This Week in Startups - E1002: Wealthfront CEO & Co-founder Andy Rachleff on hitting escape velocity at Wealthfront, pioneering “self-driving money” for consumers, shares insights on product-building in 1980’s vs. today, best investor attributes, & the future of NextGen banking

Episode Date: November 19, 2019

1:08 Jason intros Andy Rachleff 2:20 Where is Wealthfront at currently? 4:44 How are traditional money managers allowed to get away with so much? 10:19 How has Andy dealt with becoming the elder statesmen at his company? 14:15 What are Wealthfront Cash Accounts? 18:27 Wealthfront's long term vision 23:49 What is high-revenue retention? How does Wealthfront maintain it? 27:44 How has Silicon Valley changed since Andy started at Benchmark? 32:10 Andy describes his greatest skill as an investor 35:30 What were the 1980's like in Venture Capital? 40:05 What do you call a VC who's never lost money? 55:01 Jason & Andy discuss how Silicon Valley is viewed in the present day

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the easiest way to automate your work. It connects all your business software and handles the work for you so you can focus on the things that matter most. Right now through February, try Zapier free for 14 days by going to Zapier.com slash twist. Upcoming launch events. Apply for the next launch accelerator cohort. are due December 23rd. Learn more and apply at launchaccelerator.co. Okay, everybody, welcome to an amazing episode of this week in startups. Sometimes on the program, I bring a world-class investor, somebody who has invested and defined the industry. Other times, I'll bring a world-class founder onto the podcast. And once in a blue moon, I find somebody

who has been a world-class investor and a world-class entrepreneur and CEO. Andy Rackleff is one of those individuals having been one of the, I believe you were a founding partner of Benchmark. Correct. And obviously the president, CEO and co-founder of Wealthfront, which I'm lucky enough to have just weasel my way onto that cap table. It's good to be there. It's good to have you.

Well, you know, I try to work for my supper here. try to add some value, but you are in the great position now of what I guess we call in the industry escape velocity. Wealthfront. You started as CEO. Adam came in with CEO for a while. You came back. And boy, have you been on a tear?

Give us the broad strokes of where we are now as a business with Wellfront.com. Well, we've evolved to be a next generation banking service that helps you with your short-term and long-term financial needs. We do that with an FDIC insured high-yield cash account for your short-term needs and a best-in-class investment service, passive investment service, supplemented with automated financial planning. And we do all of this through a mobile app so it's available at any time. We started as an investment service, and over time, we've evolved into this next generation banking service. I think maybe the third time you've been on the podcast out of the 900. 90 somewhat episodes I've had.

We'll hit 1,000 in a week or so. And you started doing, I guess, what people call a robo advisor. Correct. Using science and algorithms to set up the perfect portfolio management at the lowest possible fee. And when I heard this idea, I was like, this is the greatest thing ever because the two things I hated about working with my previous money managers was, you know, I made a little bit of money selling a company. They tell you you, you got to get a money manager. You ask your rich friends. You get one.

And it was a charming guy who I really liked, actually, but I didn't like that I had to call on the phone and talk to them. And nothing was done automated. And I couldn't get explanations. I never knew how much I was paying them. And I saw Wealthfront, that beautiful dial, one to ten in risk. I could be a ten in risk if I'm young. I could be one, two, or three if I'm in the retirement phase and I need the money now. I could set it and forget it.

And then you loaded me up with all of those amazing Vanguard funds back in the day. I don't know what you use now, but the lowest possible fees. I know that my guy was charging me over a point. It might have been a point, point and a half or something. And then that was all of a sudden in all of these funds that weren't the vanguard's, they were their own proprietary funds, which doesn't take a genius without mentioning names, they're double dipping, aren't they? Yes.

How can they be allowed to double dip? Haven't they poured regulation onto the industry? And the industry still gets to do all this weird stuff that, you know, I think it would be charitable to say is not in the best interest of the consumer. And that a cynical person might say is like double dealing. Well, a registered investment advisor has to do what's in your best interest. Okay. A broker does not. A broker only has to do what's suitable.

Suitable. What a reasonable word that is. And so suitable means it's reasonable. But let me give you an example of what's in your best interest versus what's suitable. If I'm a fiduciary, a registered investment advisor, I can only propose a fund that is the ideal fund for you. But if I'm not a registered investment advisor and not a fiduciary. and not a fiduciary, I can propose a fund that's okay. So, for example, let's say I want an equity fund. Okay. Well, there might be an actively managed equity fund that pays, that charges 2% and gives me a

kickback of half a percent. And there might be an index fund from Vanguard that charges 0.03%. Well, they both are equity funds, so they're both suitable for you. So they can do that as long as they're not, registered. Now, this is the funny thing is, you can tell if a financial advisor is registered, if they spell the word advisor, A-D-V-I-S-E-R. If they spell advisor OR, they're not registered. Oh, well, that makes it super easy because I forgot already, but if it's E or O. So Merrill Lynch calls their stockbrokers financial advisors, but they spell it O-R-S. Oh, my Lord. So they're not fiduciaries. And what?

Am I, should I just surmise from all of this that the industry as it was constructed owns Washington to a certain extent and can get all of these bills, Dodd-Frank, all of these layering they put on to try to regulate the industry. That was all created by the industry itself, wasn't it? Well, there are a lot of elements of Dodd-Frank that the financial industry doesn't want. Okay. But they have an incredibly powerful lobby. Incredibly powerful lobby. I mean, if you can wind up, and how does Vanguard charge so little? Is it a non-profit or something? It literally is a not-for-profit. It's a co-op like REI. So what they, they're owned by the investors in their funds, like a mutual savings bank, is owned by their depositors. So any money that they would have taken in profit, they turn back into lower fees. So that's why they're so much less expensive than everyone else.

So Vanguard, their goal is not to make. make more money, their charter is to lower fees. Their charter is to do what's in the best interest of their clients. Wow. They're the only financial institution we know of besides ourselves. Yeah. And we try to model ourselves after Vanguard that literally puts the interests of their clients first. And when you think about that, that's kind of how most great businesses work. You're trying to think about outside of finance, outside of finance, right? And it's only when you have some monopolistic you know, uh,

position or you can intimidate the consumers, I think. There's a lot of intimidation that occurs where you feel like an idiot asking questions to your own advisor. Like I would ask, I'm like, where's your fee in this statement? And they'd be like,

oh yeah, go to this page. You see that. That's the fee. And I'm like, okay, that's the only fee. They're like,

well, there's some other fees. I'm like, where do I see those fees? Oh, drill down on this fund, go to this page. And in this disclosure in part 37B,

it says we might take you have a point. Mm-hmm. When you use Wealthfront, that beautiful interface, you see all your trades, and it says, you paid Wealthfront $275. You have to have a lot of money with us. Well, I have a lot of money. For the investment service, we only charge a quarter of a percent. Okay. I don't mean to back into things, but once in a while I'll see I'm giving you guys a couple of hundred dollars.

I feel good about it. Thank you very much. So that leads a person to wonder, how do you make money? How is wealth front going to become a profitable business? Or is it just that the other businesses are taking so much of a vig, a vigourish, that they got fat. They got fat on the hog. And they just built these big offices and these big salaries. And you're just running it like an internet company, like a consumer startup.

So you're just running more efficiently and you don't need to take that much money. It really is as simple as that. Is it really? Yeah, because if we can't automate a service, we don't deliver it. And if you automate everything that you do, you have much lower cost to deliver the service so you can afford to charge much less. We have a high-yield cash account that we introduced in February. This is the new thing.

This is the new thing. And in the first eight months of offering this service, we've attracted almost $8 billion. Eight within eight. Eight within eight. This is the fastest growing bank, I think, in the history of this country. And the reason that we were able to grow so quickly is, number one, we made the sign-up process incredibly easy. In less than two minutes, you can sign up for this. No friction.

No friction. And we're able to pass along far more of the economics to you. So before the recent Fed cuts, we paid as high as 2.57%. People say, how can you do that? Well, we don't need to make as big of a VIG. It's just like Amazon. that we can take our cost savings and share those economics with our clients. And there has been a very well-known strategy in the tech business.

And you are one of the tech elder statesmen. I mean that respectfully. Thank you very much. I do not mean you're old. Because listen, I'm 48. I feel old. You're slightly older than me. You've been out of for maybe 10 more years.

You start to feel out, don't you? I'm in my 60s now. You're in your 60s. It's amazing how all of a sudden you get. past 40 or something, and then you start to feel old because we hang out with kids all day. The average age at your company is what? 30. 28.

Okay. And you're 60 something. Yes. I'm the old man. And you were like this, but doesn't it keep you young? Isn't it the greatest thing ever to work around these young people who want to change the world? Yes.

That and for the last 15 years I've taught at Stanford Graduate School of Business. And so the combination of the two definitely keeps me fresh. Keep you sharp, doesn't it? keeps you very sharp. When we get back, I want you to comment on the classic playbook in Silicon Valley, which is, your margin, right, is my opportunity and how some companies will release a product with no intention of ever making money from that product. They do it with some product they add later. And this is a hirish strategy. I want you to break it down for us in how to execute that specific play and playbook in high-tech startups. We get back on this weekend startups.

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Let's get back to this amazing podcast. All right. Welcome back, everybody. Andy Rockcliff is with us. co-founder of Benchmark, one of the founding partners, benchmark. It's got to be mind-blowing to see what's happened with your firm, huh? It is very rewarding, I can tell you that. My goodness.

And then you got back in the game, you do Wealthfront, and here we are. You start this unbelievably low advisor program on your phone in the app. It's gorgeous. I use it. I've used it forever. Only 25 basis points. then you launch in February of this year, just what is that, eight months ago, savings accounts, cash. We can't call them savings account because we're not licensed or chartered as a bank, so we call them cash accounts.

So they're cash accounts. I just want to make sure in case that you're not getting trouble here. Okay. So they're cash accounts, and it's, did you say it was FDIC? It's FDIC insured. Actually, they come with a million dollars of FDIC insurance, not 250K as is. normal because we broker our deposits among four banks and that way aggregate up the FDIC insurance from each.

Which is fascinating because when I was, I remember when the financial crisis happened in 2008, when it gets to the Great Recession, 2009, 10 period, people were so shuckin that they were taking their money and thinking banks are going to all go under. I should take my 500,000 in life savings and put it in 10 banks, 50K each. So when they do go under maybe six or seven or eight of the ones I picked will still be going. I mean, that's how crazy is that. But you basically productize that. We productize that.

Why doesn't the FDIC just go up to a million? Why don't they raise that? I don't know the answer to that question. It used to be 100, right? I don't know what it's been over time. I just know it's been a 250K for a while. So you pay 2.5 a year now. We used to.

It's down to 2.07% today. Oh, because we did three rate cuts this year. We did two-way cuts, and there's one that was announced this morning, so we're going to have to go down another quarter of a percent. But I was getting charged nothing in my bank account, I think, with like banked nothing. Paid nothing. You were getting paid nothing. And I was paying all these fees because I would forget that I had an account. Right.

You know, I don't know why I need six accounts, but all of a sudden I wind up with three, four, five accounts. And then one of them, I forget to put money in, and they're charging me $40 a month. And I don't realize there for six months. I say, hey, there's some error here. You billed me six months, $40 a month. But like, yeah, you've got to keep a minimum of $1,000. Why don't you tell me? Like we told you when you signed.

You know, it's really funny. Before the last rate cut in September, Jamie Diamond was interviewed by Bloomberg and asked, what are you going to do once the Fed cuts its rates? And without pausing, he said raise fees. Wow. That is bonkers. Bonkers. Okay.

So now we have two very strong businesses. What were we at in wealth management kind of? space in the in the in the in the robo advisor business we have eight in the cash just under 14 billion in the investment got and then eight in the other business so about just under 22 billion got it it's a lot of cheddar there's a lot of money under management now before we went to break i talked about this hey we're going to uh take your margin your business and make it free so people used to pay for browsers Microsoft made it free browser now nobody charged for browsers same thing happen with Gmail, make email free, boom, or make it incredibly low cost. What are you doing here?

What is the strategy here? Which is the real business? Or is it going to be a collection of businesses that eventually are just all low margin? Or at some point, am I going to pay you $100 a year to be like Amazon Prime? Because what I heard was that Bezos, I heard this from an insider, that Bezos doesn't care about profits on anything. He just cares about the number of prime subscribers. Now, this is secondhand. It's from somebody who was inside of Amazon, and that they just have a group. And the group that steers Amazon is the prime business. That paying $100 a year.

Now it's $169 a year. But they make margins on all of the transactions. I think the prime drives more purchases. Because why wouldn't you if you don't have to pay anything for the shipping? Yeah, no, it took out all the friction. It was brilliant. It was such a brilliant move. And then he boiled the frog.

I think that started at 49 was the introductory price. Then it went to 69. and now I think it's $149 if you pay monthly or something. And who doesn't pay? You have to. You have to. So what is your strategy here? And you're glad to.

I'm happy to pay. Yes. The only thing I'm not happy about is that suddenly my house looks like the GPS depot. Same as mine. I get home sometimes. It's 12 boxes. I'm like, and I'm opening it up and it's like, well, one's got toothpaste, one's got vitamins.

This is what happens when you have three kids. What is our business here? What are you trying to do in the strategy playbook here? Our vision is to ultimately. optimize and automate all of your finances. One of our engineers simplified that to self-driving money. So we want your money to become self-driving. What do I mean by that?

By the end of the first half of next year, you'll be able to direct deposit your paycheck with us. We'll automatically pay your bills, and then we'll take the remaining money and routed to the most appropriate account depending on your situation and goals. Oh my Lord. So if you're saving to buy a home, that money should not be in the market because you don't want market risk. So we'll put that in the high yield cash account. If you're saving for your kids college education, it'll automatically be routed to a 529 account. If you have excess money, it will either go into a taxable or retirement investment account. It is the financial singularity. Yeah, it's a financial hub.

That's unbelievable because literally the existential underlying anxiety we all have about our money is that we are not doing it intelligently, that we're making some mistakes. And when you did the Robo Advisor, you know long term you're doing it right. But you don't know month to month if you're doing it right, what bank account is, etc. And most people keep way too much money in cash. They do. Yeah, we can tell this from the account linking, which is how we optimize our client's accounts. So our average client links six and a quarter financial accounts to our service.

I did. So that might be your bank account or bank accounts. I got my mortgage. I got my Silicon Valley Bank in there. Right. It might be your home through Zillow and Redfin. We value that. If you have a coin base account for your Bitcoin.

No, no, no, no, no, no, no crypto, please. No imaginary money. Okay, you lost me there, but keep going. But people link up all of these accounts. So we know more about our clients than anyone on earth financially. Yes. By the way, we would never share that data with anyone. We don't have an advertising-based model, so there's no reason to do that.

And we are able to use that information to determine what's best for you, given your situation and goals. I love that. When you did that, it was so much fun to put in, like, the property. God, I'm really sounding. But the properties I own, I own a couple of places. I own our office. I own two homes. So I put in the three properties. Didn't you use our portfolio, our instant portfolio line of credit to finance this place? Well, okay, that's true. That's true. Thank you, Andy. I thought you said you weren't going to release personal information. It's true. I called Andy. I said, Andy, I need to buy a place.

He's like, yeah, you got a margin loan thing. And you have this margin loan feature, right? It's well, when you give us at least $25,000 in your investment account, you're automatically enrolled in what we call our portfolio line of credit. And in order to access up to 30% of it the next day, you push one button, that's it. There's no paperwork. Was I part of pushing this effort? Because I kept telling you the one thing that my bank had was they would give me margin loans.

And I was like, you've got to have this. It's like the one. But ours is faster, easier and less expensive. Well, you don't have to call the person. And you know what they would do when I call my financial advisor? I'd like, listen, I need like 500 grand. They were like, okay, what do you need for? I'm like, well, what the fuck business is of yours?

Like, why are you asking? I'm going to Vegas. I'm putting it on black. Who cares? By $500 grand. Like, they literally, we're like, oh, okay, is this for a home? And I'm like, oh, I know what's going on here. They want to upsell me.

So they want to know, oh, it's a big piece. And that's what I did. I wanted to move quickly on the space that we're in right now. And I was setting up the mortgage. My friends over at Silicon Valley Bank. That takes a little bit of time. I mean, they can do it fast for me. So one of these days will have mortgages that will be so much easy.

than any mortgage that you ever have. That would be incredible if we could do that. Because I was just thinking about this and I was like, God, you know, like it's a mortgage. It's like one of the last things that's so arduous and painful to just do. I mean, and Silicon Valley Bank does it faster than anybody. So imagine no paperwork. Yeah. No underwriting period.

You know, Rocket Mortgage says push button get mortgage. That's not exactly true. It takes 15 minutes. And then you have to send in all the paperwork. Because you link all of your accounts to us, we have all your financial information. There's no paperwork we'll need. Yeah. And we'll be able to instantly underwrite you.

Again, this is all data driven. Yeah. Okay. In executing this playbook of low fees and do you think this is a good strategy that's just put wealth aside for a second, but in your experience, building and investing in companies, should people be doing, you know, lift? said today, we're going to make ride sharing our business. We're going to make it profitable. And downtown Josh Brown was like, well, then I'm not interested in owning the stock. I'm

interested in owning Uber because Uber is going to make ride sharing profitable at some level, but they also have Uber Eats, Uber money for payments and whatever, and they're going to add and add in VTOLs. Which is the better strategy is to try to build the platform and just add a bunch of services or to focus on one? Because you're adding services here. I think it all depends on the business. Okay. We're very unusual for a fintech company, a consumer fintech company, in that we have what's known in the SaaS world as high revenue retention.

Another way of describing this is negative churn. Okay. So once someone joins us as a client, each year they generate more and more revenue for us. And the reason they do that is they tend to add to their balance. Our target clients are 28 to 40 years old. The earning years. Right. So they're saving.

So as they save money, they give it to us. And then with more assets, we earn more money. And then because the process is delightful, they tend to subscribe to more services. So the combination of earning more fees on more assets and our clients using more services means that the, you can think of the revenue per client. curve is an exponentially sloping upward curve, whereas a traditional thin tech or consumer internet company is a decay curve. So we're very unusual in that our clients generate more and more value over time. Right.

That works for us. In other businesses, getting a lot of money up front and then having them churned could make more sense. Yeah. All right. When we get back from this break, I want to talk about acquiring customers. you've really run the table on this strategy. You've done really well with it.

I know that you were trying to figure it out a couple of years ago and we're trying a lot of different experiments. I want to know how those experiments went, which ones worked, which ones didn't refer a friend, advertising, going into companies and training people, education, content marketing.

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Two days after my birthday, individual requests for capital are separate installment loans issued by Celtic Bank member FDIC. All right, let's get back to this amazing episode. All right, welcome back. Annie Rackliff is with us. Amazing investor. Perhaps an even better.

entrepreneur. You know Wealthfront. Go to Wealthfront.com, sign up. And it's just one of the best products made here in Silicon Valley. I think in the last decade, definitely top ten. And this is a place where people make killer products. Thank you. It's different now than it was when you got started as a venture capitalist, what, 20, 30 years ago.

Back then, people didn't make great products. They made okay, good products. You know, they made, I actually might disagree with that. Okay, that's fun. I think that the world was dominated by hardware when I got started. And so the nature of a startup was very different. It had very high, a typical startup in which we would invest 20, 30 years ago, had high technical risk and low market risk.

If you really could build what you said you could and deliver 10 times price performance, you knew there was a market for the product. Okay, hold on. I got unpack that and repeat it back. It was high technical risk, but low market risk. which means if I'm, it's going to be hard to make this product, but it's going to be easy to sell it. Correct.

And people will pay for it. If you actually deliver on what you said. But today. It's the opposite. It's low technical, it's low technical risk, high market risk. Now, what kills companies is lack of market, not poor execution. So it's really, really hard as an investor to guess which market, which applications. are going to succeed in which ones aren't.

So the early stage venture industry actually outsourced the first round onto the Angel community because it's a tough risk reward. And so what they did was they let companies prove their market and then they came in at a higher price. And the markets were so much larger today that you could afford to pay a higher price and still get the same return. It's so interesting you mentioned this observation. and then we have to stop again because we now have two brilliant observations.

So now we have to unpack. I'm going to take the latter first, which is the VC industry used to take on the early stage risk. Because if it worked, you were done. You made your profit. Now, there's 20 people who are making a smart lock or 20 people who are going to make a social network. And what you need to do is just figure out which one actually gets traction of the 20, the two or three, and then try to pay a higher price for those, which means... And win the beauty contest to get in.

So it's become a completely different type of investor or investment strategy. Correct. I'm trying to unpack this in my mind of how it changed. Software, hardware to software. Hardware to software. So that was what created this change. Because as we transition to software, the technical risk went away. There was no question as to whether or not you could,

create Uber, the question is, did anyone want to hail a ride? Right, right. There is no question as to whether or not you could create Airbnb. There is a question is that would anyone really be willing to stay in someone else's home? So VCs used to be making a bet that you could build it. Your competency as a crafts person, your competency and your ability to make the technology work. Now you're making a bet. Can this person scale it and manifest the market and the go-to-market strategy. Once the venture capitalist gets involved, the entrepreneur still has to find that product market fit,

but they're doing that with the angel's money, not with the VC's money. Which, by the way, I've been meeting with a lot of LPs and telling them what I do, and their minds are blown because they're like, how do you invest in 80 companies a year? And we'll have an accelerator, seven come at a time. And they're like, how do you manage relationships?

I'm like, well, eight out of ten, die. So they're gone. I just have to do the last 20%. So it's only really 16 a year that I have to maintain the relationship with for that company. And then I talk to all the other ones about, hey, what's next? The other 60, we're talking about their next company. And with Raul from Reportive, it was superhuman, you know, and you just watch whatever the next company is. And they are trying to, the LPs in the world are trying to get their heads around this changing world.

Because when I show them the chart of when VCs get involved, they're like, wait a second, Jason, you're buying 15% of this company? How do you buy 15% of this company? I'm like, you write a $1.5 million check. And they're like, wait, what do the VCs do? I'm like, they pay $15 million for 15%. And they're like, you've got a really good business. And I'm like, I know.

Assuming that you can pick. Well, that's my special. Yes. Come on, Andy. Yeah. Look, look, I begged you. You're better than I at that. Did I beg you to be, I begged you to be involved in this comment because I know a winner when I see it, both the person and

the product. It is a skill, right? What was your skill when you were an investor? And what do you think the skill is? My skill was identifying the great technologist before they started a company. Whoa. Wait a second. They haven't decided to start a company. Correct. And you found the technologist before. How? Well, in most companies, there are two or three product people that are engineers that that most everyone in the company goes to for their judgment. The gurus, the Jedi. Oh, my Lord. What a playbook.

They're fantastic product people. How did you get that playbook? Well, you know, you've heard the term entrepreneur and residence. Yes. So I did the first entrepreneur and residence in the venture capital industry. You're such a humble guy. This is the playbook of playbooks. You created it.

So this is how we created an entrepreneur. in residence, it wasn't an executive in residence that we would put together with a company. We looked for people who worked in industries that were undergoing change because without change, there's seldom opportunity. And we looked for the people in those companies who were the most likely to conceptualize an innovation. And then we would pursue them for anywhere between one in five years. Oh, my Lord. It's like the most amazing strategy.

And I consider myself a strategy. I really think about systems and I think about how they work and how power accumulates and how wealth accumulates. And how wealth accumulates. I always wondered where the entrepreneur residence thing came from. I was an entrepreneur in action for Sequoia, actually. And I guess they got that from you. And I always wondered, yeah, how benchmark did that.

But we actually did it at my firm prior to benchmark. Oh, okay. Merrill Pickard, in 1987 was the first one. Oh, Merrill Pickard, right. Yeah. And we did it. Remind everybody that firm. Well, it was a firm that started in 1980.

It was a spin out from the Bank of America's venture capital arm. You know, if you look at the firms that generate the vast majority of the early stage venture industry returns, there's a persistent group of about 20. And so 3% of the venture. firms generate something on the order of 95% of the realized returns of the industry. Not the total returns, the realized returns, which is what's really important. Wait, explain to the events what the difference between returns and realized this. So a realized return is you actually can sell the security and get cash for it. Got it. Not just markup on paper. Correct. And so almost everyone who is among the top 20 firms can trace their

firm's history back to a firm that was in business in the late 1970s. Wow. So benchmark came out of two great firms called Merrill Pickard, Anderson, and Iyer, and TVI. And those two firms, what did TVI stand for? Was it? Technology venture investors. Wow. And Merrill Pickard had come from B of A, and TVI had come from something called IVA, which spawned IVP, TVI, and C6. partner. So it's really funny. We all go back to the same place in the genealogical tree. It is amazing. What was it like in the 80s in venture capital? You know, I'll never forget when I was in business school, I went to Stanford, Don Valentine, who just passed away, who was, I think, one of the two greatest venture capitalists of all time.

And the person from whom I really got the ideas behind product market fit. Why was Don so special? Because he came up with a methodology that was spectacularly brilliant. It seems so easy in hindsight. But he had this philosophy that if a startup can screw something up, it will screw it up. So the only way that it can succeed is if the pull from the market is so great that it overcomes the ineptitude of the startup. No, it's not that the people are bad. It's that they're terribly under-resourced and understaffed.

And so he cared desperately about the likely demand for the product. He was the first to really get that market was what determines success, not execution. And his favorite question that was even in the obituary that Sequoia Capital published on their website was who cares. His question was, who cares about this product? And that's what led to the incredible returns that he had and that his partners had after him. Now, you said he was one of the top two or three. Who else was up there? You know, the only other person up there, I would say, would be John Doer.

John Doer. He was amazing. What was, I mean, he's still alive, but he's not practicing really anymore. I think so, yes. What was his skill? What was his superpower? Why was he so great? I think he was amazing at recognizing things that could be big and didn't let anything else get in the way.

So conviction? Well, no, he didn't worry about price. Oh. He didn't worry about structure. All those things. For example, Netscape. You know, the founder of Netscape, Jim Clark, had previously founded Silicon Graphics. He's one of two handfuls of entrepreneurs I know of who've created more than one company that have generated

100 million in revenue. And because Jim had been so successful at Silicon Graphics, which was the Google of its time in the 1980s, he was able to command a really high price. But the going valuation at that time for startups, this is 1994. Oh, let me guess. Five million dollars. That's what I was going to guess, four or five. And he wanted 20. And so Jim had gone to his investors at Silicon Graphics, who had backed him at Silicon Graphics, and they only wanted to pay $5 million or $6 million pre. And he asked for $20, which at that time was outrageous today. It's not at all.

And Doar didn't even blink and said, absolutely, because he saw how big it could be and didn't worry about how wacky someone was. He didn't worry about the price. He really focused on the opportunity. What has worked back to the cliffhanger question I asked and we got sidetracked because of all the interesting asides. Back to my interview technique, always listen to the person talking. What techniques has well-front tried over this journey that have spectacularly failed that you thought would work and which ones have worked that you thought might spectacularly fail? And everything in between.

Well, I'm a big believer that you have to take shots on goal. Okay. That without risk, there's no return. Just like in venture capital. The one thing, you know, I was not trained to be an operating executive, and I think I play a CEO. I think I identify more as an investor than I do as an operator. The one thing that I took with me from venture capital, because very little of venture capital is appropriate. Very few of the skills one learns in venture capital are appropriate to running a company.

But the one thing that I brought with me was the belief in slugging percentage, not batting average. What's the difference? What I mean by that is most every job. in the world is evaluated on the percentage of time you're correct. That's irrelevant in venture capital. Why? Because the only way to be right most of the time is to have small wins. If you take very little risk, you can succeed most of the time, but with very little risk

comes very little return. Got it. So one of my favorite lines with my students when I taught venture capital was, what do you call a venture capitalist who's never lost money? unemployed because I don't want them as a partner because they're unlikely to have any big wins. Right. They have to take chances. So it's about the magnitude of the win, not the percentage of the time you succeed.

Which I believe goes against human instincts at its core. At its core. It feels so bad to lose. So I constantly have to educate our employees at Wealthfront that this is what we do and that we're going to fail most of the time. So I even published a memo on product philosophy where I say, I want us to fail most of the time. What is this product philosophy memo called? The product philosophy memo? Well, just the product philosophy memo about how we're going to take a lot of shots on goal. We're going to try a lot of products. Most of them are going to fail. And we want the ones that succeed to succeed big.

The cash account succeeded really big. An investment product that we thought was a brilliant product called Risk Parity that I came on your show to discuss. Right. Turned out to be a, well, it has a billion under management. It was a single. Yeah. It's okay to hit a single. But you can't beat yourself up about it.

But I can see in your eyes the sadness that it wasn't. So even you who wrote the philosophical, you were just melancholy. Because failures hurt more than successes feel good. There was a Nobel Prize awarded for that. Hold on. failures hurt more than successes feel good. Correct. So we as humans, we take it so hard when we fail and we don't enjoy the wins as much.

That's why venture capital is so hard. Yeah, I think there are certain people who are uniquely qualified to do it. There is a personality or archetype where you have to be. steadfast. And I saw that first when I was at Sequoia, because I was part of that team, I still am. And when I saw Michael Moritz and Doug and Jim Gets and their new guy, Ruloff and Alfred, these two young kids they hired, they were always classy and steadfast and optimistic. And they just seemed to be so even killed. I wouldn't say robotic like, but almost like they were a different species where the founders were running around. We were like spastic.

And then there are these adults in the room. And you know, Doug Leone says to me one time, you know, Jason, hope is not a plan. Let's build a plan. And like right in my core, I'm like, whoa, we should build a plan. Yeah, I'm in my 30s or whatever. And it does seem like you have to become Jedi-like. You lose an arm, you lose a wrist. You also have to have amnesia. You got to forget it. Because you got to forget it. You move on. You move on.

Listen, and that's what I mean by the fact. That's my wife crazy. But I have amnesia about other things. Where's the car? It served me really well from a professional standpoint. And I try to use that same philosophy. Look, you try to learn from your mistakes. But you can't let them bring you down.

You have to take more shots on goal. Yeah. I think it is a hard thing to get good out in life of not taking it so personal when you found. Yes. It's hard. But you can wire yourself for that. But I think that's what makes Silicon Valley so special is that we accept failure. We don't look for failure, which is what I think some people believe, but we're willing to tolerate it,

whereas other parts of the United States see someone who's failed and think there must be something wrong with them. Okay. When we get back from this final break, I want to go big picture. We're going to go out 30,000 feet and talk about Silicon Valley, how it's kind of hated now. And that seems like a first for our industry. and people are really being critical of a lot of these flameouts like, let's say, the co-working space or the Theranos. And they kind of now are associating Silicon Valley with the two crazy, you know, creators that got created. I want to know what Andy Rackleff thinks of that when we get back on this week at startups.

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for me. He connects my Twitter account and pipes any reply that includes my ad handle at Jason into a Google spreadsheet. Now, we've been doing this for years because I like to keep track of who's talking to us, and then we can do analysis on it. And when I ask for suggestions of Accelerator companies, I can easily filter through all these replies in the spreadsheet. So we have all this unstructured data on Twitter. It's a mess. We need to get it into a database. How do you do that? Well, Prash just did it. You connect your Google account to your Twitter account and zip, zip, zip, Zapier makes you happier. Okay, so join me and more than 4.5 million people who are using Zapier to save an average of 40 hours a month. That's right. And right now through February,

try Zapier for free by going to our special link, Zappier. dot com slash twist z-a-p-i-e-r-com slash t-w-w-w-st-t. You know how to do it. Go there, zapier.com slash twist and you can get that 14-day free trial. You get a lot of credits and go do whatever you need to do. Okay, let's get back to this amazing program. All right, Andy Ratcliffe is here. We're just talking about that slugging percentage versus batting percentage. Batting average. Batting average. Now, I know what a batting average. Batting average is. I was up at bat four times. I got a single, double, I got a single or a double or anything. I got on base one time.

So it's 250. Right. 4. 1 divide into 4, 250. It's 25%, but everything's out of the 1,000, so they call it 250. So they call it 250 out of 1,000. Got it. What is slugging percentage?

Slugging percentage is you take the number of bases that were, that you earned and you divided by the number of times up. So if you hit a home run in one time up, you've hit a thousand. If you had a, if you had a double and a triple, you have five bases in four times up. four times up, so you hit 1,250. And the reason this is important is it has much more impact on runs scored and therefore wins. Got it. And at the end of the day, we're playing for wins. Wins. And so if you are getting a bunch of 20- So in Eric Reese lingo, batting average is like a vanity metric. It's a vanity, yeah, for Eric Reese. Nice shout-is by my shoulder at the lean startup. But it's true. It's a

vanity metric. You're like, listen, you get a, if you're a venture capitalist and you sell a couple of $50 million companies. What a waste of time. I was trying to explain this to somebody the other day. I was so bent out of shape that one of my companies sold for 30. Because it has no impact on the economics of the fund. One of our companies sold for $35 million. And we made nine times our money.

But we didn't put $100K in. So we made like a whatever, 900K, 800K, and I beg the founder not to sell. I said, don't you realize this company acquiring you for $35 million believes there's an opportunity to at least 10 X's. Do you realize that 10x 30 million dollars is a lot more money than $30 million? They're not buying this because they think it's going to be steady state worth 30. And the founders, you know what the problem was? There were four of them.

And just it's very hard. And it's expensive to live here too. So people want to make, they want to take care of that first. And they think they can come up with another idea that's just as good. And unfortunately, that seldom happens. That's another misnomer is that you can just. just get lightning in a bottle two or three times. Even Steve Jobs failed at his next startup.

Yeah, next. Next. His next startup next was a disaster. And it was basically a holding pattern for him to come back to Apple, apparently. Do you think he premeditated that as a holding pattern? No. No, he thought he was going to kill Apple. Yes.

So it was almost like saving face. And then revisionist history is that was the holding pattern. But every great marketer is a revisionist. Exactly. Was he the best marketer in the history of Silicon Valley? Or somebody better. Pretty damn good. I can't imagine anyone better.

Yeah, right. I know better product people, but I don't know a better product people. Give me that. Or better product companies. You know, I think that Scott Cook, the founder of Into, it's the best product person I've ever met. Really? And I thought Steve Blank was an amazing product person who basically developed the philosophy

on which Eric Reese based his book. Yeah. I think those two guys were just incredible. Amazing. But actually, someone even better than that, who doesn't get talked about a lot is John Warnock, the founder of Adobe. He had so many innovations, it was unbelievable. Really?

He did Photoshop. He did Illustrator. First of all, he did PostScript that enabled what you see is what you get printing. Wow. He did Photoshop. Actually, he licensed Photoshop. He did Illustrator. Then they licensed Photoshop but made it much better.

And then he almost single-handedly made PDF or Acrobat. He was an amazing, he is an amazing man. Yeah. Wasn't that an amazing story? Like everybody thought they were going to go out of business? Well, they keep reinventing themselves. And then they were like, yeah, we're going to go out of business. We can't sell the $1,000 creative suite every three years.

Like, yeah, we're going to go out of business. You know what? Well, screw it. We'll charge $250 a year. Everybody's like, it'll never work. The business is going to get collapsed. Well, they actually tested it in Australia for a year. So they had a lot of data on that before they rolled it out.

Isn't that amazing how stupid the public markets can be? They're so dumb. Yes. Why are the public markets so dumb sometimes? Because they want instant gratification. And if you think about it, going from a perpetual to a subscription model significantly lowers revenues in the short term so people therefore think the company's less valuable. But three years hence, it's more valuable.

Microsoft saw that game plan did the same thing and now they're the world's most valuable company. It's so amazing how being short-sighted, the impulse control is so important. people are so short-term greedy. The marshmallow test is happening on Wall Street. We do it at Wealthfront. Our first-year revenue is much lower than a traditional fintech company, but because of our clients are in the wealth accumulation phase of their lives, they keep generating more and more and more revenue over time.

So in five years' time, we'll have more revenues, but relative to other financial services startups, we have less revenue in year one. So our revenues don't look as big, but over the long term, because I'm willing to wait on those marshmallows, I think we'll do better. Yeah. You know, it's also interesting, too, is the number of wells in your system has changed dramatically, hasn't it? Mm-hmm. I don't know, pick a number, I don't know, five years ago.

How many people over $5 million accounts? Handful? Actually, no. You know, it's funny that I think that people with, first of all, we're not focused. on people with larger accounts. I know that. But a third of our assets come from accounts in excess of half a million dollars. Wow. A third of our investment assets. So quite a bit of money. And we have a lot of accounts in excess of a million dollars, but that's not our intent. What about in excess of five or ten? You get a lot of those? Yeah. Actually, our largest unaffiliated, I think,

is over $20 million. Because we're just as appropriate for someone with $50 million as $50,000. It's It's just that if you have $50 million, you like having the Goldman Sachs person to talk to. You like their tickets. You like the meals they take you to. But the cost, I mean, on a net of fee after tax basis, they can't compare. And if you just think about those costs, it doesn't take a genius to realize. Listen, they're taking you to a Knicks game, whatever it is. You pay for it.

You're paying for it. Like, listen, if you've got $10 million there and they're charging you 2% on your money, then take a genius to figure out it's $200,000 a year. they take you to a $1,000 or $2,000 nick game. That's nothing. It's 1% of what you just gave them. They're ripping you off on a level that is just unbelievable. And these guys call me, Andy, like insane.

And when they email me, I write them back and say, I manage my own money. Thank you, though. It's very nice. And then they write back and they say, you know, there's a lot of things we can do for you. You can't do for yourself. And I just put a link to my book. And I say, read the book. and then let me know how much you want to invest in my next fund.

That's what I say to them. Like, I have access to the greatest wealth accumulation machine outside of dead dinosaurs that has existed in the humanity of man. That's Silicon Valley, right? Is there anything that has ever generated wealth like this? Well, I think the auto industry in its time did. As you said, the oil industry. in its time. Energy cars. Okay. Energy and cars. Those are the biggies.

I mean... Probably, probably trains. Trams and robber barons in the 1800s. That generated tremendous work. That actually probably generated on a... Compared to the other people in society returns that are not as big as the ones now. And maybe the telegraph turning into the telephone. All right, let's talk about this because right now Silicon Valley is hated.

at a level that I have never experienced and I've been in the industry since 1989 when I started fixing laser printers at the age of 19, the HP Laser Jet 2. It's a pretty great innovation. You remember the two. I do. Maybe a third of the size of that big HP1.

I would clean those rollers. I would go to guys' offices like you, Venture Capitalist and lawyers and clean their, fix their printer jams, which basically would happen every thousand pages, minimum. What do we deserve to be hated for and that we can learn from? And what do we need to just say, you know what? People don't understand it.

We're misunderstood. Or, you know, it's just a product of the general hysterical social media culture. How do you parse it? How would you advise people like myself coming up as a 48-year-old venture capitalist or angel investor and people in their 20s and 30s? How should we reconcile this over the arc of time? Because were people hated like this in the 80s or 90s? I don't remember him. We were kind of champions and heroes.

Remember, Silicon Valley served engineers in the 80s. Startups built products for other engineers. So we weren't in popular culture. No one knew or cared about the companies. They might have known about Apple, but there weren't consumer companies. I think Intuit was one of the first consumer technology companies. and then the internet enabled consumer companies in a way that we've never had before. So I don't think they were in the public consciousness, number one.

I think that the fact that so many jobs have been lost as a result of internet companies taking excess out of the system can't help but make people angry with them. It's one of the, I think a lot of good has been done in society. but the number of jobs lost while we go through the shakeout is really, really hard. And I think that should drive humility and it doesn't. Explain what that means, drive humility, but it doesn't. I mean, unpack it. I don't think you can be arrogant in front of people when you've caused people to lose their jobs.

Right. This is a time to be compassionate. Right, empathetic. Empathetic. And so, and then last. is that we have some pretty wacky founders. Because you're able to build a much larger company much faster, a lot of people,

a lot of founders have come to believe it was because they were so great as opposed to because they actually hit on something that just was at the right place at the right time. Yes. So then if a person has a level of fame, and notoriety and compensation that is not correlating, a level of success that doesn't correlate with their actual contribution, but correlates with the world wanting the product. But you can understand.

Look at rock and rollers. You know, when you're in their early 20s, they go on the road, they become famous and they wreck hotel. I mean, the old stories in the 60s and 70s. Yeah, they just wreck hotel rooms. Well, that's what some, a limited number of tech founders are doing today, except they're doing it with a lot of money. And that brings a negative stigma to the industry, to the point that I've seen a bunch of articles that say that disruptive companies are by definition bad.

Well, there's nothing about Clay Christensen's definition of disruption, which is making something uneconomic for the incumbent to address that makes a company bad. You don't have to be an asshole. You don't have to be a horrible person to innovate. and to drive a big company, unfortunately, when some people were young and hit this success, it got to their head more than it should have, just like it has with rock and roll stars. And because tech was never in the public consciousness in the way that it is now, it doesn't surprise me that there's the backlash. Yeah.

The scale of this business is so large now because of the Internet and the adoption of mobile. Right. So, you know, back in the day, the number of people who had PCs, we counted households with PCs and it was what, 20, 30 percent of household had a PC and we're like, wow, this is incredible. There's six people in that house. Maybe two or three of them might actually use it. I remember Bill Gates talked about a computer or PC on every desktop.

That was considered wacky. Yeah. Wait, why would somebody other than the secretary would have a computer? Why? The accountant's the secretary in the copy room. Why would anybody else have one? Why would an executive be using a calculator? I mean, not sense.

But because of that, things. get bigger, much quicker. And what people forget is, like, if your app goes viral and gets really big, it's because of those smartphones. And what came before you, those PCs, and what came before you, you know, those routers from Cisco, whatever it was, like, you're building, you're standing on the shoulders of giants. Right. And it's hard for people to have that arc of history and to be a little bit humble and say, you know, listen, I, yeah, I might be selling out stadiums right now, but I'm playing the guitar riffs that the bluesman, you know, perfected. But it's not everyone who's that way. Look at Reed Hastings, who's built Netflix into an amazing company. A finer

individual one couldn't find. Absolutely. Calm, cool, collected, goes to my local watering hall, nice guy. He is just, he is fantastic. And someone from, I was fortunate to sit on the board of his previous company and I learned a tremendous amount from him. You know, John Warnock of Adobe, just an amazing man and what he's done. So you don't have to be bad. to innovate. Yeah. But unfortunately, some have been bad. Yeah.

I really talk to my founders about it now as I invest, which is, you know, just you have to hold yourself on a personal basis to a very high standard because if your standard is not very high, the next group of people, some of them are going to have permission to lower their standard 10 or 20 percent. And then your real problem is the people you don't know at your own company. are going to go 20% lower than that. So your worst behavior is going to be trickle down two or three levels and magnify times three. People model the behavior of the CEO.

Right. And if the CEO tells an off-color joke, that is free reign for somebody two or three levels down to say a career ending joke. And I am constantly telling people like, listen, I know you heard something, a joke at a comedy store. You can't bring that up at work. Like, let's just try to be super professional at all times and not allow these shenanigans. And you said something about Clayton Christensen about the definition of disruption. Let's just unpack that one. You defined it as something that's so economical.

Well, the technical definition. So people misuse the term disruption to mean innovative. But Clay actually came up with the theory, disruption theory. and unfortunately it's been terribly misused. I teach a course on the subject, so it's near and dear to my heart. But the definition of something that's disruptive, it's easier, what is it, simpler, cheaper, and more convenient than the alternatives. And if you make something that's simpler, cheaper, and more convenient than the alternatives, by definition, it's going to be uneconomic for the incumbents to address.

So it's not as performant as what's out there from before, but if it's simpler, cheaper, and more convenient, you're appealing to an audience that's either overserved by the existing products and people don't need to pay up for something for which they're overserved, or you're making something possible, this is more often the case with technology companies, you're making something possible to acquire that you couldn't before. So think eBay versus Sotheby's. Yeah. simpler.

For sure. You don't have to go somewhere. More convenient. And Sotheby's wasn't going to get involved with auctions for something for $30. It was uneconomic for them to go after eBay. They're not doing comic books or pads dispensers unless it's the first Superman and they kind of do it as a goof. Right. And they're like, we're doing a Superman comic.

If you think about a Google ad, you could buy a self-service text ad for $1 with your credit card. But it was a text ad versus a Yahoo ad. you had to spend $10,000 for the month for a graphical display out. And before that, you'd have to spend $250,000 for the month on TV ads on local TV. Exactly. And $10 billion for TV national. Fascinating. And Airbnb.

That's why companies can't go after the true disruptors because it's un-economic. And that creates what's known as an innovator's dilemma, which was the title of Clay's first book. If you go after the disruptor, you kill your. own economics and destroy yourself. And if you ignore them, they ultimately kill you. So you're screwed either way. Which means you have to cannibalize yourself. You have to cannibalize yourself. Which is a dark and weird term. But it is if you are going to cross the chasm and make it through this, you're going to beat the innovator's dilemma. You're going to have to just take some hard medicine and say, you know what? We know we're charging a lot for this product. We now have

a product that costs a lot less. And we know we had all these features. Now we took out a bunch of features. We removed features. We made it simpler, cheaply. You can do it. Banks don't have to pay you 0.01% on your checking account deposits. No. They don't. But why can we pay 2.07

percent? They could do it, but they don't want to because it's going to kill their economics. Right. Amazing. It's amazing. When do you think you'll have this automated what's left over?

What's left over? So I tell you, hey, listen, I pay my bills. You've got to be on the cusp of that. That's not a, that's like a blocking and tackling. You'll get that one built. You already got the savings part built. So, okay, mission accomplished. And you got the money built and you have the algorithm that says put some percentage into money already.

Because you're already in the robo advisor part of the business. Keep a certain percentage of my money in cash. Right. Actually, no, we keep almost nothing in cash. Almost nothing. Even on the lowest setting, because you're so good at putting things in. into alternative assets or like... Well, it might be in fixed income.

Fixed income. Okay. So knowing all that, when does this singularity occur where I say, hey, whatever's left, deal with the $1,000 that's left every month? When do you think that product exists? Well, in the first quarter, we'll deliver direct deposit, auto bill, pay, and debit cards. Really? Yeah. And then probably in Q2, we're already testing, but in Q2, you'll see...

automated advice as to what you first we have to advise you what you should do so you trust it before you hit the autopilot button that's such a great way oh so you have a you have a four thousand dollar balance you've maintained this four thousand dollar balance a better solution might be to put three thousand of it into your equity and whatever and keep a thousand in cash you have the correct would you like to proceed and do this yes or no and hit the button so you can actually do... So we've invested in the last four years a significant amount

in the automation platform and a significant amount in the advice platform in order to enable this. This has taken a long time to set up. Yeah, it's really interesting having this like revealed complexity. I think they call it in the video game culture

where like the game is super complex but you don't make it super complex for the first level. You start revealing things in the second level that aren't in the first and so on. And when you get to the 12th level, now you know about all the special keys and how to use these different power-ups or whatever. You're basically going to reveal to everybody the complexity of this over time. Actually, we don't want to reveal any complexity.

Well, you want to. We failed if we've made it complex, even the more of our services you use. Actually, the three pillars to our value prop are price simplicity and automation. We always want to deliver better price. the automation enables that by lowering our costs so we can share the economics. We have to make it really, really simple because if it's not simple, you're going to walk away. And automation is what enables us to deliver products quickly and inexpensively. Okay, I'm also an investor in Robin Hood.

They allow people to trade individual stocks. Correct. Not your business. Correct. Too complex. No, it's serving a different customer. Got it. So they're serving a do it yourself or we're serving someone who wants to delegate. And they do it yourself versus 10% of the market, 90% does not want to trade stocks.

Something on that order. People shouldn't be trading individual stocks or they should. The research is really, really clear that even professionals over the long term don't outperform the market. Sometimes I hear people talk about the automation of buying and selling of stocks in like these mutual funds or whatever that are automated. You mean like algorithmic quant funds? Yeah. Very, very few, if any, have ever succeeded over the long term. Yeah.

And so people are saying these things might be bad for the market. Are they bad for the market that the robots are trading stuff or good for the market? Well, I think that's more, that's a question about whether or not high frequency trading is good or bad for the market. So that's bad for the market. Well, you know, it's really funny that there are some people who argue that, it's good for liquidity. I happen to be of the mind that it's front running. It's front running. It's front running. If you're saying, can I, I'll pay you $100,000 to put this server 20 feet closer on the fiber line or whatever the metaphor is, you're obviously doing it to front run.

Right. And you're not trading and holding these things unless somebody else buys it. So this is the part that most people don't realize is commission free trading isn't free. Right. That the way they make money is that. they get paid by the exchanges for giving them the trade. Right. So there is a commission and that comes out of the price of your stock. So if you're holding for a long term, you may not feel the impact, but you are paying.

Correct. You just don't pay each time you do it. You pay because some other trader is also able to loan those stocks out, right? That's actually a very, very minor part of the economic model. Yeah. Interesting. It's called payment for order flow is a big part of the economic model. what do you think of all this like short interest and people betting against stocks like Tesla?

I'm just curious. I think that makes for a better market. It does. I think that you need short sellers. If we're long, we don't like them. Right. But it makes for a more liquid and well-functioning market. So people should be able to take the other side of the bet.

Absolutely. How do you feel about the activism from anonymous accounts on Twitter and the, like this sort of taking pictures of like depots and speculating rampant speculation like they're flying planes over lots and taking pictures and then spreading it on and it's like well who knows what those cars are and then like the next day the cars are gone and they're like it's almost like they're going mad and it seems like some kind of Russian operation to make it like a Putin Russian operation to make people confused as to what's going on well this is the constant debate about what's good research and what's inside information right

Technically, if it's available to everyone, it's good research. So if you buy drones and you fly them over parking lots to see how many people are shopping at a store, I would argue that's good research. If you're paying someone who's an employee of a company to find out about what their order rate is, that's inside information. Yeah, interesting. here's a good tweet from somebody on your team, Kate, quick history lesson to all those predicting the incumbents move to zero commissions will kill Robin Hood. When Schwab launched a no-fee-robob advisor was supposed to kill wealth front, 20 billion we're still here.

Talk about incumbents and the impact you're having on them and their ability to compete because this goes back to the Clayton Christian Union, sort of crossing the chasm. Can they possibly move quick enough or would they just have to cut 80% of their cost to ever do there, that cannibalism of their own? Well, because of a notion. I don't fear them at all because we're not serving their customers. Our target customer is a millennial who saves. So it's someone who's 28 to 40 with less than a million dollars is the ideal customer for us.

They don't use the incumbents. They use the incumbent banks. So we think of our competitors as the big four banks, Chase, Wells Fargo, B of A, and City. and its banking is one of only two industries with a negative net promoter score. If you look at Chase, they tried to create a personal finance app called Finn. They just wrote it off after spending $100 million on it. Yes, like a skunk works over here with like a bunch of kids working on it with a bunch of senior executives hating them for doing this. Right.

So if we can deliver superb products, if we can help your money. Pardon me, cable is the only other industry with a negative net promoter score. Yeah. It's just like literally, you're. When are you coming to fix my cable? Tuesday. Tuesday morning? Tuesday.

No, no. Tuesday is a day. What hour? Oh, Tuesday morning? It's like, okay, 9, 10, 11? So if you meet people's expectations and you don't require them to talk to someone because our clients say we pay you not to talk to us. Of course.

Then you win their hearts and minds. And then because they're in the saving mode of their career, they just keep giving us more and more money. You know what actually was really impressed with? I think you've gotten better and better. hour of the years is the response time. And I don't know if I got some VIP label on my account. You don't. The response time. I don't know if I feel good or bad about that. I'll be talking about it after. But the response time, when you have a problem at wealth front or a question is wicked.

You know why? Why? We don't have many problems. So if there is a problem, it's just like, yeah, that's a unique one. Like, but do you have how many? You have a lot of customer support people? No, we have actually very few. What's really cool about what we've done is we call, instead of calling it customer support or customer service, we call it product support because the team of product specialists are there to support the products. They're not there to give financial advice.

And half of their job is to support you and deal with your issues. And the other half is to try to determine what are the issues in the product. that are causing you to email us or, in fewer cases, call us. And if we can knock off all of those issues through software development, they don't have a job. So their job is to work themselves out of a job. You know, I just realize I got to ask you about, I love that, by the way, I got to ask you about governance. It seems like we lost the script in Silicon Valley about governance of these companies, super voting chairs, 100 to 1.

I could command that and I wouldn't take it because I think it's wrong. So on a moral basis. On a moral basis. You just don't want it. I don't want it. Why? Why is it morally wrong? Because if I can't convince you through logic of the merits of my argument, I don't

deserve to win that one of the things that I've learned over my career is emotion leads to really bad decisions. And I want a board that constructively challenges me. I don't want a bunch of yes people around me. they're not all stupid. As a matter of fact, the fact that they're not involved in the day-to-day business is good. It's my job to make sure that our board meetings focus on 100,000 foot-level issues, not the details. Now, they're really bad directors if they want to start opining on our email program to follow up on a new product.

But if we stay at 100,000 feet, the fact that they're not involved every single day means that they can give me a perspective and the management team on things that we're too close to. So I look forward to board meetings because it's an opportunity to step out of the day-to-day and really focus on the high level. If we get one great comment on which we can act in a board meeting, it's a spectacularly successful board meeting, not because I have low expectations, but because having one great suggestion that actually impacts the business is really hard to do. If we get two of those in a meeting, amazing. Amazing. Yeah, because these are high-level strategy, big picture things. You're not doing tactical in the meeting. But the numbers

have gotten so big. Mike Volpe, who is a phenomenal venture capitalist and one of my board members, talks about the New Yorkification of Silicon Valley. As more and more people come here to make money, as opposed to come here for the delight over the mission. Yeah. You see more and more greed. And as the numbers get bigger and bigger, you get more and more worried, at least as an investor about missing out on that deal.

And if it requires giving someone 50 to one voting shares and things of that, you're going to fold. So done. But the numbers are so big, you can't miss those deals. I understand why it's happening. I just think it's a shame. Yeah. But I sound like an old man, so for...

No, I mean, being founder-friendly, I mean, the playbook in Silicon Valley used to be, and you were there for it, correct me if I'm wrong in any of this, the person who starts the company is not the person who's going to take it public. We all know that. We're going to get a professional CEO at some point.

And if this person happens to be the unicorn founder who can build the product and get product market fit and take it public, Okay, Malsasov. Great. But that's not what we're, that's not the playbook. Now we're kind of like, well, maybe that is the playbook, we'll put people around them who are good. I think that's always been the ideal.

But there aren't very many people who are great at every step of that process. Although people seem to be getting better at it. Maybe the mentorship is getting better at it, I think. But yeah, no, this is just crazy to see. Or there's attribution error about how great they are that maybe it's because the markets are so big and want the products so much. Don Valentine. Back to Don Valentine. Is that we're basically conflating the result with the cause.

Correct. Cause and correlation. That's the argument against. That would be the argument against. Yeah. I mean, I had one founder, this is going to sound crazy, they came to our accelerator, and they had given themselves 100 to one voting shares after we invested. And then I find out about it, like in some documents when we're reviewing them.

And I'm like, when did this happen? And like, well, we, you know, I'm the only board members. gave them to myself and like you have investors like I'm not sure let's put aside legally if somebody advised you terribly to do this or not where did this come from I had a former student who whose investors were willing to give it to him and he wanted to know my opinion and I said I think that's just awful I wouldn't take it and this like series A this was this was his second round so like probably series A or series A yeah so there was the seed and this was the Series A.

And I said, sure, you can raise money, but from whom? And it wasn't that great of a company. No. And he ultimately didn't take it. But I couldn't believe that he wanted it, and he didn't understand the adverse selection that would come of it if he wasn't Facebook or Google or a company like that. And the adverse selection to define that in this situation would be your company's not great. and you've got an investor who is giving you rights that are ludicrous,

what does that say about an investor who would select to do that with a company that is not a crazy breakout? You basically have picked the worst investor on the plight. Not a good one. What do you think about this entitlement that's going around? When you were back in the day as an investor, you came to the office, you worked, came in, You had a cup of coffee. You took meetings. You did a lunch.

Did more work. You went home. You put your kids to bed. You play with them. Worked. You do a little work at the end of the evening. And you worked. I see a lot of my contemporaries,

this next generation of investors. Kyoto, Coachella, second weekend, Coachella, Burning Man. I'm going to go to the setup week of Burning Man and stay through to Burning Man, two weeks at Burning Man. They don't seem to be working very hard.

Is there like too much entitlement right now? because we're at the top of this peak and people are just not putting the work in. You know, I don't think I have enough perspective on that. I see plenty of people who are working really hard. And I always find that the people who are best at what they do also work the hardest. You know, the famous story was Jerry Rice was perhaps the greatest receiver in football. And he also was the hardest working person in practice. It's correlated.

I think it's highly correlated. Really? I do. So Kobe Bryant would show up at the gym two or three hours before everybody leaving an hour later. and he was better because of that. It was a crazy idea. What about balance? What about life work balance?

Where did that come from in Silicon Valley? I did not come here for balance. And suddenly I'm here. And people are like, I want to get paid max dollars to do minimum work. Why are you in Silicon Valley? How do you expect to have an extraordinary outcome?

Because it's now tolerated. I don't tolerate it. I'm done. I am done with clock punching lifework balance. Please, for the love of God, if that's what your intention is with your company? No.

It's bonkers. I would agree. When did hard work become not the ideal? Well, if you go to Europe, they think we're crazy. Okay. And they have pretty nice lives. Okay. You know what?

When you retire, retire a little bit early, you could take time off. But God, there's so many, I mean, I understand if people don't want to work hard. What I don't understand. If you choose that, great. You chose that. Right. What I'm talking about is... I think it's hard to be on the top of your game and have work-life balance.

Not only is it hard, you don't want to say, I don't think, but let's be honest, it's impossible. I think it is. It's impossible. So what I am referring to here is not that you choose to have a lifestyle that is take it easy and take a siesta or take eight weeks in the summer, whatever. If you want to do that great, you opted into that. But who ups into the Rangers or the Seals or the Olympics or the NBA and then decides to have balance? That's what I find appalling. You're deciding to go do stuff that requires commitment and then not being actually committed.

It's bizarre. People want the reward without the effort now. Because they think they've seen other people accomplish them. and those people would be called lottery ticket winners. Whether they have a startup or not, if the startup turned into a lottery ticket, those are lottery ticket winners. You know, another one of my teaching partners, Bill Barnett, who's a professor at Stanford, taught me a great lesson about teaching. And that is, when we teach the case method, we propose a dilemma or present a dilemma through a case, and then we discuss it to try to figure out what's the best thing to do. And there isn't a right answer, but it leads to a really interesting conversation.

and well orchestrated, we get the students to teach each other. We're not there to lecture to tell them what the right answer is. And one of the things that Bill taught me is that whenever a student would answer with examples, he would say, no, I want your logic. Because an example can be an outlier. You can always come up with an outlier example. Right. So he demands, and I do now too, and I do now, too, and I do.

it inside the company, I demand that people present their logic. Right. And so I think one of the things you're describing is proof throughout liars. Proof throughout liars. Yeah. That is the wrong way to make important decisions. I think so. It's to pick some crazy outlier and be like, you know what?

The steak came out perfect. I must be a great chef. It's like, well, where'd you get the steak? I don't know. What temperature was it? Don't know. What seasoning? I don't know.

randomly put it in there. It's like, okay, make it again. It's like, this tastes terrible. You think you might want to just have a little bit of technique here, a little bit? Andy, you crushed it again. From now on, once a year. Okay. We're just going to lock it in. You got it. It's every Q4. We're going to just assess what happened in the industry for the past year. We'll do our year roundup, Andy and Jason show, and we're just going to do it every year. We do our hour and a half. Such a pleasure to know you and to be part, thank you for letting me part of Wealthfront.

If you guys are out there and you're not using Wealthfront yet, my lord, it's incredible. Sign up right now at Wealthfront.com and this isn't an advertisement. It's just, God, I love the product, and I just love our time together. Thank you very much, Jason.

I'll see you in 2020 in October, at Halloween, from now on the Halloween show with Andy and Jason. It's very scary. We're going to put it in. It's going to be scary. It's going to be some candid opinions. We'll see you all next time. Bye-bye.