00:00hi and welcome to the a 16z podcast this
00:03conversation between Bethany Coates CEO
00:05and founder of brakeline and Andy
00:07rackleff co-founder and executive
00:09chairman of wealth front and also
00:11co-founder of benchmark capital is based
00:13on an event at the breakline
00:15tech program for military veterans which
00:17was hosted at Andreessen Horowitz in it
00:19coats and rackleff talk about what it's
00:21like to go from being an investor to a
00:23CEO the enduring importance of product
00:25market fit and other key elements of
00:27good leadership as an entrepreneur so
00:30Andy one of the things that I've
00:32reflected on quite a bit about your
00:35journey is that you invested in many
00:37promising companies over many many years
00:39you could have ridden off into the
00:42sunset 12 years ago and just put your
00:44feet up and instead you decided to
00:47co-found wealthfront and so you went
00:50from being an investor now to being an
00:52entrepreneur and a CEO you have said
00:55many times that if you had known how
00:57difficult it would be to start and build
01:00wealth from and to run it you wouldn't
01:02have done it what has been so hard about
01:04it oh god people are difficult yeah
01:08you've all led people and you all know
01:11how challenging that can be it's a lot
01:14easier to think of the solution than to
01:16actually execute it but I think that
01:18perhaps is the most difficult part of
01:21the entire process has it been difficult
01:25absolutely the company so basically what
01:27we're trying to do is take the financial
01:30services that are delivered to the very
01:33wealthy through people called private
01:35wealth managers automate those services
01:38and software so we can deliver it for
01:40account minimums of as low as $500 and
01:43deliver better outcomes than what
01:47Goldman Sachs gives you with a fifteen
01:49million dollar account that's because
01:52almost everything and investing that's
01:54good practice is really routine and
01:56computers are a lot better at routine
01:59things than people so one of the
02:03challenges is that the industry is
02:06totally stubby investment or financial
02:09industry is totally stacked against the
02:12no one cares about clients they only
02:15care about how much money they make and
02:17I know that sounds weird coming from me
02:20but I'm an idealist and it just really
02:23bothers me and all of the systems all of
02:26the protocols everything is stacked
02:29against innovation even the regulations
02:32which would put there for a good reason
02:34so we're regulated by two entities the
02:37SEC and FINRA which regulates
02:39broker-dealers well one of the most
02:42challenging restrictions is that you
02:45can't use testimonials to build your
02:47business now every startup that I know
02:50of has been built through testimonials
02:52where someone says I love your service
02:54now the reason is that's how you do a
02:57Ponzi scheme so the SEC forbids you from
03:00using testimonials but what it means it
03:04really limits innovation because you're
03:06at a tremendous disadvantage to the
03:08incumbent so there are all these things
03:09the infrastructure unless you have tens
03:13of millions of dollars you can't get
03:15access to it the banks in order to
03:18electronically transfer money do a
03:21credit check on the company even though
03:23it has nothing to do with the company
03:25the money is just going to transfer so
03:27there are all these dumb things along
03:30the way that you have to deal with you
03:31said that entrepreneurs should keep in
03:33mind that the market is always right and
03:35that it's much more important than you
03:38and your idea and why is that the key
03:41insight and do you see people getting it
03:43wrong absolutely so a lot of
03:45entrepreneurs are often very bright and
03:48they think they're right and when the
03:50dogs don't want to eat their dog food it
03:53must be the dog's fault so let me find
03:57some new dogs then they just keep going
04:00and going and going and they don't want
04:02to listen to that feedback unfortunately
04:05the people who do that almost never
04:07succeed so the fact that you can run at
04:11a hundred miles an hour into that wall
04:13isn't going to make you successful
04:14you're just going to die
04:16so what matters more is your ability to
04:20navigate to try to figure out which dogs
04:25food if any and then how do you deliver
04:28to them in a better way and so that's
04:31what I mean by the market is always
04:33right if the market doesn't want to buy
04:35your product it doesn't matter how smart
04:37you are or what a great idea
04:40logically your idea is all that matters
04:43is whether or not someone has a burning
04:46a desperate problem that needs to be
04:50and so does that mean that the most
04:52famous companies that we think of today
04:55when they were at the business yeah none
04:59of their original ideas were the ideas
05:01on which they succeeded so Apple Google
05:05you name the company Salesforce
05:07hewlett-packard none of them succeeded
05:10at their original idea if you can
05:13but they all revise history to make it
05:16seem like they did because you want to
05:20buy products from a company that
05:22intended to sell to you and so the mark
05:26of a great marketer is there a great
05:28revisionist and so I don't look ill upon
05:32it I just understand it and respect it
05:35because that's what consumers want to
05:37hear so now that you're a CEO of your
05:42own company and you've had to navigate
05:43these things as well that's the other
05:45thing that's hard is it the dogs don't
05:47eat your dog food you have to go home at
05:49night oh what am I gonna do as you
05:54look back the experience of being a CEO
05:56would that change the advice and counsel
06:00that you would give entrepreneurs at
06:03this stage mark wisely can I used to
06:05teach together and I learned a
06:08tremendous amount about being a CEO for
06:10mark now mark hates venture capitalists
06:13because the company that he grew to be a
06:16billion-dollar business actually was
06:19very very hard to finance and I think 60
06:21venture capitalists including myself
06:23turned him down so he does not have a
06:26higher opinion of venture capitalists
06:28so we got off to a rocky start but I'll
06:32never forget after I started the company
06:35years Android teaching he said oh you
06:38would be such a better than sure
06:39capitalist now for having had this
06:41experience and I said mark I couldn't
06:44disagree with you more and he said why
06:46and I said because the skills that
06:49you're developed as an operating
06:51executive have nothing to do with
06:53identifying which company might succeed
06:56I think I'm a better board member
06:59because I talk less now because you have
07:01a greater appreciation for how the
07:03sausage is made and it's ugly it's
07:06really really ugly and so now if I go
07:10into a board meeting I'm gonna ask fewer
07:11questions and focus a lot more on do I
07:15think the management team knows what to
07:18do because if they do I'm gonna trust
07:21they're gonna know what to do better
07:23than I will it's not my job to find
07:26issue with any of the particulars things
07:29that they do they're closer to the
07:30business than I it's my job to determine
07:33one today a product market fit to hold
07:36the mirror up to them so they can be
07:38intellectually honest about their
07:39product market fit or in general do they
07:42seem to know what to do or they grasping
07:45at straws and I think before I was an
07:49executive I might have engaged sooner
07:52but I don't think the advice that I give
07:55is terribly different
07:56you've said that embracing your love of
07:59teaching has made you a better more
08:01authentic leader and here again it's
08:04this I think new different skill set or
08:07type of skill set that you weren't
08:09necessarily using on a day-to-day basis
08:11as an investor or a CEO but then you
08:13found a way to weave it in as you're
08:15running wealthfront what is it about
08:17teaching that makes you more effective
08:19well I think like all of you have been
08:22leaders and I'm sure you all
08:24experimented with different styles of
08:26leadership you might have first tried
08:29you're a commanding officer and then you
08:31might have looked to see who else was
08:33more authentic to me and it takes a
08:36while to figure that out as a venture
08:38capitalist I didn't really have to lead
08:40I did not lead a team of investors I
08:44sometimes would lead
08:46the entrepreneur but only when they felt
08:49like they were lost and that was a bad
08:53the Selden to get out of those but I
08:56didn't have to lead people and so I
09:00never really had I knew what some of the
09:02important characteristics were but I
09:05hadn't figured out an authentic form of
09:08leadership so I got the company started
09:11and ran it and then I never saw myself
09:13as an executive so I brought in a CEO
09:16who had more experience he ran it for
09:19three years and then I came back about
09:2017 months ago and so when I came back I
09:23made a number of changes we have weekly
09:27product reviews for products that are in
09:29development to make sure that the
09:32project team is getting the input of the
09:35executive staff they don't have to act
09:37on that input we're just providing some
09:40perspective and this one afternoon we
09:43had two terrible meetings where each of
09:47the project teams had ignored many of
09:51the basic principles on which we build
09:55products to the point that we started to
09:57codify all of these things so that it
10:00doesn't happen anymore and I got very
10:03frustrated and I started asking really
10:06tough questions and in an intimidating
10:09fashion which didn't help matters at all
10:12and so after the meeting someone who was
10:15two levels below me a director level
10:18person pulled me aside and he sort of
10:21had the intervention and he said Andy
10:24you're much better when you teach us or
10:29you provide context so that we can make
10:31our own decision then when you tell us
10:34what to do or get frustrated with us for
10:37not having paid attention to the context
10:40and it's sort of like the light bulb
10:42went off and I realized what a horrible
10:45job I had I knew the meetings went
10:47poorly but that really helped me
10:51understand what a poor job I
10:53done and so I went home that night and I
10:56thought a lot about it and it was a very
10:58emotional meeting too for everyone who
11:00was involved and I went home that night
11:03and I committed to spending a lot more
11:06time providing context and a lot less
11:09time providing details detailed feedback
11:13and the team reacted incredibly well we
11:18started shipping products a lot faster
11:20and the growth of the business has
11:22accelerated so yeah you have two
11:28favorite pieces of advice for
11:29entrepreneurs and folks in general so
11:33the first is put the gun in the other
11:34person's hands not actually learned from
11:36one of my partners and the second is
11:38always create a fear of loss yes can you
11:42talk to us about what those tools of
11:44advice mean sure so I'm a really big
11:47believer in the golden rule you know we
11:49teach it to our children but very few
11:51people actually execute it in business
11:54and there's no reason for that so in my
11:57life I have found that treating other
11:59people the way I'd like to be treated
12:01leads to far better outcomes but I had
12:04the good fortune to go to graduate
12:06school with a fellow named Bruce
12:07Dunleavy and Bruce is just amazing at
12:11influencing people probably the best
12:13influencer I've ever met and one of the
12:16things that he does is he takes this
12:18golden rule to the next level that in
12:21any negotiation he always says to the
12:25person on the other side of the table if
12:27you tell me what's fair and I'll do that
12:30now that's not what you're used to from
12:32those people now for good people they
12:36usually feel pressure and they actually
12:38want to give back more because they
12:41don't want to come across as greedy now
12:44he's not doing it for that reason but he
12:46truly believes that I trust you Bethany
12:49you tell me what you want to do now if
12:52Bethany comes back with a reasonable
12:55offer even something that's slightly
12:57above market I'd say fine now if Bethany
13:01takes advantage of this situation then
13:04I'll just never work with her again so
13:07nation overvaluation if the market price
13:09was five million dollar value for the
13:13company and somebody came back and said
13:14seven Bruce would say sure but if
13:16someone came back and said fifteen he'd
13:19just walk away because that's not the
13:22kind of person you want to work with and
13:24I found in my life that treating every
13:27negotiation that way works out 90% of
13:31the time and I sleep better at night
13:34number one and then fear loss comes from
13:38another one of my partner's all my best
13:40ideas come from other people I just
13:43packaged them differently another way to
13:45say that these days is FOMO fear of
13:47missing out so this actually was awarded
13:49a Nobel Prize by Kahneman and Tversky so
13:53what they found is that the pain that
13:55comes from loss is far greater than the
13:58joy that comes from gene and that very
14:01few people act out of opportunity they
14:05almost always act out of fear of missing
14:07out for example if I want to recruit you
14:10to come work for me you'll sell them
14:13join just because I give you a good
14:16you'll typically wait until there maybe
14:21isn't a better offer so you're always
14:24trying to work your options to figure
14:26out what's the best thing for you and
14:28it's only once you realize that the deal
14:30might be going away that you saw and
14:34it's amazing how this plays out not just
14:37in recruiting but it plays out in
14:39business development it plays out in
14:41sales if you can't create a fear of loss
14:44you're never going to close the
14:46transaction and so basically I have to
14:49make you believe that the opportunity is
14:52going away but you have to do it in a
14:55courteous way so you have to be
14:57courteously indifferent my question for
15:00you is what have you found out
15:01surprising the thing that most surprises
15:04me is how consistently stupid people are
15:10so there is a tremendous amount of
15:13research that has been published that
15:16shows that even the experts can't pick
15:20stocks to outperform the market I mean
15:22this is incredibly well understood and
15:25our chief investment officer wrote the
15:29book literally called a random walk down
15:31Wall Street forty three years ago that
15:34found that people would be better off
15:36buying an index than they would trying
15:39to pick individual stocks the most
15:41famous chapter in the book was one where
15:44he ran an experiment where he had
15:46chimpanzees throw darts at a list of
15:50stocks and he compared their performance
15:53to mutual fund managers and the
15:56chimpanzees won most of the time so this
16:02is incredibly well known yet people
16:06still buy mutual funds and pay 1% for
16:11the right to do it that's the first
16:13thing that just amazes me the second
16:16thing that amazes me is that there has
16:18been and this is incredibly timely
16:20there's a tremendous amount of research
16:23that has shown that individual investors
16:26buy when the market goes up and sell
16:29when the market goes down this is
16:32unbelievably stupid but it feels right
16:36now nothing about investing good
16:39investing feels right contrarians make
16:42money you buy when the market goes down
16:44and you sell when the market goes up
16:46it's the exact opposite
16:48you cannot time the market there are
16:51probably five investors in the entire
16:53world who are good at timing the market
16:56and they have hundred million dollar
16:59minimums and get paid enormous fees so
17:03if you as an individual think you can do
17:06it you should start your own hedge fund
17:10galbart an organization found that this
17:13behavior of buying when the market goes
17:15up and selling like those down cost the
17:17average investor about 4% annual
17:20it's just terrible it's a slow and
17:23steady wins the race
17:25just invests the same amount of money
17:27every month or quarter or or half you
17:30did you find that the comparison
17:33industry have seen your success and are
17:36following your trend of going more
17:40towards a software-based quite the
17:44truly again this is human nature one of
17:47the biggest mistakes that entrepreneurs
17:49make is thinking that everyone that once
17:53others see what you're doing of course
17:55they're gonna drop what they're doing
17:57and do what you're doing it doesn't work
17:59that well because we all have opinions
18:02and we all have egos just because
18:06someone's doing well doesn't mean that
18:08I'm likely to drop what I'm doing and do
18:11what they're doing there's actually two
18:13term for this in psychology cognitive
18:15dissonance it's like why do people smoke
18:17you know they know that it's gonna give
18:20them cancer but they come up with
18:22reasons why I won't give them cancer
18:23they work out or the better genes or for
18:26whatever reason and so people tend not
18:29to copy other people they do what
18:32they're most comfortable with Willy
18:34Sutton was a famous bank robber and they
18:36asked him why did you rob banks and he
18:38said that's where the money is
18:39so all the money is with older people
18:42who are near retirement so every one of
18:46our competitors is focused on the bank
18:49where the money is which are older
18:51people older people don't want pure
18:53software so even our closest competitor
18:56which was pure software has given it up
18:58and they now have married advisors or
19:01planners to their software now I'm a big
19:05sports fan and Wayne Gretzky had a line
19:07that I always loved and they asked the
19:09great one why were you so good and he
19:12said everyone skates to where the puck
19:14is I skate to where the puck is going to
19:16be I think that's what we're doing time
19:22there were a couple principles to your
19:23probably management that they kind of
19:25messed up and then you end up kind of
19:27codifying some of those things because I
19:28didn't do a good enough job providing
19:31that context there are things like
19:36always provide context that you can
19:40never have a black box that if you want
19:43to engender trust especially through
19:45software people need to understand why
19:48you did what you did always develop for
19:53our core target audience even if it
19:56means a lousy solution for other people
19:59so one of the challenges we faced is
20:02that with investment or financial
20:04products there are a lot of corner cases
20:05by serving everyone you serve no one so
20:09we had all of these corner cases in our
20:11products and we weren't making decisions
20:13so we weren't shipping products we
20:16weren't making decisions so we could
20:18actually get software out the door and
20:21so I came in and I said was that I'd
20:23rather that we build something that's
20:25great or superb for 70% of our clients
20:29and shitty for 30 than something that's
20:32pretty good for a hundred number one
20:34you'll never develop the product that's
20:36pretty good for hundred because there's
20:38too many things that you need to address
20:40number two you don't build love I
20:44believe that delight is the greatest
20:46form of virality and the way you build
20:49delight is by solving a problems burning
20:53need so if we can do that for 70 percent
20:56of our clients the 30 push that might
20:58complain about us once but they're only
21:00going to complain about us once but the
21:0270 percent who love us
21:03are gonna keep talking about us so those
21:07are two examples of things that we do in
21:10our product and that we will purposely
21:12piss people off with what we do if it
21:17serves our core target audience my
21:20question is what are the three key
21:22takeaways say you want your students to
21:24take from your classes when you talk to
21:26them what would they be keep learning is
21:30the way I end my class
21:32so we've just spent ten weeks exploring
21:35a particular topic but we've only
21:38touched the edge of the issue and if
21:41you're gonna be successful in your
21:43career keep learning and it's gonna be
21:47your judgment that's going to separate
21:48you from your colleagues the line that I
21:51like to use is the CEO is seldom the
21:54smartest person in the room but she
21:56usually has the best judgment and so
21:59really think about how can you develop
22:02your judgment judgment is really
22:04decision-making under uncertainty
22:06and it's pattern matching and so you
22:10want to keep growing that pattern
22:12matching database and be really really
22:15conscious about it all right Andy thank
22:18you so much for joining us
