Andy Rachleff has had the kind of Silicon Valley success that keeps pulling the extravagantly ambitious to Northern California. As a longtime venture capitalist, he co-founded Benchmark Capital, which under his watch backed eBay and Juniper Networks, among other big scores. He retired from Benchmark in 2005 to teach entrepreneurship at the Stanford Graduate School of Business.
Over the years, he says students and proteges at companies in his venture portfolio would come to him for investment advice, and it struck him as wrong that he couldn't steer them to the same million-dollar-minimum financial advisers that he trusted with his own money. He co-founded Wealthfront in 2008 to make sophisticated money management available to people with orders-of-magnitude less cash to invest.
Last summer, Wealthfront rebooted itself as a purely software-based money management service aimed at young tech employees who, post-IPO, suddenly find themselves sitting on more money than they ever could have imagined. Rachleff says despite Wealthfront's target market, you don't actually need to hit the IPO jackpot to open an account � you just need $5,000. The point of Wealthfront isn't to land wealthy clients, he says, but to serve the Silicon Valley rank-and-file by democratizing better access to financial services.
We sat down with Rachleff recently to talk money, IPOs, and why young tech workers are more comfortable trusting their windfalls to algorithms.
Wired: Wealthfront is purely software-driven. There's no human being actively managing clients' money. Why is that a selling point?
Andy Rachleff: As we started really digging in and talking to people, what we learned was young people who worked at tech companies, many of whom worked at tech companies that were about to go public or had recently gone public, all complained about the suits in the lobby lined up to take their money. They didn't trust them because of the fees and biases in their service.... The funny thing about the people that we target, the younger generation, is some of them say, 'I'd pay you not to talk to me.' Facebook people especially. Facebook and LinkedIn people, they don't want to talk. It's a generational thing.
Wired: Wealthfront also doesn't allow clients to simply say how much risk they're comfortable with. Their money is allocated based on a risk profile developed through a 10-question survey. Why do it this way?
Rachleff: What we know from behavioral economics research is that people consistently overstate their tolerance for risk. If I give you a portfolio that's riskier than you really are comfortable with, then you're likely to sell early. And that's the cause of major wealth contraction. There are all these academic studies showing people buy when the market's going up and sell when it's going down, which is the worst thing they can do.
Wired: With high-profile IPOs like Facebook performing so badly, are you seeing less demand for money management from young techies who haven't done so well?
Rachleff: No matter if the company grows by 30 percent or declines by 30 percent post-IPO, the employees are typically sitting on money they could never imagine having. We outsiders are all focused on how the stock performs. When you're an employee, it's not as much about how the stock performs; it's about how much value has been created. Even a Zynga that's worth (just) $2 billion, if you translate that down to what the average employee owns, it's a sum that's something that most of them could never have imagined getting. And they have to think about, okay, what do I do with that money?
Wired: Are there any common traits you notice among the young and newly wealthy in Silicon Valley?
Rachleff: Today's young people are far less ostentatious in what they want to do with the money. I think they're more socially conscious. I think they want to give more of it to charity. I think they want to spend less of it on fancy toys. I think the first decision they want to make is, "Should I buy a house," and I don't think that's changed over 25 or 30 years. But instead of buying a Porsche or a Ferrari, they might think about taking a year off from work to travel, which isn't ostentatious. It's a life-changing experience. And they all seem to want to be angel investors.
Wired: What do you tell the would-be angels?
Rachleff: Unless you're someone who's likely to be sought after by the best entrepreneurs, it's a losing game. At the highest level, if you think about it, 3 percent of the venture capital firms generate 95 percent of the industry's returns. And the people in that 3 percent don't change. As an asset class, venture capital is at best break even. What that says is there's a tremendous amount of money lost by people in that 97 percent. I was fortunate enough to be in the 3 percent. Angels have access to investment opportunities that have (even) worse risk-reward. The seeds are the worst risk-reward of the investment spectrum. If the angel has access to the worst risk-reward and the average venture return is bad, then to me it's a really bad proposition. If you're an average person investing in your friends, it's not likely to end well.
Wired: So why do so many people want to do it?
Rachleff: I think it's what they envision as the returns, because no one talks about the losers. It reminds me of fishing stories. Everyone always tells you about the big fish they caught not the ones that got away. And many more got away than the one big one that you caught. Everyone talks about the winners, but the vast majority of angel investments fail. They also think it's exciting to say, "I backed a company that succeeded." And I think that the successful angels have been glorified. So who wouldn't want to share in that glory?
__Wired:__Do you ever encounter people who want to just stop working altogether and live off their IPO hauls?
Rachleff: That's a lot of money in the Bay Area. I don't think there are very many people who can afford to do that, number one. But I think the people who work in startups don't work there for the money. They work there because of the challenge. This is especially true of the best engineers. I don't think just because the company they work for was successful means they want to give it all up. I think they like challenges, intellectual challenges. This is a wonderful community for that reason. It's a different culture.
Wired: If someone came to you personally and asked you for financial advice, what would you tell them to do?
Rachleff: Exactly what the software says. Because software is without emotion. Software doesn't have to worry about buying a beach house. Software doesn't worry about the bills. Software does what is rational. The software is based on modern portfolio theory, which is the basis by which almost all institutional money is managed and which won the Nobel Prize in 1990. So the software is not something that we made up. We're just implementing the best practices of the industry. As a matter of fact, much of our backend is based on software that was open-sourced by Goldman Sachs. When you say, "That's what the algorithms say," well, the Goldman Sachs guy is telling you what the algorithm says. He just makes you feel good and takes you out to a nice dinner. Now for people in their 50s and 60s and older, they like that. And they should stay with that. My mother definitely needs her stock broker to talk to. We are not the right service for my mother.
Wired: How does running your own company compare to life in venture capital?
Rachleff: It's much harder. There's no comparison. I didn't really know what I was in for. The biggest surprise is how all-consuming it is. I prided myself on being engaged with my portfolio when I was a venture capitalist. I was always involved with my companies. But when I would go out to dinner at night with my family, I was focused on my family. I could unplug. I could watch a movie. I could go to a sporting event. But now it's all-consuming. There's never a minute in the day when I'm not thinking about the business, and what I could be doing better or we could be doing better.
Wired: And what did your many years in venture teach you about succeeding as a business?
Rachleff: I think one of the biggest misperceptions is that people think the way you come up with a compelling business to start is you look at a market, you look for the problems, and you come up with solutions. That leads to mundane businesses that typically don't grow to be very large. Those companies grow to be the $20 million, $30 million flips. As a venture capitalist, I never liked those businesses. Believe it or not, the companies that end up becoming really big are the opposite. The entrepreneur recognizes an inflection point in technology, which can enable a new kind of product. Then the challenge becomes, "Who cares about the product? What's the right market for it?" You figure that out after you have the product idea. The companies that find a market for their product succeed. The companies that don't find a market for their product fail. Without change, there's no opportunity.
