Andy Rachleff, who cofounded the venture firm Benchmark back in 1995 and has more recently been leading the wealth management firm Wealthfront and teaching at Stanford, is widely sought out for his startup advice. It has become harder to come by, though, given the demands on Rachleff’s time. Most notably, Rachleff has had to dial back his work at Stanford toone course during one quarter of the year — a class that we can only guess is heavily oversubscribed by students.
That doesn’t mean he doesn’t enjoy the work. Right now, he’s helping two longtime friends, AppDynamics cofounder Jyoti Bansal and VC John Vrionis, with a new kind of accelerator program they are launching today (more on that here). In a quick call to discuss that program earlier this week, he also fielded a few questions from us about the current state of early-stage startup investing and how founders can best navigate it.
We asked him, for example, about how a glut of seed-stage investment has impacted the way that startups are raising money — often in pre-seed, then seed, then post-seed rounds, before raising Series A funding. We wondered if, nomenclature aside, he felt things had changed fundamentally.
As it turns out, he does not. “While the structure and characters involved are very different than 10 years ago, the steps you need to go through are no different,” said Rachleff. “The whole point is to understand what an investor at the next round expects. You have to determine whether or not you’re ready [for that next meeting], and try to achieve product-market fit as fast as possible before you get to it.” Indeed, Rachleff suggested that he thinks it unwise for founders to raise seed rounds serially. “When companies raise seed funding, [that money] is to prove the dogs want to eat the dog food. If they can’t [prove that], and they have to ask for more seed funding,” the startup becomes “less compelling” to later investors.
We asked him about some of the biggest mistakes that founders make, and he said that many of these center on who founders approach for funding, how they pace the rate at which they approach investors, and how, exactly, they pitch their startups. On that last point, said Rachleff, “People think data is a way to compel people, but it’s the story that compels people, and that has never changed, whether you’re talking about political campaigns or business presentations.” (We asked for more details, but he half-kiddingly suggested that founders will need to hear about the importance of narratives via that aforementioned accelerator program.)
We also asked Rachleff about some now-famous research he prepared some time around 2006 that suggested that every year, about 15 U.S. startups are created that eventually reach $100 million in annual revenue. His point at the time was that VCs can only succeed by getting behind those companies. (It’s largely the premise around which the venture firm Andreessen Horowitz was launched, cofounder Marc Andreessen had told this editor when the firm’s first fund was getting off the ground back in 2009.)
We wondered: is that number still 15 so many years later? Rachleff noted that he hasn’t updated his research, but he said he doesn’t “think it’s much bigger in the U.S. I do think the number is larger with Chinese companies, but here, I bet you it hasn’t changed or maybe it’s 20 companies each year that at some point reach $100 million in annual revenue.”
Before we jumped off the phone, Rachleff had a question for us, which is why there aren’t more articles about seed-funded companies going out of business. (Maybe he thinks this would keep more people from pursuing half-baked ideas.)
“Thousand of companies are raising seed funding — 10 times the amount of companies that were starting with a Series A” during the go-go dot com era of the late ’90s, he said. “But when I ask investor friends what’s happening to them all, the best answer I get is that a small number of them are successful, a slightly larger portion get acqui-hired, and the largest portion keeps raising money to keep the hope alive.”
Some of them “get to $1 million to $2 million in revenue to reach breakeven,” Rachleff continued, but, alas, that’s no reason for celebration. If a startup has raised outside funding and “there’s no money to grow into a business, that’s a failure.”