This Week in Startups - Andy Rachleff on SVB, how to evaluate VCs, market pull indicators, Wealthfront, and more | E1699

Episode Date: March 15, 2023

Wealthfront Chairman and Co-Founder Andy Rachleff joins Jason for an incredible interview! They start the show by discussing the SVB situation before breaking down different tech mini-crashes throughout Silicon Valley history (2:28). Then, they break down Wealthfront’s business and how to know if a business has market pull (40:49). They finish up the show by covering a range of topics, from AI to stock-based comp (1:13:45). (0:00) Jason kicks off the show (2:28) SVB situation (9:26) The FDIC’s $250K limit (13:27) MasterClass - Get 15% off an annual membership at https://masterclass.com/startups (14:49) The bank run (16:17) The SVB ecosystem (22:20) Merge - Integrate up to 5 customers for free today at https://merge.dev/twist (23:45) Cycle changes (36:15) How to judge a VC (39:27) Issuu - Get 50% off when you go to https://issuu.com/podcast and use promo code twist (40:49) Wealthfront’s operation (48:58) Reactions to the market (55:00) Modern analysis and stock buybacks (1:01:24 ) Caring about profitability (1:02:06) Attaining market pull (1:13:45) Andy’s thoughts on AI (1:16:31) The makeup of a great entrepreneur (1:18:50) Stock-based compensation (1:25:06) How we avoided inflation FOLLOW Andy: https://twitter.com/arachleff FOLLOW Jason: https://linktr.ee/calacanis

Hey, everybody, welcome back. We have an amazing interview today. That's right, another member of the Twist Five Timers Club. We're going to get jackets made, Twist with a Five on it, Twist with a Ten on it. And we're going to start sending these jackets to these elite guests who you have demanded. I have back on this program every single year. You know, we got Slutman in that group. We've got so many amazing individuals in that group now.

And I told the producers, listen, I want more in-depth interviews. on this podcast. We do a lot of news, but you keep telling me, where's the interviews with the investors and the founders? You want more of those? I'm going to give you more of those. Well, today we're joined by Andy Brackcliffe. He is the chairman and co-founder of Wealthfront, fifth time on the show. He co-founded benchmark. He's been through it all. He's been investing in companies and been in the technology industry since the 80s. I started in the 90s. He's got a lot more information than I do. He's my big brother. He's a mentor to me. We go over what just happened in the banking system, SVB. We go how to judge a VC, how Wellfront is doing,

stock-based compensation, early indicators of market pull for consumers and enterprise startups, because he came up with the term product market fit, and he teaches the course on product market fit at Stanford's business school. So this is your Stanford MBA right here, right now. So much more. It's going to be a great show. I need you to stick with us. This week in startups is brought to you by Masterclass. Learn for the world's best minds. Anytime, anywhere, and at your own pace. Get 15% off an annual membership to Masterclass at masterclass.com slash startups. Merge. Let your developers get back to their core product. Merge is a single API to add hundreds of integrations to your app. Integrate up to

five customers for free today at merge.dev slash twist. And issue is the all-in-one platform for creating and distributing beautiful digital content. Get started with Issue today for free or sign up for an annual premium account and get 50% off when you go to issue.com slash podcast and use promo code twist. That's I-S-S-U-U dot com slash podcast and use promo code twist. Okay, everybody, legend Andy Rackleaf is here. He is the chairman and co-founder of Wealthfront, an amazing service that I am a huge fan of. And he also co-founded legendary venture capital firm benchmark in 1995.

You can visit Wealthfront.com. This is his fifth appearance. He is in the five-timers club now on this week in startups. Do you get a coat? You do. You do. We're sending it to you. 2013, 2018, 2019, and 2021.

He's back. and I'm insisting that he become a yearly, a yearly guest. We're recording this, Andy, after what was, for me, a terrifying five-day experience from Thursday when I was in board meetings and watching startups, absolutely go into full panic mode, trying to get money out of Silicon Valley Bank, Silicon Valley Bank getting closed on. I don't know what receivership by the FDIC. and then subsequent bank runs starting in the back channels,

photos on the weekend of people lining up at banks, and then finally yell in on Sunday going on the talk show, saying, hey, we're going to have something, and then maybe an hour or so before Asian markets opened up on Sunday, the $25 billion new program to backstop the deposit tours and the deposits in bank accounts, not saving the banks. It's not a bailout. It's just a backstop on U.S. Treasuries. You, what was your take on this? I was in full-scale panic mode. You have been around a little bit longer. What was your take when you saw this happening? Let's start with what you saw on Thursday, Friday.

Well, I thought it was all really unfortunate, and I thought it was a terrible mistake that the bank management made in terms of what they put some of their money in. But it really bothered. me that the popular press was spinning a narrative that this was a tech issue, and to me, this had absolutely nothing to do with tech. I knew that Silicon Valley had a ton of book value, so I was never worried that people would get all of their deposits back. The assets of the bank far exceed the deposits to a bank deposits or liabilities. So, but banks only have to keep something like four or five percent of their deposits in cash because you never need any more than that in normal day-to-day activities. But when you have a run on the bank, that four or five percent reserve doesn't cover you. So I knew that if we could calm everybody down, that this problem

would go away. And I thought the government came up with a great idea, which was to bridge the bank for money, cash, so that loans that will last a year or a few years could be liquidated in an orderly fashion. They wouldn't have to rush to sell them. And taxpayers wouldn't lose any money and all the depositors would get their money back. So I think that's a fantastic outcome. It's a sad outcome for the employees and investors in Silicon Valley Bank, but it's their own be in fault. Yeah. Perhaps not all the employees, of course.

Some employees maybe who were involved in this and the shareholders, you know, and the board, there's going to be some post-mortem that occurs here. And it's too soon to tell. And we don't know, just it's important to say, we don't know if there's some malfeasance that went on here. But there is an anti-tech sentiment. People were saying, hey, let it burn. And, you know, that if you let a bank run and you let a bank burn, quickly there could be

two or three more. And I don't know what your reaction was on Sunday when we found another bank went into receivership. Was that something that you saw as, oh, wait a second, there's a contagion happening here because that was the true fear I had was like, oh, wait a second, I'm seeing other people taking money out of other bank accounts logically or illogically. I'm supposing, you know, it's logical in some ways and illogical in others. And we can unpack that. But man, that, when the our signature bank go out as well. I was like, wait, what's going on here? But the one of your crypto issues with signature bank, I think it's completely unrelated. I guess, but they put it as happening in the same time period. So one wonders if there are assets

in the background, because I don't know if you saw Circle, which does that USDC, the stablecoin, Jeremy Alar's company, a friend of the pod, they had a couple million or billion, I'm sorry, at Silicon Valley Bank. So they're stablecoin deep tagged, I guess, when people thought, oh, it's not going to correlate. So I think the financial system is so intertwined now that when something seizes and then the panic sets in all kinds of weird things can happen. Well, clearly the internet sure has a terrible impact on panic. Yeah, for sure. It accelerates panic. It accelerates joy and it accelerates panic. Absolutely. And, you know, I had panic and I was telling people like, hey, listen, the government needs to do something immediately. And when I saw the anti-sentiment

building of let it burn doesn't matter. And I was like, the Fed and the president can't possibly think it's a good idea to let banks burn and let people's money get bought by hedge funds or sharks for 50, 60 cents on the dollar and go into collections and be in line in a bankruptcy process for a year. But there's no precedent for that. I mean, that's, forget politics. Yeah. The FDIC is in the business of protecting depositors.

So when I saw them take over, that gave me great confidence that all of this would be worked out very, very quickly, that either through an auction where they would find another bank to take it over or through what they ultimately came up with, I had great confidence that this was going to get worked out, that it wasn't a political issue at all. Yeah, you know, I like to think that, but then I saw Trump get elected in this like crazy black swan event. And so I just don't know sometimes like if this is the time that we see a different outcome. And you know, and you seem to lab of the black swan was like, you're being a moron. Like every bank that's ever gone under has been backstopped. I'm like, okay, but didn't you write the black swan that like at some point this could be different? But I guess if we're going with the odds, they always seem to have been backstopped, right? I mean, that is the question.

Well, that's the mission of the FDIC. That's what they exist for. This is one of the reasons why we have one of the former chairs of the FDIC on our advisory board at Wealthfront so that we can understand this. But now they have a 250K FDIC limit. So let's unpack that for a second. Is that antiquated? Is it too low? Does that need to be addressed here?

Because when you have a 250K FDIC limit and then you start hearing, hey, some portion of these deposits will be released, hey, we're going to definitely get you the 250 on my money. Monday. That was like the early signaling from the FDIC. So you had this like, hey, you're going to get some of it. And I think that's what really started to make people panic. And then you had these sharks come in. And I don't know if it's true. I think what really made them panic was, I think that what people read in the media and read on social media contributed greatly to the panic. And people don't know what they're talking about, but that doesn't stop them from posting. Yep. And so somebody, I read a story somewhere that Peter Thiel encouraged his companies, cause the run.

And that's what caused Silicon Valley Bank to sell their long-term bonds, which is the exact opposite thing of what happened. So I try not to pay any attention to social media. I try to go to the experts and find out for myself. I can't tell you about banks. But what I do know the insurance associated with brokerage firms better, it's known as SIPC insurance, securities investor protection corporation, I think is what it stands for. And it serves a very similar purpose for brokerage firms as what FDIC does for banks. And I know from having written a blog post about this that in something like point,

0.3% of all brokerage bankruptcies did investors not get 100% of their money back. Interesting. Yes, $500,000. By the way, yeah, it's $250,000 on cash, 500,000 securities. But even with that, in only 0.3% of all bankruptcies, did people not get 100% of their money back. So the fact that the insurance only goes up to 250 is not the relevant issue. It's whether or not the assets can cover the deposits. Right.

And here, the assets were hobbled in some way. They were angled because of the increasing rate environment. And that is something that Silicon Valley Bank and other banks, if they're caught up in this, they should have been aware if they should have done that risk management and they failed to do so. That is as best we can tell the price. I think the big problem was they bought long-term bonds, which is the opposite of what a treasurer is supposed to do of matching the duration of one's assets to one's liabilities. So if the vast majority of the liabilities are deposits, which are completely liquid, then you shouldn't really have much, if any, long-term bonds. Yeah.

And we really just need to reiterate, like, this Peter Thiel caused it nonsense. The, on Wednesday, after the bell, that's when SVB, Silicon Valley Bank put out the press release about rebalancing its balance sheet. So people are taking this like correlation doing causation and there, this idea that Peter Thiel led their founder's companies to take their money out. There were people saying, hey, you probably shouldn't have your money in Silicon Valley Bank in November, December, January. I'm not sure. I agree with any of that. because look, they had 200 billion of assets. And so they lost 1.8 billion on this dumb trade.

Right. That's 1% of their assets. That shouldn't have caused a run. And every now and then I still meet founders who say, look, I just can't, I'm not an idea person. It's not that I don't believe you. It's just that I don't think you're trying hard enough. And I don't think you've really spent the time, understand,

understanding what people need because there is no shortage of things that need to be improved. That is friend of the podcast, Alexis O'Hanian, and the Reddit co-founder. He just did a masterclass called Building Your Startup. And his point about there being a never-ending amount of great startup ideas is so spot on. If you're a business leader, you can learn so much on Masterclass. Amazing lessons from Bob Eiger, Chris Foss, Kim Scott. I got a little cameo in that one. And paying for an unlimited Masterclass subscription is a no-brainer. It's so affordable. And just think about that awesome insight from Alexis and that was just 23 seconds. Give this to your employees.

Give this to your children. Give this to your college age siblings. Give this to anybody in your life who needs to be inspired and who might need to learn. And that's what I love about Masterclass. I highly recommend you check it out. Get unlimited access to every class and, As a twist listener, you get 15% off an annual membership. What a deal. Go to masterclass.com slash startups now. That's masterclass.com slash startups for 15% off masterclass. Right.

But there is some prison is a lemur that occurs where if somebody out of an abundance of caution takes their money out, somebody hears about it. And that was for me, I've never seen a bank run occur firsthand. I don't know if you, did you see it firsthand in 2008 or? Yeah. So witnessing at firsthand was just wild. Like there were a group of people saying these are, these companies are, these, this will be a non-issue.

Silicon Valley Bank's too big to fail. There was a group of people who said, well, as an abundance of caution, maybe we should take half our money out or some amount. And then there were a group of people who were like, well, if there's any chance of downside, but why not just wired out, waded out, split it into five bank accounts? And maybe that was what we should have been doing from the beginning. that last position was mine. Like maybe we should have had this stuff broken up into multiple accounts already.

And when people were faced with that, it was wild to watch how quickly one group of people were wrong and then ultimately right. It is too big to fail. And they were right. But we had a panic going on this weekend, Andy, where people were trying to figure out how to make payroll next week. You know, I'm a, you're a poker player. Yes.

Right? So if I'm a big believer that one shouldn't judge it, decision by its outcome when there is risk involved. You know that bad poker players judge their decisions by outcomes. And I think that in this situation, we shouldn't judge whether or not someone made the right decision or wrong decision based on this really weird thing happening because logically there shouldn't have been a run on the bank. There really shouldn't have been because taking a 1% loss in your assets should not have scared people, number one. Number two, we built or Silicon Valley built a phenomenal ecosystem over the last 40 years.

And one that was sort of a network effect in that companies understood that if they kept their deposits with Silicon Valley, they were more likely to get loans when they needed it. And they were not likely to get those loans from other banks. So it was in one's interest to keep their deposits at Silicon Valley. Now, you could argue whether or not they should have been on balance sheet or off balance sheet in a treasury fund. But this system worked exceptionally well for 40 years. And I would argue that had they not screw, had Silicon Valley Bank not screwed up, the system would have continued to work exceptionally well.

And it would not have served everyone. to have split their money up among many banks. This is, I think, one of the post-mortem items, so we might as well just hash it out here. Two non-experts hashing this out. Well, you're an expert on the history of Silicon Valley since you helped build Silicon Valley. So I would disagree that you're not an expert. But your point, and I think a lot of people, maybe in the audience,

who are new founders, are under 10 years in this, Silicon Valley Bank would, yeah, If you had your deposits there and they got to know you as a relationship. And not only did they help people with venture debt or loans for their businesses, people who were doing mortgages or maybe wanted to get a loan against their securities, like a GP loan. So you're a general partner at a firm. You could have a loan against future revenue based on your venture, you know, your venture funds performance.

I don't know if you ever did one of those or you know people who did. Yeah, I've never done one. but there's all these kind of devices that I guess people can use. And that hometown bank feeling was really great for us. What happens if we don't have that? We'll soon see. It's possible if nobody buys it. You think somebody would buy it?

I don't know. They said there was an auction. And we don't have the results of the auction. We don't because that's not the thing that was most important to calming people down. So I think that the government did a great job in this case. I'm feeling pretty good about it. I wish they had just gotten out a little bit earlier. And I think the little bit of that thud that came out that like, hey, we're going to have your 250, but not the rest.

I had people who had payrolls over 250, so they're like, oh, my God. But it was a good stress test. Correct me if I'm wrong here. One of the things I've learned, you know, being around for just a decade or so less than you or maybe a little bit more, 15 years maybe. is that a lot of what we do is based on mutual trust. Delaware corporations, founders not absconding with the money, venture capitalists not putting the money in their friends companies.

You know, just there's a level of trust here. What was great about the weekend was in the five or six discussions I had with VCs and investors to backstop payroll, everybody stepped up. Everybody stepped up in every instance. And not to invest in the companies, because you might have reached your full allocation of what you wanted to own in a particular company as a venture firm or a seat firm.

We were in that situation in many, most of the cases actually. We just said, we'll just give you a loan. Pay it back. And I was actually considering just maybe I'll just do this personally or out of the fund. I was trying to make those decisions and figure out what the right thing to do here was. But just giving people loans to be paid back when the Silicon Valley money came back. And that was a good stress test in some ways. Maybe you could talk a little bit about the concept of trust in an ecosystem and what you've seen in the maturation of Silicon Valley from the 90s into the arts and to today.

Well, I think it's gotten more greedy. So it's encouraging to me that that was the case because we, I think the valley used to be far more mission driven. And I think it's much more dollars driven today than it used to be. So, well, some examples of that back in the day when you were company building and investing in them was more collegial or did you have specific anecdotes or thoughts about that? Yeah. One of my teaching partners, Mark, I've been teaching at Stanford Graduate School of Business for 18 years now. And one of my teaching partners was Mark Leslie, who built a very successful company called Veritas software. He built it to about a billion and a half million in revenue before he retired, his success.

didn't do as good a job in it. I think it was sold to Symantec and then later spun out again. But Mark is very wise on many of these issues. And he likes to say that entrepreneurs start companies for three reasons. One, to change the world. Two, to build a great enterprise and three to make money. The people who are just focused on number three, the mercenaries, tend not to do nearly as well as the people who try to do all three. I think it was far more common 20 years ago or 30 years ago to have a desire to do all three. And more recently, I think there's been more focus on just number three. It's fascinating. It's 2023. What a year it's been already. Closing enterprise deals. It's going to get harder, right? Let's be honest. Let's call it what it is.

A lot of companies are reducing spend. You know that. And the last thing you want to do is slow your sales team down with the lack of integrations. Right? People expect integrations in your product. You know, your people management tool. It's got to work seamlessly with your payroll provider. Your CRM, that's got to work with the accounting software, obviously. And if it doesn't, it's just a huge issue, right? That could be the reason why people say, I'm not going to use the product. Now, when you start a company, integrations are brutally hard and they take a long time. With merge, you have integrations instantly. Merge is the leading unified API that allows you to launch integrations in days, not quarters. You're going to have unlimited new revenue opportunities and you're going to make your customers so much happier. And customer satisfaction, that's what it's about. We talk about it here on the pod all the time. Delight your customers.

Well, Merge offers over 150 integrations across five categories, human resource information systems, H-R-I-S, ATS, applicant tracking systems, accounting, CRM, and ticketing. Right? So you have to use merge. Here's your call to action. Merge has unlimited integrations, and they charge based on how many of your customers use the integrations.

They are going to give you five linked accounts for free today at merge.dev slash twist. Again, five linked accounts for free at merge. Atmurge.com. Let's talk about cycles changing. You've lived through the dot-com bus as a capital allocator, the 2008 great financial. crisis and now... The 1987 stock market cross.

Oh yeah, right. You were of age then too. I was 16 years old. You were probably whatever, your 20s or something. I was 29. 29, right. And what were you doing at the time? I was working in venture capital. So I've seen all of these cycles. So you've seen four cycles now. The, let's just maybe I'll just have...

By the way, there was a mini crash. Yes. In 1984. Oh, 84 there was. Okay. So there was a, there was something in 94, 95, I remember. There was a huge run up in tech between 80 and 83. Ah, really?

And then the market closed in 84. And that launched a shakeout of the venture industry that was far more severe than the one that we experienced in 2001. It was fascinating. Did they name that one? that one doesn't have a name, but I've heard people talk about it. So it wasn't a stock market crash, but it was a mini crash for the tech industry. Wow. What was that one caused by?

Was there a precipitating event? I don't remember there being an event. It was maybe weaker companies were starting to go public. And so some of those companies started. they didn't deliver on their expectations, and then the market basically said enough, we don't want any more of these IPOs. But there was a huge number of tech IPOs

between 1980 and 1983. There was a video game crash in 1983. And that was acute. That was with Atari, had lost a bunch of money, Mattel, there was all these, because that was a big part of it in the early days, wasn't? It was like you had mini computers, the PC was coming out, and then you had the video games.

Those were three of the major pillars. The microprocessor was the big driver. So there were 120 PC companies that were started. Wow. All of which tried to go public. Yeah. I remember this. Not all of them could succeed.

Yeah. Dell succeeded. HP compact. There was Eagle computer. I remember that one. That was one that didn't. Yeah. But there were 120, I think.

There were 100 disc drive companies. Oh, right, because each of the components was a company. Memory ships, modems, you had haze, the modems. So it was almost as if you took the iPhone apart, and each one of those was a startup. And then they all got put into the iPhone, and you had all of the components being, they hadn't been commoditized yet, yeah? and consolidated. It hadn't been consolidated.

So let's talk about each of the four major ones later, 87, 2000, 2008, and then going into this, what I'm calling the speculative asset bubble. We don't have a name for this last one, but I call it the speculative asset bubble, or it could be the zero interest rate bubble. And which one do you like best, Andy? I'm not sure I have a preference. What do you think this? Well, let's start, well, let's go backwards.

What caused this last bubble? You had to put your finger on this. I think interest rates going up. Okay. So then it was the interest rate bubble. Okay. So let me. It's more about sentiment than anything else.

Explain that. Well, it was inflation. It's inflation and the worries about the impact of increasing interest rates in the economy. So the stock market is based on expectations on how companies are going to do in the future, not how they're doing currently. So when something happens that leads investors to think the companies are going to do better, the stock market goes up. When there are events that lead investors to think that companies are going to do worse, the market goes down. It's really as simple as that. Now, there are different companies do poorly and well in different market environment.

So it's not as though all companies are up and all companies are down, but it has a lot to do with sentiment. So when you compare what happened during this one, the interest rate bubble, to the great financial crisis, how should founders and capital allocators look at those two? And then how does behavior change inside of a company, on a board of a company, from the peak of these boom cycles to the trial of despair that we just saw in 2022, that we witnessed in 2008, 2009? And how do you, the peak behavior, the trial of despair, and then maybe what you think is the best operating principles when not in peak and when not in trial. It's all irrelevant. It's all irrelevant. All irrelevant. All irrelevant.

All are. All irrelevant. All are. Sure. If you look at the number of great companies started every year, it's incredibly consistent. So I had a friend named Bill Hellman, who at one point was the managing partner of Greylock before he retired, who was a superb venture. venture capitalists. And when we were young in the business in 1984, we went to lunch and Bill said to me, I bet you there are only a dozen great companies started every year. Now, the total number

of companies started every year goes up and down, depending on the market environment, like a sign curve. But Bill's hypothesis was that it was about a dozen. So this had always stuck with me. and I remember in 1995 or six, Mary Meeker put out an analysis of all of the companies, the tech companies that had gone public since 1980. And I did a little analysis on it and found that the number of companies that reached 100 million of revenue at some point in their life was only 50, 15 per year plus or minus three.

It was unbelievably consistent, and it had nothing to do with the economy. As a matter of fact, when economies are perceived as bad or markets are perceived as bad, those are great times to start a company because everything's a lot less expensive. Talent, marketing, office space, if you choose to have one, everything, you can do more with less, dollars so further. Right. So if you were to invest in one of these 15 companies every year as a venture capital firm, I did a little calculation and your net IRA would be over 100%. If you did one every other year, your net IRA would be over 50%. So it became clear to me that you didn't need to do all that many of them, but our goal when I was a venture capitalist at benchmark was, can we get into

as many of those 15 as we can? As a matter of fact, when Ben Horowitz and Mark Andreessen started their venture firm, they came to me for advice because I was on the board of their company opswear. And they actually used the research that I did on this point in their offering memorandum and made the point that they wanted to get that there are a small, all number of great companies and they wanted to get into as many as possible. And that price didn't matter all of all that much. Is that true or not true as we look back? I think it's generally true. Generally true. So if you get into a rocket chip, you get on the rocket ship. Now, with momentum investing, I think that's been even exaggerated of late. But if you get in one of these great

companies, you're going to do exceptionally well for realized returns. And remember, the only thing that matters are realized returns, not what you mark companies up to based on financings in your portfolio. So what I learned over my many years in the venture capital business was that whenever a CEO blamed their bad performance on the economy, I knew I had a really crappy CEO. Yeah. Because it wasn't the economy. It was a bad product market fit.

The dogs didn't want to eat the dog food. Now, sometimes the economy can make that a little worse, but if people are desperate for your product, it doesn't matter if the times are good or bad. They're going to buy your product. Are people still buying iPhones and AirPods? They can't live without them. People still buying Teslas. They are. They're still buying Snowflake and Databricks software. They're still buying Confluence software. So if you solve a really significant problem, people are going to keep buying or using your product. The economy has nothing to do with it. All right, so let's talk about wealth front. It's a very contrarian point of view, I know. Well, I, you know, I have always felt that the fortunes are made in the down markets are just collected in the up markets.

And that's just a function of the absolute luck that I became a Sequoia Scout in 2008, 2009, at the end of the great financial crisis, and three of the first seven investments became unicorns. And people were, oh, wow, you can hit a unicorn every other investment or every third. And it was like, there weren't that many. companies, the people who were starting them were dogged, and I just had an exceptional network around me, and I was only taking referrals from the people in my inner circle. Right.

That's what it's true. But it was only years after that that I actually could attribute that. And now I'm going to have the hard, hard work of doing what you did, which is, hey, analyzing the reality, not the luck or the strategies that worked, but actually making it into a playbook. And I've really started to make a playbook of how I think the earliest, stage investing works and getting to companies before other people get to them before in Driesen-Harrowitz, which is going for the momentum move, hey, we can get in the series B or C, it doesn't matter. I'm trying to figure out how do you identify them when they're in the

ideation stage and the product market fit stage, you know, in the earliest stages, which is a different, different strategy, obviously. For a number of years, for a number of years, I chaired the University of Pennsylvania Endowment Investment Board. Penn's Endowment, I think, is the seventh largest in the United States and the premier university endowments, I think, are the best managed pools of capital in the world. And I had a conversation with the fellow who runs the investment team there, Peter Ahman, who's just superb. And he was asking me the same question. And I said, you're going to learn a lot about the quality of your venture managers because the really good ones are going to

keep drawing capital and the crappy ones are not because they're going to get scared. And you should invest at a steady state and not let market conditions affect you if you want to build a phenomenal portfolio and a phenomenal franchise. And a fund should be deployed over how many years to deal with this possibility of hitting a peak or a trow? You think they should be in sort of best practice deployed over 30 months, 40 months? Because you saw people deploying them over 12 during the The best limited partner I know was Horsley Bridge, and one of the founders, Phil Horsley, used to say that his adventure funds are like wine vintages. There are some good ones and bad ones. So ideally, you get to invest across vintages, but you just have to understand that there are going to be some bad harvests.

So historically, the economic model of a venture firm was that you invested in new companies over approximately three and a half years. And that got shortened quite a bit. I mean, I was watching as new fund managers were sending updates. I'll just put this out here for your reaction to people who were potential LPs. I wasn't an LP, but I was getting updates in an email with a bunch of emojis. And our portfolio is up, you know, we have a 200% IRA. We've deployed this tens of millions of dollars in 14 months. And it's already a 5x fund.

Now, this is on paper, of course. Exactly. What's your reaction to this sort of rapid deployment in paper wins? I don't think it's a good idea, number one. And number two, I think that. valuations are not the way that you judge a venture capitalists or multiples of their fund. Back to my point about there only being 15 companies started each year that make it to 100 million in revenue, the way that I judge a venture capitalist is by how many companies

did they back that grew into $100 million revenue businesses. Now, maybe that's up to 20 or 23 companies. per year now because of inflation and other reasons, but it's still a relatively small number of companies each year. And I can tell you that there is persistence among the venture capitalists that back companies at an early stage that ultimately grow to generate revenues in excess of $100 million. I know that's what I prided myself on and my partners prided themselves on. And that's how we viewed others. If you backed a company that got acquired for a billion dollars that had no revenue, let's not kid ourselves. You were lucky. But if you built a company that had revenues

of $100 million and it was sold for $2 billion, that was skill. That was much more skill. Because that's a real business. I think that is what's been lost on this generation of GPs that grew up in the second half of what was a 13 year run. I don't know that we've had that long of a run in a while. I'm trying to think about the run from the doc. The doccom era run was only what, six or seven years of run, maybe. 95 to 2000, 2001. Yeah. So that was like six years of run. And then you had 2003 to 2008. That was five, six years of run. And then this one went 13 years, right at 2009, 2008,

straight up until 20, 2021, I mean, it's, you start to believe it. So you start to believe you're that good.

I mean, literally, um, for somebody who started their investment career at the start of a double, a double long run, you have to recalibrate yourself.

I have, I had to recalibrate and make sure that I'm betting properly. And this is why these like sessions with you, this is like for me, like a coaching session. I almost feel like I shouldn't publish this and I should just take all the wisdom myself.

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code twist TWI-S-T at checkout for your free starter account or 50% off an annual premium account. Well, let's talk about wealth right now. How's the company doing? And how are you operating in this environment? Because you had this company lived, you know, and was started during this boom cycle. And now it's lived through the bus cycle. Yeah.

Give us the update. Well, I'm proud that we're well in excess revenue wise of that milestone that I care so deeply about. Okay, nine figgies. Okay, that's what we like. We're growing very rapidly, perhaps the fastest rate we've grown in many years, and we're very profitable. So all of the work that we put in to build a business model that had high operating leverage is now paying off. So the business couldn't be doing better. And for people who don't know wealth, front of self-driving money, you put your money in. A lot of my family members use it because I told them like, you know, don't need to pick stocks, just have a nice

blended, you can set it at 1 to 10 and it walks you through a little wizard that explains your risk profile and shows you hey, this is where you're going to wind up in 10, 20, 30 years if you stick with what people, I guess, call a robo portfolio, but what's the term that you like to use? Well, that's just part of

what we do now, Jason. No, I know there's fire, you got some loans and GF5.9s. We offer very low-cost loans. We offer very high interest-paying cash accounts. So our cash account, we're not a bank, but we broker all of our deposits to FDIC insured banks. And as a result, we're able to offer 4.05% on our cash account with $2 million of FDIC insurance.

So a bank can only offer $250,000, but by splitting your money up among eight banks, we can get you $2 million. dollars. And by the time this airs, that'll be up to $3 million. That's fantastic. So I wonder, you are for individuals, have people asked to put corporate treasuries in there for startups? They have, but that's not our business. We're a direct-to-consumer business to basically make it incredibly easy to grow your savings and investments. We want to help you grow your wealth on your terms. And then we even recently introduced a stock investing service. We haven't really promoted that very heavily, but it's not focused on trading.

Our clients keep asking us to enable them to consolidate all of their assets with us. So we just introduced a stock investing account that has a little different approach. Number one, you can tell a lot about a company by how it gets compensated. we don't get any commissions, nor do we even collect payment for order flow. So there's no incentive for us to drive trading. As a matter of fact, the vast majority of individuals don't trade very often. And we know this from the account linking data that people enter into their wealth front account to get the benefit of our financial planning software.

But we created a slightly different user experience than what anyone else has. and that is we offer stock collections as a way to think about long-term investing. So if you're interested in machine learning or electric vehicles or inflation busters, we'll give you a portfolio of eight stocks. It's equally weighted. You can edit that the weighting of those eight stocks. You can choose not to have some of them. But you just tell us how much money you want to invest, push one button.

and we take care of all of the trades for you. So the concept here. So these collections are like playlists on Spotify. So you can buy stocks the way you learn about music on Spotify. And let me see if I'm interpreting this correct. The benefit of this is somebody gets a little diversification and gets a broader profile of the category without having to monitor the individual players within it. And you do that for them.

in terms of the collection. And we do the research to put these collections together, and we tell you the pluses and minuses of these collections. So we like to think that it's a shortcut to smarter investing. We think that stocks should be a small percentage of your portfolio because the academic research is really clear that a diversified portfolio of low-cost index funds over the long term will likely do better, but most people want to own stocks. So if you're going to own stocks, we want to help you do it a little bit better. Super, super intelligent. And now the product's been

around now for over 10 years. So have you started to see, because this was one of your early concepts, is, hey, we start with people really early and then we grow. So when you look at cohort data from 2009, 10, 11, 12, what are you seeing in years, you know, 8, 9, 10, 11, 12 with those customers? What do you learn from them? What do you see in the data? Because you get a, you're in a really interesting place in terms of seeing data of people who are thoughtful about investing at an early age. Well, we, from the beginning, have always thought about putting the interests of our clients first. We've been tremendously, I would say, more transparent than anyone else that I know in the business.

We publish white papers on everything that we do, so in a way that no one else does. We give more of the value to our clients. We charge lower fees. We pay out higher interest on cash accounts. We charge lower interest on our borrowing product. We don't take PFOs on our stock investment. in products, so we think we give more value. And we really focus on delighting our clients.

So what we have learned over the years is that our net expansion ratio or negative churn, as they call it in the SaaS business, is over 140%. Wow. So if we were a SaaS company, we would be in the top three to five all of all SaaS companies in terms of net expansion ratio because our clients keep depositing more and more money and they adopt more and more of our services. Fees are still just 25 bips a year. 25 bips on the investment service.

There's no fees on any of our saving or checking like services. Again, we're not a bank, but we offer bank-like services through our cash account. and we offer a very low interest rate relative to home equity loans on our portfolio line of credit. And so when- And no fees on the stock investment account. When you do that 100, when we're talking about like 100% growth, that's over what period of time? So somebody starts with $10,000 in their account, 10 years later, what do you see typically? Well, typically someone starts with, they usually start with an initial deposit of $10,000.

Okay. And then by the end of the year, that grows to $20,000. And then that tends to grow at about 30% a year. Wow. So that means doubling every 2.5 years. If you do the rule of 72, they're going to keep doubling every two and a half years, which makes sense. People's nest egg will grow.

In this kind of crazy macro environment, how did people who took the, a plan of having a balanced portfolio and turning the dials, how did it work out for them? Because people were in a full-scale panic, I think, when the market corrected, Bitcoin crashed, all this stuff. And so how did your customers do? What was the reaction? Because you've always said, like, hey, you know, you don't want to sell into a panic. I think everybody understands that.

And the way to get richards to do is, they don't understand it. But not emotionally. Right. So you still have people in the market crashes coming in and liquid in. Well, no, actually. we see very little churn among our largest clients. So it's only the people with less than $5,000 that tend to withdraw their money. And I think that's because they might not really be able to afford to lock that money up for the long term.

For our investment service, you really shouldn't give us the money unless you're willing to lock it up for the long term. Otherwise, you should put it in our cash account, which pays the high interest. rate. But what we've learned is, or what our clients have learned, is that it doesn't pay to try to time the market. You know, we've had four bear markets since 2018. That's well above the normal rate of bear markets. But we had one at the beginning of 2018, the one end of 2018. We had one during COVID and one during this year. A bear market being defined is when the market goes down by more than 20%. And what our clients have learned is that by staying invested, they do far better because when you pull your money out, you don't know when to put it back in.

So you miss out on the recovery. And that's why it doesn't make sense to try to time the market. Now, honestly, with the latest drawdown, the latest decrease in value in the stock market, our clients have seen their accounts decline, but not by nearly as much as the S&P 500. Now, when the S&P 500 is up 40%, your wealth fund account is not going to be up 40%. Yes. It'll be up less, but you're going to miss out on the declines. And over the long term, we think that we can offer you the best risk-adjusted return. Yeah, I mean, and for 90% of people who are saving.

they need something simple and predictable. So why would they even optimize? I don't know what percentage you think it is. It's painful. One of our clients said to us, you are nutritious, not delicious. If you want to do your own trading, it's going to be challenging.

I've tried it myself. It's very hard to beat an index. It's very hard to beat an index portfolio. I mean, the statistics, are just extraordinary of people who try, and even the people who try one year and do succeed in beating the index meaningfully, the very next year they don't.

Well, even among professionals. Yeah, I'm talking about pros. Let's put aside amateurs. Yes. But for the people who do it for a living, two thirds of professional investors, people who run mutual funds or money management firms, two thirds of them underperform the market each year,

over five years, 80% of them underperform. So why does it exist? These are the people who are the best in the world at doing this. There are a few who consistently outperform, but they charge really high fees and have exceptionally high minimums, so they're not typically available to the average person. Would these be like this giant hedge fund type folks? that do it.

Not necessary giant hedge funds, but yeah, places like Bowpost that have just had amazing track records over long periods of time. What did they get? Did they have, I don't want to say inside information in an illegal way, but do they have unique insights into the world or data sources

or, you know, algorithms or trading strategies? What is it that makes those folks, those folks? Was it just rigor? Well, academics would say that the only way that you can outperform the market is if you have an information advantage. Okay.

And academics would further say that the only way that you can get an information advantage is illegally. I don't agree. I actually think that there are a very limited number of people, and it's probably on the order of 20 to 30, who are much better at interpreting data in their particular field than anyone else. Now, typically that field might run out of gas, that approach might work for a while and then maybe after a while it doesn't work as well. But, you know, Seth Clarman from Bowpost, for example, is able to do it across a number of different disciplines.

I don't understand how he's able to do it, but he is over long periods of time. So as an example, I'm just going to make one up here so the audience understands and so I do. You have energy or something. You just understand oil, natural gas, coal, whatever. You've been studying energy. You don't have inside information. BP oil is not calling you and saying like, hey, great quarter or, oh, man, things didn't go well. You're just watching the data that's available from data sources about the flows of tankers, oil, the sale price, what somebody's charging.

And you know when certain things go up and certain things go down and certain things are taking longer to be delivered, that is going to be indicative of some actual performance. and you so then you can either put a trade short or long on the market. You find the signal in the noise. Everyone has the noise. There are a few special people who can find signal in that. That is fascinating. And then, of course, the reward you get for this is probably people assuming that you're got some information you shouldn't have. How should information work from publicly traded companies in such a fast-paced market like today?

there were people who were like, you know what, we should just put information out every week or we should just publish how much cash and how many orders we got every day and this concept of like quarterly data is that something that needs to change over time? Should people be getting real time data about companies? There were some people sort of floating this

over the last couple of years that maybe, and should trading be occurring over wider periods of time? We have the off hours marketing crypto. That just is going to lead to even more speculation, and I just abhorred speculation. Got it. So I'm not sure that's a good idea. But that's just an opinion. Well, yeah, I mean, that's why you're here just to get your unique insight into it.

It is, you know, interesting to think about if you could trade these stocks all the time. And if Amazon just said, here's our sales from the last, here's our trailing seven-day sales, here's our sales per day or whatever. you don't get very granular information from companies. They have the choice of kind of obscurifying it, putting all their bets into one bucket and not telling how each one is doing. What's the fair thing to do there?

Because you want to balance the privacy of a company to not give away the secret sauce, right? Versus people trying to do analysis of these companies. So how does modern analysis work for people who don't understand? like analysts seem to have data about companies. We get quarterly reports. They kind of bundle things. You know, you might have Google putting their other bets and you're trying to figure

out like they, for a long time, they wouldn't tell us what YouTube made, right? They wouldn't break that out. How are those decisions made or, and how should they be made? Well, there's a law called Reg FD that requires that companies share any information about their businesses to everyone at the same time. So it used to be before Reg FD, which came out a little more than 20 years ago, that management teams could tell some investors or could give some data to some investors who paid more attention to them earlier than they gave it to the world in general. And a number of people did very well by virtue of companies doing that. and the SEC changed the rules such that if you were going to disclose information,

you have to disclose it to everyone at the same time. Fair disclosures. Fair disclosures came out October 2000. Okay, 2000. So I think that was actually a very good idea. Now, it's up to a management team to decide how granular the information should be. one could see how one could gain advantage in stock price if the information were more granular. But by doing that, you have less control over the outcome, over what people understand.

So I think there's a trade-off between trying to maximize your stock price and trying to make your business more manageable. And generally speaking, as someone who sat on a number of public company boards, I do not think it's a good idea for management teams to focus on the short-term maximization of their stock price. There's a lot of talk about stock buybacks being evil or not in the best interest of all Americans, equality, equity, whatever terms people want to use. How do you look at stock buybacks as a device or tool for publicly traded companies, a lot of which feel, hey, maybe our stocks undervalued? we should remove some of those shares from existence and the backlash against stock buybacks.

Well, I don't think there's anything untoward about stock buybacks, or I don't think it gives advantage to some groups over others. Typically, when a company does a stock buyback, that is a signal to me that they don't have a better use for the capital. Okay. that I would prefer that a company has so many good opportunities ahead of them that they would use their capital to do that. Now, they're limited from doing that because when you buy backstock, it doesn't affect your, it doesn't affect your income, but it reduces the number of shares, so it increases your earnings per share.

And that's the hope for why the stock price might go up is that if you can increase earnings per share with the same multiple, then your stock price might go up. If you were to spend that money on a new initiative in your business, that would likely increase expenses and cause your earnings per share to decline. But most growth investors I know would prefer that a growth business would prefer that a growth business, business invest, have the opportunities that could lead them to step up their investment, even if it means reducing their earnings so as to get a bigger outcome. There's a famous venture capitalist with whom I'm close, who is of the belief that if a company makes a profit, that's a bad sign because all of the money, that's a sign that they don't have more compelling uses of the money. I strongly disagree with that investor who's actually

not surprisingly a momentum investor. So momentum investors. He or she has been very successful. Yes. And momentum investors benefit from the growth rate exceeding the expectations. Now, I'm a believer that profit the reason that a management team should, care about profitability is that it allows you to be in control of your own destiny. This was really important to me that if you don't need to raise money, you can make much better long-term investments, and that is going to lead, I believe, to better long-term outcomes, assuming you have product market fit and a market that is large enough to allow you to continue to grow because ultimate size of market addressed, I think, is the single largest

determinant of outcome. So if you're in control of your own destiny, TAM is super important, assuming you have product market fit. Right. You cannot go after electric vehicle, the electric vehicle market or the housing market or the transportation market, if you don't have a great product that solves those problems. Exactly.

For which people are desperate. That is something you bring up over and over. You need to have market pull. Unpack how you know you have that. Because I meet a lot of founders at the early stage. Oh, I got product market fit. And we asked them, how would you describe your product market fit on a form? You know, and we do it in a very gracious way.

We say, we're figuring it out. We're testing things. So they don't have to say they don't have it. Then we say light. People are giving us positive feedback on our product. And then we have strong. and we don't even put an average in there. And we have strong, hey, the product's growing 20% month over month, 5% week, over week for more than 10 weeks.

And it's really like we sort of freed them from having to say, oh, it's great. We kind of shuffle a bit of these three buckets as a test. But explain to people when you know you have market pull, when you know the product has such great product market fit. Well, for your audience, I'm the guy who actually coined the term product market fit. There it is. and I've been teaching a course on it for 15 years. So it's my great passion. And this is a question I get from my students.

Is this for the graduate business school? Yeah, for the graduate school of business. When do you teach it? Is it virtual? You teach it in person? No, I teach it in person in the spring. Okay. I may have to sneak in an audit this class.

I may see in the back row. As you might imagine, many people have asked me this question. Or there are objective ways to measure it because a lot of people say they have it when I don't think they do. So I've simplified it down to one heuristic for consumer companies and another one for enterprise companies. Here we go. So the best heuristics that I have observed, and I've seen a bunch of others, but I don't think they're nearly as good, are for number one, consumer companies, exponential organic growth. Exponential organic growth.

Organic growth. You're not paying for users. Not paying for users because you can kid yourself if you're, you're not paying for users. if you're paying for users. Just because you grew through acquiring users doesn't mean that you're going to keep them. You can churn those users pretty damn quickly. That's a crappy business. Just because your LTV is greater than your KAC or your payback is a short amount of time does not mean you have a good business.

In order to have a good business, you have to retain those clients. and more importantly, they have to tell their friends about it. If there's no word of mouth, that's not a terribly compelling business. The only way that you can get exponential organic growth, so non-paid, is through word of mouth. So to me, delight is the greatest form of virality. And the only way that you can get that is if your early customer base is desperate for your product, because if there's a good enough alternative, not a better alternative, if there's a good enough alternative from the incumbents, most consumers are going to buy the good enough

alternative because it's less risky. So it's got to be that good. It's got to be that good to drive word of mouth. And the best way to test word of mouth is exponential organic growth. And so let's talk about the business to business side. then when you're making business software, enterprise software, products or services for businesses, and what is the sign you see there? Is that net expansion?

That's a good one. Okay. That's necessary, but not sufficient. Okay. So we're on the road. You're on the road, but it's not quite there. It's a factor in what I prefer to look at, which is sales yield. So that Mark Leslie that I talked about earlier wrote this amazing paper with a Stanford professor

named Chuck Holloway called the Sales Learning Curve. And I recommend it to anyone in your audience. It's a Harvard Business Review article that is free that you can download. And in the article, the authors posit that when a company launches a product that has to be sold through a direct sales force, so business to business. The best measure of how the business is doing is its sales yield. So the numerator in sales yield is the contribution margin in dollars for the average sales team. So if the average team generates half a million dollars with a 60% gross margin,

that's $300,000 a year. the denominator is the cost of fielding a sales team. So you have to take the fully burdened cost to field to do that. So it's the salary of the sales rep, the commissions of the rep, the salary and commissions of the sales engineer, the person who does the technical part of the sale, the cost associated with the fraction of the inside rep that might be used, and then all the management overhead. When you factor all that in, fully baked, and that typically averages about $600,000 per team.

So the funny thing that the authors observed is that until you get to a sales yield of one, you're sort of treading water. once you get to a sales yield of one, it very quickly goes up to three. Fascinating. It's fascinating. You've got $600,000 in cost, and they're selling $100,000, $200,000 a year. So you're under 1.0. You're at whatever it is, 0.2, 0.3. So you're still looking for the recipe for what sells.

And the funny thing is, once she hit 1.0, for some reason, I don't think, maybe it's a law of nature, you quickly increase that number. Now, part of the way that you increase that number is through net expansion ratio. Part of the way that you increase the number is through word of mouth, which makes selling a hell of a lot easier. Yep. Becoming an industry standard. Having good buzz, like nobody gets fired for using IBM or, hey, it's AWS Cloud, but I think I know what it is. I mean, all of those things are obviously clear factors. I think is once the sales team gets a taste of those commissions, and they start hitting those bonus and those spiffs,

and they start filling themselves. They work harder. You know, it's really hard to be super motivated as a sales team when it's not working. But it starts working. I think you want to run, man. It's like when you break through as a runner. So the point of the article was not finding product market fit.

The point of the article was, you need a different sales team between zero and one, one and three and greater than three. Oh, see, that's interesting. So there's the grinded out, try to find product market fit, try to find the sales pitch people. There's the, oh, you told me the sales pitch. I got it from here. And then there's the Rote 3X.

He calls the last one the coin operated rep. They just take orders. Okay. That's what I say in the road. The first one, the first one is the enlightened rep. They just, they're more marketers than they are salespeople because they're trying to figure out. the message and the positioning and the audience that cares about the product. These are the empathy ones.

These are the ones who are reading the customers and watching what they respond to. So I think the most valuable person in an enterprise salesperson in an array sales company is the sales rep who knows how to do that. I pay them double the equity over half the number of years. I love it because you only need them for a little bit of time. it's like, you know what they're like, they're like, those folks in the studio, we got the band, and like they know how to make the riff or the loop that makes the hit song, you know? They just, they know, they watch the audience, you know, like a great music producer,

and they just know, oh, wow, you heard those chords, you heard, you know, money for nothing from dire straight. And it's just like, boom, the audience got to their feet. They just know what connects. So you can't bull-h-explancial organic growth, and you can't- that bullshit sales yield. You know, and that is part of being an entrepreneur and a capital allocator is not falling into the trap of believing the bullshit, but accepting the reality that this stuff is flat until it's not.

This stuff struggles until it soars. That's one of the hardest things for people I find to contend with, because you want to feel like it just goes up. But it doesn't. You just struggle in the mud for years. Somebody asked me a One of my students just asked me a question, can you have product market fit and not make money?

And I said, no. That means because there's three elements of your value proposition. There's what you build, for whom is it relevant, and how do you charge for your product, the business model? And until you prove all three, you haven't proven your value hypothesis.

So you can't have product market fit until you've proven all three. So just growing, doesn't prove anything. As we saw with Uber. Right. And so that's why people often ask me the question, what matters more profitability or growth? And my attitude is profitability matters because you're in control of your own destiny.

We wanted to put in place a business model that had high operating costs, high fixed cost, low variable cost. so that once you got above a certain level, it became really profitable. Our gross margin is over. At wealth front, yeah. At wealth front is over 90%. So all the incremental revenue is exceptionally profitable. Because of automation and product design and architecture?

We designed out all of the costs. If we can't deliver a product through software, we're not going to, whereas others will try to deliver it with people. And that's how we can also afford to give more value. to our clients because if you automate everything, you take the cost out and you can give more value back to your clients. Right, but you have to be committed to it. And that it takes a leadership because once people hit a brick wall and they're like,

well, we want to add this service, but it requires us to build a thousand reps to talk to people on the phone. Now you lost. Now you lost. Now you lost. So we offer phenomenal service, but we are off the charts in the number of clients per rep. If you called us, you would never wait. There's no hold time.

Which is really, even during COVID, there was no hold time. Did you learn this from Bezos and Amazon and like that you, he just really super automated and like customer support was super automated? You couldn't call on the phone kind of thing. Well, from the semiconductor business in the 1980s, you didn't want people in there. Yeah. So all the great CFOs I knew wanted to get rid of all of the variable costs. Scott McNeely at Sun Microsystems famously said, I don't want to. pay a tax to anyone. He didn't want anyone who would charge him a variable cost associated with

every computer he sold because he knew how much it impacted his gross margin. You've watched a lot of platforms, cloud computing, the PC era, client server, mobile, VR, virtual reality. You saw that one five times every seven years. It came around. Let's talk about AI, because that one's been floating around the validity since the 60s. Let's be honest. My wife at an artificial intelligence conference when she worked at a software company in 1984, in 1986. In 1986, right. So for folks who think they're like, you know, discovering new worlds here, people have been hanging out here for a long time. Is it now, is this the moment that we're in right now?

And is this a platform shift that we could compare to say cloud computing, mobile, or the internet. You know, my son got his master's in computer science at Stanford in artificial intelligence. And so he has been riveted on generative AI because that's what he was most interested. He graduated bachelors in 17 and masters in 18. And he, when chat GPT came out, he was flabbergasted because only four years ago, the papers that he was reading of what was being done were radically less capable.

And so I think generative AI is an enormous breakthrough. It's an inflection point that will enable many new businesses to be created just as the other platforms you describe enabled new companies to be created. do you think it will be and I know it's hard to rank things but if we look at the last three cloud computing the internet itself and mobile where do you think it ranks 10, 20 years from now? I know it's impossible to tell but what is your gut tell you? You know, it's really funny.

My investment idol is a guy named Howard Marks who founded a company called Oak Tree Capital. Yep. And Howard is as famous for his quarterly letters to his investors as he is, his amazing returns. and whenever Howard is asked to predict the market, he usually says, wait a second, while I ask my taxi driver. I don't know if anyone can predict that. So I'm going to beg off on that one.

I have no clue. Well, let's ask this. Where do you think it goes from being a plaving and like super impressive, you know, when you're writing a press release or some, you know, marketing copy or a to-do list? and then it becomes like indispensable because that's what I'm trying to figure out. It's fun to play with it. That's a function of what people do with it. Correct. Venture capitalists are not visionaries.

And anyone who represents themselves as a visionary is completely full of it. Entrepreneurs are visionaries. 100. So I believe what makes a great entrepreneur is not grit. It's not effort. It's not all the soft issues. In technology, I think what makes, an entrepreneur successful is a killer insight.

Mike Maples is actually writing a book about this. Now, to me, an insight is the recognition of an inflection point that enables a new kind of product, and then the challenge becomes, who wants that product. Now, everyone who does that, once they succeed, revises history to make it sound like they looked at a market and tried to solve a problem, because that's what consumers can better relate to. That's not what they actually did. That's how we retell the story. That's how we retell the story.

Victor's get to tell the history. Exactly. But the great entrepreneurs know that without change, there's seldom opportunity. So the great entrepreneurs, when there's a platform change, figure out how to take advantage of that change to build a new kind of product. And then they have the successful ones find a desperate market for the product, the unsuccessful ones do not find a market for their product. So all of the successful products I know you could never have expected until after they were successful.

And the fun thing, the thing that I enjoyed the most about being a venture capitalist was listening to an entrepreneur when they came into our office. Tell us about the future. And every once in a while, you would just say, that just makes so much sense. Yes. And that's from somebody who is doing 10 or 20 of those a week. And then one of those would stand out. So it's not like you just ran into somebody at a dinner party. You were collecting people in a funnel to have them tell you about the future. And of that subset of the 1% of society, 1% of them would actually hit the note. Exactly. That's what this business is. And that's why there's 10 a year that matter. Exactly. Back to your point from half an hour ago. There are only so many killer ideas. Maybe it's a year. Yeah, I mean, hey, you know, I didn't ask you about stock-based comp. This become a bit of an issue.

Do you think that people should account for that? I mean, and, you know, take ownership of it, or should they be able to keep it off the books and this adjusted EBITA kind of stuff where it kind of obscures the reality of the business? And I'm speaking specifically about the publicly traded public crowd, because it does seem like I can understand both interpretations of it. I don't have a strong position. So I'm trying to understand what you think.

I understand the accounting theory that says it's compensation and therefore it should be counted in an income statement. Got it. Makes sense. It makes perfect sense to me. But on the other hand, from a policy standpoint, Europe did this for many years before we did. and we did a hell of a lot better than Europe economically. So why go to their system when this works a lot better? So I think it ought to be backed out.

It should be back down. I realize there's no good theoretical argument for that, but I think that companies that offer stock-based compensation do a heck of a lot better. And so I think we don't want to create disincentives for doing it. Is there, the most cynical

kind of criticism I've heard of it is like, the management teams are abusing it, and it's a way to dilute the investors too much,

and it's like kind of sneaky. This is like the undercurrent here and that it should be a little, I don't know, pulled back a little bit.

And so let me expand the question here. we've reset compensation, we've reset the expectation of how many employees it takes to operate a company. Zuckerberg saying he doesn't want to have managers, managing managers, managers. And obviously Elon cutting Twitter down to whatever it is, you know, 30% of where it was. And listen, the existing man, the previous management were planning on cutting a third of it. So he got two thirds or whatever it happens to be. I don't have the exact numbers.

Did something go wrong in Silicon Valley with intent? entitlement with compensation, with the size of staffs, and how do we unwind it and does it need to be unwound? I don't know. Free markets work that way. That when, you know, if a company does exceptionally well and is able to generate a ton of value, earns high margins and earns a ton of value, they can pay their employees a lot more than anyone else. And then if you want, if there's a scarce number of people, you have to compete for them. So that drives up what we offer. Google earns 45% operating margins, something phenomenal.

And that allows them to pay their people a lot more than other people could. And that changed the entire scale of compensation in Silicon Valley. I don't know how it's going to go back because there are only so many truly talented people. There are not nearly enough quality people to build all of the, even just those 20 companies a year. The outliers, yeah. The outliers. So if there aren't enough people to staff them, how are we going to give them less compensation? I don't understand how that could be.

All of this is disclosed. Companies in their proxies, their annual proxies, have to list how much stock they're asking for each year. I know as a private company, once a year we go to our board for an increase in the size of our stock pool. We explain the logic. Now, in the days when companies took five years to go public, you took a lot less dilution than now when companies take 10 years to go public. But you get bigger, multiple. So the returns haven't changed all that much even with all of this. It is fascinating. I got to think that there are forces at work, including remote work, that are going to drive compensation down or eliminate or offshore positions in some ways. Because what I've seen is, in this recalibration, many folks are learning how to manage remote workforces. Once you learn how to manage people remote, the theatrics of coming to an office the personality a person has versus just their raw output and then becomes less important. If a manager figures that out, they got people in Manila, San Paulo, Toronto, and Silicon Valley.

When it's out of the country, I think that gets exponentially more difficult. I understand remote within your country, but remote outside of your country. Look, I think that generative AI is going to handle a lot of tasks. You know, it writes pretty damn good code for the basics. I mean, it is whipping through stuff. I think that is the augmented developer, you know, like they're just becoming bionic. You know, you want to do some simple code-based login screen or something. It's like, change your password screen.

It's just going to be written in like 10 seconds or 20 seconds as opposed to 20 minutes. So to get the people that you need to set it up correctly, they're going to be expensive. So are you in the camp that like this AI stuff is going to grow exponentially fast and then become so good at stuff that we'll see a smaller envelope of employed people and could be cataclysmic or do you go with the history of humans have always found something to do with their time? You always find something to do with their time. I think it's going to be like the internet. The internet took a lot of cost.

I'm a big believer that we avoided inflation for many, many years, not because of outsourcing to China, but because the internet eliminated an entire layer of distribution in the economy of the United States. Examples being, well, everything's been disintermediated in the middle. So if you no longer need distributors between manufacturers and manufacturers and connections. consumers, that means the consumer gets a much better price on every single product. And I think that actually is what kept inflation down. And I think the current inflation that we're experiencing is very temporary. Say more. Why is it temporary?

I just think that it was more a result of the shortages with supply chains than anything else. And it's taking, and then sentiment started to kick in where companies who hadn't raised their prices in many years thought, ooh, now I have an excuse that I can raise the price. Yes. Yes. So I don't think there's, I don't think there's anything fundamental in the economy that drives the greater inflation. So I don't think that's going to last all that long. Things should be going down, not up. Like, we should be getting efficient. And like the fact that a pair of jeans when we were kids cost 10 to 20 bucks and then you can go to Old Navy now and buy a pair of jeans for 20 bucks.

Yeah, that's pretty amazing. And then... It's pretty amazing. It's pretty amazing. And people used to have the newspaper delivered to their doorstep every day. Just think about that, printing it and newsstands, you know, marking things up 2X. So the internet got rid of all of that stuff in the middle. All that.

And that's what I think really kept inflation down. And there's, we're continuing to have innovation. Generative AI can take even more cost out of the system. And that's why I think long term inflation. should be well under control, but I'm no economist. Well, I mean, this macro stuff, I think, I may have come to the conclusion that no macro is like, I don't know, trying to like do dream interpretation or something. Like, I don't know that anybody can actually do it, although sometimes it feels like people

got something right. It just feels to me like everything's micro or everything's a smaller system. I think everything is micro. Yeah, I mean, just the cost of things should be going down in almost all cases. because of efficiency, like the cost of a developer. They should be three times faster than they were 10 years ago, and they should be in 10 years three times faster than now, which means you've got a 9x lift in two decades.

Assuming there are electrons involved. Yeah. Yeah, precisely, right, if you have to build stuff otherwise. All right, listen, I've kept you for well over an hour. Will you come back in one year? Can we just put this on in one year? I'm tempted to do every six months, but I don't want to abuse the privilege of taking an hour,

hour and a half of your time. But I learned so much, Andy, and I really do appreciate the time you take to come on here and share these lessons and help the community. Everybody go check out Wealthfront.com. It is absolutely extraordinary. And really, if your friends and family are trying to advise you on, like, hey, how do I manage my money?

What tech stock should I buy? Just tell them, don't. Just go to Wealthfront, set up an account. I did this with my mom. I did it with my brothers. They all did it. every time I see them, they take out Wealthfront, they talk to me, Andy, about Wealthfront, how great it is.

They show me how well it's going. It has made my life simpler. It was like when I told people like, oh, can you build my website? I'm like, go to Squarespace. I'm just like Squarespace exists. They're sponsors of my show. Use the promo, go twist.

It works. It's easy. You could do e-commerce or whatever. I'd tell them, just use Wealthfront. It's easy. You're hiring right now? You got any positions you need? Because we're growing so quickly.

Yeah, I think so. We are hiring at a rapid rate. Okay. So go to wealth. Let's see, wealth front jobs. I probably will find the URL before you know careers. Okay, here we go. Wealthfront.com slash careers.

It's a mission, okay, and to help people grow their wealth. And you don't need to have a background in finance. You just have to be passionate about it. Actually, we don't look for people in finance because they usually think wrong. They try to take advantage of people versus giving the value to the people. Oh my God, that is such a great insight. You know, finance people come in and they're like, how are we going to screw with these people. It's like, no, no, no, this is not what we're doing here. We're not trying to

screw them. It's like, I have like three ways we could screw these people. So, Jason, our, our, our mission statement is literally to build a financial system that favors individuals, not institutions. The current financial system favors institutions. Man, they got to bring you, the next time they bring these banks up to, you know, Capitol Hill, and they're like, how are you charging all this money for, like, accounts that people didn't even know they have? They got to have you come up there and be like, you know, you can just solve all this with software. and hiring people who don't want to abuse the customers. It really is that simple.

It's intent. There's enough. And you can make money doing it. Yes. Yes. Andy, you're just a treasure. And I treasure our time together. And thank you so much.

And we'll see everybody next time. Bye bye.