17: Andy Rachleff, Co-Founder Benchmark Capital and CEO of Wealthfront

**Romeen Sheth** (0:00)
Product market fit is one of the most ubiquitous and foundational terms in the startup community today.
It's a term that's inspired blog posts, books, curriculums, conferences, and even plot lines of TV shows. It's virtually impossible to talk about products today without hearing reference to product market fit. There are over 400,000 unique results on Google and over 5,000 videos on YouTube explaining the concept. It's why in episode 19, it's our honor to speak with the legendary executive and investor who coined the term Andy Rachleff. Andy co-founded Benchmark Capital and led the single best performing early stage fund of all time. Benchmark has invested in an absolutely dynamite list of startups over the last 20 years, including household names such as eBay, Uber, Twitter, Snapchat, Dropbox, Instagram, WeWork, Yelp, Zendesk, and Zillow amongst others.
Over the past decade, Andy switched back to the operating side and founded Wealthfront. And today, Wealthfront is the leading automated investment service in the market with over $10 billion in assets under management. Andy, welcome and thanks so much for joining us.

**Andy Rachleff** (1:07)
Thank you for having me.

**Romeen Sheth** (1:08)
So Andy, I'm excited to talk to you today and dive into a bunch of topics related to startups and venture by really focusing the bulk of this conversation on your foundational work surrounding product market fit and disruptive innovation and applying it to your experience leading Wealthfront.
As a starting place for our conversation, let's talk about the phrase product market fit, a term you coined and one that has truly become foundational in the startup community. You know, in preparing for our conversation, I became curious to put numbers behind just how widespread this phrase has become and I was astounded. Over 400,000 unique results for the phrase on Google and 5,000 plus videos referencing and explaining product market fit on YouTube. You know, through its prevalence, the phrase has started to take on a meaning of its own, but I'd be most interested in hearing if you could give us your take on product market fit and why it matters.

**Andy Rachleff** (1:59)
Well, the simplest way to explain it is when the dogs want to eat the dog food.
It really is as simple as that. That you know that you have succeeded when the, or you know you're going to succeed when the dogs want to eat the dog food. If the dogs want to eat the dog food, you can screw everything else up in the company and you're gonna be successful. Conversely, you can dot all the i's and cross all the t's, right?

**Romeen Sheth** (2:28)
And one of the most interesting and I think visceral nuances you used to describe product market fit is, looking for desperation within potential customers. And I think that's really what I hear when I hear that dog food analogy. And it's to say that if you don't find desperation, it means there's likely a good enough alternative in the market and that will doom you, right?
You've also gone one step forward to say if customers aren't desperate for your product, look for a new group that's desperate instead of iterating your product to find what those people want. Why focus on a new customer set instead of new product at this stage?

**Andy Rachleff** (3:04)
Let me frame this in terms used by Steve Blank and Eric Grease. So I think Steve really revolutionized the way one goes about building a startup with his four steps to the epiphany. And then Eric Grease made it more digestible in the Lean Startup. They're actually good friends. Eric was a disciple of Steve. So I almost think of four steps to the epiphany as the Old Testament and the Lean Startup as the New Testament to the customer development process.
Both of those guys, but basically what it is is the application of the scientific method to business. Amazingly, no one prior to Steve had ever thought to apply the scientific method that we learn in third grade to business, the idea of proposing hypotheses and then testing those hypotheses. So there are two critical, so Steve believes there are two critical hypotheses that you have to address in the early stages of a business. The first one is what he calls the value hypothesis. This is the what, the who and the how. What are you going to build, who is it relevant, and what's the business model you're going to use to deliver. Only once you prove the value hypothesis should you move on to what's known as the group hypothesis, which is how do you acquire customers cost-effectively. The biggest mistake that people make, that entrepreneurs make, is that they spend a lot of money on customer acquisition before they know the customers really want their product. If you do that, if you have customers that don't really, aren't desperate for your product, they're not going to stick, they're not going to tell their friends, and you therefore have wasted your money. So it is really important to first nail your value hypothesis before you move on to your growth hypothesis. Companies waste most of their money on growth hypothesis.