‍In this episode of the Startup Field Guide podcast, Sandhya Hegde and John Vrionis chat with Andy Rachleff. Andy is a legendary Venture Capitalist who originally coined the term "product-market fit." He has had an incredibly accomplished career in the tech industry, co-founding Benchmark Capital in 1995 and Wealthfront in 2008. Andy has mentored and guided hundreds of founders and investors, and in this episode talks about why understanding product-market fit is the only thing that matters and all the pitfalls founders face along the way. ‍‍‍

‍

Read our full article on how to find product-market fit based on our conversation with Andy where we unpack the counterintutive secrets that he shared with us.

Be sure to check out more Startup Field Guide Podcast episodes on Spotify, Apple, and Youtube. Hosted by Unusual Ventures General Partner Sandhya Hegde (former EVP at Amplitude), the SFG podcast uncovers how the top unicorn founders of today really found product-market fit.

‍

‍

Episode Transcript

‍

Sandhya Hedge 

Our guest today is the legendary VC who coined the term “product-market fit” and has mentored and guided hundreds of founders and investors, Andy Rachleff. Say hello, Andy.

‍

Andy Rachleff  

Hello there. Thank you very much.

‍

Sandhya Hedge 

Andy has had an incredibly accomplished career in the tech industry. He co-founded Benchmark Capital in 1995, which quickly became a leading fund with investments in iconic startups like eBay, Twitter, and Uber. He started Wealthfront in 2008, which has mainstreamed robo investing and now manages over $20 billion for half a million customers. Since 2005, he has also been teaching entrepreneurship at Stanford GSB. In fact, both me and my co-host today, John, met Andy there and feel incredibly grateful to call him a mentor. Please take us away, John.

‍

John Vrionis  

Hi, Andy. Hi, Sandhya. This is extremely fun for me because now I get to ask Andy some questions. I've been learning from Andy about product-market fit and how to be a good venture capitalist for almost 20 years. So, excited to dive in. One of the things I wanted to start with, Andy, was I think few people realize that before Benchmark, you had quite a successful career as a venture capitalist. And I'd love it if you wouldn't mind sharing how you got into the venture industry, and then how you shaped your approach to investing and this idea of product-market fit, over time?

‍

Andy Rachleff 

Sure. Well, I had read about venture capital in a Sunday New York Times when I was a junior in college. And I thought, “Wow, that's a really cool industry” because it combined three things in which I was interested. One, investing, and I'd spent a lot of time on public tech investing in college. Oddly enough, it happened by accident. Number two, I loved computer science, something I studied in college. And number three, entrepreneurship. My dad had a small business, so I couldn't imagine that you could actually get paid for working in a field that combined all three. After I graduated college, I worked on Wall Street, in New York, because I wanted to live in Manhattan. And I became friends with someone who also worked on Wall Street who wanted to work in venture capital. And he convinced me that the best path we had, to get into it, was to go to Stanford Graduate School of Business to get closer to the community. And that's how I finally got to work for an early-stage firm when I graduated.

‍

John Vrionis  

What a fascinating journey. So can you take us through the arc—you getting started at that firm and then starting Benchmark and coining product market fit.

‍

Andy Rachleff 

I knew nothing about product-market fit, it wasn't even on my radar, but I always wanted to become better at what I do. Like the two of you, I'm a student of the business; I'm always trying to figure out how to get better, and it was clear to me that Sequoia was the best firm in the business. They ran a very different playbook than anyone else in venture, and I was fortunate to sit on a number of boards with Sequoia partners. So, I tried to learn everything I could about their very different playbook. And I would characterize the foundation of that playbook as being something that Don Valentine, their founder, used to say, which is: “If a startup can screw something up, they will.” Not that they're not very good, it's just that they're under-resourced. So, the only way they can succeed is if the market pull for the product is so strong that it overcomes the ineptitude of the startup. I put a name to that of product-market fit. Don didn't call it that. But it was really Don who came up with the concept. I really came to understand it incredibly well, once I retired in early 2005 and started teaching it. So, I think that I could have been a lot better had I understood all of the nuances when I was actually practicing venture capital.

‍

John Vrionis 

So interesting. And at Benchmark, in 1995, you started this new firm with your partners. You all are experienced, but you are a new entrant.

‍

Andy Rachleff  

Well, three of the five of us had a lot of years of experience.

‍

John Vrionis

Venture experience?

Andy Rachleff
Yes.

John Vrionis
But the others had some operating experience if I’m right?

‍

Andy Rachleff  

One of them was an entrepreneur that we had backed at Merrill Pickard, my partner Bruce Dunlevie, sat on his board and he was just an amazing talent. He had started two companies by the time he was 26. The first one he sold to Apple. He got the attention of someone who's famous in the valley, named Bill Campbell, who mentored him. 

‍

John Vrionis  

And at the time was there a particular insight that you had developed as a group about the market? I ask because you always talk about insight and market opportunity when you talk about product-market fit. So, just as a new entrant, I'm curious how you all thought about it then.

‍

Andy Rachleff  

Well, the world was very different in 1995. Back then we were still investing in companies with high technical risk and low market risk. There were instances of, if you really could build what you said you could you knew people would buy them. So, there were examples of companies that proposed to build a chip with 10 times the processing power, or 10 times the bandwidth or 1/10 the latency, or 10 times the storage. If you really could deliver on that promise, you knew people would buy. So venture capital back then was really all about, can the entrepreneur actually deliver on this architectural insight? So they were usually technical insights. Product-market fit wasn't very challenging, it was more could you actually deliver on the breakthrough in the technology. Those were primarily hardware-oriented businesses, the world started to change circa 1994 - 1995, where software became dominant. Now, software companies have very low technical risk and very high market risk. You know that you can deliver the product, but you don't know whether or not somebody's actually going to use it. How would one possibly know that people would be willing to rent air mattresses for the night in your apartment? I would argue that no one is good at figuring that out consistently. So the venture business — as this became more and more prevalent circa 2000, 2001, and post internet bubble bursting — the premier venture firms figured out that it's a really crappy risk-adjusted return to invest in raw startups with low technical risk and high market risk. So, they outsource that to seed investors. And they let the seed investors take on that risk. And then they waited until the market was proven, and then they would pay up for that. Now, the number of companies worth — back then we used to invest in, circa 1995, we would invest $5 million pre-money valuation hoping the company would be worth $500 million. Fast forward to 2005, you invested $50 million hoping the company would be worth $5 billion. Now, you made 20 to 30 times your money because of the dilution involved, but the returns actually stayed the same even though the firms invested at a much higher price because the markets got bigger and the number of companies worth $5 billion in 2005 was comparable to the number of companies worth $500 million in 1995. So product-market fit became something far, far more important to evaluate for a business with low technical risk and I actually think that's something that you all are really superb at figuring out.

‍

Sandhya Hedge  

Building on that a little bit, Andy, you said as a premier fund, you want to find companies just at that moment that they have figured out the market risk. And I guess that is also the genesis of this idea of product-market fit. What is it that you looked for? I mean, you've talked a lot about the value hypothesis versus the growth hypothesis. What is it that you would say is already figured out to say, yes, the market risk is low? What are the elements that you looked for that you now call having found product-market fit?

‍

‍

‍

Andy Rachleff 

Well, there are a couple of heuristics that I've come to believe are very good indicators of product-market fit, or proof of the value hypothesis or the value proposition, as you described. One for enterprise businesses and one for consumer businesses. On the consumer side, I think the best test is whether or not the company can generate exponential organic growth. Organic growth, not paid growth. You can always fake growth if you spend more money; the problem is the clients or customers you acquire don't necessarily stay. So, growth in general isn't a good enough indication of product-market fit — it needs to be organic growth. The only way that you can generate organic growth is through word of mouth. And the only way you generate word of mouth is through delight. So, you know you’ve hit a nerve if you can drive exponential organic growth — and it needs to be exponential in order to reach escape velocity, if you will. So, that's the way I look at consumer companies. I recommend that consumer companies not spend any money on marketing — paid marketing — until after they have proven exponential organic growth. On the enterprise side, the best heuristic that I've seen is something that I learned from one of my teaching partners, Mark Leslie, that he published in a paper he co-wrote called The Sales Learning Curve, which is available if you Google it. It's an article in the Harvard Business Review. And basically, Mark, and Chuck Holloway, his co-author, found that there's a learning curve to sales just as there is to manufacturing and that companies — really the growth of companies — doesn't really take off until the sales yield is greater than one. Now, sales yield is defined as a numerator, equal to the contribution margin or gross margin generated by a sales team. That's a sales rep, a systems engineer, and a portion of an inside sales rep who does prospecting. And the denominator is the cost to field the team. So typically, it might cost $200,000 or $250,000 to hire a sales rep. For a year, they might cost 150, 175. For these systems engineers, there's additional money for the inside sales rep, who does the prospecting and then there's the management overhead. So the total cost to fuel the whole sales team is generally five to $600,000. So you need to generate over five or $600,000 in gross margin per team before you really have product-market fit. And then, interestingly, what they found was it was very quick — the sales yield, once it exceeds one, quickly goes to three. I don't know why this is; it may be like Pareto’s Law, the 80/20 Law. It just happens to work that way. But it's really, really hard to get to a sales yield of greater than one. Because, in order to do so, you need to have found a desperate customer. Not just any customer, but a desperate customer. And you need to figure out how you articulate what it is that you do, to that desperate customer. So, you're in discovery mode until you hit that sales yield greater than one. Then, it very rapidly goes from one to three, and then you use a different rep for each phase, zero to one on sales yield, one to three, and then after three.

‍

Sandhya Hedge 

What's the most counterintuitive thing you have found that you have to teach founders again and again, on this topic of product-market fit?

‍

‍

Andy Rachleff 

Well, on the enterprise side, literally the most counterintuitive thing is you should not go after the big market first. It's the exact opposite of what everyone tells you. Now, if ultimate size of market addressed is the single greatest determinant of outcome, then of course you should go after big markets. The problem is that markets adopt products in a particular order. There's a phenomenal book on this subject called Crossing the Chasm, where Geoffrey Moore basically explained that for every product, the initial adopters, — who he calls “early adopters” — are visionaries who desperately want to solve a problem on the enterprise side to get ahead. On the consumer side, just so that they can make their life a lot better. But they don't care about references. They just care about solving the problem. So you have to serve them first. Then come what he calls “the early majority,” or the pragmatists. They only buy based on references, so it doesn't matter how well you solve their problem — if there aren't five people who tell them this is a great thing that you should buy, they're not going to buy. That's the largest part of the market. Then come the conservatives — or the late majority — the people who only buy once a product becomes the standard. And then come the laggards who basically never buy. So, the big mistake I see people make is in their pursuit of a lighthouse account  — this is the term that I often hear — I want to get a famous reference out of the gate, so I'm going to try to win a really big account and then use them for reference. The problem is those lighthouse accounts are usually pragmatists; they’re not desperate. So you have this Catch-22: You're trying to sell to someone who isn't going to buy until you have references, and you don't have any references to sell them. So, the counterintuitive advice is: sell to the crappy little companies that are desperate and then as you build out the whole product — so, all of the interfaces, the additional features, and the support from third parties needed to solve the problems to get the references — then you can go after the pragmatists.

‍

John Vrionis 

Andy, I'm surprised that's the number one counterintuitive thing because while it is counterintuitive, and it's a common trap, you've always preached this idea of iterating on the who, as opposed to the what.

‍

Andy Rachleff 

So that's number two.

‍

John Vrionis 

Okay. So it was a long time ago, but I feel like that's stuck in my brain.

‍

‍

Andy Rachleff 

I'm a really big devotee of the lean startup methodology. It was really first proposed by Steve Blank, and then popularized by Eric Ries with his book, The Lean Startup. The two of them were basically the first people to propose applying the scientific method to business, which is really funny when you think about it. In third grade, at least in the United States, we all learn about the scientific method. We have to come up with a hypothesis, we design an experiment, we run the experiment, and then we iterate on our hypothesis. So, what Steve and Eric proposed is that one should apply — an entrepreneur — should apply that to business. Namely, you should come up with a hypothesis about your business and then run experiments to test it, basically in two categories: 1) they call the value hypothesis, and then 2) only following the proof of the value hypothesis, should you pursue the growth hypothesis. So, the value hypothesis represents the what, the who, and the how. What are you going to build? For whom is it relevant? And the how is: What’s the business model that you're going to apply to price the product? Only once you've proven that, should you spend time on the growth hypothesis, which is: How do you cost-effectively acquire customers? Mistake number three is don't go after the growth hypothesis until you've proven the value hypothesis. If you don't lay a strong foundation — if the dogs don't want to eat the dog food — then it doesn't matter how cost effectively you can acquire people, they're not going to stay and it's not going to be effective. So, going back to the value hypothesis, almost no one's initial value hypothesis is correct. And that's true for every successful company. The problem is, they all revise history, once they succeed, to make you think that it was their initial hypothesis. Because as consumers, we prefer to buy from companies who always intended to serve our needs. But the problem is the value hypothesis — the what, the who, and the how — are seldom correct. Now, one's instinct is to iterate on the product, add more features to get someone to buy. That almost never works. And the reason it almost never works is that the only people who are going to buy your product are early adopters who are desperate for what you have. If there's a good enough alternative, buyers will always buy the good enough alternative. It's lower risk. It doesn't matter if you're better. If theirs is good enough, you will lose. So, the only way that you can succeed as a startup is if you serve someone who's desperate. So, if your initial value hypothesis does not prove to be correct, you shouldn't add more features because adding more features doesn't turn someone into someone who's desperate. You have to change the audience to whom you target the product, to try to find a common audience that's desperate for what you do. And that's why iterating on the who, rather than the what is almost always the right thing to do. And that, too, is very counterintuitive.

‍

Sandhya Hedge 

That is so well said, Andy. A couple reactions. So one, I think we see a lot of founders think they have product-market fit way before they actually do, right? They haven't actually proven the growth hypothesis at all. You talked about organic growth.

‍

Andy Rachleff 

Because the way people are usually fooled is they've paid for growth and the company grows quickly, so they think they have product-market fit.

‍

Sandhya Hedge 

Right. They don't have that big organic growth yet. They definitely don't have any proven sales yield they can kind of rely on yet. In fact, we see people tripping up right at the value hypothesis stage and I want to talk a little bit about the lean startup methodology because I think that's definitely getting misunderstood a lot, commonly, and the idea of testing the value hypothesis with an MVP is the kind of question I want to surface because the idea of the minimum viable product, superficially, is simple. But if you think about, specifically, what is minimum and what is viable, therein lies the difference between a truly disruptive idea and an extremely meh idea. So, how do you think about this? What do you look for in a minimum and a viable product?

‍

Andy Rachleff 

Well, I actually teach my students that before the MVP, they actually need to validate the concept in the implementation. Eric Ries talks about using the concierge method to do this. As an MVP. I refer to that as testing the implementation. So, what do I mean by test the concept and test the implementation? Well, I'm a really big believer in a philosophy promoted by Clay Christensen, the person who coined the term Disruption Theory. Clay believes that startups need to fail fast and cheap — that you don't have very much capital, and you don't have very much time. So, if you're going to fail, you want to fail quickly and inexpensively so you have plenty of money to try other experiments. So, if you buy into this belief of failing fast and cheap, then why even start building something before you know it's going to be the best use of your time and effort? I believe that first you need to validate the concept. How does one do that? Well, you can look to see if people are searching to solve the kind of problem you have. You can look at search results, you can do a Kickstarter program, you can do a smoke test where you run an advertisement for the product to see if anybody might be interested in it. Just because people are interested in the concept doesn't mean that they're going to be interested in what you intend to build. That's where validating the implementation comes from. So, Steve Blank says that in order for someone to really care about your implementation, they need to have already spent money trying to solve that problem themselves. So, the example that he uses in his book, Four Steps to the Epiphany, is a bank that has a very long line of people trying to get to their tellers. I know this is a very old fashioned example, but it's Steve's example, in the book. So, imagine a bank that has a very long line. If they try to solve the problem by serving everyone in line water, they're not terribly desperate. If they try to hire more tellers, they're not spending money on technology. So, they're unlikely to look for a solution. If they have tried to jerry-rig something together by hiring a consultant to write some code, now that person might be interested. And the best test of whether or not they actually are interested, is when you describe what you want, do they almost reach across the table and grab you by the collar, saying, “When can I have this?”. If they say, ”I might be interested in it,” then that's a “no” because no one really wants to tell you the truth when the answer is no. 

‍

John Vrionis 

Is it fair to say what you’ve really done there is test the desperation hypothesis?

‍

Andy Rachleff  

You just summarized what I said in about five minutes, in five words.

‍

John Vrionis  

Well I cheated. I've heard you say it a few times. So, that connects the dots, I think. Do you feel like some of the most innovative products can be built cheap and fast? Have you thought about some of the traps? Sandhya and I have discussed MVP as it relates to… I don't know, take Figma, a recent success story that we hear a lot about. That was a product that took a while to build. I'm not sure it could have been done cheap and fast. Maybe Snowflake as well. . 

‍

Andy Rachleff  

What they could do to prove cheaply, and quickly, is prove whether or not people were desperate, with a prototype. So, I have a surprising answer to your question, John. It's very commonly believed that entrepreneurs succeed by analyzing a market, looking for a problem, and building a solution. That actually seldom leads to a large outcome. Because anybody can do that, it’s too commodity. The really great and successful technology companies do the opposite. What you're told not to do, which is: The founder observes an inflection point in technology. Based on that inflection point, they realize a different kind of product that can be built. And then the challenge is figuring out who wants that. So, it's starting with a technology and going to the market versus starting with the market and building a technology. When you do that, whenever there is an inflection point in technology, you can usually build those MVPs very, very inexpensively because they're new, it becomes very expensive to build products. So, if you start with the market, look for a problem, and then build a product, that generally is far, far more capital-intensive and it takes a lot longer to build a product that's differentiated. Now, once people succeed — starting with the technology, creating a product and finding a market — they revise history and then the story they tell is that they started with the market and came up with a solution, because that's what you want to hear. So, one of my biggest challenges with my students is they all believe the stories that they’ve read. And then I tell them what actually happened, because I'm old enough to know how the company actually started.

‍

John Vrionis 

You remember the gritty details?

‍

Andy Rachleff 

Yes.

‍

Sandhya Hedge  

I’d love to ask, since you brought up the problem of revisionist history — from your direct experiences — where have you seen people balance the need to get something into your customers hands to get feedback, shipped quickly, essentially — that is a big impetus in our industry — versus making sure that you are not just doing incremental innovation where, yes, you are solving a problem, but it's not big enough, and the customer isn't desperate enough, and you're just not able to gauge that? Any examples from your lived experiences that come to mind?

‍

Andy Rachleff 

I summarized my entire product course on product-market fit in one question: What do you uniquely offer that people desperately want? If you're just going to add incremental improvements, then it's unlikely people are desperate for an incremental improvement. There's a good enough alternative. Without change, there's seldom opportunity. This is something most people don't realize. And by the way, there's exceptions to everything I'm saying, I'm giving you; there's always outliers which is why I don't have my students argue with examples because the examples could be outliers. But without change, there’s seldom opportunity, the whole incremental thing is not based on change.

‍

John Vrionis  

One of the interesting things that I learned from Brian NeSmith, who is a previous guest on the podcast and someone that Andy and I have both had the pleasure of working with. When he started Arctic Wolf, he told me, “I don't mind if I upset the first 25 to 50 customer prospects. What I want to know is that there's 5,000 more just like that.” So, he pitched the very innovative solution that was Arctic Wolf, knowing that he didn't have the implementation. It would take a long time, in fact, to build it. But he didn't want to go through the process unless he had a lot of confirmation that people were really desperate and thought what he was building was really innovative.

‍

Andy Rachleff  

Brian taught me that maybes are worthless. If you ask a customer, ”Are you interested in it?” and they say, ”Well, if you add these features, I will be,”  they’re not. If they ask for more features, they're not desperate, and they're never going to buy your product. They're lying to you. They just don't want to say no to you because as human beings, we've learned that that's impolite. In the customer development process of trying to validate the implementation, I think one should apply the same Five Why methodology that engineers apply to post mortems. That, when you ask the person, ”Would you like to buy the product?” and they say, ”Well, yeah, I might.” “Well, I hear you say might, why not yes?” And then they give you an answer. And you just keep on asking. Now, most people are not willing to do that, because they think that's either awkward or annoying. And one of the things that I taught my Head of Customer Support at Wealthfront, when we first shipped, was if a potential customer calls you up and asks you questions, then I want you to ask them, “Are you going to open an account?” If they say maybe, that's a no. So ask them why and keep asking them questions until you find out why they won't open an account to the point that you annoy them. Now, he had worked in private wealth management where he was taught you should never annoy your customer. So I said, ”Look, Jed, if you really piss off 100 customers, what do we care?” We have a potential market of 10 million customers, so pissing off early prospects, it's not like they're gonna go around talking about how much they dislike you. But again, I think entrepreneurs think that might happen.

‍

Sandhya Hedge  

I think this is probably the hardest lesson to internalize, speaking for the founders in our audience, is: treat every maybe as a no.

‍

Andy Rachleff 

Maybe is worse than no because it's no with false hope. So, I only want yes or no. And if it's no, I want to know why it's no so I might be able to adjust my hypothesis. Maybe doesn't help me adjust my hypothesis.

‍

Sandhya Hedge  

John, I'm curious, what's been the most influential of all of these conversations you've been having with Andy over the years? What’s been the most influential for you, in terms of your approach and building Unusual Ventures?

‍

John Vrionis  

Well, as you know, I tell everyone at Unusual if you want to meet a great venture capitalist, let me introduce you to Andy. Let me start there. You know, there's no way I could give you one thing, Sandhya. This conversation alone is the last 17-18 years — I'm a slow learner, so, it's taken me a while to digest everything. I need to hear it multiple times. Everything I know about venture capital, I've learned from Andy and I can't think of a big decision or a challenge I faced in the last 17 years where I didn't go to him for guidance. I just want to say that Andy’s a master of the craft, and any success I've ever had I really owe to Andy.

‍

Andy Rachleff

Kind to say that, John, but you've had some awfully good success over the years and you've learned along the way from all the different experiments that you've run. And Sandhya, I see you doing it too. Look, the amazing thing about venture capital is you can be wrong the vast majority of the time and be really successful. Because unlike almost every other endeavor, venture capital is not about the percentage of the time you're right. It's about the magnitude of the success when you are. And very few people get that and you two do.

‍

John Vrionis  

You know, Andy, as much as you're an amazing student and professor of this industry and startups — and we've all learned so much from you — I do want to say that I think the most important thing you've taught me is, I think, never have I reached out to you with a challenge or struggle, and you haven't immediately gotten back to me. You're a giver. You taught me that, and I know that's how you treat people. That's the most important thing. We've often laughed about it, but it's so authentic to you. I think you told me one of the keys to success is picking the right partners — whether that's in business with founders, or obviously in my personal life — it's been the most important decision I've ever made. So, I am so grateful to you for that as well.

‍

Andy Rachleff  

I've benefited enormously from having great partners who made me look a lot better. There are many people who are better venture capitalists than I. I like studying this stuff and trying to figure out a better way to articulate it. That doesn't mean that I was the best at what I did. But I think what I’ve become is being pretty good at helping articulate these things fairly simply.

‍

Sandhya Hedge  

Since you're on the topic of VCs, I've heard from John, Andy, that you've come up with several archetypes for VC personas, and how they approach this job and try to win. We would love to hear some of those. And also, we'd love to figure out how you classify John and yourself perhaps?

‍

Andy Rachleff 

Haha I’ll let John classify himself, but when John set out to pursue a career in venture capital full time, when he graduated from the GSB in ‘06, I remember he scheduled a meeting with me to talk about what was the best personal strategy for him to follow. And that for the first time made me think about what were some personal strategies that I had seen succeed. And I think, together, John, you and I came up with seven of these personal strategies from which to choose, you tried a few of them on and one of them worked best for you. I've since expanded it to 12. Twelve unique strategies that I've seen over the years where people have succeeded. And the challenge is picking something that's authentic to you. And by the way, not everyone succeeds, even if they pick a strategy that's authentic to them. But if they are fortunate enough to succeed, then they start to combine some of these, but there's usually — like minimum viable product — there's usually one feature that gets you your success, and from there you can build. So the 12 VC personas that I've seen are The Beggar, The Salesperson, The Logo Hunter. I don't mean to be sexist in this term, but The Smart Guy, The Talent Guy, The Founder, The Famous Exec, The Lab Rat, The Technologist, The Networker (or Schmoozer), The Sage Advisor, and The Industry Expert.

1) So there is a very famous venture capitalist who was a phenomenal Beggar. He often would find really good companies, but would often lose out in the beauty contest of which investor was chosen. And so at the end, after he lost, he would beg the entrepreneur for a small piece. So just give me $250,000, or $500,000, out of a five or $10 million round. Well, after he accumulated four or five of these that went on to success, which actually had very little impact on his fund, he was able to promote that he had invested in the very beginning of these successful companies, entrepreneurs never do due diligence, almost never do due diligence. So they didn't know he really didn't have much to do with those companies. But he begged his way into a number of successful ones, and succeeded. And then he was able to actually win deals based on his track record.

2) The Salesperson is someone who just knocks down the door when they hear a company is great. So, through whatever means, they might hear that a company is starting up and they just don't take no for an answer. This works for some people's personality, and not others.

3) The Logo Hunter — this is something that I think John intelligently adopted — for young venture capitalists, that you figure out what markets are very important. You then try to figure out which company is likely to win in that very important market, and then invest at a very late stage. So that you can say you invested in that successful company. Again, entrepreneurs don't check at what stage you invested. So if you put two or three of these together, that allows you to make a much more compelling case to try to win the Series A deal, because you might have had more, you might have been associated with more successful companies than others.

4) The Smart Guy is what it seems — that you're just so sharp, that people want to work with you because they enjoy your intellect, they really like bouncing ideas off of you. Sandhya, I see you as this one.

5)The Talent Guy is someone who networks in really talented people, with the hope that they will later start a company. And if you were early on in getting to know them relative to other venture capitalists, then they're more likely to call you first.

6)The Founder, we all know is, if you founded a company, perhaps that puts you in a better position to win a deal from another founder. In fact, the data says this is one of the worst areas of return. Because what makes you a great founder doesn't make you a great picker of investments.

7) The Famous Exec is perhaps the most common path to success. If you've been a VP at a very successful company, then the odds are that you were very heavily recruited, because people wanted you in their company. That's a very good proxy for network and you were also probably highly sought after for your advice, which is another great proxy for network. All things being equal, the person with the best network is likely to have the best returns. Because if you fish in a better pond, you're likely to catch more fish. So The Famous Exec — other than CEO — is really good. CEOs tend not to make really good venture capitalists because they tend to make a common mistake, which is they evaluate companies based on whether or not they would want to run that company, which is absolutely irrelevant.

8) The Lab Rat is someone who roots around —this was more relevant back in the days with high technical risk — but you root around in the labs at Stanford and Berkeley and MIT to try to find some really breakthrough technologies and encourage, perhaps the graduate students to start a company around that where you can be the initial investor.

9) The Famous Technologist is someone like Marc Andreessen, who founders just want to talk to because they want to get their opinion.

10) The Networker, or The Schmoozer, is someone who goes to all the conferences, and is always working all the angles to find out what deals are in process.

11) The Sage Advisor is what it sounds like. This one takes a little while, but you don't speak often, but when you do, people always really value what you say. And they tend to tell their friends about it because people like that are very unique. That's an oxymoron, very unique.

12) And then the Industry Expert is someone like Bill Gurley and marketplaces, where you made an investment in a particular market space that happens to be pretty broad. And people think because you had a good investment that you're the expert, so they tend to bring you more companies in that space. Interestingly, in venture capital, if you spend all your time in one marketplace, you tend to fish in that pond too long, and you miss out on the next pond. But those are the 12 personas that I've seen work very, very well — when they have worked.

‍

Sandhya Hedge 

I feel like you should write a book on this topic alone, Andy. 

‍

John Vrionis

I think it's amazing that seven has now become 12.

‍

Andy Rachleff 

What do you think about the expansion, John?

‍

John Vrionis  

Well, I remember the conversation because most of them I didn't qualify for, I couldn't be The CEO or The Smart Guy or The Sage Advisor — many did not apply. So, I had to find the thing that was authentic, and I remember feeling that as someone who loves technology and loves to learn and has a background there, what energized me was the talent approach — going and finding the really smart, thoughtful product people and sharing ideas about how markets were changing and how products needed to evolve. Roaming the halls of Berkeley and Stanford and MIT and trying to find interesting projects. But I think to your point earlier, the market has changed just so much in the sense that so many of the bets we make today, there is a ton of market risk. So, just having technical innovation is insufficient in terms of good seed investing. 

‍

Sandhya Hedge  

I'm curious on that topic. Andy, you were instrumental in encouraging John to start Unusual Ventures, and you've seen how the venture capital ecosystem has evolved dramatically in the last 10 years alone. What did you see as the gap in the market and the opportunity to build another fund? What was your observation?

‍

Andy Rachleff 

Well, I am strongly of the belief that entrepreneurs do not succeed in technology because of their grit or their attitude. I think they succeed because they had a unique and powerful insight that led to a product that people desperately wanted. How else can you explain a 25-year-old running a billion dollar business? They're not great executives, they just happen to have great insight. Now, some of them learn to become very good leaders, and some of them do not. Which is why I don't think only founders can run companies. I think there are advantages to that, but to me, the insight is what is absolutely critical. When the premier venture firms outsourced the first round of investment to angel investors, there was something really big missing. And that was a partner with whom you could discuss how to best turn the insight into a compelling value hypothesis. I'm using the lingo from my class, and I hope it's clear. But I don't see that in angels. At all. I know angels think that they won the business away from venture capitalists, nothing could be further from the truth, in my observation. And I think one of the phenomenal things that Unusual uniquely brings, is the ability to act as a sounding board. Not the Director, but a sounding board for the founder to think about how to translate that insight into a compelling value proposition. Now, it's going to have to be the founder’s idea. It's not the venture capitalist who comes up with this idea. But there's a way to know how to do that that is a unique, and I think incredibly valuable, skill set that few people have especially at the seed stage.

‍

John Vrionis 

Yeah, this idea that you can demystify the part of the journey from idea — insight to actual product-market fit is what we wanted to build the entire firm around and felt like it was a lost art. Somewhere the industry had transitioned to one of, ”make a lot of bets; see what happens and bet more on the ones that work,” but a lack of partnership with the founders and that insight-to-product-market fit journey. 

‍

Andy Rachleff 

Look, I think that there are ways to improve the probability that your insight finds product-market fit, but it is by no means a sure thing. So, just because I teach — or you offer — a process for that does not ensure success, but I really do believe it can improve the probability.

‍

John Vrionis  

Yeah, we talked about changing the slope of the trajectory to get there, but not making it happen guaranteed. So helpful, Andy. This is amazing. We're so grateful for you and your time and insights. This is such a highlight for Sandhya and I to get to do this. So thank you so much.

‍

Andy Rachleff 

Well, it's a highlight for me to see how well you are all doing. There's no greater feeling for a teacher than seeing his or her students go on to success.

‍

Sandhya Hedge  

Fingers crossed. Thank you so much, Andy. Thank you so much for being on our show. This whole show was inspired by the phrase product-market fit, that you coined, so we feel super grateful having you on here. Thank you so much.

‍

Andy Rachleff 

My pleasure.

‍