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I recently had a chance to catch up with Andy Rachleff, who taught me at Stanford GSB. Andy is the CEO of software-based financial advisor Wealthfront, and is of course well known as a founding partner of legendary VC firm Benchmark Capital. If Benchmark's Bill Gurley is the sage of Silicon Valley, surely Andy is its professor. Below, I've shared some of Andy's professorial wisdom, which I thought the broader entrepreneurial community might benefit from.

NH: What advice do you give your students about finding a co-founder?
AR: I've learned from the experience of my former [Stanford MBA] students, that it usually doesn't work to "recruit" a technical co-founder. You need to have a common point-of-view, and find someone who sees the problem as you do, and is equally passionate about solving it. The challenge is that it's really hard to get it right out of the gate. That's because you build a product, and target customer segments sequentially. The odds of that first segment being the right one are low. When it doesn't work, then doubts set in. That's when it's critical that both co-founders are committed to each other and to solving the problem. I haven't always held this view, but I've now come around to it, based on my students' experience.

NH: When should entrepreneurs consider outsourcing product development?
AR: If you're in constant iteration mode -- pre product/market fit -- it's a false economy to outsource. It works better for situations with a defined market and longer development cycles.

NH: Do you advise entrepreneurs to raise seed capital when it's available?
AR: It's a good idea to raise capital when you can, especially if you have a significant other. I used to be against founders selling their stock in a secondary offering. Now, I believe that if you sleep better at night, it's good for everyone. Seed funding is analogous to secondary stock. You're no more macho by not taking a salary. And you'll think more broadly. 

NH: What advice do you have about the chicken-and-egg issue of raising capital and attracting a solid co-founder?
AR: There's nothing wrong with signing up a lead investor conditional on having a CTO join. It's a totally reasonable approach. People with better judgment wouldn't fault you for that. You could have the potential CTO join the investor meeting. 

NH:  What advice do you have on customer development and finding product/market fit?
AR: You have to identify people that have the problem AND that have spent money trying to solve it. It's not enough for them to simply have the problem. Focus on "Who Cares" - a particular group. Develop your hypothesis, and test one hypothesis at a time. You can't just ask a customer what they think. Tell them, and then listen to their reaction. 

NH: What's the best way for an entrepreneur to identity the right investors to target?
AR: The best way is to hire an attorney that's experienced at your stage. Use them to identify which angels are oriented towards your sector. You want to be introduced to those angels, vs cold calling. 

NH: What separates a lead investor from a follower?
AR: A lead investor is someone who knows your space, and probably you, and is willing to sit down and negotiate a price with you. Followers might not want to do that, in order to remain the good cop.

NH: What do you do with negative VC feedback?
AR: Listen to objections. Is the objection to you poorly articulating the problem or a disagreement on the market opportunity? The former is your fault. But if they don't believe in the opportunity, don't waste your time on "missionary" work. Startups can't afford to do that. Preach to the choir. Not everyone needs to like your idea.

Related Posts by Andy
To be a great entrepreneur, you must be non-consensus and right
Entrepreneurs in Silicon Valley love to talk about disruption, though few know what it really means. They mistake better products for disruptive ones. 

Andy Rachleff is president and CEO of Wealthfront, an SEC-registered software-based financial advisor, and teaches at the Stanford Graduate School of Business. Before Wealthfront, he co-founded and was general partner at Benchmark Capital. @arachleff
Nadim Hossain is a SaaS entrepreneur based in San Francisco. He was the CMO at PowerReviews (NASDAQ: BV), and was previously a marketing executive at Salesforce.com. @NadimHossain
2/18/2013 22:51:48

Disruption is only a theory until disruption is achieved.

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