Wealthfront

Andy Rachleff spent years as a venture capitalist and later retired from that business to give back, joining the faculty at his Stanford alma mater and becoming a trustee at the University of Pennsylvania. As chair of Penn's endowment committee, he sat in a meeting where the management team explained how they generated their strong returns. He saw an opportunity: software could deliver what the premier university endowments did to ordinary investors. He said the idea found him, and he was not looking to start a company.

Wealthfront launched its service in December 2011. The model was simple: a diversified portfolio of low-cost index funds, a minimum of only $500 to open an account, and an advisory fee of less than a quarter of a percent annually. The company's core differentiator was tax efficiency. Using tax loss harvesting and direct indexing, run daily by software, it said it could add roughly one and a half to two percent to annual after-tax returns, a capability traditionally available only to the very wealthy and only at year end from human advisors.

Wealthfront modeled its pricing on Dropbox's free-storage-plus-referrals approach. The first $10,000 under management was free, and each referral gave both the referrer and the friend an extra $5,000 managed for free. Andy described this as the first time virality had been applied to investing. Roughly 15% of sent invitations resulted in a new user funding at least $5,000. Growth was tied to client satisfaction: the more satisfied clients were, the more invitations they sent.

The company emphasized sustainability over speed. Andy said it had about $60 million left of roughly $130 million raised, and he was willing to sacrifice growth for a sustainable business rather than repeat the late-1990s pattern of burning cash to get big fast. He also stressed that every new service must first improve clients' net-of-fee, after-tax returns. The host noted that a large share of assets, roughly 70% of clients by Andy's estimate, sat in accounts of at least $10,000, and that a small fraction of investors held most of the capital.

As of November 2016, Wealthfront managed about $4.4 billion in assets for roughly 100,000 individual investors with a team of about 140 people. Andy argued that automated investing would grow faster than ETFs did, and that the company was barely tapping its market. The company planned additional revenue-generating services that would add value to client accounts.