This Week in Startups - Andy Rachleff on management theory, Reed Hastings’ genius, lessons from passing on Netflix & more | E1158

Episode Date: January 5, 2021

Check out Wealthfront: https://www.wealthfront.com FOLLOW Andy: https://twitter.com/arachleff FOLLOW Jason: https://linktr.ee/calacanis

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Your first app is free forever, and right now, O-Doo is offering $1,000 off your first implementation pack at O-do.com slash twist. That's O-D-O-O-O-com slash twist and Squarespace. Turn your idea into a new website. Go to Squarespace.com slash twist for a free trial. And when you're ready to launch, use Offer Code Twist to save 10% off your first purchase of a website or domain. Hey, everybody, welcome to this week in startups. We are starting 2021 off with friend of the show,

brilliant investor, the person who defined the term, literally created the term of art, product market fit, co-founder of benchmark, which he created because, well, he needed a job and the previous venture capital part we was working at was retiring and going through generational change. He teaches. He starts companies. He invests in them. And I think most of all, Andy, you have an incredibly positive outlook on life and you're very successful. And so I wanted to start. And of course, you're the founder of Wealthfront. Thank you for allowing me to be on the cap table, which is going into its 10th year this year. Now, there was a little pivot in the beginning. We'll talk about pivots. But I was thinking about you last night and I was thinking,

I always leave my conversations and our talks, and this is the fourth of them. We had you on the podcast on episode 335 in 2013, episode 813 and 2018, and episode 1002 in 2019. And here we are for our fourth conversation. I always leave a conversation with you feeling smarter, more energized and actually more optimistic. Were you always this optimistic and do you think that contributed to your success? Or were you earlier in your life prior to massive success as an investor, a founder, et cetera, life success. Did you find your positivity just ramped up? You know, I've always been optimistic. And it's funny, it drives my wife crazy because she can be pessimistic. But the other day, we were driving down to Carmel and listening to

to a podcast that hosted Danny Meyer, the famous restaurateur, and he talked about how optimism was a really important quality and an entrepreneur in my wife, immediately threw an elbow into my side. I just like, get this podcast off here, put on something else. Again, this is Danny Meyer talking about how great, but I mean, think about what restaurants have been through in 2020, the year of the pandemic. the amount of suffering we've seen. And, you know, I think the real definition of positivity,

if you go back to even Victor Franco, in his theory is Man Search for Meaning, if you haven't read a great book, most people when you ask them what their favorite book is, it's in the top three, or at least self-aware people. That positivity is really the defining factor of what helps people get through really hard times,

that belief that they can control their destiny. It's a big part of it, isn't it? I guess it is. It sure has worked for me. But then I haven't known any difference, so I just am who I am. Well, what about the dark times? I mean, there has had to have been some bumps in the road for you where you thought, man, I suck at this, or gosh, you know, and we're sitting here in the new year.

People are maybe thinking positively about 2021 as a year. We get this pandemic behind us growth in the stock market, and we'll talk about Wealthfront and all the tremendous offerings that you guys provide has been awesome. And tech stocks have gone absolutely bonkers, valuations. So this pandemic is such a weird, mind-blowing phenomenon because in our industry, majority of people are having it up here while in all other industries and then just in generally human suffering from mental illness to the death from the actual virus to education to our children has been really brutal.

So, yeah, how do you think about, you know, have you gotten bad beats in your life and how you got through them? I've certainly been tested, but I think I've been radically more fortunate than others. So what I define is tested, I think others might actually want. So I remember a point when I was about, oh, six years or so into my venture career, I had a year in which all of my portfolio companies did poorly. And I don't know why it was, but they were just all on a bad streak. And I knew that the managing partner of the firm that I worked at the time was concerned as to whether or not I could be good at what I do.

And fortunately, that worked out, but I had to have faith in my company. because I knew they were very good businesses. So that was one. And for Walthfront, 2018 was really trying for me because we had two market corrections and a bare market in that year. And the company actually did some great things. The software that we delivered was fantastic, but it wasn't showing up in the financial results.

And so I think that was the most trying for me. in terms of leadership, making sure, trying to get people to focus on what we were setting up for 2019, which turned into a phenomenal year, as opposed to what the financials looked like as a result of our assets under management not growing to the extent we had wanted that year. So when you break apart those two, in both cases, you have outside factors that are out of your control. One, the market was behaving as it is want to do, you know, having down bad beats in a specific explicit product offering well front, which is set it, forget it. And the people who buy into your software are people who theoretically, I would think, should understand this investing

for the long term. So you actually had, was that the first time during this 10-year run? that you had to actually sit people down and say, this is that moment we talked about when you signed up. Don't sell on the way down. You know, like this is the human behavior. We're trying to correct with this very product. Everybody sells at the wrong time. Well, you know, it's really funny. We have not suffered from that, specifically people selling when the market goes down.

It's actually been quite astounding to all of us, how. withdrawals are not at all correlated with market performance. But what is correlated with market performance are add-on deposits. Interesting. Hold on. I got to guess that then. So people either add on when the market's down because they get greedy and they've heard that before or they add on when it's going up because they have FOMO.

Is it both or one of the other? Well, there's a lot of research, academic research that's been done that shows that people invest when the market goes up and they sell when the market goes down. So we have not experienced the sell when the market goes down. But what we have experienced is our clientele is 90% of it is 40 years old or younger. And they're in the savings mode of their lives. They're in the wealth accumulation mode of their lives. So typically they continue to add to their accounts consistently, except when markets go down. They don't pull money out, but they pull back, they don't add to their accounts, which is actually a really bad thing to do because they think they're

timing the market. They're a little scared to put the money to work. But if they had, they would have done much better because it's almost like buying the market on sale. This is what I did. You have been a great counsel to me. I always thought, you know what? I should just focus on what I do really well and let you manage the money, this extra capital over here and do it. And I had it set on a three, which probably too conservative for, you know, somebody in my late 40s. But when that market dropped, I went in and I said, roop, 10. And I moved it to 10 while all hell was breaking loose in the end of March because I said, looking historically at pandemics, having spoken with Andy many times, this two shall pass. This two shall pass. You know, as

Gandalf said to Frodo, you know, like all we have to do is decide to do with the time we've been given or whatever that, I'm butchering the quote. And listen, the time we've been given is we know that it's going to go up and to the right over some period of time. We'll get back to wealth front in the stocks in a minute, but there was this moment in time when you had all of the companies you selected, you anointed, as we know, and we've talked about before, venture capital is about anointing companies in some ways. You're working for one of the first venture firms. I forgot the name of it. It was like five guys' names. Merrill Pickard, Anderson, and Iyer. Okay, four names. Merrill Pickard is how it was correct. And they were like started in the 80s or

70s. 1980. 80. So, I mean, these were one of the first 10 or so of that cohort of venture capitalists you work for. And you're a young guy working there and you make whatever,

four or five, six bets and they're all going south. And your boss thinks, who did I put in charge of this swath of capital? And you're thinking, am I, should I be in this position? Now, the LPs in a venture fund, they're not seeing that day to day, right?

So this is just in your own head and your boss's head. Did your boss give you some counsel like, hey, ride it out kid, it's going to be okay? Or was it like, maybe we need to ride you right out the door? Well, he asked me a lot of questions about the companies because he was concerned that they weren't going to do well. So it wasn't that he wanted to ride me out the door, but I could tell based on the questions that he asked about my portfolio companies that he was very, very concerned. I am in love with a new product.

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You have to be really, really patient because you cannot affect that outcome. So you have to make the right decisions going in and you have to rely on those decisions. I'm always amazing. by venture capitalists with whom I sat on boards who would blame management when the company didn't do well. And this was the beginning of my thinking about product market fit and its power. You know, I'm a big believer that companies succeed and fail based on the quality of their product market fit. So you could be a lousy management and do exceptionally well.

And you could be a great management and do incredibly poorly if the dogs don't want to eat the dog food. So I kept coming back to first principles, which was, do customers want to buy the product? And are these just temporary issues? And if they weren't temporary issues, then I would get a lot more worried. But in the case of those companies, I was fortunate in that they were just very temporary issues. Explain how they just all happened to have happened at the same time, which was really inconvenient. You know, and if you, you're not a poker player, are you? Have you played poker?

Yeah. So we got to get you in the game because you've got money. Only to take my money. That's no reason. You do have money. You would become quickly addicted to it because you do have these moments where you could be ahead. You could make all the right decisions.

And then you lose five times in a row, which when you're a 70%, you know, 80% favorite, 65% favorite five times in a row, six times in a row, and you lose all of those, your mind starts to go crazy and you start to question things. And they think that's why so many venture capitalists get attracted to the brain chemistry associated with venture, which is you have these like incredible highs where, you know, oh my God, I pick Slack or I picked Uber or I picked Airbnb. I mean, can you imagine what Paul Graham's brain is doing right now that he backed Airbnb. and, you know, in December, Airbnb became worth almost $100 million, and we'll get into stocks and the sort of newfound retail investors, the Robin Hood crowd in a minute.

But I do want to talk about this perplexing nature of management theory because you're sitting there and you just pointed out there could be two different things at play. They could be, there could be poor decision making or bad beats and, you know, mistakes, bumps in the road, things that can be ironed out, and then there are systematic things. But we look back on a systematic failure of leadership with extreme product market fit, and then we read into it, that maybe the causation there was, oh, that eccentric founder, who was a nightmare who treated people in this certain way, is their management theory is correct.

When you look at management theory, how do you try to decipher that? in relation to this phenomenon? I don't. I try to really focus on product market fit, the quality of the product market fit. And I came to believe at the end of my venture capital tenure that my number one value added as a board member was to hold the mirror up to management so that they could be intellectually honest about the quality of their product market fit. Because if I told them I believed or I didn't believe, that wasn't relevant.

Because who am I? I'm not involved in the business every single day. But where I could add value is by holding the mirror up to them to make sure that they were being intellectually honest about their opportunity. And they were in a better position to judge that than I. That made them appreciate me because I wasn't directing. I wasn't, you know, trying to put my thumb on the scale. And it led them to be more intellectually honest.

and often led to a great outcome because, look, almost every successful company has pivoted from its original business plan in order to find that success. And the challenge I faced is as I got older, how do I help people recognize the market issues so that they make the right changes without telling them what to do? This is such an astute point. when you're trying to help somebody, especially somebody who has self-selected to be a leader, telling somebody who has the chutzpah and the drive to become that CEO and to get past the hurdle of raising venture capital, which is one in 10,000 or 100,000 founders are able to cross that hurdle, you can't tell them do X.

You have to somehow get through to them by holding up the mirror, as you say. What would be the language you would use with me if I was a founder who was, you know, getting more concerned about, you know, operating management theory, the reception, you know, area at the company, you know, my my out of control sales manager who's high performing but a jerk. And I'm not focused on the product. How do you hold up that mirror? What's the language you used to use when trying to communicate that to folks? Well, first and foremost, I'd spend a lot of time talking to the management teams about

the importance of product market fit to see if I got buy-in on that, to see what their attitude was. And assuming that we had a meeting of the mind that that was the most important thing to success, and generally we did have a meeting of the minds on that, then I would ask them to evaluate it. So that's a key part. One, you're getting buy-in and you're framing the discussion. Hey, listen, do you believe that the product is the most important thing here?

Okay, everybody says yes. Great. Now we're all now to step two, which is how do we confirm that we have that? Not just our gut, but how do we actually know we have? What are the techniques for knowing we have product market fit? And this has changed over time because we have big data. We have metrics that you didn't have, correct in the 90s? The amount of data.

The metrics, though, that I use that I've come to use or the heuristics that I've come to recommend don't require big data. Okay, here we go. They're really, really simple. Let's do it. Give us the heuristic for peoples who don't know what the word means. I'm no genius. I didn't go to an Ivy League school, but I think it means heuristic means like rules that you can apply on some consistent basis. Yeah.

Okay. The tricks or hints that you use to do what you do. Okay, here we go. So what are the heuristics that you use? Because wealth front has consistently, and I know this, I'm not speaking as somebody who's a shareholder. I'm speaking as somebody or your friend. I hope we have like a friendship now over these four episodes. It'd be like we do. I want to know what are the ones that, because if you look at every feature, you add to that product and I use my wife as a proxy as well because she loves the product. She loves using it. It's very addictive. And every new product seems to, I don't know if you're batting a thousand, but you're certainly batting very, very well. Actually, I don't want to, if we're batting a thousand or close to a thousand, we've done a really poor job. Why? Because it's just like venture capital. No risk, no reward.

I think that returns are Pareto optimal. I mean, in almost every field, 20% of the sample generates 80% of the value. If you try... Wait a second. Paredo optimal. Yeah. Which is that phenomenon when? It's the 80-20 rule.

Goetheedo, Paredo, an Italian philosopher, actually, or mathematician came up with the concept, which I think is one of the greatest laws of nature, that 20%... of the population, no matter what the population is or the topic is, generates 80% of the value. So 80% of your sales usually come from 20% of your customers. 80% of your returns come from 20% of your portfolio companies. 80% of the great ideas come from 20% of your employees. It's incredibly consistent. Now, if you want a really high probability of success,

the likelihood that you're going to get a big win is exceptionally low. So one of the jokes I used to use when I taught a class on venture capital at Stanford was, what do you call a venture capitalist who's never lost money on an investment? Okay, hold on. What do you call a venture capitalist who never lost money on an investment? Somebody who, yeah, somebody's doing it wrong. Go ahead. Unemployed, because I don't want that person as my partner.

Exactly. No risk, no reward. You got to make bets. And if you're not making great bets, you're not pushing hard enough. And I was watching a friend of mine had a product that launched just yesterday or the day before. And let's just say this product had incredible success for most of the deployment. But in the final moments, the product didn't do so well. And I just texted him and I said, that was incredible. what an amazing success, you know, and you're pushing the envelope if you're, if things aren't blowing up once in a while, you know, you're not pushing any row back. So I preach, I want to fail a lot. Ah. So I preach. Do you have a number? Pardon? You have a number? Like half

half the bet shouldn't work? Well, less than half should work. Oh, okay. Wow. So we actually talk about this. It's an explicit part of our product process at wealth front because I want to, people to reach. I want them to go for things that are impactful. And that's true, you know, while you might like all of the features that we have, not all of them hit a nerve. So for example, we built a product that is a superb product to help employees sell their stock after their company goes public. Yes, I remember. The executives have something called a 10b-5-1 plan. available to them that private wealth managers make available to sell their stock consistently, but the rank and file employees don't.

So we built this great product, but we couldn't get buy-in from the equity administrators of the companies because I think they were in the pockets of the people who manage those option plans. And even though what we offered was free with no commissions well before Robin Hood, we couldn't get any buy-in. same thing with financial planning so not all of our great features are appreciated we think they all add value but there's no accounting for taste as someone who's invested in over 200 companies and I've advised many more I want to talk to you about a serious pain point and that is your burn rate

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I mean, that is part of what great founders run up against is if you are doing something innovative, there might be somebody who's already taken that hill and you want to take that hill or you want to level that hill. It's hard to take a hill that's already been taken. So you have to change the roles of the game if you hope to succeed. You can't out-execute somebody, especially someone who's bigger. In tech, that seldom works. Yeah. So when we look at something like an Amazon, you look at something like a Facebook, you're not going to take the hill they're already on.

You want to look for a different hill. A different hill that maybe is growing so that you can eventually reach the heights that they're at. And maybe you get the high ground. So the simple heuristics or the simple formulas that we think about or that I preach in consumer is exponential organic growth. Exponential organic growth. Okay, exponential we know. So let's break that down, right?

Yeah, exponential we know. It's non-linearly, so more than linearly. And organic, meaning not paid. Now, the only way that you get organic growth is through word of mouth. So you really, you have to really satisfy the consumer in order for the consumer to tell their friends. So you know you've really hit a nerve when you observe word of mouth. And this we've seen so many times. What would be the products that you look at and say, there's a product with this real world virality, this word of mouth that then of course drives

organic growth. And then if it is really truly transcendent, could be exponential organic growth. growth. That is the heuristic we're talking about here. Give us the examples that come to mind for you. Name a franchise technology company, Jason, and I will bet that they didn't advertise in their early days. Google, no advertising. Tesla. Facebook. Amazon. Netflix. None of these companies. Instagram. You name it that if it's a product that you like, Airbnb, again, word of mouth, DoorDash, Word of mouth. But Apple. But Apple. did do famously advertising, and Steve Jobs was obsessed with it. Explain that exception.

After they had exponential organic growth. So you can accelerate your growth with paid. But if you can't generate rapid growth solely through word of mouth, you haven't hit a nerve and you don't have product market fit. Interesting. Really simple metric. It's such a simple metric. But we have a generation now.

I'll say, as we do, it's 2021 here and we look back on the teens, this 2010 to 2020 period. I'll call it, you know, Y Combinator, you know, coming out of Web 2.0, the post great recession era, this boom period, when Facebook and Google's ad networks had reached such an amazing footprint that you could put into their casino a lot of bets on paid growth. It seems like everybody is optimizing for paid growth first. Is this the big mistake of the teens? Or is it, who cares? Like, there's so much money sloshing around. It doesn't matter if you blow some money on paid. It's a huge mistake.

And if you talk to the premier venture capitalists, they all know to filter for that. Because you can grow through paid. The question is, will the customers stay with you? So if you buy someone who then churns, what good is that growth? Right. They have to stick with the product. The first thing the good venture capitalists do is really try to understand how much of the growth was from organic to try to get at whether or not this is a really high quality business. They'll use the term good unit economics as the proxy for this.

What does unit economics mean for people who have just hearing that term? the first time here on this week in startups? It means can you acquire a customer cost effectively and will it generate cash flow over, that customer generate cash flow over time? Okay. So my customer acquisition cost $10 and my app cost $5. So I lose $5 every time where it's a $10 subscription. So if they make it to year two, then I'm in the black. But everybody churns in the first six months because the product's not good, it doesn't have product market fit. And that's the unit economics they're looking for. Yes.

When we look at that advertising, in the case of Steve Jobs, it seems to me some people also do advertising, I think, as a, I almost think like a victory lap or like as a playful, fun culture exercise for their own team, partners, et cetera. Do you get the sense that some people do that? Maybe, but I don't think there are. many of them. I think that for the most part, it's either for customer acquisition or brand building. All right. So that's consumer. If you want to talk about enterprise, there are a lot more successful enterprise companies than there are consumer companies. Why are there so many more successful

enterprise companies than consumer companies? I think it's easier to succeed. Okay. It's an easier path. It's an easier path. So why is it easier? Because if it's easier, I'm going to guess it goes back to your product market fit, the term that you coined, which, let's face it, it was Don Valentine at Sequoia who had this idea, perhaps one of the greatest venture capital. You put him in the top three of all time? Top five? Top two. Top two. So you have John Dorr, Michael Moritz, Doug Leone, who else is in that cohort? I'm just throwing names out here. Well, to me, the top two are Dorr and Valentine. Okay. So this, let's do product market film. We'll circle back around to John Doer. For product market fit, Don Valentine, who passed this year, Michael Moritz,

wrote a wonderful little book just about his legacy. And I got to meet him. I got to be in the room when I pitched him. And I didn't know who this guy was. He's just this quiet little old guy in the corner of the room. But he came up to me with a big smile afterwards. I really enjoyed your vision. And I just remember that interaction when I, you know, 15 years ago or so when I raised money from Sequoia from one of my companies. And what was so special about Don Valentine? Because you were somebody who studied the people who came before you and tried to codify and you're thoughtful. So what did you, what did Don Valentine say to you? What did you hear when you were at board meetings with him or other Sequoia folks that led you to codify product market fit?

Well, it's what I did have his fingerprints on it, correct? Yeah, it's what I observed and then followed up with some of the partners who were my age. So I'm 62 and Don was in his late 80s when he passed away, so a generation ahead of me. But I think the brilliance of Valentine was the observation that if a startup can screw something up, it will. Not because they're bad, but because they're so under-resourced relative to the incumbents that it's really, really hard to do well in the beginning. And so you need a pull from the market that's so strong that it overcomes the fact you're going to screw up almost everything that you try to execute as a startup.

Ah, yes, if you want to build a website or an online store or you want to do a conference or maybe you've got some really creative project you want to do, or maybe just a portfolio, there is only one place for you to go. I literally was on the phone with a founder who was like, how do I make something beautiful? and she was like going to spend $35,000. I kid you not on a website with modest functionality to some crazy agency. And I said, hold on, show me the scope of work. She shows me the scope of work. I said, you realize Squarespace is better than this. And Squarespace is literally going to cost you 1% of what they're asking for for the next couple of years.

Squarespace makes beautiful websites. That's all you need to know. And they have tons of templates that are all responsive. You get to be part of the square space. ecosystem, which is constantly improving. You can blog and publish content. That's obvious. Promote your business.

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We were locked up in our houses. And I looked and I said, you know, there's all these companies not getting funded. We started something called Remote Demoday.com. I said to everybody, I want the website up in 24 hours. They had it up in minutes, and then we just had to write the copy. We got it all up online, and it has played a huge part in that. We actually purchased the Remote Demoday.com domain right on the site. Go to Squarespace.com slash Twist for a free trial, and when you're ready to launch,

use the Off of Code Twist, and you'll save 10% off your first purchase of a website or domain. Please use the promo code Twist so they know that I sent you. Squarespace and the team have been an incredible partner of this program for years. great founder. We'd love to have them back on the pod, actually. We have to check in. We haven't talked in a long time. So go ahead and use Squarespace.com slash twist. Thanks again Squarespace and the team over there for making great software. The market loves the product so much. It's pulling the market out of your hands that it forgives any type of rough edges or internal under-resourced or just incompetence that you may have in your five-person startup. Exactly.

Yeah. And if you look at the early outside. Apple computers, or you look at how rough the first Tesla was, the Roadster. There was so much promise and so much market pull from those products. Even Netflix with people mailing DVDs, they wanted to have a different experience than going to Blockbuster that they sought out that company. Well, think about how crappy the original content was on Netflix streaming. But you solved a problem that people, they wanted some entertainment and they wanted it instantly.

Right. So that minimum viable product really hit a nerve and overcame the fact that most initial products don't really solve a broad set of needs, but they hit a nerve with a particular audience that then tells their friends about it as the business grows. It can then afford to invest in the product and make it better, build out what Jeffrey Moore calls the whole product. You cross the chasm and you build a bigger and bigger business. And even if you think about the, I've read two Netflix books recently.

The Patty McCord one, she came on the pod just about her HR management philosophy a couple years ago. And then I just read Reed Hastings and Erin, I forgot her last name, but she's going to come on the pod, talking about their Netflix culture, no rules, rules. and the fact that Aaron Meyer is the co-author, and I kind of think she's kind of the whole author, they had a plan. Were you on the DVD plan when they mailed you the DVDs? Yeah, and Reed's a good friend of mine.

You know, I sat on the board of his previous company. What? And we turned down Netflix three times. Wait, wait, hold on. Tell everybody the name of the previous company. It was called Pure Software. He built it to be about $170 million in revenue in technical software, which was an amazing achievement.

We went public and ultimately sold the business. Reed then retired to focus on his great passion, which is education. I think he became the superintendent in charge of all schools in California. He actually went back to get a graduate. He had been a teacher and he worked in the Peace Corps before he became a software engineer. But he got, he got a, he got a, master's degree in education because he wanted to be authentic to try to make an impact. And what few people in California realize is that there was a law in California that required

a super majority of voters to vote for a pond issue to build schools or to improve school buildings. And Reed took this on to make it a majority. And as a result, the schools in California are radically better now because there have been so many more bond issues that have been done on behalf of schools. So Reed made an enormous difference in education. He was an angel investor in Netflix and the chairman because the VP of marketing from pure software was a video file. And he couldn't get DVDs because at Blocklusters, they only had VHS.

So it started as a video rental business, pure rental. and it failed. And then read it converted pure into a subscription business. And he thought, well, we're failing anyway. Why don't we try subscription? This is the real story, not the story that everyone tells. Well, I mean, really, these are where the bodies are buried. It's so incredible because in the book, he talks about pure software and just he seems to

look back on his time there as complete incompetence and that he was just, he was flailing. Oh, let me tell you. I have learned more from him than anyone else I've ever worked with other than my partner, Bruce Dunleavy. Reed Hastings was an amazing CEO. He made me a better board member. He used to say that about himself. He was just superb.

What made him so superb in those early years? And then we'll get to the later years. You know how I talked earlier about the need to go for it? Yeah. So every year he would come to his board. Now, mind you, this is a guy who. He had never managed anyone before he started his software company. He wrote this amazing utility single-handedly that found memory leak problems in graphical user interfaces.

And this was an enormous problem in Unix when he solved this problem. The product was called Purify and it exploded because every C++ developer faced this problem. It's a memory debugger. Yeah. So the thing that Reid did that just blew me away was that every year, the beginning of every year, he would tell his board, this is what I'm going to bet the company on. What? Yes. So you made this investment in pure software and this maniac comes to the board.

If you've made a decision to invest in his company and says, by the way, we're putting the entire company on this number on the roulette wheel. Well, it was an asymmetric risk, Jason. I know you're a gambler. So the way that he would bet the company is if it succeeded, we would do exceptionally well. And if we failed, we'd take a step back, but we wouldn't go out of business. So there was no, as we call it in the gambling business, risk of ruin. The risk of ruin is when you place a bet so large that it depletes your bankroll. So these were not bankroll depleting.

These were high risk, step back, but you could recover from them. Yes. Wow. He would be an incredible poker player. He instinctively knew to do this, which just blew me away because I'd never worked with a CEO who did this. And you might recall in 2011, Netflix decided to separate its streaming business from its DVD business.

Quicky. What was it, Quixter? Quickster. I can teach a case on this. And it was an unmitigated disaster. But Reed wanted to bet the company on streaming. And what most people didn't realize is that the user experience of streaming is radically different than the user experience of DVDs. Remember, with DVDs, there was a queue that you had to set up so that they would mail you

the most appropriate DVD when you mailed one back. But with streaming, it was in. instant. So the queue was an irrelevant user experience. Right. And you couldn't, if he wanted to be great at streaming, he couldn't have the two experiences on one website. So he wanted to separate the two. And people went nuts when he tried to do that. They told him he was a fool and the stock plummeted. 85%. And you know what he did? He raised money when his stock was down 85% because he so believed in his strategy that he needed the money to buy more content to make streaming more compelling.

Right. So this is an example of this crazy asymmetrical bet and it didn't ruin the company. In fact, the step back was in a way a slingshot. So the asymmetrical bet could take a step back, but it puts that fire in the belly of the founder with those learnings that you slings shot ahead and streaming was born. Now, he had been in streaming for four years, so he had the data to know that it was going to be successful that investors didn't really understand. But what he ultimately did was he put the two sites back together again, but he buried DVD. He was like, yeah, if you guys want this, you're going to have to go find it.

You're going to go find it. Yeah. The interesting thing about that, I knew this was a special company because I was a Netflix subscriber from like the moment it happened because I was a cinephile. and I was in my big Kurosawa phase and Frankenheimer. I wanted to watch all these movies. Now, the way you watched old movies was you either went to Kim's video in New York and Lurysai where they had this obscure films or you had to buy them from, you know, some criterion collection for $35 a DVD.

I didn't have that option. And he came out with this DVD rental and they had a version when I somehow got them a customer support and I said, I want to get like six movies. So do I have to sign up for two different? different cues and so I have two simultaneous accounts because I'm prepared to do that. And they said, no, we actually have a nine version one for $40 a month. And I was like, what? They had a nine dis-version.

I didn't know that. Nope. They didn't tell anybody. But there was a group of people who were such maniacs that they were doing, you know, two or three subscriptions to the same address. And obviously they figured it out because people would be returning DVDs. It would start becoming confusing, right? And then what I would do is I became a machine.

I got two. I had my old computer, I had my new computer. I had two DVD drives on each. I'm sorry to the DVD gods of the world. I didn't know this was illegal at the time. Maybe it's not. I would just rip them and put them on my hard drive on my computer.

So when I was working, I had two different monitors. I could watch a Corosawa film and I could blog. And it was like the greatest experience ever. But he says over and over again that he didn't understand humans. He looked at human beings as, essentially like software and part of the infrastructure of the company in that Patty McCord, which I don't know if you know her.

I do. You used to drive to work with him. And basically he kind of gives her credit for, he doesn't say this explicitly, but the kind of undercurrent is she gave him the empathy like Chip and made him start to think about humans' experiences and how to make this new culture. Before we get into that and his human. Well, there's no question that Patty had an impact. But Reed is, he's just an amazing, amazing guy.

Yet, you as an investor passed three times on Netflix. So here we go. You know, the chess board is playing out, Andy. And this is what I do for a living. We're playing chess here. And you just moved your rook and exposed your night. I'm moving my queen up. You're in check.

What did you learn from he's the greatest ever to you past three times on Netflix? which would have been a career-defining investment, even for Andy Rackcliffe. Well, I wasn't the consumer guy at the time, so I wasn't leading this, but. But I have all in it. Okay, all right. Some ownership. Here we go. So, you know, the first time we turned it down, it was the rental business, which didn't make

any sense. The second time he had just converted to subscription. And then... More compelling. More compelling. but he didn't yet have the data. And the third time, we were worried about how big the market could become for it. And the lesson learned is when you have someone who's just great, forget product market

fit, you just give them the money. Yes, yes, yes, yes, one thousand times yes. My biggest mistakes in life were before I was an angel investor, Elon was asking me for introductions to people who might invest in Tesla. Mark Pinkis was trying to do this online poker game that against Zenga and my friend Evan Williams was doing this Twitter thing. And in all three cases, I wasn't an angel investor at the time. I just was like, here, I'll introduce you to venture capitalists, but I knew they were going to be successful. And I could have been on the cap tables, but like an idiot, I didn't actually pull the trigger on it.

Now, he did this Netflix culture deck. And he came up with a very interesting version of how to manage people. I'm curious, how do you look at managing people? And then we'll get into his view of it. And I want to sort of compare and contrast. But when you look at managing people now at Wealthfront, what is the culture you've chosen to build? And how is it going? You know, it's interesting.

I think that one of the lessons that I learned from one of my teaching partners at Stanford, a fellow named Mark Leslie, who built a very successful company called Veritas. that he built into about a billion and a half in revenue and then he retired. And the company didn't do nearly as well after he retired. It was sold to Symantec and then I think spun off again. Anyway, Mark was an astute judge of culture. And he said something to me that really had an impact in one of the classes. And that's the fun thing about teaching is how much you learn.

what he said was the second the CEO changes, the culture changes, because culture models the behavior of the CEO. So if the CEO changes, people then start to model the new CEO. If the CEO is kind, the culture is going to be kind. If the CEO is a dick, the culture is going to be a dick because you think, hey, if I act like the CEO, I'm going to get ahead. So when I became a CEO, I thought a lot about that Mark Leslie line and what it was that I wanted to model. So I'm a really big believer in the golden rule.

Treat others the way you'd like to be treated. And the thing that I was really most satisfied with was we often would get asked the question by potential recruits. What's your culture? I don't think you can describe a culture, but I do. think you can describe your values because the culture derives from the values. And about a few years ago, we tasked a multi-functional team to interview everyone in our company to come up with a very short list of values that were unique to wealth front. and I was really ecstatic to learn that the four things that they came up with were exactly

what I try to model every single day. Wow. Okay. So risk-taking, trust, candid communication. What do you got? So the four of them are, so the things that we value are, number one, the well-being of our clients. So we try to put our clients' interests ahead of our own.

This is the golden rule thing. Number two is information that empowers. And by that, we're really referring to being candid and transparent. People in our company are shocked with how candid and transparent the management team is. We share all of our financials. We share our board meetings. We literally share everything because the better informed they are, the better decisions they're going to be able to make because you want to push that.

decision-making as low as possible. That's something consistent with Netflix. Number three is fresh perspectives, which I think is also something consistent, although we weren't trying to do it with Netflix, but having worked around Reed, he certainly had an impact on the behaviors I wanted to model. So fresh perspectives means we want people to come in and question what we're doing, so that especially if they come from outside companies because they might have better ideas than we do.

So we want to embrace that. And then. All right. Well-being of clients, golden rule. We got that. Information that empowers candidates and transparency. We got that fresh perspective because people coming in, hey, they might, you might be doing it wrong. And he talks about this in his book.

Okay. And the last one is endurance. Oh, endurance. There you go. I was giving you a little filibuster there, my friend. Thank you very much. My pleasure. My pleasure.

I'm sorry about that. It's all good. I got that. Listen, I turned 50 in November and I got my AARP. So you and I will be getting the two for one special in Palo Alto at 430. We'll be eating our dinner. It'll be in bed by 7.30. Well, the last one has to do with long-term focus that whenever possible we try to choose the path that

leads to the best long-term outcome, not the best short-term outcome. I love it. And you have to model this over and over and over again to get other people to do it. So I was ecstatic when the team came up with those four values. I love it. And the endurance one is just so critical because almost every success we've seen is the result of getting through those first X number of years. That's probably two, three, four of product market fit and those next X number of years of scaling. and then, of course, one of your favorite books and mine, Bill to Last,

becoming a sustainable enterprise, right? Well, especially given the perturbations of the stock market and the impact that it could have on our business, you know, we used to have trolls that said, oh, wait till they have a stock market correction. Well, we've had about eight of those, and we've done just fine. And then wait until they have a bear market. And so then we had a bare market, but it corrected.

And they said, well, it corrected so fast. So wait till they have a real bear market. So then we had the bear market from COVID-19. They're still going to come up with excuses. But you have to be able to live through those times when people slow up on their ad-on deposits temporarily. Yes. And being built to last. And who is the guy from built to last?

Good to great. Jim Collins? Jim Collins. Jim Collins. Which, by the way, was the number one driver of the culture at Benchmark. Jim Collins, and the name benchmark comes from. We've talked about this before. You know, it's an architectural term.

It's a term of art. We would, in the old days, benchmark software versus each other. They would benchmark computers versus each other. So if you were to open up PC magazine or any of those kind of when we were in the hardware and early software days, you know, Windows and operating system days of this great technological journey we've been on for five decades here, six decades, benchmarking one computer versus another, benchmarking one operating system versus another, benchmarking one spreadsheet versus another spreadsheet was kind of how you did it. And Bill to last and Jim Collins,

good to great. He really tried to talk about the sustainability and endurance is one of those things. Talk about his impact on benchmark and your thinking and what's special about Jim Collins and we've got to book him as a guest. You really do, if you can get him, he's really, really hard to get. He is. But Bill the last studied 18 companies that had been successful over very long periods of time, market leaders for up to 100 years. And Collins found that two, there were three key things to the company's success, two of

which we really embraced at benchmark. And one was a cult like culture. and two was a desire to constantly experiment. The third one was CEOs who were clock builders, not time tellers, meaning they created an organization. They didn't try to make the decisions themselves. So that wasn't terribly relevant to us. But the cult-like culture and the embracing of experimentation were two things

that we really wanted to do. And those are things that I've carried forward with me. You know, Collins wrote a book before Built to Last. Good to Great. No, Good to Great was after Built to Last, actually. Yeah, it was after. So Jim Collins was a year ahead of me in business school, and he was a lecturer at Stanford who did exceptional well.

So I knew of him. But he wrote a book before Bill to Last called, I think, beyond entrepreneurship and it was all about how you create a compelling mission statement. Okay. Yeah, 92 beyond entrepreneurship, turning your best business into an enduring great company, then built to last, successful habits of visionary companies. Then when in 2001, when I got on the train, good to great, and then I went backwards. So that's my bad.

No, no problem. And great by choice came later, turning the flywheel because the flywheel was the other concept. He really codified for a lot of us founders. We'll get into that in a moment. Well, we just used beyond entrepreneurship to redo our mission statements, our original missions. And he's in the book talks about you want a big, hairy, audacious goal, and you want something that's measurable and something that you likely need to adapt after 10 years or so.

So our original mission statement at wealth front was to democratize access to sophisticated financial advice. And it's fairly measurable. We think that the impact that not only we've had but on the industry has caused other people to do what we do. And we thought it's time to refresh it as we started getting the banking in addition to investing. And so our new mission statement is to build a financial system that favors people, not institutions. Okay. Now, there you're tilting at windmills.

So this is some donkey hoady shit right now. That's what I do. Oh, my lord. Now, how has that gone for wealth front? Let's start delving into a little bit of wealth front. You've been incredible for 51 minutes on the pod straight of giving us so much knowledge, the density of this pod will go down in history. It's one of your great.

A trifectas when you bet three. What do they call it when you bet four horses, Nick? What is that four horse bet when you go to the track? Superfecta. There it is. Okay. That's a super facto in terminology is when you bet. bet on your one, two, three, four.

Trifactors when you bet on three, you get the idea. All right. There's a lot of gambling terminology going on here. So tilting out windmills, number one, fees. Oh, my Lord. Anytime you make any cheddar in this world, you start getting people coming to you, asking you to manage your money,

and they're going to get one, oh, I just won 1%. Just one, maybe 1.25 or 1.5, But one, they frame it as 1%. Why is this framing complete, utter bullshit? And then how have you shifted this framework with wealth fund specifically? Well, I think we innovated with our incredibly low fee and no nickel and dime fees on our investment service. Banking has a lot more fees. Now, the reason banking has such high fees is something that I hadn't realized until we dug into it.

And that is consumer banks are built on a business model that embraces branches. They deliver their service through branches. Just like car dealerships. Right. Now, what I hadn't appreciated was the average cost, annual cost to a consumer to maintain that branch is $200. What? each one of the consumers has to pay 200 to keep that office up and running, keep the lights on. Yes.

That's a lot of money. Because each branch supports about 1,500 people and they cost around $300,000 to run. Okay. That's just for the receptionist, the office space. That doesn't even count the money managers, does it? No. No, but that's just the basic tellers, the basic functions. Put the lights on.

So in order to support that $200, they've got to get at least $200 of fees out of you. Now, young people tend not to find value in those branches. So they don't want to pay the fees that are required to support it. Now, the fees can come in the form of minimums or if you overdraft your account. There are all sorts of horrible fees and then there's float. You know, back in the days of the Pony Express, when it took a long time to move money from one place to another, you could expect that it would take time for something to clear. But today, everything is instant. But that doesn't mean that banks clear immediately because they know they can take that money that's in transit and make money on that money.

They call that float. So a huge amount of money is made on float. So what we're trying to do is get rid of float so that money can move immediately and get rid of the cost of the float so it accrues to you and not to the banks. We can do really well making money with you, not from you. And that's why we're trying to build. So there's a double entendre to this mission statement in that we're both trying to build a financial system at wealth front that serves. you such that we favor you, not us. And we're trying to set an example so that other people, and therefore the entire financial system changes from favoring the institution to favoring the

consumer. And this manifests itself in incredibly low fees and no fees for the first X amount. Explain where you're at with that. Because when you were talking about this, I was just thinking you not only turned the, and I think some of the great services do this, the tax on a young person coming in was so great that they wouldn't even, they'd be scared to walk into the branch. You made it so you explicitly, when you walk in the branch, you're free rolling. Here's a free cup of coffee. Stay as long as you like. It's on us. We're going to support you until you get to the point at which it would be reasonable for you to pay something.

We'll let you drink free coffee. There's no physical branch. We don't have branches. Exactly. So there's that. We pay you not to talk to us. So we want to build software that's so effortless that you don't need anyone, even though all of our support people, people in client support, are licensed as financial advisors or even

chartered financial analysts. So the quality of them is off the charts, but they're there if you, want them, but you shouldn't need them. So you're 75% less expensive. 0.25 for the fees? For the, for our investment service, our banking service, we offer a complete checking service with direct deposit, with debit cards. For only $40 a month, flat fee. No fee. Wait, hold on a second. You can go to wealth front right now and write checks and get direct deposit from your employer and pay $0.0.0. Correct. Not only that, Jason, we pay you 0.35% interest on your checking balance. So, no one pays interest on their checking balance. Because they are conniving people who are not

thinking long term. You don't have to say this. I will. The financial industrial complex are sharks and you get in the pool with sharks. You're going to get bit and they're going to bleed you. and that's what they're doing. You don't want to sit there. Who's going to sit there and move their money out of the checking account and risk the $35 bounce checking fee? So they give you pain if you move the money out of there. And then you get no gain because if you move it into the savings account,

they're paying you this de minimis amount. And then they're charging you minimum fees. You said, I'm taking all the goddamn pain out of this. You don't have to think about it. But wait, there's more. It's like against your knife. Yes. So not only did we introduce a complete suite of checking service features so that we're on par with literally any checking account, but we also introduced the first feature from our self-driving money vision, which I've shared with you in the past.

Now, this is the autonomous driving of finance. This is your big, hairy, audacious goal. B. Hag as presented in Jim Collins' book. Correct? So in September, we introduced autopilot, which monitors one of your financial accounts, either external or wealth front. And whenever your balance goes at least $100 above a threshold that you set, so you control it,

will automatically move that money to the most appropriate place. So it'll move to a wealth front cash account where you're an interest or it can move into one of our investment accounts. And in the near future, very, very near future, it'll even move to third parties. So imagine a bank that would take your excess savings and send it to Goldman's Marcus because they paid a higher interest rate. that would never happen. That wealth front will move your savings. So we automate all of your savings. So we'll move the money to the most appropriate place

depending on your particular situation. So not only have we taken the fees out of this, we actually to have taken the work out of managing your savings so that we always move your money to the most appropriate place. Now you do all this for free. And the only thing you have to do is instead of paying 1% to your money manager, you guys just charge 1.5%, right? You raise the fees so that you make money.

The financial world is analogous to whack a mole, if any of you've ever played the arcade game, where there are all these mold that if one mole comes up, you hit it on the head, you knock it down, it shows up somewhere else. Or two. So, you know, nothing, historically nothing has been free that if something's free, you know you're paying for it somewhere else. It's three-card Monty. Charles Schwab introduced a competitor to our automated investment service that they call intelligent

portfolios that they claim is free. There's no advisory fee. What they don't tell you is that you must keep a minimum of 10% of your account in cash. Now, if our average, so they get the float. They get the float. So the average return on our account over the last nine years has been over 8%. Very few people have been able to compound at that level over the last nine years. So if you've set aside 10% of your money in cash that doesn't earn any interest, by the way, then the opportunity costs. All that money, 800 bucks. You've lost 0.8%, which is a hell of a lot more than the quarter of a percent fee that we

charge. Unbelievable. Unbelievable. And all this tilting at windmills, they are getting shaped. aren't they? They're starting to be like the Lincoln Town Car companies that were taking 50, 60% of the Vig when Uber came along. They're getting a little nervous. They're starting to copy some of your offering. And you guys are just staying true to the original long-term vision of being on the side of these consumers. Where are you at in terms of the assets under management?

And when does this become for you? What are the goals now going into the second day? decade. Let me say it that way. Well, as of December, we were at about $22 billion. And it continues to grow very, very rapidly. But that doesn't capture everything because of all of the services that we do. We also offer really low-cost loans, which I know that you're a really big fan of. I asked you for this a lot. I need that margin loan. So our portfolio line of credit now only charges 2.4%. I think that it's the fastest, easiest, and cheapest way to borrow. and it's something that you're automatically enrolled into if you open an investment account of at least $25,000 with us.

This is such a great for you. This is a feature for people who don't know when I was on the way up. I was like, hey, Andy, the only thing that's keeping me at Alliance Bernstein, you know, I mean, the thing that I, I mean, you talk about phones. Oh, my God. They train the financial managers to ask you about your kids, to write down notes about you, the assistant write that. And then every time I want to talk to them, I just want 50.

grant to pay down some poker debt or any 10k to pay for some tuition or something. And it's a whole conversation. And then I wind up getting up sold on something. It's making me bonkers. I don't want to go to the next game. I don't want to go to dinner. I don't want 45 fucking minutes on the phone. I'm sorry to curse.

It's too much time. I want to press a button and get done with it. And then you, and I said this margin load thing, you said, J-Cal, be patient. We're going to get there. So if you have a half-milly or a quarter-milly in your account and you just need to Jason, 25,000. Wait, only 25. So let's say you got 50 dimes in there.

You got 50k. You're coming up in your career, but you need to pay, I don't know, 10K to put down money to move apartments. And you're going to get your deposit back from your previous apartment. Now you don't want to sell equities and pay capital gains. You need that 10K, but you're going to replenish it or you can replenish 5K of it. You can just do a margin loan. Rich people have access to these devices, which is why they don't have to ever sell their equities that are going up and to the right.

And this is what's unfair about the financial system in America. Is it not? Well, you know, that's very subjective. I think that they charge way too much for what they do, but I think they charge so much more because they have to justify the cost of those branches. And now those branches go away and everything starts. And are they starting to shutter branches now? Are they looking at this and saying, you know what,

we're never going to be able to compete with the wealth fronts of the world? Yeah, but they're not going to do what Netflix did. They're not going to kill themselves to win the new business. They're too scared to do the asymmetrical bet. And let's be honest, to do an asymmetrical bet, you need to have what's called founder authority. You need to be the founder of the company who can walk in there to that board and say, I am Steve Jobs, I am Andy, I am Elon, I am whoever it happens to be.

And here's the big, hairy audacious goal, and here is the asymmetrical bet. You don't like it. You can vote me off the board, but we're making those bets. Big companies are run by people on what, two year, four year contract? They can't make a B-Hag. But you know something, Jason? Reed is not the founder of Netflix. He just acts like it.

So you have to act like it. You don't have to necessarily be a founder. but you need to act like a founder. But if you have 4% of the company or 2% of the company and you're like a hired gun at these big giant companies, it is hard to act that way, is it not? I don't think it is. I think you just have to walk.

I think you have to do it read does, which is you start every year on what you're going to bet the company on and you build credibility with your board and you get them to buy into your vision. And if you get them to buy into your vision, even if your stock goes down significantly, if they understood what you were trying to accomplish, they're going to go with you. The problem is that most hired CEOs don't have, they don't have the confidence that the founder does

that they're not going to get fired. So they got to come into it a little more reckless abandon and just be, I would say Bob Iger reminds me of this a little bit. He was like a corporate guy, kind of a suit, you know, and he kept getting, you know, ABC Cap Cities, ESPN, whatever. He kept getting like little bits of more responsibility. Then he goes into Disney. I don't know.

Did you read Bob Eiger, right of a lifetime yet? I haven't, but, you know, he has done what the great tech CEOs do, which is to reinvent the business. More often than not, it's through acquisition than it is through internal development. But, you know, what he did with the acquisitions of Pixar and Lucasfilm and Marvel were unbelievable. And those were huge acquisitions that are normal. CEO wouldn't make.

Any one of those bets is a, you want to talk about risk of ruin, it's not going to ruin the company because they're $5, $10 billion bets, but it could ruin your ability to remain in that seat. But you know something, by not taking risk in technology, at least, you take more risk. So I don't understand companies that don't take risk. Right. When we watch Salesforce buy Slack, they're giving up 10% of the Salesforce organization or when Facebook bought WhatsApp, I think that was almost 20% of Facebook's value.

And when they bought Instagram, maybe it was two or three percent of their value. These were big, audacious bets. These are big, hairy, audacious goals. And what you're saying is, listen, if you don't make those bets, other people will. And if they do make those bets, you're going to lose. It's like, you know, when you're in a poker tournament, at a certain point, you have to put the chips in. you have to put the chips in.

You have to make a bet. You can't win at poker if everybody else is betting constantly and you're not betting ever. You have to at some point put some risk on the line. You can't win by playing not to lose. Yes. You can't play on your heels. I mean, he did, I mean, he, do you realize Michael Eisner was dead set against buying Pixar? And he was telling Bob Eiger, do not do this, do not do this.

and he tried to fight him on it. On buying Pixar. It was like, and he got Steve Jobs to sell him Pixar just by calling him on the phone and just checking in with him one day and saying, hey, is there more we could do? I'd love to meet you sometime. This is after Eisner and him were at odds and snipping at each other. And Steve, in the book, he tells the story of Steve Jobs saying, yeah, let's talk right now. And he's like pulling over his like convertible 500 S.L Mercedes into the driveway and talking to Steve Jobs

and then flying up to close the deal. If anybody out there knows Iiger, please tell him I'm in love with the book and I want to get him on the pot. But what, I mean, talk about a ride of a lifetime. And look at the bet he's making on Disney Plus. Audacious. And, I mean, he literally yesterday,

I don't want to date the timing of this, but this is our new episode for 2021. But last month, he announced, I think, nine Star Wars properties. Ashoka, Obi-Wan, I mean,

they basically are just saying we're going for it and we're going to put everything into Disney Plus and we'll have 250 million members by 2024. I mean, and he raised the price at the same time.

So when they get to $10 a month, that's $2.5 billion a month. When they did movies, the top movies would do a billion. So it's almost like having $2 billion movies a month, which is like having $24 billion movies a year.

No, $30 billion movies a year. Pretty good, huh? Yeah. And it's all Netflix is doing, right? Like, Netflix empowered this because they saw Netflix by Daredevil and a bunch of the sort of minor Marvel characters. And I think it, they realize, holy cow, we keep giving Star Wars and Marvel to Netflix. We need to bring those things home. I want to talk to you as we wrap, because I know you got to go about hiring talent and maintaining talent and what your philosophy is on this.

You know, people are always like, oh, you got to buy, you got to get the 10x engineer. And, you know, they're one in a hundred or the 100x engineer. They're one in a thousand. And as you, you know, get older and you've seen a lot, this extreme culture of, you know, 996 that we were celebrating in China. Then there's this like sort of wishy-washy millennial, you know, lifestyle first, work to live, European approach. And then you have a cultural.

freedom and responsibility at Netflix, since we're sort of celebrating them on today's pod a bit. And they were like, you know, listen, you've got to bring it and you're going to be basically every January you're going to be interviewing to keep your job for the next year. And people thought it was too intense, but the people who are there love it. So what is your philosophy and how do you look at all the different philosophies of building and managing talent? I think that, look, A's higher A's and B's higher C. C's. A's higher A's.

B's higher C's, got it. And if you keep a bunch of Bs around, the A's are going to leave because they don't want to work with B's. I think that was the great insight that Netflix had. So they're actually doing the A's of favor by eliminating the poor performers. So I think a performance culture is a better one, is a better one to keep great talent. I'm really in awe of Facebook in that they have created a performance culture that's kind. You know, people like working there, even though they're held to a very high standard. And I think that's something really interesting to aspire to where you hold people to a high standard,

but you do it in a kind way versus a cutthroat way. Wait, now, would this be perceived as insincere in some ways in execution? Like, hey, you said, you've got to hit all these numbers. Sorry, you're just not good enough. Bye. Like, how do you actually manage that? And I do agree with you that Facebook is a kind of enigma to me because people think Facebook is like a cigarette company now.

And I know people who work at Facebook. You know people who work at Facebook. The company has absolutely been hated for a decade. And people consider the company unethical in many ways. And then the people who work there stay. and I see people who stay there and then I see other people who are friends of mine leave and they have nothing but bad things to say about Zuckerberg and how he runs the company. But there's this other group that stay.

I don't know. I can't figure out their culture. So how do you execute on something like that, you think? I think you can't be a slave to numbers or metrics. I think you have to use judgment in this as well. So with an engineer, you're not going to evaluate them on lines of code, but you can see whether or not they're making an impact. I think you want to hire people with headroom.

I think one of the biggest mistakes people make is hiring someone because they can do the job. But I think you want someone who has the capability with mentorship to actually do a lot more than the job. Interesting. So you like to develop talent that has upside. Yeah. If they don't have upside, then they're going to stagnate. And if they stagnate, it's going to frustrate their top performer colleagues. That's fascinating because the criticism or the thing that people get confused with when they look at that Netflix culture doc is that, you know, good performance gets a generous severance is kind of a slogan.

No, no, good performance, poor performance gets a generous severance. Well, I think they were saying like adequate or good performance gets a good performance. I said, you have to be great. I'm not sure. That's true. But I think poor performance. Yeah. Maybe they're mythilize.

What are that? It's a little mythology there. But how do you assess? Everyone can't be great. It would be wonderful if you could build a team of all great people. But that's real. And I roll my eyes whenever people say, I have a world-class development team. Well, if you add up the number of companies that supposedly have world-class development teams,

it's greater than the population of engineers. So I think there's a normal curve to every profession, and everyone can't be superb. Yes. And just to be clear, it's adequate performance. It gets a generous several. Thank you. Adequate. We found a word.

And this is why words matter, right? It's so interesting. I love words because adequate is if you were to say somebody, you did an adequate job, people would be like, okay, I'm going to keep the job. I did the job you asked me. I did an adequate job. What they're saying is, you know what, we're looking like you are, Andy, for people who have upside and people who take on more responsive people and people who are ambitious.

And I think there's also a window of time. Correct me if I'm wrong if you've had this experience in life, which is people can be exceptional performers, but at a certain point, the marriage runs a sense. course. The relationship runs its course. They've done the five years. They're bored. They're burnt out. They want to do something else. And then they become either adequate, toxic, but they've been around so long. How do you deal with that? How do you deal with somebody who's been a high performer for four years? And then they kind of go from that fifth, sixth gear down to second, third year, or they put it in neutral and they're just, they're coasting on previous performance and now they're

adequate. You know, we want, I learned an amazing lesson from Coach K, the Duke basketball coach, when I was fortunate enough to be introduced to him at an internet conference that my partner Bill Gurley from Benchmark put on. Good friend of mine, big friend of the pod. Yeah. Yeah. Bill was a college, as you know, was a college basketball player and he adores Coach K. So he had him do the keynote for a conference that he put on. And I, I got to spend, I and a couple of others got to spend an hour with him before the keynote. And I asked him how he, and this was 20 years ago, how did he deal with one and done basketball players, you know, recruiting someone for just one year?

And he said, you know, I want to do what's best for them. Does this sound familiar? Yeah. And he said, I've built a reputation over the years that my, alumni players will tell the recruit, if you're ready for the NBA, Coach K'll tell you. And if you're not, he'll be honest with you and you should listen to him. But he's going to try to- Reputation building.

Right. And so he's going to try to get you there. Not everybody gets there, but he's going to try to get you there. After all, you know, later on, he was the coach of the Olympic team. This is the guy who knows college and professional basketball players in what it takes. So his view was, look, if a kid's ready to go to the NBA, I'm not going to hold them back because it would be better for my basketball program. By doing right by my players, I'm going to benefit by recruiting other great players in the future. And he said the same goes for coaches.

And this is what completely changed my management philosophy. He said, my whole goal with my assistant coaches is to turn the. into head coaches for Division I programs, which is the elite programs in college basketball. Think about it. If one of my assistant coaches gets to be a head coach at a Division One program, think of the line of people that are going to want to take that person's job. I'm going to get an incredible group of people who are going to apply for that job. And so he said, I'm going to keep trying to train these people to be head coaches because it improves my talent pool.

It can make my life a little more difficult if a coach leaves me after two or three years, who I've put a lot of money into training, money and time. But so be it. Wow. Such a great philosophy. It's such an amazing philosophy. So it completely changed my attitude. So what I constantly preach at Wellfrey, and unfortunately, some employees have a hard. hard time believing it, I say, look, you're not going to spend your entire career working for

wealth fruit. No. But we want to help you achieve your career aspirations. So be honest with us and we'll help you achieve your goals. So if two or three years into it, you're just not as interested anymore. You want to develop another skill that you can't develop here. Tell us and we'll help you find that job. through our relationships will help you find that job.

And the vast majority of people actually take us up on this, but the ones that don't lose out, it's better for the company and it's better for them if we're all on the same program. See, I love this philosophy. I have a similar one, but I, it's, you know, I'm still young in my career. I don't have the same Zen level. I'm kind of in my like Obi-Wan-Anne-Anakin phase as a Jedi where I still have a little anger. I still have a little of that, you know, edginess to me where I'm not as sort of, you know, gray here at Obi-Wan or Yoda like you, Andy, but I tell people, if you want to be on good terms

with me and you want to leave, here's the path. You hire your train your replacement and then I go to war for you, getting you whatever you want and I relentlessly sort you forever. However, If you cross me, I will be a Sith Lord, Dark Knight, Darth Vader forever. I'm not sure I'm going to go there, Jason, but I'm not going to give the person a good reference because I put trust in them and they didn't return it. Correct. I had some people who were backstabbing me in my own organization and I went Darth Vader, kicked them out of the organization. and then, oh, a reference comes in? Oh, you know what? I never give a bad reference is what I say to people,

but I can't give a reference in this instance. The challenge is it's hard for people to believe that if they raise their hand and say they'd like to leave, that they won't be fired and it won't work against them. Because most millennials, take, prefer advice from their friends to advice from experts. And their friends, I find, reinforce the idea that you shouldn't do that. That's too big of a risk to take to share. They're dopey. They're dopey friends. You know, it's like, if that'd be like going to relationship

advice to your friend who's divorced or has a dysfunctional marriage. And then they're like, you know, like you've been in these conversations. Five guys are at a dinner. And then one guy's just got a complete disaster of a marriage or relationship history. And he's the one given advice to everybody on their marriages. It's like, yeah, that's not the guy you want to go to or gal, whatever the situation may be. I had somebody steal for me. Can you imagine stealing databases for me? Like, what do you think will happen? I am going to like take out my lightsaber and start swinging it recklessly at everything in my path. It's crazy. But you have a little more equanimity. You're happy. Let me tell you, I didn't when I was younger.

Give it to me. This is the transition I'm going through. And I'll tell you, in the story of the person who double-crossed me, threatened me, tried to extort money from me, yada, yada, yada, yada. They finally kind of apologized. And then I gave him a great reference. After not giving references, they immediately got a job. Person wrote me back. Thank you.

So I squashed it. I squashed the beef because I don't want to accumulate bad feelings for myself. but tell me about dark, Andy, the dark moments where you performed suboptimally. You can obscureify the other parties or not, but tell me about those dark moments where you went to the dark side and you regret it and what you learn from it. Well, you know, you're a Scorpio, as am I, and Scorpios are vengeful. And I think earlier in my life, I was a lot more vengeful, but if you crossed me, I wanted to get back at you.

I've really worked hard to try to expunge that from my character, because I don't think any positive energy comes from that. And that's, I was only able to do that with the advice and counsel of my incredible wife, who you've met. And I also benefited amazingly from having a partner for many, many years named Bruce Dunleavy, who is phenomenal in this dimension, he never lets issues like this get in the way. And so having him as a role model made a huge positive impact on me. Okay, but hold on a second. Somebody crosses you. The word gets out on the street.

I know how guys like you think. I know how I think. You can't be the sucker who gets rolled. Because once somebody rolls you, the chances of another person rolling you or people believing that you can be world becomes a thing. So sometimes if somebody want... I'm smiling because I'm about to share with you a Bruce Dunley v. philosophy that you're going to think is nuts.

Okay, let me hear it. But has worked unbelievably well for me. And that is always put the gun in the other person's hand. Oh, sweet Jesus. What I'm talking about? I never let that lightstabre stays in my hand on my belt. That's my number one rule. I don't understand.

I knew I was going to get you on this. So Bruce, when Bruce works with an entrepreneur, he will, and has to negotiate the deal. In almost every case, he will say, let's say, Jason, you were the person on the other side. He'll say, Jason, you tell me what's fair and I'll do it. Oh, my Lord. It's literally like Obi-Wan Kenobi turning the lightsaber off and saying,

if you strike me down, I'll come back 10 times stronger. Now, the logic is that for most people, they don't want to be seen as overreaching. So they're going to do what's fair, maybe even slightly bit unfair to them. Now, if somebody comes back and asks for a little bit more than market or fair, Bruce is going to say fine. But if you fire the gun at him, he just won't work with you. So disengagement is the price you pay. Is the price you pay. And let me tell you, that is a huge penalty because getting to work with Bruce Dunlevy

is an amazing experience as you will hear from anyone who has ever worked with him. You know, I had this happen to me, this very interesting philosophy, because I had one founder, I'm going to tell you the situation, you tell me if I don't leave it or not. this founder said we had the right to do half of the next round like a write in a document we took the risk on this round we asked to have half the next round

founder calls me hey jay cow you were the first to commit to this new round you put down the 500k but since you put down to 500k we filled out the other 500k because you're Jason Galicanus and people follow your investments and now we're at 1.5 we want you to go down to 250 and I said wait

second, let me just make sure I'm clear. Because we committed to the last round and we ceded the company and we committed first to this round, now these other new people are going to cut our participation down by half. He's like, yeah, because these people are amazing. Like, we got Steve Case. And I was like, Steve Case is a friend of mine. That's a big deal. You got Steve Case. But, you know, we want to keep our right. And he literally is calling me over and over and over again. I get to the third call and I realize if this person thinks that screwing me over is

a good idea well why am I in business with this person because this is going to continue so I said to him I said it's a brilliant philosophy isn't it it is I don't I boost on leaving it I didn't realize it and I literally took the lightsaber and I handed it to him

and I said you know what we'll sell our share since you have so much demand we will give our 500K back And of the previous investment, we will sell half of that into this round. So we own 6% of the company. I will sell 3% of the company and take the other 3% as idiot insurance in case you actually get this to the promise land.

We make 4x on our original investment. We have the free roll for the other 3%. And I got this idiot out of my life. That's the Dunleavy strategy. Let me tell you, you sleep so much better at night. You know what? I do because this founder was so annoying. It's a much better way to live.

And I preach it to all those around me. My students repeat it to me. The people in my company repeat it to me. It's hard for some people to do to give trust to get trust. Most people want you to earn trust. But it's a much nicer, I find it to be a much nicer way to live. But you couldn't do that. Tell me that story about that vindictin if you had when you were young.

You have that story. You're debating if you get to tell me. Come on. I'm scurified. You could take out some names. You can polish it a little bit. Tell me when you did the wrong thing. The thing that cured me, I'll tell you a story that cured me of it.

Great. That's what I want to hear. But it wasn't something that I did. It was what the other person did. When I was about 30, I got to lead a round of highly sought-after semiconductor company. And back then, we had syndicates of three or four vener. venture firms. But in this case, there were six people who had committed. And someone from one of the most well-renowned venture firms was being cut back. Now, the logic that I had to use was the board

members would get a bigger opportunity to invest than the non-board members. They put in more work, which I think is a very, very fair algorithm. Totally valid. And he said, and so the partner who was with this premier firm who wasn't going on the board, who was cut back to half of what the board members got, called me up and he said, you cannot do that to this firm. He said, if you do that to, he said, do you not realize who you're dealing with? If you do that to us, I will make sure to ruin your career. He literally said this to me.

And I don't want to use a phone. 32 years old. And 30 years old. And he said, oh my God, a little peepie in the pants? I will, I will make, and if you knew who this was, you would really make you pee pee in the pants. I will make it my career goal to ruin you. What?

I know who it is. I'm not saying. You're going to whisper it in my ear later. You're going to tell me on the, tell me on the chat. So I held firm. They did their piece. it turned out to be a very, luck would have it, it turned out to be a very successful company. And then about 15 years later, we had completely forgotten.

He did this to a lot of people, by the way. This was his MO, so I knew to expect it. Sharp out bodied. We were in an investment together in a company. And I'll never forget this. and I made a point about the way we allocate equity in this, that was a contentious issue. And he said to me, you know something?

You should be a partner of my firm. I love the way you think. It's so funny when people act crazy and they don't remember it. He has no recollection whatsoever of, I live with that fear at 50. People come up to me like, you don't remember me. And I'm just like, oh, fuck. Oh, no, here it goes. I'm like, what did I do?

Oh, it's so funny. I put it, listen, I put my best guest in the Zoom chat. Take a look. Don't tell anybody. Just give me, am I in the zone? You can click on that link. No, no. Okay.

But that was, he actually didn't use to do that. No. I know he was iconoclastic. Yes. All right. I can say who I guess since it's not him. I put Tom Perkins, rest in peace. He was iconoclastic.

because he was just, yeah, he was an egot maniac, let's face it. Perkins was, you need to have a little ego. I think he got wackier in his older age because I think he created modern venture capital. I think we all owe an enormous debt of gratitude to Tom Perkins because he created the model that we're still pursuing today. Interesting. And then, yeah, I mean, he, MBA from Harvard, went to MIT and was on the, you know, was on the, I mean, was he famous for me on the HP board? I think he was. Well, Compa. He was the

chairman of Compaq. Yeah, which I think was bought by. Bought by HP. Yeah, yeah. But he went a little wacky in the old. He went wacky after he retired. But when he was in the game, boy, you know, you talk to John Doer, he reveres him. Yeah. See, that's the problem with the press, I think, sometimes. They get somebody who gets eccentric when they're older, and they're just like, okay, this is going to be page views. Let's just get this person. And then this is what happens when you get old and you retire. You become, you go from being hyperrelevant to being completely forgotten and irrelevant in 10 years. This is what happens. This is the nature of human existence. You were the top TV star in the 90s or 80s or musician. And then you're playing

bar mitzvahs or, you know, you can't, nobody, everybody wants you at their keynote and then nobody wants your keynote. And then some journalists find out, oh, Tom Perkins is available to do an interview with anybody. And then they started asking him questions. He starts saying crazy stuff. And it was actually sad to watch. It was sad to watch. Because, you know, back when we invested in hardware companies, he was the one who really, I mean,

I remember my friends who worked at Kleiner Perkins would cite his advice. You want high technical risk, low market risk, the kind of people that you would choose, the way that you would structure deals. All these things were innovations from Tom Perkins. Yeah. I mean, he was, wow, $8 billion, he was worth at the peak. And then he went and I never actually read it. He wrote a memoir, huh? Captain of capitalism I'm seeing here.

And then he did the documentary Something Ventured. Oh, no, he was featured in that, yeah. He was featured, which was a really interesting documentary. Yeah, it's really interesting. How do you think about the, you know, let's just call it what it is? We are all sitting here and there's a clock ticking, right? We're all on the road to the eventual outcome of humanity, which is we pass. We go.

You think about that, I think, when you hit 50 or some point in your 50 is like, okay, I'm counting backwards now. You're getting up, you're going to work every day. You obviously have a sense of purpose. You have this positivity. how do you think about your legacy or do you even bother thinking about that? I don't think about it. I just try to do good things every day and good things result. See, I think that's very, that is such good wisdom for people.

You have to enjoy the journey. If you're thinking too much about the past and the mistakes you made or you're too fearful about the future or concerned status games or whatever, you just miss what's happening every day, which is the wonderful nature of going to work and enjoying the people you work with and enjoying what you do. And let me tell you something.

Yesterday was a Thursday, today's a Friday. And I was just thinking, my pal Andy's coming on the podcast. It's one of my favorite things every year when we do this, we have you on the pod, we talk, and all of a sudden I look up and it's 90 minutes or it's an hour and 20 minutes. I mean, we could just go on forever.

I feel like I have 50 more questions, But I am going to stop this. We'll do it next year. I hope you'll have me back next year. Andy, as long as you and I are on this goddamn planet, we're doing it every year. We're doing our year in review, our year looking forward. Wisdom from Andy Rackcliffe, founder of Wealthfront, creator of product market fit, exceptional human being, incredible thinker, great mentor, great human being,

and co-founder of Benchmark. I could go on and on. everybody go to wealthfront.com, open an account, have your kids open an account, have your cousin, have your mom and dad open an account, whoever you know, have them open an account, open an account for them, put the first thousand dollars in, it's a mitzvah you can do for them so that they stop getting ripped off and they get a better education. I never even asked you about all these new day traders and millennials that Robin Hood, another investment of mine, has inspired. Let me end on that. What are you, what's your advice for that generation? They're getting very excited. They're

buying Airbnb, they're buying Uber, they're buying weird shit like Nicola, which is a complete and utter fraud and disaster, according to many people. We're seeing these SPACs. They have variability and the quality. Let's be generous here. Obviously, the ones my friend Chamoth are doing are serious companies. Other people may be not so serious. And then you have Dave Portnoy, who was just on the pod from Barstool Sports doing performance art of buying stocks. He's obviously gambling. He's super clear about that. But it did inspire a lot of people to get in there. And, maybe trade options or try different ways of getting involved, that's a good thing, isn't it? The research is really clear, Jason. It's not a good thing. Well, I mean, it's a good thing that

people are getting interested in finance. It is. But the research is really clear that you want a diversified portfolio of low-cost index funds. That's the way to maximize your wealth over time. It's not as fun. So take a portion of your money and have fun with it. But recognize. that it's fun. You know, our chief investment officer, Bert Malkiel, really invented the index fund with his book, A Random Walkdown Wall Street, one of the most influential books in finance. And I'll never forget, we once hosted an event for our clients in the Bay Area where they got to meet Bert. And somebody raised their hand and asked Bert a question. He said, do you own any stocks? This is the guy, you know, he was on the Vanguard board for 27 years. He's the biggest proponent of passive

investing you'll ever find. And he was asked, do you own stocks? And he said, yes. And I also like to go to the dog track because I find it entertaining. Of course. Of course. Please, you should do it and should have fun with it and learn about it. But it should not be the foundation of how you invest. This is, I think, the big lesson. I think, and part of the path to understanding and financial literacy is making some mistakes. And, you know, if you're, if you're buying and selling stocks in a market that's on a tear, you feel like a genius, just like when you get aces three times in a night and you clean everybody's clock at the poker table, you hit your set three times or whatever it is, and then you come back to the poker table and you start playing for a couple of years, and then

you realize, oh my God, I know nothing. I got lucky that first time out. And I had Dave on the pot, and he's like, listen, Jake, I'm an idiot. I'm just out here playing and I'm making a joke that I'm better than Warren Buffett and they put me on CNBC. This is all a joke. And I was like, I know it's a joke because you said you saw a deer out on your lawn in Nantucket. So you bought John Deer. And you're saying stocks only go up.

Which stocks only go up is a historical fact that overall stocks have gone up as an index, which is the point of wealth front. So if you open a Robin Hood account, please do that. Have some fun with 10% of your money, 20% of money. whatever you like to gamble, but please open at the same time your wealth front account and then have that bedrock, that foundation so that you are secure and you're not getting ripped off by these crazy fees that these crazy banks are doing. Andy, just always wonderful to see you and talk to you. I hope when this pandemic passes, you're taking the vaccine the second

it becomes available, correct? You bet. Okay, so you're not like from Marin where these crazy people graduate degrees who are worth millions of dollars and live in five million dollar homes. don't believe in vaccines for some insane reason. I don't understand. I don't understand it. It's like if you go north of the Golden Gate Bridge, you go north of San Francisco, you lose your mind. You get a bunch of money and you lose your belief in science.

What's that? But you have beautiful views. You got incredible views. I mean, you're in Tiburon and you're looking and you're on top of the world. You're on Mount Tam. You're seeing these beautiful visas and you forget that vaccines and science work and that we don't have pandemics and people are not. dying of the plagues because of vaccines.

Please, in the love of God, take your goddamn vaccine so Andy and I can go get some ramen or sushi or something in the new. It's sometime in 2020. You think it's all over April, May? I don't think that we'll have the distribution of vaccines broad enough by that, unfortunately. So you think we're, when are you and I going to like a Warriors game? Well, I don't think I'm going to get a, I don't think I will have the opportunity.

to get a vaccine until May June at the earliest. I thought, yeah, you know what? You're 62, Andy. I think you get it in March April. No, I'm actually 62 sucks because I'm not 65. So I'm in the last group. I had that crazy idea. I think all this morality, we have to rethink a lot of the morality we have.

You know what a challenge trial is by chance? No. In science. So this is crazy. the challenge trial is when you actually introduce something dangerous to a person to see how they respond to it. So in the case of the coronavirus, you would get 100 people. You would give them, you know, 50 of them one vaccine, or let's say 33 of them one vaccine, 33, another vaccine, and 33, no vaccine, placebo. then you actually give them all on purpose the same exact quantity of coronavirus and the same

exact delivery mechanism and then you watch. Now, this is considered unethical because you're putting people at risk. But the risk is much less than flying in a helicopter, a motorcycle, deep sea scuba diving, or going to war in Iraq or any other war. But we, or the science community, I should say, do not allow challenge trials as a blanket rule. And then all this pain and massive suffering has occurred. But we allow astronauts to go out into space with, you know, I think if you were on the space shuttle, I think there were, I think nine people died in the history of the space shuttle. My producer will look it up for me to make me look smart while we're here. But, you know, we had two space shuttles explode tragically, one on the way up, one on the way down, and we

lost a half dozen people in each instance, I think, or four or five or six. And we celebrate those people. We could have solved and had this vaccine out in month three or four. I'm talking about March or April, because that's when they had the vaccine ready. They could have done the challenge trial, and we would have had this vaccine being delivered in May or June. We'd be through this if we had done challenge trials. And the UK has now approved a challenge trial for punchline this month, January 20, 21, when the vaccine is already completed and been through the typical trial process. It's crazy, right? I'm not sure I can agree with you on that one.

Okay. You don't like the idea I've introduced it. I think that we let this kid Alex Honnold, well, I desperately want to have on the podcast, we let him climb, you know, mountains with no rope. And we give him a million dollar sponsorship from the North Face. I think we should get 100 kids who are low risk the next time this happens, let them introduce this and give them $100,000 and God forbid if they were to pass, give their families $10 million. I know it creates economic inequality and there's all these kind of issues, but if they had informed

consent and it wasn't like they were doing it out of some destitute situation, but they wanted to be heroes like Alex wants to be climbing a mountain with no rope or astronauts want to be, you know, 15, 19 deaths. Incredible. Wow. For the space shuttle. I don't know how many missions that was. Anyway, you disagree. On this one, yes. You don't want. All right. Challenge trials for another day. Yes. Okay, everybody tune in January, 2022 when Andy will be back on the program. I've decided unilaterally that you're the first guest of every year going forward.

Thank you. Oh, that's quite an honor. That's it. We start the year with Andy's wisdom, and that carries us at least until June or July. We may need to get a booster shot. We may need an Andy booster shot over the summer. We'll see how bad 2021 is, but I'm hoping everybody has a great year. Welcome to 2021, everybody.

And let's give it up one more time for Andy Rackley. Thank you, Jesus. Follow him on Twitter. A-A-A-R-A-C-H-L-E-F-F. I don't know if he tweets that often. But most importantly, get your family on the wealthfront right now. Everybody in your family needs to be on Wealthfront.com so they stop getting ripped off. We'll see you all next time on this week in startups.