Deep Thoughts from Andy Rachleff

My classmates Julio and Matt kicked off their excellent podcast, iinnovate, with an interview featuring Andy Rachleff, co-founder of Benchmark Capital and GSB professor. Benchmark is perhaps best known as the sole VC investor in eBay as well as a major investor in Webvan.

During the school year, I had an opportunity to attend a “meet the professor” dinner with Andy and a half dozen or so classmates. The dinner really stood out as one of the best learning experiences I’ve had at the GSB. Andy has a way of capturing complex business ideas and translating them in pithy, well-crystallized statements. After the dinner, there were about four of these concepts that I mulled over for weeks; the more I thought about them, the more sense they made. He covers some of them in his interview with Matt and Julio, but I thought I’d share.

Product-market fit is everything
According to Andy, the sole driver of a start-up company’s success is how well the product fits with the market need. Put in a different way, are you making the dog food that the dogs want to eat? If you get this right, you can afford to mess up everything else. The logical extension of this, according to Andy, is that execution doesn’t matter if you have the market fit in place. I’m not sure if I agree with that last statement though. It requires quite a bit of execution to develop the product, understand the customer need, re-engineer the product, communicate the value proposition, figure out the pricing, develop a distribution channel, and bring the product to market. When I prodded him on this, I think he classified all these activities as part of establishing the “product-market fit” and not as execution.

The Groucho Marx Principle
Groucho Marx famously said “I don’t want to belong to any club that will accept me as a member”. Ain’t that the truth! I think I’ve spent my whole life seeking entrance into clubs of all sorts only to find out they weren’t so hot once I got in. But I digress. Andy’s point was that VCs never want to invest in companies that actually want their money. If the company is truly great, most likely it doesn’t want or need the capital. Though we didn’t really get into it, I think he implied that the flip-side is true as well—beware of any venture capitalist that wants to give you money.

It’s great when a major company enters your market
This was a real eye-opener for me. Most companies live in fear that Microsoft and Google will enter their market and blow them out of the water a la Netscape. Andy’s insight, however, is that more often than not, the presence of the competitor validates the product-market and as a result, actually grows the total market size significantly. So, the start-up may have a smaller share of the market, but now the market is sizable and legitimate. Not only that, but the start-up company gets fantastic free publicity vis-a-vis the entrance of a Goliath company.

80/20 is the mark of a great entrepreneur
Finally, during the dinner conversation, someone asked Andy what was it about the great entrepreneurs that he backed that made them successful. Andy’s response was that they had great vision to see what are the hand full of things that will make or break the business. After they seized on those things, they spent all their time making sure they got them right. It could be something like the pricing model, the “last mile” distribution expense, or building the direct sales force. What’s equally important is realizing, “this other 80% of stuff is crap and I’m not going to spend anytime with this crap because it’s crap” (my own words, not Andy’s).

The dinner ended with me spilling an enchilda all over my pants--but that is a story for another post.