The Tim Ferriss Show - #397: Two Questions Every Entrepreneur Should Answer

Starting point is 00:00:00 At this altitude, I can run flat out for a half mile before my hands start shaking. Can I ask you a personal question? Now would have seemed the perfect time. What if I did the opposite? I'm a cybernetic organism, living tissue over a metal endoskeleton. The Tim Ferriss Show. This episode is brought to you by Peloton. I love Peloton.

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Starting point is 00:04:05 on 99designs. So check it out, 99designs.com forward slash Tim. Well, hello, boys and girls, damasi caballeros. This is Tim Ferriss. Welcome to another episode of The Tim Ferriss Show, where it is my job to sit down with world-class performers of all different types to tease out the habits, routines, favorite books, et cetera, and so on ad infinitum, ad nauseum, so that you can apply and test them in your own life. This time, we have a different format. I will not be the one doing the deconstructing. Instead, we have a takeover by Mike Maples Jr., an old and close friend of mine. So who is this Mike Maples Jr.? Mike and his firm, Floodgate, have invested in and supported many of the startups you might recognize. Many of them

Starting point is 00:04:51 are no longer startups. They are publicly traded companies, including Twitter. And then you got all these big names like Twitch, Lyft, Chegg, and Okta, among others, long before they were household names. He's been on the Forbes Midas list eight times in the last decade, but he's much more than a successful investor. Of course, that would be enough by itself, but Mike has also succeeded as both a founder and operating executive. He's also simply a great guy and the first person who really taught me how to angel invest 100 years ago when I first moved to Silicon Valley. For more on that background, if you're interested, listen to my interview with Mike at tim.blog forward slash Mike Maples. In this episode,

Starting point is 00:05:34 however, Mike speaks with Andy Ratcliffe, co-founder of Wealthfront and Benchmark Capital, about two of the biggest questions that should be on every startup founder's mind. One, how do you reach product market fit, which is a term that Andy coined? And two, how do you know when you've achieved it? And this episode is really strong. It's a very strong conversation and includes many examples and heuristics for how not to fool yourself and how easy it is to fool yourself. And Andy has known many of the startup world's giants and synthesized their lessons. So you will also hear what Andy has learned from Don Valentin of Sequoia, Scott Cook of Intuit, Reed Hastings of Netflix, Jeffrey Moore, Clay Christensen, Eric Ries, and Steve Blank, for example. The audio from this conversation is from the premiere episode of Mike's brand new podcast, which I've been trying to get him to do

Starting point is 00:06:21 for a long time, so I'm thrilled that it's finally coming out called Starting Greatness, which I highly recommend you check out. There are some very incredible guests coming. So if you like this conversation between Mike and Andy, be sure to subscribe to Starting Greatness on Apple Podcasts or wherever you get your podcasts. You can also check out the website at greatness.floodgate.com. And you can follow Mike, say hello on the interwebs at M2JR. That's his Twitter handle, at M, the number two, J-R. Starting Greatness, the podcast I just mentioned, will offer lessons from the startup super performers and feature interviews with some of Silicon Valley's most legendary entrepreneurs, including Netscape co-founder Mark Andreessen, LinkedIn founder Reid Hoffman, Nextdoor co-founder Sarah Leary, and more.

Starting point is 00:07:09 Again, that's starting greatness, and you can subscribe on Apple Podcasts or wherever you listen to podcasts. Enjoy. If the customer doesn't scream, you don't have product market fit. That's the voice of Andy Radcliffe, the person credited with coining the term product market fit. And since getting product market fit is vital to a raw startup, we thought we'd get straight to it and talk to him. This is Mike Maples Jr. of Floodgate, and it's Go Time with Andy Radcliffe. Welcome to Starting Greatness, a podcast dedicated to ambitious founders who want to go from nothing to awesome, super fast. When you're a startup founder, you have to channel your inner James

Starting point is 00:07:53 Bond, your MacGyver, your Wonder Woman. I'm going to help you win by curating the lessons of the super performers, but before they were successful. So without further ado, ignition sequence start. Let's get started. In 1995, Andy Radcliffe co-founded the firm Benchmark Capital, widely acknowledged to be one of the best VC firms in Silicon Valley, with some of the best startup investments of all time. He's also a co-founder and CEO of Wealthfront, so his ideas about product market fit and startup success aren't just academic. And speaking of academics, Andy also teaches the renowned class at Stanford Business School,

Starting point is 00:08:38 aligning startups with their markets. He literally is the professor of product market fit. Let's catch up with him. Andy Radcliffe, thanks for joining our podcast. Thank you for having me. Andy, one of the reasons that I was excited to talk to you was to talk about the idea of product market fit, which is probably one of the most famous descriptors of what a zero to one startup is trying to get to.

Starting point is 00:09:03 Where did that term come from in the first place? What's the origin story? I can tell you the origin story of the concept. I learned it from Sequoia Capital. Don Valentine really invented it. Don used to say, I'm looking to invest in companies that can screw everything up and still succeed because the customer pulls the product out of their hands. I'm paraphrasing. I'm not sure I got that exactly right. He felt that way because the startup will screw everything up. So I want a company that has such demand from the market that they can literally screw everything up and still succeed. I actually define it in terms used by Steve Blank and Eric Ries. They were the first to apply the scientific method to business.

Starting point is 00:09:56 And I think that Steve's great contribution to the entrepreneurship business was the idea that first you have to prove a value hypothesis and only once you've proven the value hypothesis should you test a growth hypothesis. To me, product market fit is when you have proven the value hypothesis. So the value hypothesis is the what, the who, and the how. What are you going to build? For whom is it relevant? How's the business model? I get this question a lot. How do I know when I have it? I have four heuristics that I use, two for consumer and two for enterprise. Okay. So the two best consumer ones that I know are exponential organic growth. People can gain

Starting point is 00:10:43 growth and they do it all the time. And I'm always amazed that people fall for it and that they kid themselves into thinking they have product market fit because they bought it. The only way to know that you have product market fit is if you get word of mouth. I learned this from Scott Cook, who's the best product guy that I've ever met. And so Scott was riveted on word of mouth. Well, the best test of word of mouth is exponential organic growth because the only way you can get exponential organic growth is through word of mouth. The other heuristic that I suggest is net promoter score, which is a proxy for word of mouth. It's not quite as good, and there are outliers where it just doesn't work.

Starting point is 00:11:33 So Shamath Paliapatiya, who started the growth group at Facebook, once told me that at the height of Facebook's growth, their net promoter score was negative 14. So it's not always an ideal indicator. On the enterprise side, the two that I suggest are one that I learned from one of my teaching partners at life, sales life it was, was by measuring the sales yield. The sales yield is the contribution margin of a sales team divided by the total cost to field the sales team. So if you have a direct sales rep, an SE, an inside sales rep, and management overhead, a sales team might cost on the order of $500,000 or $600,000. Not until what Mark and Chuck Holloway, his co-author of the paper that they published in Harvard Business Review found, was that when a

Starting point is 00:12:41 company gets to a sales yield greater than one, that's how you know you've hit product market fit. That's, to me, the best test of enterprise product market fit. The other one I learned from Doug Leone of Sequoia. All my best ideas have come from other people. I just put a name on it. You're just curating. You're channeling your wisdom.

Starting point is 00:13:01 Exactly. And so Doug, who has one of the best noses for product market fit of anyone that I've ever met, taught me an amazing lesson when we sat on one of our boards together. And that was every enterprise company has to do a proof of concept trial. In order to make these trials as productive as possible, companies typically require that they be limited to 30 days and that the customer sign a contract that says, if the product does what you represent, I will buy it after 30 days. No company ever lives up to that contract as you've experienced. So what Doug suggests is at the end of 30 days, you pull the trial no matter what. If the customer doesn't scream, you don't have product market fit. Because if they're not going to buy it at the end of the 30 days, they're not desperate. And if you're not desperate, you don't have product market fit. Steve Blank in his book, Four Steps to the Epiphany, conjures an image of the customer reaching across the

Starting point is 00:14:06 table and grabbing you by the collar saying, when can I have this? I need this. Yeah, or even I've wanted this. I've tried to do this before. I've spent money on it. Even better, I've already spent money trying to do this myself. Yeah, so it's interesting because I think there are two counterintuitive lessons, right? One is a lot of founders, when they pitch early customers,

Starting point is 00:14:26 they want to feel that their idea gets validated, and they sometimes don't see that you're trying to find people who are in on the secret with you, right? The real goal is to find the limited subset of people who are in on the secret with you. You could go talk to those other folks later, but don't waste a lot of ergas of energy. But the other thing that I think that this kind of reveals is it's not necessarily bad

Starting point is 00:14:51 if the customer's built what you view as a competitive offering. It's great. Exactly. And so it's counterintuitive because you'd think, well, it's going to be hard to close this customer because I have competition here. But precisely the opposite is true. They've progressed down the idea maze far enough to know that they've been waiting for you. Some of the most successful enterprise software companies actually were spin-outs of products that companies built for themselves, but they couldn't maintain them. You know, it's really funny.

Starting point is 00:15:21 The second biggest mistake that I see entrepreneurs make, especially in enterprise, is that when they pitch a potential customer on the idea and the potential customer doesn't like the idea, then they try to iterate on the product to build something the customer would want. By definition, that's right in consensus. So it's going to lead to a mundane outcome. That's the absolute wrong thing to do, even though that feels right. So you want to go find people who actually love what you're doing, not try to convince the no's and turn them into yeses. Yeah, and you want them to be saying, when is our next meeting? What is our next step?

Starting point is 00:16:00 How are we going to make progress on this? Come back tomorrow. I wanted to have my boss Bob here, but I didn't know what you were really doing. I want to get on this. By the way, this is analogous to how to attract a venture capitalist as well. If the venture capitalist doesn't immediately say, when can I meet you again, you haven't found product market fit. That's right. Yeah, and it's funny to me, like the best startup scenarios I've seen are when the entrepreneur, the early investors, and the early customers are all in on a secret together.

Starting point is 00:16:29 They're starting a movement that the rest of the world will one day accept, but they're starting it as rebels. They're starting it as people who are going to prove to the rest of the world that their insight is right. That is fun. They haven't caught up. There's a book that I've heard you reference recently that it seems like people have forgotten about and maybe they should put more front and center, which is Crossing the Chasm. Why do you think that is? Why do you think Crossing the Chasm is current for today's world and should be read by more folks?

Starting point is 00:16:58 Well, the fundamental idea expressed in Crossing the Chasm is there is a natural rate of adoption of every product. That hasn't changed. It was true 100 years ago, and it's going to be true in another 100 years. The basic premise is that there are different people who are willing to adopt at different rates. By the way, those people change over time. But putting aside the lunatic fringe of the innovators, the first people who adopt products are the early adopters. These people are revolutionary, not evolutionary. They want to buy a product to solve their problem. And all they need is a proof of concept in order to do it. And if they get a proof of concept, they're going to buy on the merits of the product. They have a problem, they're desperate,

Starting point is 00:17:55 they're willing to buy it. Next come the pragmatists. The pragmatists only buy, they want something that's evolutionary, not revolutionary. They're not trying to get ahead in their jobs. They're trying not to get fired. And they'll only buy if five people tell them they should buy. So it doesn't matter how well you serve their needs. They're not going to buy until they get references. They need social proof.

Starting point is 00:18:24 The next group, the conservatives, or the late majority, as Jeffrey Moore, the author, calls them, only buy once it's become the standard. And then finally are the laggards who don't buy. Now, the biggest chunk of the market is represented by the pragmatists or the early majority, which leads most entrepreneurs to go after them first. But there's a catch-22. How can you go after them first if you don't have any references? The biggest problem by far, the biggest mistake I see people make is trying to start with the pragmatists because it's the biggest market, because every podcast you listen to or every book

Starting point is 00:19:06 written on entrepreneurship says you should go after a big market because ultimate size of market addressed is the single greatest deterrent outcome, which is true, but you're not going to capture that market if you try to start with that market. And this lesson will last forever. I often get asked, well, if your product is so great, why doesn't everyone use it? Because it takes a while for you to transition from early adopters to the early majority to the late majority of the ladder. A lot of times I find it interesting. People will bring up so-called counter examples like Facebook.

Starting point is 00:19:42 Well, they're outliers. Yeah. And also, I mean, Facebook started at Harvard. Actually, Facebook is a perfect example of the crossing the chasm philosophy. So they solved a very, very small problem, which is there was no common Facebook across the freshman class at Harvard. It was only by house. So the only way you could see who else was in the freshman class was through the Facebook. And then it spread to some other

Starting point is 00:20:13 Ivy League schools because the kids at Dartmouth and Yale had friends at Harvard. And then it spread to other colleges. And then it spread to high schools after that. So it exactly followed the crossing the chasm. It's not an outlier at all. But I often hear people try to find issue with theories using examples. And my teaching partner for my product market fit class at Stanford is a fellow named Bill Barnett, who's a professor. And one of the great lessons I learned about teaching from Bill is he does not allow students to use examples in their arguments because the example could be an outlier. So he asks the students to give me the logic. And if you can't give the logic,

Starting point is 00:21:02 you can't win the argument. And even, I guess, in the case of Facebook then, it feels like that was an example where Mark Zuckerberg didn't say, I wonder what the market for social networking is going to be. I think he was solving his own problem. So here's the problem. As soon as a company becomes successful, it revises history. Because people in the early majority want to believe that the product was built for them. Telling the story of how you actually got there is off-putting. So every great marketer I know is a revisionist. Here's another great example, Google. So we all know about how it took off as a search engine, but as a business, it exactly followed the crossing

Starting point is 00:21:45 the chasm philosophy or the technology adoption life cycle. When they first started monetizing, they used text ads. Now, at the time, Yahoo offered display ads. Yahoo sold these ads through a sales force. So in order to justify the cost of a sales call, you had to sign up to a minimum of $10,000 a month contract for six or 12 months to justify the cost of the sales call. And you also had to pay for a graphic artist. Back then, we didn't have designers in startups or in companies. They were contractors. So you had to pay for a graphic artist to design the display app. And that might cost $3,000 to $5,000.

Starting point is 00:22:31 So the minimum cost to run an ad was $13,000 to $15,000. When Google came to market with this six-word text ad, they got the idea from Overture, but it didn't matter. But they had this text ad. When they took it to people who did display ads, they said, why would I, a picture's worth a thousand words, why would I pay for a text ad? So you know who the only people who bought the X text ads were in the beginning? Yeah, I guess anybody who wasn't paying $6,000. Startups who couldn't afford it.

Starting point is 00:23:04 Yep. So they went to the desperate, and you could buy an ad for as little as $1 on your credit card with a self-service process, and they got startups to sign up for it. They were the desperate. they proved the efficacy of text ads versus display ads, they crossed the chasm into the early majority and they got references and they were able to grow the market. But they started with startups. They didn't start with traditional advertising. What I love about that example is how it illustrates. But no one tells that story because that's not what you wanted to hear if you were a traditional advertiser.

Starting point is 00:23:42 If you're a pragmatist buyer, you want to be central in a hero's narrative about you, right? Not about like the crazy, wacky stuff you did in the early days when you were trying to find a small band of desperate people who believed what you believed. One of my biggest challenges when I teach this concept to my students is they've all heard the revisionist story. So they don't believe me. And the storyteller has no incentive to change the story. So you're talking to the voice of authority of that company. You're talking to the founder of the company and he's saying, this is my story. That's pretty hard to go against. But like when you go back in time, I see this with some of the investments that we made that worked out. It's easy to misremember how it even happened. It's easy to not even understand why you did something or why it worked or,

Starting point is 00:24:31 you know, what in fact, one of my favorite stories, revised stories that the founder actually never tells himself or the CEO never tells himself, but everyone tells about him is the story of Netflix. So Netflix started as a DVD rental by mail where you literally paid $6 every time you rented and they'd mail you another's DVD. And it failed miserably. Well, Reed Hastings was the seed investor. He wasn't the founder

Starting point is 00:25:02 of the company and he was the chairman of the company. One of the big mistakes we talked about was how people iterate on the what, they shouldn't, but you should iterate on the who and the how, the business model. So Reed ran a very successful technical software company prior to starting Netflix. I know this because I was on his board of directors, Pure Software. And one of the things that Reed did to turn Pure into a very successful, I think, greater than $100 million revenue technical software company, which was very unusual at that time, was he changed the business model from perpetual license to subscription license. That was really controversial in the early 1990s. When he stepped in to take over Netflix because it was failing, he said, well,

Starting point is 00:25:55 why don't we try this subscription thing? It might work. And little did he know, it was the ideal antidote to the late fees that Blockbuster charged that used to drive everyone crazy. So Reed was trying to find people who were desperate. At the time, you couldn't rent DVDs. You didn't have much of a selection at Blockbuster stores. So people were desperate to get the DVDs, but not at $6 per unit through the mail. The business model allowed the desperate people to do it. Now the story changed to Reed was driving to Blockbuster to return a movie one day and

Starting point is 00:26:36 he passed his gym and he thought, why don't I apply the gym business model to Blockbuster? Yep. That's not how it happened at all. So that's what he says now. That's not what he says, but that's what the myth became about Netflix. Okay. Rather than this business ain't working, I better try plan B. And it sure worked.

Starting point is 00:26:57 Which is probably a good way to think about pivots in general, right? How does this thought process relate to pivots in your mind? You have to be willing to fail, but you don't pivot on the product. pivots in general, right? How does this thought process relate to pivots in your mind? You have to be willing to fail, but you don't pivot on the product. If you fix the market and pivot the product, then you have no advantage because your original insight is gone. So what advantage do you have over anyone else? You're now in that right in consensus quadrant. You have to try to find a different market or a different business model to enable people to buy your product. The technical insight that underlies your product is usually what you're betting the whole company on. And if that insight is invalid, you're probably better off just starting over, right? You don't have a company. Now you're just

Starting point is 00:27:42 out there just selling whatever hoping for a miracle exactly but i guess similarly that's a hell mary okay and so so then if i understand correctly the valid definition of a pivot is keep your insight keep your proprietary insight but then find the right customer for that existing insight rather than abandon your insight. Don't let go of your secret. I don't believe that everyone can apply the lean startup methodology to succeed. I think it increases your odds of succeeding. Just because you're pivoting on the market doesn't mean you're going to find a desperate market. But if you do, you're going to build a much better business. The metaphor of pivot is apt in that a pivot involves keeping your pivot foot on the ground as you move your body, right? That's a great insight.

Starting point is 00:28:31 Yeah, and your pivot foot has to be the same, right? You can't have any arbitrary aspect of success be your pivot. Now, there are outliers. There are exceptions. A great example is Instagram ended up doing something completely different than what it started out to do. That was not a pivot. That was a restart. Well, it's funny, and I was involved with a company called Chegg, which did textbook rentals, a complete restart.

Starting point is 00:28:57 We were out of money, and we'd had this idea, and Facebook decided to go into classifieds. And so we're like, well, we're out of business if we're a classifieds company. So let's try this textbook rental idea that we've kind of had in the back corner. And we didn't have enough money to do it, but we thought all we have to do is prove people will rent textbooks and we'll raise some. But the company was fundamentally different from the idea. It was just an idea that we tried out in desperation. So the vast majority of successful startup or successful technology companies pivoted from their original proposed market in their business plan. Very, very few restarted. Yep.

Starting point is 00:29:34 There are exceptions, but that's why you shouldn't argue the example. You have to argue the logic. Which relates to a point I've heard you make before. Not everybody needs to like your product. In fact, it may even be better if not everybody likes your product. What do you mean by that? It's actually the subject of the first class in my product market fit course, which is not everyone should like your idea or should everyone like your idea. And the answer is absolutely not.

Starting point is 00:30:02 So let me give you some context. First, let me offer a framework for thinking about this that I learned from my investment idol, a man named Howard Marks, who was the founder of a distressed debt investment firm called Oak Tree Capital. He believes that investing, and I believe entrepreneurship, can be described with a two-by-two matrix. On one dimension, 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 the returns get arbitraged away. The only way to make outsized returns as an investor or an entrepreneur is to be right

Starting point is 00:30:46 in non-consensus. The problem is you only know that you're non-consensus when you start, not whether or not you're right. You hope that you're right. Unless you're non-consensus, you don't have a chance to serve the desperate because they wouldn't be desperate if they were already served. Now, if you ask five people on the street about your idea, which might be a killer idea,

Starting point is 00:31:09 at least four out of the five of them should say they don't like it because they haven't been conditioned to like it. Human beings are conditioned to like things or not like things. Think of the greatest ideas in the last 10 years. Uber, if you asked 10 people on the street about Uber, a ride-hailing service, they'd say, why do I need that? That feels unsafe. And why will a stranger drive me around? Airbnb, would I let somebody into my home to rent a room?

Starting point is 00:31:39 That's crazy. So you want people to not like it. If everyone likes the idea, it means they've already been conditioned. So you're trying to do a better job of what somebody else has. And that is not a recipe for success in technology. You talked earlier about Scott Cook and being the best product guy you knew. I've also heard you use the term savored surprises. I think that's a really good framing principle. So can you talk about that a little bit? Sure. That's something that I learned from Scott. One of the best parts

Starting point is 00:32:11 of teaching is how much you get to learn. And we are really fortunate being here in Silicon Valley that we can write cases about companies and then have the protagonist of the case actually come to the class to discuss what happened and not give you the revised history, but tell you what actually happened. And so I'm incredibly fortunate to have taught a couple of classes where Scott was the guest. He was the protagonist of the case and the guest. And one of the amazing lessons that I learned from him was a concept that is a core part of the Intuit culture now, which is to savor surprises. And by that, they mean that whenever you create a new product and

Starting point is 00:32:56 bring it to market, either as a minimum viable product to a group of five users or to a thousand users, there's always going to be a surprise, something you didn't expect people to react to positively or negatively. And Scott found that all of the value lies in the surprise. And it's interesting. I've heard him say that in a in another forum which was so we were on a panel together once at south by southwest and he brought this up and he said that when he's in a meeting and somebody's proposing a big project or a launch or a new initiative he would ask well as you did this analysis and work what surprised you and what he what he learned was that if if the people

Starting point is 00:33:45 couldn't answer that question they were really just trying to get their agenda across they were just really trying to get money for their pet project but but how how could you possibly have a market discovery or customer discovery exercise where nothing surprised you right like how could that how could that ever make sense you're in the right in consensus quadrant if you have, which is death. Yeah, or you just weren't listening to the market. So where we internalized it was now when we talk to people, we say every iteration, so like every company in zero to one pre-product market fit mode, we like to say has an iteration tempo.

Starting point is 00:34:24 And so a consumer product may iterate every day. An enterprise software company can't deliver half a loaf to General Motors, so their tempo may be slower. But we like to say you must have savored surprises at the end of every iteration, or on some level you wasted the iteration. You didn't gather any new earned secrets in the engagement with a customer. You know, our president at Wealthfront has a great saying that the definition of a good experiment is one from which you learned, not one that succeeded. Right, right.

Starting point is 00:34:58 And so if there are no surprises, then you didn't learn anything. Right. And it wasn't a good experiment. And what was the biggest mistake you made at Wealthfront where you look back on it and you're just like, I should have known. I know that was unforced error. So number one was I ignored a lesson that I teach my students over and over and over again, which is don't project your own tastes onto other people.

Starting point is 00:35:26 This is an enormous mistake my MBAs make. They say, well, I wouldn't use that product. Therefore, it's not a good company. Well, you might not be the target audience. So that's irrelevant. And as a venture capitalist, you know, that's one of the first things you have to unlearn. So I did that in terms of thinking about the attractiveness of what we initially offered. And then the other thing was the original implementation of the idea was a marketplace where you could choose investment managers who we would apply the Ivy methodology to determine who was likely to outperform the market. And we did a really good job of picking the managers and nobody cared.

Starting point is 00:36:07 And part of the problem was we applied Steve Blank's customer development methodology to one side of the two-sided marketplace, but not to both sides. Because at Benchmark, we had backed a number of very successful marketplaces or network effects business. I had effectively co-founded Equinix, which is now a multi-billion dollar company. So I'd seen that firsthand. We had OpenTable. We had operating systems companies, Red Hat. We had eBay. We had a ton of them. And so what I had learned from this experience was that it's hard to catalyze a marketplace. So you tend to focus on the sell side before the buy side. I even recruited Jeff Jordan, who's now a partner at Andreessen Horowitz, who had run eBay North America and PayPal.

Starting point is 00:37:00 And after he retired from eBay, he actually ran OpenTable, another network effects business marketplace. And he agreed that this was the right thing to do. So we spent all of our efforts applying customer development to the sell side and never to the buy side, assuming that if we had the liquidity that the buy side would just come. That was the dumbest thing I ever could have done. When did you have sort of the epiphany that, oh, I need to re-remember some of my thinking on this? Well, we were failing. That tends to get your attention. We had about 10 or 11 months of cash left in the bank. We were growing, but we weren't growing at the rate that would get us another venture financing.

Starting point is 00:37:48 I knew that we had to do something different. Interestingly, the night that I made the decision, I was reading a chapter of a Clay Christensen book that I we were doing wasn't disruptive in the Christensen definition. It was better, but better doesn't matter. And it was one of those, oh my God moments, this makes no sense. And I'd been trying to get my VP of marketing to talk to people who started a signup process but didn't follow through to see why they didn't. One of the challenges with millennials, and forgive me for saying this, I'm 60 years old, is that people in my generation like to talk to people. Millennials don't. This is the key to the success of Wealthfront, by the way, is our clients pay us not to talk to them. We deliver a full suite of next generation banking services and investment services without having to talk to us about anything. Everything's automated. The downside

Starting point is 00:38:54 of it is they only want to look at behavioral data or email feedback to make decisions. And I knew we had to get out, as Steve says, you have to get out of the effing building to talk to customers. So after six months of trying to get my VP of marketing to do it, I was a first time CEO and I didn't want to step in and tell her what to do because that's not very empowering. And finally I said, the hell with it. I'm going to start calling these people myself. The feedback they gave me was unbelievably consistent, which was we used to just address the public equity portion of your portfolio, which should be about a third of your money. People said, I'd rather that you manage all of my money adequately and inexpensively than a portion of it superbly.

Starting point is 00:39:43 How did you nail your niche early on? Actually, it was a crossing the chasm suggestion from one of my angel investors. Again, we had started as this investment management service. So we had evolved. It was a pivot because 90% of the software was the same. Instead of having a marketplace of investment managers, it was just us that manage your portfolio. I had a board meeting before we launched the new service. And I said to my board members, people who are exposed to this love it. But my biggest concern is that we have a chicken and egg problem. And that is people don't know how

Starting point is 00:40:26 to evaluate a financial advisor. So they use assets under management as the proxy for quality. It's actually a terrible proxy for quality. It's a great proxy for how good someone is at selling others, not how good they are at investing. And so I'm not quite sure what we're going to do here. And Doug McKenzie, who's a retired partner of Kleiner Perkins, who believed in crossing the chasm because he's my age, said, Andy, why don't you focus on young people in tech? Because they'll care a lot more about the quality of the user experience than they will the assets under management. And you and your team have enough credibility in this community that they'll take the early adopters will take the shot at the proof of concept. That was the critical insight in the history of our company.

Starting point is 00:41:19 So what do you do? Just call up people at Facebook and say, try this? Facebook was about six or 12 months away from IPO. A number of employees had sold secondary stock. We thought, well, who are the best connected people in Silicon Valley? It's the people who work at the social networks. So we did three or four seminars at Facebook and LinkedIn where we educated people on investment best practices, not wealth front, because we wanted to get the engineer as the earliest adopter, because we thought they would provide the references to the less well-educated people on investing. And what we know about engineers is

Starting point is 00:42:06 they hate being sold. They're like cats. They're not like dogs. Salespeople are like dogs. They want to be petted and loved. Engineers do not want to be sold to. So we did this beta test, I'll never forget, with Adam D'Angelo of Cora and a few people at Cora. And the beta test we did of the seminar to eight people was 80% education and 20% selling. And at the end of the seminar, Adam said, Andy, you have to decide which one it's going to be because it can't be both. And he was absolutely right. That was the surprise. So we went all education and immediately Facebook and LinkedIn people signed up and then use their networks to start telling their friends. And then we learned that employees of enterprise software companies were not good targets because they were older than people who worked at consumer internet companies.

Starting point is 00:43:10 Well, and it may also be the case that at first it's like, well, selling just to engineers and social networking companies, doesn't that limit your market? But it turns out that those are the people who will respect the contrarian insights that you had. And so then the leap of faith becomes, are there going to be more people who respect that value proposition over time? And then we moved into adjacent markets. We got product managers. We got business development people. We got salespeople at the internet companies. And then they went to school with people in other professions. So we started getting doctors and lawyers and accountants

Starting point is 00:43:39 and people in the investment business. And it just kept spreading and spreading and spreading. And we grew exponentially organically. Yeah, I remember when I first got it, just the idea that it will just autopilot everything, right? The tax loss harvesting, all the dynamic balancing of your account. We didn't have all that in the beginning, but over time as we added more features, we appealed to an ever broader audience. And then we had this insight last year. Some people in the company were anxious to hear what our vision was. And so we had made a huge investment over the previous three years in our automation engine and in our advice engine.

Starting point is 00:44:22 Two things that others haven't done. I had gone for a walk with one of our product managers and it sort of hit me that the vision for the company was to optimize and automate all of your finances. And then one of our engineers simplified that to self-driving money. That's where we wanted to be. Now, in order to do that, we had to offer a cash account because the idea is that you would direct deposit your paycheck with us. We automatically pay your bills and then route the remaining money to the most appropriate account, be it a short-term account or a long-term account, be it something that pays a high-yield interest or something that's invested. And so we came out with a cash account.

Starting point is 00:45:05 We put it in beta last year and it came out in February and it just exploded. And so now we've completely repositioned around delivering a next generation banking service that's differentiated by the fact that we will offer self-driving money. So we appeal to millennials who save, whereas all of the existing new banks are focused on people who are unbanked or are living paycheck to paycheck. Well, thanks for hanging with us, Andy. Always a pleasure. It was great to see you. Always a pleasure.

Starting point is 00:45:38 Thanks for listening to this interview with me and Andy Radcliffe. I wanted to take a moment now to talk about a key point that Andy made that I think is essential for going for greatness. Entrepreneurship can be described with a two-by-two matrix. On one dimension, 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. Unless you're non-consensus, you don't have a chance to serve the desperate because they wouldn't be

Starting point is 00:46:17 desperate if they were already served. If you aspire to create a great startup, consider one simple fact. Great breakthroughs come from insights that defy conventional wisdom. Andy Radcliffe referred to this as being non-consensus and right. At Floodgate, we call it insight development. But the high-order bit is the same. Let's examine each perspective, starting with Andy. Andy pointed out that startup ideas have two dimensions. Are you right or are you wrong?

Starting point is 00:46:43 And are you consensus or non-consensus? Wrong is always bad because if you're wrong, you fail. But it turns out that just being right is not enough either. Most people don't realize that if you're right and consensus, you'll usually not achieve greatness. Your startup might have a good idea, but if it's too obvious, multiple MeToo competitors will get funded by MeToo VCs. And as competition floods the market, prices erode, sales cycles lengthen, But if it's too obvious, multiple Me Too competitors will get funded by Me Too VCs.

Starting point is 00:47:11 And as competition floods the market, prices erode, sales cycles lengthen, and exit options become less compelling. The path to greatness is to be non-consensus and right. As soon as a business opportunity becomes apparent, to even a small number of people, the odds begin to work against the startup. I call this effect the startup law of the jungle. If you've ever watched the Nature Channel and seen a baby wildebeest born on the Serengeti plains of East Africa, you can get a visceral feel for what the typical startup faces in its early days. The baby wildebeest is dropped out of its mother's womb onto the ground in a wet sack. It could barely stand up. And if the baby animal takes more than five minutes to get moving, it will find itself surrounded by hyenas, jackals, and Nubian vultures. In the startup law of the

Starting point is 00:47:51 jungle, startups are initially very vulnerable to the various predators and hazards that surround them. Being non-consensus and right affords the startup the time to survive, adapt, and succeed after trial and error without fatal consequences. No one preys upon them because no one believes their idea is important. This gives the startup time to master differentiable and specific skills and build strengths for the inevitable competitive battles that will come in the future. At Floodgate, we emphasize that insight development should happen before customer development. This flows directly

Starting point is 00:48:25 from Andy Radcliffe's reasoning. Many of you have heard of customer development. Andy mentioned it in our discussion. It was defined by Steve Blank and applies the scientific method to getting product market fit. Many subsequent works have been built on Steve's theory. Insight development happens even before customer development. It helps you figure out if your idea is big enough before you even get started. One of the most valuable lessons that Andy teaches us is that insight is not the same as analysis. You can analyze customer pain when you start your startup, and the pain might be real, but that does not prove that your idea is unique. You can analyze a market for gaps or white space, but that doesn't mean you've discovered something that no one else has yet seen.

Starting point is 00:49:09 Insight is about knowing things that others don't know yet. Insights are what help a startup get an unfair advantage when they have very few other advantages. Insight development is a method we have learned from the super-performing founders. When you develop insights, you ask different types of questions that go beyond basic analysis. What is my earned secret? What work have I done to find something out that others don't know? How did I uncover the secret? Why is it a secret?

Starting point is 00:49:36 What work did I do to develop conviction that my secret is real? What is my why now? Almost every startup idea has been tried. Shouldn't I assume that startup idea has been tried. Shouldn't I assume that my idea has been tried? Who's tried something similar? Why did they not succeed? Has there been any major technology change event that makes something possible only now?

Starting point is 00:49:59 Is there increasing adoption of a technology that makes something possible only now? Why is now the time for your idea to happen? In future episodes, we will talk lots about insight development. But speaking of now, what does this all mean for you? You must commit yourself to having a real insight if you want to be truly great. All of the greatest breakthroughs came from unconventional insights. The theory of gravity, Euclidean geometry, the solar system, all of these ideas were put forward by heretics in their time. So my own quote I will leave you with is, there's a right kind of crazy. If you like this interview, please subscribe to my podcast, Starting Greatness,

Starting point is 00:50:39 where each week I'll share an interview with a legendary founder or thought leader like Mark Andreessen, Reid Hoffman, Steve Blank, and more. Each interview will be accompanied by a deeper exploration of a key lesson of the super performers in order to provide you actionable insights as you pursue your own path to greatness. You can follow me on Twitter, at M2JR, and please shoot me an email with any comments or questions to greatness at floodgate.com. And if you like the show, I'd be grateful

Starting point is 00:51:02 if you could leave us a review on Apple Podcasts. Never let go of your inner power to do great things in whatever matters to you and until we meet again, remember, greatness is a decision. Hey guys, this is Tim again. Just a few more things before you take off. Number one, this is Five Bullet Friday. Do you want to get a short email from me? Would you enjoy getting a short email from me every Friday that provides a little morsel of fun for the weekend? And Five Bullet Friday is a very short email

Starting point is 00:51:36 where I share the coolest things I've found or that I've been pondering over the week. That could include favorite new albums that I've discovered. It could include gizmos and gadgets and all sorts of weird shit that I've somehow dug up in the world of the esoteric as I do. It could include favorite articles that I've read and that I've shared with my close friends, for instance. And it's very short. It's just a little tiny bite of goodness before you head off for the weekend. So if you want to receive that, check it out. Just go to 4hourworkweek.com. That's 4hourworkweek.com,

Starting point is 00:52:11 all spelled out, and just drop in your email and you will get the very next one. And if you sign up, I hope you enjoy it. This episode of the Tim Ferriss Show is brought to you by 99designs. 99designs is a global creative platform that makes it easy for you to find an amazing designer and create designs you'll love. From logos, to branding, to packaging, to books, you name it, they have it. And I've used them for just about everything. 99designs is the go-to creative resource for any budget. I've used them for years now for book covers, for instance mock-ups of The 4-Hour Body,

Starting point is 00:52:45 which went on to become a number one New York Times bestseller, illustrations for the multi-volume Tao of Seneca, including the cover, and many other creative projects. I've been very impressed by the quality of their work. Most recently, I used 99designs to update the illustrations and layout of my Five Morning Rituals ebook. The illustrations worked out great. I loved working with the designer we selected and I plan to work with him on more projects in the future. And that's something you can do. You don't have to start from scratch every time. And right now, my listeners can get $20 off plus a free $99 upgrade on their first design contest. Simply submit a brief on the site describing what you need. And designers who are interested in your project, often from around the world, will submit concepts for you to choose from.

Starting point is 00:53:27 You refine as you go, give feedback, and once you're ready, you choose one to finalize. It's a great way to get started and find the right match. A great designer and a great design at a great price. So head to 99designs.com forward slash Tim to learn more or get started today. You can also see examples of some of the work that I have done with designers on 99designs. So check it out, 99designs.com forward slash Tim. This episode is brought to you by Peloton. I love Peloton. Peloton is a cutting edge indoor cycling bike that brings live studio classes right to your home. You don't have to worry about fitting classes into your schedule, making it to the studio, or dealing with some commute to the gym. I have a Peloton bike in my

Starting point is 00:54:08 master bedroom at home, and it is one of the first things that I do in the morning. I wake up, meditate for 20 minutes, and then I knock out a short 20-minute ride, usually high-intensity interval training or HIIT. Then I take a shower, and I'm in higher gear for the rest of the day. It's beautifully convenient and has become something that I actually look forward to. And I was skeptical in the beginning. I didn't think I would dig it. And I really do. So you have a lot of options. For one, if you like, you can ride live with thousands of other Peloton riders from across the country on the interactive leaderboard to keep you motivated. I tend to use a lot of the classes on demand and have four to six of them that I've bookmarked and use over

Starting point is 00:54:45 and over again. There are up to 14 new classes every day with thousands of classes on demand, and there are a variety of workouts to choose from. 45-minute classes, 20-minute burns, hip-hop, rock and roll, low-impact, or high-intensity. Pick the class structure and style that works for you. Peloton has an amazing roster of incredible instructors in New York City. They really do have great instructors of every possible personality and style, and you can find one that you love, no matter what you're in the mood for. Personally, I use Matt Wilpers a lot, but I use a bunch of them. I'm promiscuous and enjoy classes from a lot of their instructors. With real-time metrics, you can track your performance over time and continue to beat your personal best. I did not think the gamification would work for me, and they really hit the nail on the head.

Starting point is 00:55:30 It does work, at least for me, tremendously well to keep me pushing consistently. So, discover this cutting-edge indoor cycling bike that brings the studio experience to your home. Peloton is offering listeners of this podcast a limited-time offer. Go to onepeloton.com, that's spelled O-N-E-P-E-L-O-T-O-N.com. Enter the code TIMPODCAST, all one word, at checkout and get $100 off accessories with your Peloton bike purchase. Get a great workout at home anytime you want. Go to onepeloton.com and use the code TIMPODCAST to get started.

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The Tim Ferriss Show - #397: Two Questions Every Entrepreneur Should Answer

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The Tim Ferriss Show - #397: Two Questions Every Entrepreneur Should Answer

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