20VC Andy Rachleff, Founder @ Benchmark & Wealthfront on What Makes The Best CEO & Board Member & Why Ivy League Endowments Are The Best Managed Capital In The World

Summary Notes


Harry Stebbings hosts venture capitalist Andy Ratcliffe on the "20 minutes VC" podcast, discussing Ratcliffe's journey from co-founding Benchmark Capital to teaching at Stanford and eventually co-founding Wealthfront. Ratcliffe shares his insights on the evolution of VC, the importance of learning from success, and the shift from high technical risk to high market risk investments. He emphasizes the intellectual property of top VC firms—their experience with success—and the minimal applicability of VC skills to entrepreneurship. Ratcliffe also critiques the investment management industry's treatment of small investors and outlines Wealthfront's mission to democratize sophisticated investment management. He predicts automated investment services will see rapid growth, mirroring the adoption trends of past technologies.

Summary Notes

Introduction to 20 minutes VC Podcast

  • Harry Stebbings is the host of the 20 minutes VC podcast and has a Snapchat handle @H.Stebbings.
  • Harry had a list of three venture capitalists he wanted to feature on his show, and Andy Ratcliffe is one of them.

Welcome to the 20 minutes VC with your host Harry Stebings at H. Stebbings on Snapchat. Now, when I started the 20 minutes VC, I wrote down the three names of vcs that out of all the ecosystem I most wanted to have on the show...

The quote introduces the podcast and the host's anticipation for having Andy Ratcliffe as a guest, highlighting the significance of this interview in the context of the show's history.

Andy Ratcliffe's Background

  • Andy Ratcliffe co-founded Benchmark Capital from 1995 to 2004 and is now the executive chairman of Wealthfront.
  • Benchmark Capital has backed major companies like Twitter, Snapchat, Dropbox, Uber, and Instagram.
  • After leaving Benchmark, Andy joined the faculty at Stanford Graduate School of Business to teach entrepreneurship.
  • Wealthfront, co-founded by Andy in 2008, has over $2 billion under management.

So from 1995 until 2004, Andy was a cofounder and general partner of world famous benchmark Capital... And upon his retirement from Benchmark, Andy joined the faculty of the Stanford Graduate School of Business... And in 2008, Andy cofounded Wealthfront...

This quote outlines Andy Ratcliffe's notable achievements in venture capital and his transition to education and founding Wealthfront, establishing his expertise and authority in the field.

Venture Capital and Education Promotions

  • VC Unlocked is a joint program by Stanford Center for Professional Development and 500 startups.
  • The program is a two-week crash course on investment strategies and how Silicon Valley operates, featuring top investors like Dave McClure and Jason Calicanis.
  • Lisa mattress is promoted as a quality product for investors who need rest after intensive learning.

VC unlocked really is a must. It's a jointly run program by Stanford center for Professional Development and 500 startups... And no better way to end the day than by climbing into your Lisa mattress...

The quote promotes VC Unlocked as an essential program for aspiring investors and mentions a mattress brand as a means to emphasize the importance of rest in a high-paced learning environment.

Andy Ratcliffe's Path to VC

  • Andy was interested in computer science, investing, and entrepreneurship from a young age, influenced by his father's small business.
  • He pursued finance and computer science in college and initially aimed for a career in computer science in New York.
  • He switched to investment banking and was advised to attend Stanford Business School to enter the venture capital world.
  • Andy was in venture capital for eleven years before starting Benchmark with his partners.

I had read about the venture capital business after my junior year of college... My dad ran a very small business and I thought, God, if I could work on that, that would be better than anything I could ever imagine... He suggested I go to business school at Stanford because that would help get me into the venture capital world.

Andy's quote provides insight into his early interest in venture capital, his educational background, and the strategic decision to attend Stanford Business School to facilitate his entry into the venture capital industry.

Transition from VC to Operations

  • Andy's move from venture capital to operations was not planned but occurred serendipitously.
  • He believes great ideas often happen by chance and that they find you rather than you finding them.
  • The motivation for starting Wealthfront was driven by a desire for social good.

Because I'm not very bright. It's not at all optimal, and I had no intention of starting a company. It actually happened serendipitously... I never intended to start a company, but the idea hit me and it was something that I needed to do for the social good of it.

This quote reflects Andy's humility and the unplanned nature of his shift from venture capital to operations, emphasizing the role of serendipity in the genesis of Wealthfront and his social motivations.

The Genesis of Wealthfront

  • After retiring from venture capital, Andy focused on giving back through teaching, board service, and cancer research funding.
  • While serving on the University of Pennsylvania's Endowment investment committee, he realized the potential for software to democratize endowment-style investing.
  • The idea for Wealthfront was sparked by the desire to provide access to top-tier investment products and services to a broader audience.

I retired from the venture capital business in the beginning of 2005 and I had a life that was well beyond anything that I ever could have imagined... And one day I was sitting listening to a presentation by the investment team on how they generate their outstanding returns... And I thought, God, if you could do that in software and lower the minimums associated with the managers in which they invest, we could bring endowment style investing to the masses.

Andy's quote describes his post-venture capital philanthropic activities and the moment of realization that led to the creation of Wealthfront, highlighting his ambition to make sophisticated investing accessible to more people.

Democratizing Investment Management

  • The speaker believed that individuals with less than $10 million could not afford high-quality investment services.
  • By incorporating software that emulates what endowments do, the aim was to democratize sophisticated investment management.
  • This approach was seen as offering a social good by making advanced investment strategies accessible to a broader audience.

"So I thought by putting in the software most of what the endowments do, I could democratize access to sophisticated investment management and thereby offer a social good."

The quote explains the speaker's motivation to use software to replicate the strategies used by endowments, making them available to those who typically couldn't access such services, with the intention of providing a social benefit.

Ivy League Endowments Management

  • Ivy League endowments are considered the best managed due to their methodology and manager evaluation.
  • They use modern portfolio theory for asset allocation and excel in selecting managers to generate alpha.
  • Large investments allow for detailed information and trade access, enabling them to distinguish between luck and skill in manager performance.

"What really separates them is their ability to evaluate managers... you can get all of their trades and do a level of attribution analysis that can truly help you determine who's lucky and who's good."

This quote highlights the distinction Ivy League endowments have in their ability to thoroughly analyze and choose investment managers, attributing their success to skill rather than luck.

The Appeal of Wealthfront

  • The speaker started Wealthfront with the intention of addressing an injustice in traditional investment management.
  • The passion for creating social good was a driving force, despite the challenges faced in the process.
  • The difficulty of finding product-market fit was identified as a significant challenge for entrepreneurs.

"I really started the company to right or wrong. It really bothers me how much the traditional investment management industry takes advantage of small investors and there's no reason for that."

The speaker's motivation for founding Wealthfront was to correct the perceived exploitation of small investors by the traditional investment industry, aiming to create a fairer system.

Finding Product-Market Fit

  • The journey to find product-market fit involves iterating through value hypotheses, which can be a difficult and sometimes depressing process.
  • Product-market fit is indicated by exponential organic growth, as opposed to growth driven by paid acquisition.

"It's very, very rare for anyone's initial idea to succeed. And the process of iterating through a series of value hypotheses is very, very difficult."

This quote describes the challenging process of refining a business idea to achieve product-market fit, emphasizing the rarity of initial ideas succeeding without significant iteration and testing.

Online Investment Management Landscape

  • The online investment management landscape is crowded, but not all services are equivalent.
  • Differentiators include net of fee after-tax, risk-adjusted performance, and the evolution of services.
  • The speaker believes that the combination of the best investment management solution and a delightful user experience will determine the market leaders.

"Just because everyone calls themselves the same thing doesn't mean they all deliver the same capability."

The quote points out that despite many players in the online investment management space claiming similar offerings, there is a significant difference in the quality and effectiveness of their services.

Lessons from Venture Capital to Entrepreneurship

  • The speaker notes that the skills learned in venture capital are not directly applicable to being an entrepreneur.
  • Being an entrepreneur provides a different perspective on leadership and investment choices.
  • A venture capitalist's value is primarily in finding and choosing investments, while a CEO's role is more about leading and reinventing the business.

"Very little of what you learn in venture capital is applicable to being an entrepreneur... 90% of the value added of a venture capitalist is finding and choosing the right investments."

This quote contrasts the roles of venture capitalists and entrepreneurs, emphasizing that the primary value of a venture capitalist lies in their investment choices, while entrepreneurial success is more about effective leadership and business innovation.

Characteristics of Great CEOs and Board Members

  • Great CEOs are characterized by their ability to continually reinvent their business over time.
  • The speaker believes that being a good board member involves speaking less and listening more.
  • The impact of board members is seen as enhancing the outcome of a company but not as critical to the success of already successful ventures.

"I think a great CEO is someone who over the long period of time, is able to continue to reinvent their business."

This quote defines what the speaker believes makes a CEO great, which is the capacity for ongoing innovation and adaptation within their company.

Importance of Reinventing Businesses

  • The cycle of business includes phases of growth and decline.
  • Exceptional CEOs can layer new businesses on top of existing ones.
  • Successful companies continuously add new businesses to sustain growth.
  • Examples include Apple's progression from computers to iPods, iPhones, and iPads, and Adobe's development from PostScript to Photoshop, PDFs, and marketing tools.

Andy Ratcliffe wrote a tremendous article about this that he published on the first round review on the importance of reinventing your business. Every business has a phase of going up and a phase of going down. What really sets apart the special CEOs is they're able to layer on new businesses on top of the old businesses.

This quote emphasizes the need for businesses to innovate and reinvent themselves to avoid decline. Special CEOs are highlighted as those who can successfully introduce new products or services to build upon their company's existing foundations.

Characteristics of a Great Board Member

  • A great board member operates at a high-level perspective.
  • They help ensure management's intellectual honesty regarding product-market fit.
  • Effective board members ask tough questions rather than directing management.
  • The role of a board member is valuable when they challenge management to think critically.

A great board member is one who focuses on 100,000 foot level because they can't possibly know the details of the business. And I think being an outsider, they can hold the mirror up to management to make sure they're being intellectually honest about their product market fit.

This quote defines what makes a great board member, highlighting the importance of maintaining a strategic viewpoint and facilitating self-assessment within the company's management team.

Evolution of the VC Ecosystem

  • Transition from high technical risk and low market risk investments to the opposite.
  • The shift from hardware to software decreased technical risk but increased market risk.
  • Market risk is the primary cause of investment failure.
  • Venture capitalists now often let angels take early-stage investment risks.
  • VC firms have moved to later-stage investments with similar return potential despite higher valuations.

Well, the biggest change is the transition from investing in companies that have high technical risk and low market risk to companies that have low technical risk and high market risk.

This quote outlines the fundamental shift in venture capital investment strategy over the past two decades, moving away from technical risk towards market risk.

Monopoly-Like Characteristics of VC and Intellectual Property

  • Top VC firms like Benchmark and Sequoia consistently achieve high returns.
  • Intellectual property of premier VC firms includes the lessons of success.
  • Learning from success is considered more valuable professionally than learning from failure.
  • Top firms understand the risks worth taking, while second-tier firms focus on avoiding risks.

And the reason that I don't think it's going to change is that the premier firms have a form of intellectual property. No one seems to understand this and that intellectual property is the lessons of success.

This quote suggests that the dominance of top VC firms will persist because their intellectual property—understanding the lessons of success—gives them a competitive advantage in making successful investments.

Investment Decision Making and Pattern Recognition

  • The quote is incomplete and does not provide enough context to summarize key points or themes.

Well, the benefit of working f

Since the quote is incomplete, it does not offer information that can be used to understand or explain the speaker's views on investment decision making and pattern recognition.

Learning from Experienced Individuals

  • Working with seasoned professionals in a firm provides an opportunity for continuous learning.
  • Being in an environment with experienced individuals is like "drinking from a fire hose" due to the wealth of knowledge available.

"For a great firm is you get to work with people who've done it for a long time before you, and it's like drinking from a fire hose and you never stop learning. It's really quite amazing."

This quote emphasizes the benefit of being in a firm with experienced colleagues, highlighting the intense and ongoing learning process.

Quick Fire Round Format

  • The quick fire round involves short statements followed by immediate thoughts.
  • The format is designed to elicit quick, spontaneous responses.

"Firearound I say a short statement and then you give me your immediate thoughts. How does that sound?"

The quote describes the structure of the quick fire round, indicating the expectation of immediate reactions to short statements.

Importance of Understanding Disruption Theory

  • Recognizing the significance of disruption theory in venture capitalism.
  • The speaker believes that a better understanding of disruption theory would have enhanced their performance as a venture capitalist.

"Your favorite book and why the innovator's dilemma. Had I understood disruption theory when I was a venture capitalist, I could have done a much better job."

This quote reveals the speaker's favorite book and their belief that knowledge of disruption theory is crucial for success in venture capitalism.

Advice on Focus and Control

  • The best advice received is to only worry about things that are within one's control.
  • This advice suggests a focus on influenceable outcomes rather than external factors.

"Ever given to you only worry about the things within your control."

The quote succinctly conveys the advice to concentrate on controllable aspects, which is a strategy to reduce unnecessary stress and increase effectiveness.

Mentorship and Influence

  • Bruce Dunleavy, a business school classmate and partner, is identified as the speaker's mentor.
  • The mentor was recruited to a partnership due to his influential skills and respected advice in the venture business.

"This one might surprise you, but my mentor was one of my partners, Bruce Dunleavy. Bruce is two years older than I and he was a business school classmate of mine, the kind of person that I just knew I had to work with."

The quote introduces Bruce Dunleavy as the speaker's mentor and highlights the importance of his influence and the professional relationship that led to their partnership.

Dismissal of Blogs and Newsletters

  • The speaker does not read blogs or newsletters, believing they often lack informed perspectives.
  • Direct knowledge from meeting companies is preferred over second-hand information.

"I don't read blogs or newsletters because they're seldom well informed."

This quote explains the speaker's preference for acquiring knowledge directly from the source rather than relying on potentially uninformed secondary sources like blogs or newsletters.

Critique of Public Information-Based Writing

  • The speaker criticizes bloggers for not engaging with companies when writing about them.
  • There is a belief that many blogs miss the point due to reliance on publicly available information rather than direct company insights.

"It drives me crazy that bloggers never seem to ask companies questions when they write about them. They just go based on public. They base their writing on publicly available information, which doesn't capture the truth."

The quote criticizes the approach taken by some bloggers, suggesting that a lack of direct engagement with companies leads to a failure to capture the full truth in their writing.

Technology Adoption and Investment Services

  • Discusses the pattern of new technologies being adopted at increasingly faster rates.
  • Highlights the growth potential of automated investment services like Wealthfront.
  • Belief that automated investment services represent a significant market opportunity, not limited by network effects.

"And if you drill down into any one of those market segments, you'll find the same thing. So, for example, in passive investing, etfs have been adopted at a much faster rate than index funds were. And automated investment services like Wealthfront have been adopted at twice the rate that etfs have."

The quote discusses the trend of faster adoption rates for new technologies, using the example of ETFs and automated investment services to illustrate this pattern, and implying significant market potential for services like Wealthfront.

Gratitude and Support for Wealthfront

  • Expresses excitement for the future growth of Wealthfront.
  • Acknowledges the potential of Wealthfront to become a significant business in the investment sector.

"And Andy, I look so forward to watching you build Wealthfront into the huge business that we both know it can be."

The quote conveys the speaker's enthusiasm and confidence in the future success of Wealthfront, suggesting a shared vision for the company's growth.

Additional Resources and Offers

  • Promotional offers for Wealthfront and the 20 Minute VC podcast are mentioned.
  • Educational opportunities in investing, such as VC Unlocked, are highlighted.
  • Lisa mattresses are promoted for their quality and convenience.

"And of course you can get an extra $5,000 managed for free on wealthfront if you sign up using www.wealthfront.com twentyminutevc."

This quote is part of a promotional offer for Wealthfront, incentivizing listeners to sign up for their services.

"VC unlocked is the place for you. It's an unbelievable two week crash course."

The quote advertises VC Unlocked as an educational program for aspiring investors, emphasizing its intensive and comprehensive nature.

"And it will teach you the tips, tactics and strategies of some of the best investors in the industry."

This quote outlines the benefits of the VC Unlocked program, highlighting the opportunity to learn from successful investors.

"So check it out on 500 vc apply."

The quote provides a call to action for listeners interested in the VC Unlocked program, directing them to where they can apply.

"But now it's been a long day, so it's time to head to my Lisa mattress."

The speaker transitions to discussing the convenience and quality of Lisa mattresses, shifting from educational content to a product endorsement.

"All Lisa mattresses themselves are made in the US and the UK, so check them out on forward slash VC and enter the promo code vc 75 at checkout for an incredible $75 off."

This quote provides details on the manufacturing locations of Lisa mattresses and offers a promotional discount code for listeners, further promoting the product.

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