rule. You know, we teach it to our children, but very few people actually execute it in business. And there's no reason for that.

So in my life, I have found that treating other people the way I'd like to be treated leads to far better outcomes. But I had the good fortune to go to graduate school with a fellow named Bruce Dunleavy, and Bruce is just amazing at influencing people, probably the best influencer I've ever met. And one of the things that he does is he takes this golden rule to the next level,

that in any negotiation, he always says to the person on the other side of the table, you tell me what's fair and I'll do that. Now, that's not what you're used to for most people. Now, for good people, they usually feel pressure, and they actually want to give back more because they don't want to come across as greedy. Now, he's not doing it for that reason, but he truly believes that, I trust you, Bethany, you tell me what you want to do.

Now, if Bethany comes back with a reasonable offer, even something that's slightly above market, I'd say fine. Now, if Bethany takes advantage of this situation, then I'll just never work with her again. So in a negotiation over evaluation, if the market price was $5 million value for the company and somebody came back and said seven, Bruce would say, sure. But if someone came back and said 15, he'd just walk away. Because that's not the kind of person you want to work with. And I found in my life that treating every negotiation that way works out 90% of the time.

And I sleep better at night. Number one. And then fear of loss comes from another one of my partners. All my best ideas come from other people. I just packaged them differently. Another way to say that these days is FOMO, Fear of Missing Out. So this actually was awarded a Nobel Prize by Kahneman and Tversky. So what they found is that the pain that comes from loss is far greater than the joy that comes from gain.

And that very few people act out of opportunity, they almost always act out of fear of missing out. For example, if I want to recruit you to come work for me, you'll seldom join just because I give you a good offer. you'll typically wait until there maybe isn't a better offer. So you're always trying to work your options to figure out what's the best thing for you. And it's only once you realize that the deal might be going away that you sign. And it's amazing how this plays out not just in recruiting, but it plays out in business development, it plays out in sales. If you can't create a fear of loss, you're never going to close. the transaction. And so basically, I have to make you believe that the opportunity is going

away. But you have to do it in a courteous way. So you have to be courteously indifferent. My question for you is, what have you found out of surprising? The thing that most surprises me is how consistently stupid people are. So there is a tremendous amount of research that has been published that shows that that even the experts can't pick stocks to outperform the market. I mean, this is incredibly well understood. And our chief investment officer wrote the book, literally, called A Random Walk Down Wall Street, 43 years ago, that found that people would be better off buying an index than they

would trying to pick individual stocks. The most famous chapter in the book was one where he ran an experiment where he had an experiment, where he had chimpanzees throw darts at a list of stocks, and he compared their performance to mutual fund managers. And the chimpanzees won most of the time. Wow. That is scary. It is scary.

So this is incredibly well known, yet people still buy mutual funds and pay 1% for the right to do it. That's the first thing that just amazes me. The second thing that amazes me is that there has been, and this is incredibly timely, there's a tremendous amount of research that has shown that individual investors buy when the market goes up and sell when the market goes down. This is unbelievably stupid, but it feels right.

Now, nothing about good investing feels right. Contrarians make money. You buy when the market goes down and you sell when the market. the market goes up. It's the exact opposite. You cannot time the market. There are probably five investors in the entire world who are good at timing the market. And they have $100 million minimums and get paid enormous fees. So if you as an individual think you can do it, you should start your own hedge fund. Because you can't. Dalbar organization found that this behavior of buying when the market goes up and selling what goes down,

costs the average investor about 4% annually. It's just terrible. And so slow and steady wins the race. Just invest the same amount of money every month or quarter or half year. Do you find that the competitors in the industry have seen your success and are following your trend of going more towards a software-based?

Quite the opposite. Julia, and this is human nature. One of the biggest mistakes that entrepreneurs make is thinking that everyone, that once others see what you're doing, of course they're going to drop what they're doing and do what you're doing. It doesn't work that way, because we all have opinions and we all have egos. Just because someone's doing well doesn't mean that I'm likely to drop what I'm doing and do what they're doing.

actually the term for this in psychology, cognitive dissonance. It's like, why do people smoke? You know, they know that it's going to give them cancer, but they come up with reasons why it won't give them cancer. They work out, or they have better genes, or for whatever reason. And so people tend not to copy other people. They do what they're most comfortable with. Willie Sutton was a famous bank robber, and they asked him, why did you rob banks? And he said, that's where the money is. So all the money is with older people. people who are near retirement. So everyone of our competitors is focused on the bank where the money is, which are older people. Older people don't want pure software. So even

our closest competitor, which was pure software, has given it up, and they now have married advisors or planners to their software. Now, I'm a big sports fan, and Wayne Gretzky had a line that I always loved, and they asked the great one, why were you so good? And he said, Everyone skates to where the puck is. I skate to where the puck's going to be. I think that's what we're doing. Time will tell. When you were talking about leadership,

you mentioned that there were a couple of principles to your prowlige management that they kind of messed up. And then you ended up kind of codifying some of those things. Because I didn't do a good enough job providing that context. Would you mind sharing with us what you did codify for those principles? There are things like always provide context, that you can never have a black box.

that if you want to engender trust, especially through software, people need to understand why you did what you did. Always develop for our core target audience, even if it means a lousy solution for other people. So one of the challenges we faced is that with investment in our financial products, there are a lot of corner cases.

By serving everyone, you serve no one. So we had all of these corner cases in our products, we weren't making decisions, so we weren't shipping products. We weren't making decisions so we could actually get software out the door. And so I came in and I said, was that I'd rather that we build something that's great or superb for 70% of our clients and shitty for 30 than something that's pretty good for 100. Number one, you'll never develop the product that's pretty good for 100 because there's too many things that you need to address. Number two, you don't build love.

I believe that delight is the greatest form of virality. And the way you build delight is by solving a problem's burning need. So if we can do that for 70% of our clients, the 30% might complain about us once, but they're only going to complain about us once, but the 70% who love us are going to keep talking about us. So those are two examples of things that we do in our product. that we will purposely piss people off with what we do if it serves our core target audits. My question is, what are the three key takeaways that you want your students to take from your classes when you talk to them?

What would they be? Keep learning is the way I end my class. So we've just spent 10 weeks exploring a particular topic, but we've only touched the edge of the issue. And if you're going to be successful in your career, keep learning. And it's going to be your judgment that's going to separate you from your colleagues. The line that I like to use is the CEO is seldom the smartest person in the room, but she usually has the best judgment. And so really think about how can you develop your judgment.

Judgment is really decision-making under uncertainty, and it's pattern matching. And so you want to keep growing that pattern matching database and be really, really conscious about it. All right, Andy, thank you so much for joining us. Thank you.