Supported by Greenhaven Road Capital, finding value off the beaten path.
Andy Rachleff joined Jason Calacanis for a nice seventy-five minutes of startup, investment, and strategy talk. Much like his conversation with Aaron Watson, Rachleff reminds us to revisit Howard Marks. Here are my notes.
Luck Rachleff started venture investing in 1996, “Right when Netscape and the Mosaic browser came out.” Sometimes, he said, “Better to be lucky than good.”
Starting Benchmark. The company’s start came from envisioning someone else’s end. Throughout the interview, Rachleff’s advice for founders is, figure out your competitor’s greatest strength and make it their greatest weakness. In venture capital, John Doerr was Kleiner Perkin’s strength. “We figured the best way to beat an individual was with a team.” And so Benchmark’s structure was created. And it worked well. “We thought an equal partnership would attract talent like no other firm…On and on we keep attracting great people who are better than the founders were.”
What’s the name of this magical arrangement? “We call it communist capitalism.”
What job are your customers hiring you for? When the conversation switches to Wealthfront, Rachleff explains, “millennial pay us not to talk to them.” How do they do that? “What might surprise people is the thing that most attracts people to our service is we do everything in software.”
Calacanis is surprised when he hears travel agents are still around, but if we ask what job are your customers hiring for? we can see why. Baby boomers and large groups use travel agents because of an informational disparity the internet can’t bridge. Millenials have the mindset of, I’ve got an app and I’ll figure it out.
But Wealthfront isn’t a casino. Their job is to provide the best service they can. Crytpo is “a great interest to our target demographic, but we are a boring service that’s focused on investment strategies that have been academically proven over time.”
“Everything we do,” Rachleff said, “is rules-based and unfortunately crypto doesn’t qualify for that.”
Some rules originated with cash flows.
“My investment idol is a guy named Howard Marks who runs a hedge fund called Oak Tree, and Howard likes to say, in order for something to be an investment it has to have a cash flow because the only way you can evaluate something is by evaluating its cash flow. If there isn’t a cash flow it’s speculation.”
But that doesn’t mean you shouldn’t invest in crypto. “If you think about buying Bitcoin as entertainment you’re going to be fine,” Rachleff said. Calacanis said he gets similar questions about angel investing since he wrote his book. Others have said this about DIY investing. If you’re going to put in the time to master something then go for it but don’t invest so much you blow up.
Zero Marginal Cost & Economies of Scale. That Wealthfront even exists is interesting. Besides learning from Marks, Rachleff mentions Bridgewater and other pioneering financial firms that innovated something which is now deliverable to the masses. This was a theme to Albert Wenger’s podcast with Patrick O’Shaughnessy too. Wenger’s big idea is that everything has become (or will become) computable and distributable thanks to zero marginal cost.
Besides distribution, the beauty of software Rachleff says, “it keeps getting better.” For example, Wealthfront combines your ‘house’ savings account with data from Redfin and Zillow to give an estimate about buying a home, the number one withdrawal reason of millennials.
The software also lets Wealthfront install bias frictions.
“There’s a lot of research that suggests human nature is such that we want to sell when the market goes down and buy when the market goes up, which the exact opposite of what you should do. The problem is, it doesn’t feel right. it doesn’t feel right to sell when you’re winning and it doesn’t feel right to buy when you’re losing.”
Calacanis put it better; “Anyone who has played blackjack and was up ten grand will tell you, leaving the table is heartbreaking.”
Nudging. “You don’t pick the risk level, because most people don’t know how to. We tell you what we think it should be and you can adjust it if you want.”
For a long time, I viewed nudging as a panacea without realizing that nothing is a panacea. Everything has tradeoffs. Nudging too.
Lessons from Reed Hastings. “There’s no one I think more about as I run Wealthfront than the lessons I learned from Reed Hastings.”
What makes him good?
“He keeps it really simple.”
“He takes asymmetric risks.”
Is that a better form of risk?
Yeah, and it comes from pattern recognition.
Venture Capital Pattern Recognizers. “I don’t think the vast majority of people should invest in startups,” Rachleff explains as he tells Jason that the top two-percent of firms generate ninety-five percent of the realized gains. What makes that top group so good?
Success. “You have to know which leaps of faith to take.” You have to know which asymmetrical risks are worth it. “The thing that separates the premier firms from the other firms is they’ve had a lot of success and they’ve learned from that success which leaps of faith to take – which you wouldn’t know unless you’ve had those successes.”
Thanks for reading.