Supported by Greenhaven Road Capital, finding value off the beaten path.
Andy Rachleff was on Going Deep with Aaron Watson and if the podcast could be described in one image it would be this:
That’s from Howard Marks. We like Marks around here; Howard Marks 1, Howard Marks 2, Howard Marks’s ‘Expert Opinion’, and Howard Marks 4. Wow. That’s a lot of Howard Marks. Let’s jump into what Rachleff had to say.
In a revisitation of Zero to One, I guessed that what Peter Thiel really wants is for ideas to be in the “Tyson Zone.” Rachleff tries to be “non-consensus” too. The Wealthfront service is different, it’s access to a service (financial advice) they couldn’t previously afford. At Wealthfront they hire differently, choosing engineers rather than bankers and giving them interesting problems to solve. Rachleff said about this:
“To be non-consensus and right you have to have tremendous knowledge of your domain…When we started the idea of people trusting their money to be managed exclusively by software was a radical idea.”
A radical idea, that’s the Tyson Zone.
The idea is mainstream now and could be the default in the future but it hasn’t always been that way. In fact, Rachleff hasn’t always felt this way. The first iteration of Wealthfront was a hybrid approach between apps and appointments. It didn’t work. “They (customers) consistently told us they would prefer we manage all their money adequately and inexpensively rather than a portion of it superbly.”
Wealthfront redirected their efforts and found a better product market fit. This, Rachleff said, “trumps everything else. If dogs don’t want to eat your dog food you’re not going to succeed.”
A good product market fit also solves the story-telling problem startups face:
“The biggest challenge a startup faces is it cannot afford to educate. Startups have to preach to the converted. We can’t convince of the merit of our approach, we have to rely on others.”
How do you start to think about this? Rachleff suggested the books The Innovator’s Dilemma and The Innovator’s Solution by Clay Christensen. “Clay’s original theory of disruption is worthy of a Nobel Prize…These two books are unbelievable.”
Those books say that customer’s preference migrate. Where speed once ruled the day now it’s about brand. Brand will give way to size and size to cost. It’s an evolution. Applying this theory isn’t so easy. Established companies have to serve their existing customers. New ideas – which may or may not be what the customers want – aren’t worth pursuing. Sometimes they are parts of the buiness an established company is all too happy to be rid of. Reading the Christensen’s books won’t tell you what to do, but they can give you a lay of the land.
To get beyond market returns you have to be non-consensus. Sometimes the market returns are fine. Low-cost index investing is a good path for many people. Other times like when drafting NBA players (Daryl Morey, Sam Hinkie), creating TV shows (Brian Koppelman, Alton Brown), or investing — being different is the only way to succeed.
Being different requires a deep understanding of customers, competition, and markets. Scott Norton provided a nice example in, of all places, ketchup.
Thanks for reading, I’m mikedariano.