Andy Rachleff co-founded the venture capital firm Benchmark Capital in 1995. In 2005, he retired to focus on giving back, beginning by teaching technology entrepreneurship courses at Stanford, becoming a trustee at the University of Pennsylvania (his undergrad alma mater), and funding cancer research with his wife.

Then in 2008, he had a revelation from his experience on the Penn endowment board about how to democratize investing advice. He “accidentally” founded a new company to do it. Wealthfront, which began as an automated investment management service and has since expanded into banking (it currently offers one of the highest interest rates on FDIC-insured cash accounts), now manages almost $15 billion in assets. He’s currently the CEO of the company.

Eric Ries recently talked with Andy about his thoughts on 35 years in Silicon Valley, why the skill sets of venture capitalists and CEOs are so different, and why telling a good story about your product is so crucial.

You’ve been in Silicon Valley since the early days. How has it changed and not changed over the last few decades? I’m sure you have unique perspective on that.

Probably the biggest change that I’ve noticed in the Valley is the transition from startups focusing on hardware, to startups built on software, and what that implies about the venture model as well.

In the old days, when companies built hardware, they were all examples of high technical risk and low market risk. If they really could build what they said they could, then you knew that people would buy the product. There were instances of, “I want to offer 10 times the performance, or 10 times the storage, or 10 times the bandwidth, or 1/10 the latency,” and if you could actually deliver on that in the timeframe proposed, you could feel pretty confident that you would build a big business.

As we transitioned to a software-driven world, we moved from high technical risk, low market risk, to the opposite: low technical risk, high market risk. You knew you could build what you set out to build. The question was, did anyone want it? How would you know that someone wants a ride-hailing service? How would you know that someone wants to rent a room in your apartment? How would you know that someone wants to buy a Beanie Baby from you? It’s literally impossible.

And how has that affected venture capital?

Previously, on the venture side you wanted to invest as early as possible, because the first round of financing got you to a product, and then you’d get beta-type customers, and then you’d raise a second round at a much higher price, and the business could immediately take off from there. So the venture process was all about trying to figure out whether or not people could deliver what they said they could, and you typically invested as early as possible at a $5 million pre-money valuation, hoping the company would be worth $500 million, in which case you’d make 20 to 30 times your money. It was 20 to 30, not 100, because of the dilution from the capital.

Venture capitalists know that the thing that causes their companies to go out of business is lack of a market, not poor execution. So it’s a fool’s errand to back a company that proposes to do a ride-hailing service or renting a room or something as crazy as that. Again–how would you know if it’s going to work? So the venture industry outsourced that market risk to the angel community. The angel community thinks they won it away from the venture community, but nothing could be further from the truth, because it’s a sucker bet. It’s a horrible risk/reward. The venture capitalists said, “Okay, let the angels invest at a $5 million valuation and take all of that market risk. We’ll invest at a $50 million valuation. We have to pay up if it works.” Now they hope the company will be worth $5 billion to make the same return as they would have in the old model. Interestingly, there now are as many companies worth $5 billion today as there were companies worth $500 million 20 years ago, which is why the returns of the premier venture capital firms have stayed the same or even gone up.

Was this happening while you were still at Benchmark?

It was starting to happen as I was retiring. It was a lot less appealing to me to be a growth equity investor, but that’s not why I retired. I retired because Benchmark has an agreement that’s unusual in the venture industry. It’s the only always-equal partnership, and the only way you can have an always-equal partnership, where new people join as equal partners, is for the older partners to get out of the way when they’re not as productive. So we made a pact among the founders that when any of us reached the point that we weren’t willing to go 110%, you had to opt out. I loved what I was doing, but I’d been successful, and I wasn’t willing to work as hard. Having helped create the culture, I believed in it. I was the second partner to opt out.

So although you were not willing to work as hard, you then founded a startup, which is… arguably the exact opposite of not working so hard!

Yeah, but that was a total accident. That was not the plan.

How did it happen?

I had a life well beyond anything that I ever could’ve imagined, financially, for sure. So I wanted to give back when I retired. This has always been a theme among all the Benchmark partners. I decided to teach at my grad school alma mater. I became a trustee at my undergrad alma mater, Penn. My wife and I funded an innovative cancer research funding initiative. I was really focused on social good. One of my responsibilities as a Penn trustee was to sit on their endowment investment board, which I now chair. The premier university endowments are by far the best-managed large pools of capital in the world, and they all invest very similarly.

Well, one day I was sitting in a presentation from the investment team on how they generate their great returns, and it struck me that much of what they do is manual and spreadsheet-based, and that if you automated it in software, you could deliver an 80/20 of what they do, and thereby democratize access to sophisticated financial advice.

This wasn’t that long ago, right? Why do you think it hadn’t been done yet?

I’m a big believer that people don’t find great ideas, great ideas find people. Steve Blank actually wrote about this—that great technology companies are built based on inflection points in technology, which cause an authentic founder to say, “Ah, with this change, I can create this new product.” Then the question becomes, who wants that product? That’s the exact opposite of every entrepreneurship book that had been written prior to Steve, which said the job of an entrepreneur is to evaluate a market, try to find problems, and come up with solutions. That leads to very mundane outcomes. That’s not how great companies are built in technology. Without change, there’s seldom opportunity.

You couldn’t do that what I had proposed to do before, because two technology changes that made it possible hadn’t happened. One was that APIs were made available by brokerage firms, and the other was the advent and popularity of the ETF—the exchange-traded fund, which is an index fund that trades like a stock. You couldn’t do what we ended up doing without those two changes.

So I was sitting in this meeting, and it just struck me that, God, you could do an 80/20 on the endowments, and really deliver an amazing service. This was near and dear to my heart, because over the years as a venture capitalist, I had recruited a lot of people to join my portfolio companies who went on to financial success, and they would often come to me for investment advice. I could never tell them to do what I do, because I could afford access to the premier products, which had much higher minimums. It always struck me as wrong that you needed to have money to make money.

I thought, “Oh, I’ll start it as a hobby, and if it turns into something, I’ll hire a CEO. I’ve done that my entire career, and that shouldn’t be so hard.” But here I am—still CEO—eight years after Wealthfront launched.

You had all this time as a venture capitalist and now you’ve had all this time as a startupyou’ve really seen it from both sides now. I imagine it’s given you unique insights into that relationship.

The joke I like to make is that as a board member I talk a lot less, now that I’ve seen how the sausage is really made. Almost no skills from being a venture capitalist translate to being a CEO, and vice versa. Because venture capitalists hire people with operating backgrounds, people think that that means that they value the operating skill. That’s not it at all. It’s the network that came from success in an operating role that the venture capitalists are attracted to.

So what are the skillsets for each?

They’re radically different. Many people have now come to me looking for advice as to which path they should pursue: operating or investment. The way that I help them is, I put an iPhone down on the table and I say, “Imagine that it’s 2006, and you see this device sitting on the table. Is your first instinct to turn it over to see who makes it, and to try to figure out what it might cost, and how is it distributed, and how many people might want it? Or is your first instinct to ask, why doesn’t it have a keyboard? And why did they sell it through their own store? Why didn’t they sell it through other stores?” If you’re the first person, you’re an investor. If you’re the second person, you’re an operator.

Which of those would you pick if someone gave you that test?

I’m an investor. The only thing that I brought with me to Wealthfront from venture capital that helps me as a CEO, other than having been exposed to an unusually large number of very good CEOs, is that the venture capital industry is predicated on slugging percentage, not batting average. It’s not the percentage of times that you succeed, it’s the magnitude of the ones that succeed. It’s better to be right two out of 10 times where the two are 20-times winners than it is to be right every single time and only have small wins each time.

Human nature leads us to want to be right every time. That’s how we’re evaluated in most everything in our lives. But without risk, you don’t get reward. My joke for my students is, what do you call a venture capitalist who’s never lost money? The answer is: unemployed, because I don’t want them as my partner. If you don’t take risks, you don’t get big returns. So I apply the same thing to running the company. We’re going to try a lot of different products, not all of which are going to work, and I don’t care. I just care about the magnitude of the ones that do. That’s really, really hard for inexperienced employees to get.

So what’s the solve for that?

Constantly talk about it. Employees are not entrepreneurs. And only the really great entrepreneurs get this—but there are few really great ones. Most hedge. You can’t hedge.

Look at how few succeed. I don’t think entrepreneurs fail because they were bad people. They fail because they didn’t find the right market. But they don’t understand that. Part of finding the right market means, if something isn’t working, you abandon it and you move on to the next thing. When companies succeed, they revise history, because no company succeeds in its initial strategy. Literally no company. But the average consumer doesn’t want to hear that. They want to think that you’ve set out to build and deliver the product they wanted.

Why do you think that matters to the average consumer? That’s a very interesting perception.

Because people, human beings, by their nature, are risk-averse. If I hear that you didn’t build the product for me and that you did it accidentally, I’m going to have less confidence that buying your product is the right thing to do. Look how Apple revised history of the iPod and the iPhone. They said they were Steve Jobs’s inventions. They weren’t. He had nothing to do with them. The Apple marketing machine made you believe it, because it made you feel better about buying them. The true creator of the iPod was a guy named Tony Fadell, who went on to start Nest as well. He recognized the value of iTunes. There were a lot of MP3 players back then, but he realized that iTunes on the Mac, where you could rip your songs, was the ideal tool to deliver a better digital music experience, and that syncing to iTunes was the key. That’s what he pitched Jobs on, and Jobs funded him to do it, like a venture capitalist. That’s not the story that was told.

What’s is the overarching story of Wealthfront? Why does it exist? Why does it need to exist?

We’re building a next-generation banking service that helps you manage both for your short-term and your long-term needs, and we do it with a complete suite of products, including one of the highest-paying FDIC-insured cash account on the market, best-in-class investment services, and free financial advice, all available to you any time via your mobile phone. Where we’re going is the concept of Self-Driving Money™. We want to get to the point where you can direct deposit your paycheck with us, we’ll automatically pay your bills, and we’ll route the remaining money to the most appropriate place, whether inside Wealthfront or outside, based on your particular situation and goals. We can do all of that so you never have to worry about your finances again.

That sounds ideal. And almost too good to be true.

It does. That’s the reaction we get from people. But we’ll be able to demonstrate a lot of it by the end of this year.

Andy and Eric will be continuing this conversation during a fireside chat at this year’s at the 2019 Lean Startup Conference in San Francisco on October 23-25, 2019.