Invest Like The Best – Keith Rabois: If You Can’t Sell Them, Compete With Them

Check out the Invest Like The Best Episode Page & Show Notes

Key Takeaways

  • “Fundamentally, being a component in someone else’s stack, doesn’t usually end well”
    • You want to be able to control each component (of the stack) so you create the ideal user experience
    • As an example, if you have a differentiated advantaged (say in chip design or battery life) you want to ship the end product to the customer yourself (and not sell your batteries to someone like Apple) – this way you get more credit for what you’re asymmetrically good at
  • Keith lists his investment criteria in this tweet
    • But the most important one – Can the founder recruit the requisite talent?
  • Keith says if you have any shot at all at “making it” as a company, there has to be something anomalous, either about your technology, or the team itself
    • “Unless you can see something that’s special, and VERY unusual, there’s no chance that this is one of the top 100 companies of all time”
  • “If you’re going to take two kids in a garage again, and take over the world of X, 10% here and there ain’t gonna cut it. You need 0s. You need to be orders of magnitude better.”
  • “People sometimes forget that I don’t think you can easily get to success by just avoiding bad ideas. You kind of have to do the positive stuff too, and that requires emulating people, companies, and ideas that have been successful.”
    • “I think more people should copy/replicate, and aim to reproduce what the successful companies do. But because we’re surrounded by a world that has more failure than success, it’s easy to get caught up in the ‘avoid the failure’ mentality.”
  • “Every business, when it works, is like an equation – X times Y times Z with some weighting. Understanding that equation in your brain, and being able to manipulate the variables, is the key to being strategic.”
  • Great career advice – “Find somebody that you can just attach yourself to, that’s incredibly impressive, and just learn through osmosis”

Books Mentioned

Intro

  • Keith Rabois (@Rabois) is currently an investment partner at Khosla Ventures, but has a storied and diverse background as an investor, entrepreneur, and executive
    • He has worked in senior positions at Paypal, LinkedIn, and Square; has led investments in companies like Stripe, YouTube, Palantir, and AirBnB; and started the company OpenDoor, which aims to transform the process of selling a home through technology.
    • Keith has quite an impressive list of bosses throughout his career  Peter ThielMax LevchinReid HoffmanJack Dorsey, and Vinod Khosla
  • Also check out the Podcast Notes from Keith’s appearance on The North Star Podcast

Own the Entire Stack 

  • Paul Graham has said – “If your technology is better, but potential customers are too set in their ways to switch, use it yourself and compete with them” 
  • A few examples:
    • If you’re a company who’s better at reducing fraud, you don’t want to sell that as service to somebody else, you want to build the full stack yourself
      • Doing so, would make you a “vertically integrated business” – these are the types of businesses Keith likes to fund
      • “Fundamentally, being a component in someone else’s stack, doesn’t usually end well”
        • There’s the adoption risk issue (you have to deal with long sales cycles etc.)
        • There’s economic issues – you’re not capturing as much value as you’re creating (probably only 10-30% of the value you create, if you’re selling to someone else, depending on how good you are at sales)
    • Apple has always been vertically integrated (they’ve never had an open platform)
      • “You want to be able to control each component, so you create the ideal user experience”
  • Keith has some advice – When you have an asymmetric ability to perform a function, then you should take advantage of that
    • A KEY POINT on Asymmetry
      • As an example, if you have a differentiated advantage (say in chip design or battery life) you want to ship the end product to the customer yourself (and not sell your batteries to someone like Apple) – this way you get more credit for what you’re asymmetrically good at
  • “When you’re dependent on long sales cycles and other customer priorities, you don’t control your fate”
    • BUT – if you sell your own product, directly to an end customer, you control your own fate
      • “You don’t want to outsource your fate and destiny to somebody else”
  • For more on this stuff, Keith recommends the book 7 Powers: The Foundations of Business Strategy
    • This book isolates the 7 ways to create strategic leverage

Keith’s Investment Criteria

  • Keith lists his investment criteria in this tweet
  • Keith says if you have any shot at all at “making it” as a company, there has to be something anomalous (aka deviating from what’s standard or expected)
    • What might be unexpected?
      • Something about the team
      • Something about the performance and attributes of the technology
    • “But there has to be something anomalous, because you don’t take over the world from scratch following a standard playbook”
    • “Unless you can see something that’s special, and VERY unusual, there’s no chance that this is one of the top 100 companies of all time”

Company Secrets

  • A company secret is a belief system about the world, that a certain company holds, that the rest of the world doesn’t really appreciate
    • Over time that hypothesis/secret is either rejected or validated
  • “All fundamentally interesting companies are predicated on one big secret”
    • As the company becomes successful, people start reverse engineering what that secret is 
    • Because of this, as a successful startup. you have to keep reinventing yourself every X years
      • The secrets that originally propelled you, probably no longer will, and you have to come up with new ones for the next generation of innovation
  • An example:
    • Opendoor’s secret – homes are much more like a commodity than people commonly assumed
      • What was the common intuition? – Residential real estate is like a piece of art, that you had to see/touch/feel to price 
      • “It’s not that difficult to price a home in the United States. You need the right data and skills, but homes are much more on the scale of a commodity than they are works of art.”

Accumulating Advantages

  • This is the idea that as a company business gets better/grows – it becomes easier to run
    • Every day the company/business gets better/stronger, so that eventually B-B+ players can run the company, because it’s so strong that you don’t need the heroic efforts of incredibly talented people
      • However, this most likely isn’t the case at all in the beginning – you may need the top 10 people in the world to make something work originally
  • Why does it become easier to run, year after year?
    • It could be trust
      • As you become more popular, the word of mouth effect takes place, boosting your credibility
  • Keith talked a bit more about this in these Podcast Notes

Keith’s Interest in Investing in Healthcare Companies

  • Healthcare is 22% of the U.S. economy – “And it’s not particularly a high quality experience for anybody. I don’t know anybody who says, ‘I can’t wait to go to the doctor today.'”
    • “Anytime you have a combination of 22% of the U.S. economy, and people have poor experiences….there’s room for innovation”
  • So what is Keith looking for?
    • Companies that improve outcome
    • Companies that improve experience
  • “Fundamentally, the world of healthcare is expensive and inconvenient, and there’s no reason why technology can’t reduce the cost, increase the convenience, and improve the outcome”
    • That’s Keith’s investing formula
    • “The fundamental magic of technology is you can do all 3 things at the same time – improve the experience, reduce the cost, and improve the quality. Through no other lever in the history of the world, can you do all 3 at the same time.”

One of Keith’s Investment Criterion – “Can the founder attract talent requisite to achieve the vision?”

  • “I think that is maybe the most primary objective in assessing a founder – can they recruit the requisite talent?”
  • Of course, every business has different challenges and thus needs different talent
  • How does Keith evaluate this early on?
    • “The ability of a particular founder to recruit for the necessary team, should show up in prior experiences that the founder had”
      • So Keith might call former colleagues of the founder, and ask them if they would join the founder’s current company, and why/why not
        • “Where the founder has the ability to recruit, the answers are often, ‘Absolutely, I can’t wait!'”
        • “If you hear too much hesitation, that’s a significant red flag”

The Difference Between Investors and Executives

  • Both operating executives and investors need to be good at recruiting,  identifying, and assessing talent
  • The primary goal for an executive is output – so shipping things on time, with a high quality
    • This involves a lot of decision making, and working through other people
  • Investing is a lot less about making decisions on a company’s behalf, and more so about “playing psychologist” (so giving the founder feedback on potential avenues and identifying less obvious trade-offs)
    • This is very different from being responsible for making decisions
  • Keith says being an executive is much more of a team sport, while investing is much more individualized (even when you work with a traditional venture fund)
    • For this reason, certain types of people may be much more suited to be an investor than an executive
    • “If you’re intellectually curious, being an investor is a much better job. You get paid for learning and trying new things, studying new things, and meeting new people. Whereas if you’re an executive, you tend to be more parochial – you master things and you get really deep, and solve problems in ways other people have never done before.”

Keith’s Thoughts on the Idea of a Lean Startup

  • “I think the lean startup was a stupid idea and followed by stupid people, and poison for Silicon Valley”
    • The idea originates from the book – Lean Startup
    • But that said…not everyone has a choice
      • There are ideas and people that would struggle to raise a lot of money
      • So if you don’t have the option of raising $X, coming up with a cohesive business strategy that can work on less money is a very reasonable and brilliant thing to do
    • “But I think some of the best ideas, that are more differentiated, defensible, and interesting, tend to require capital”
  • ‘I tend to think of startups as more like a movie. The idea behind a movie is you have this inspiring narrative, then you have to go figure out how to cast it properly.”
    • You have to get the right characters and the right people (the right actors) to make the movie successful
      • Translate this – you need the right founders, the right executives etc. to make the company successful
    • Then you have to sell tickets and market the movie
      • Translate this to selling a product
    • “Start with a narrative and vision, cast the team, then you produce it”
  • So Keith starts top down. Here’s how he thinks – he’ll ask:
    • What problem am I trying to solve?
    • How do I get the right people to help me solve it?
    • The how do I convince people I’ve solved that problem?

You Need to Be Orders of Magnitude Better

  • “If you’re going to take two kids in a garage again, and take over the world of X, 10% here and there ain’t gonna cut it. You need 0s, you need to be orders of magnitude better.”
  • “If you allow people to ship 10% better ideas, they’re not going to find the 10x ideas. You have to ruthlessly say, ‘No – we need 10x, not 10%.'”
  • So within companies, try to focus on directing money towards experiments with a 10x upside

Emulate the Successes

  • “People sometimes forget that I don’t think you can easily get to success by just avoiding bad ideas. You kind of have to do the positive stuff too, and that requires emulating people, companies, and ideas that have been successful.”
    • “It’s ABSURD in my own view, that no one emulates Apple”
  • When you find someone successful ask – “How and why are they successful?”
    • Decompose it and try to emulate that
  • “I think more people should copy/replicate, and aim to reproduce what the successful companies do. But because we’re surrounded by a world that has more failure than success, it’s easy to get caught up in the ‘avoid the failure’ mentality.”

What specifically should more people emulate in regards to Apple?

  • Their obsession around design
  • Their way of vertical integration (aka owning the whole stack – see above for more)
  • Keith recommends the book Creative Selection: Inside Apple’s Design Process During the Golden Age of Steve Jobs
    • “It conveys more about how Apple works in a way that’s specific enough, that I think most other books haven’t been able to capture.”
  • “I don’t think people emulate Amazon enough either”
    • Amazon doesn’t offer employees free perks (like lunch) – “Good luck trying to convince some startup here [in Silicon Valley] not to do that”
    • BUT – “Do you want to be more like Amazon, or that failed startup down the street?”

Interview Questions for Identifying Great Talent

  • “If you were a product, how would you describe your value proposition”
    • A good way to answer this – go find 3-4 of your friends, and ask them what they like most about you. Write down the answers and look for the common words.”
  • Side note – How does Keith articulate the criteria for an executive or employee being strategic:
    • “Every business, when it works, is like an equation – X times Y times Z with some weighting. Understanding that equation in your brain, and being able to manipulate the variables is the key to being strategic.”

Career Advice

  • “Find somebody that you can just attach yourself to, that’s incredibly impressive, and just learn through osmosis”
    • Find someone amazing, and work with them
  • “If you want to get ahead in life, just put in more effort than other people. It’s pretty simple.”
    • Find your advantages – and double down on them through sweat/attention to detail

Popular Ideas Keith Thinks Are Crazy

  • “The whole fake news debate is ridiculous. The average American today is by any metric, more informed than the average American any time in history.”
    • Yes you can clearly find content that’s false – but who cares, the net effect is what matters
    • The only question that matters for Keith – “Is a voter more informed or less informed?”
    • We all have access to any information we want with Google – and this just wasn’t true even 50 years ago
    • Tyler Cowen has said – “There’s nothing you can say about Facebook that isn’t true of the printing press”

How do you balance learning by reading, experience, osmosis etc.?

  • It depends what you’re trying to learn
    • There are certain things you can better learn through osmosis (aka from someone else) – like how to play the guitar
  • When you do read, try to focus on reading books, as opposed to online content
    • “Your brain is a muscle, and you want to exercise it. This develops capacities and abilities you can leverage later, in ways you could never forecast.”

What other investors does Keith think are taking unique approaches to investing?

  • “Surprisingly few”
    • “I think most investors forget the lessons of strategy that they would apply if they were back running and operating a startup, or advice they would give their founders, and that advice is – differentiation is your friend”
  • Keith says Y Combinator has done a great job differentiating over the last 10+ years
  • BUT – “I don’t think there’s been much pioneering, and much innovation, at the traditional venture capital level, at all”
    • Keith really recommends Who is Michael Ovitz? for more on how Andreessen Horowitz first differentiated back in their early days
    • “I don’t know that anyone in the last 5-10 years has really innovated that much”
  • Another example of someone who does “vertical innovation” well – Lux Capital
  • “From an innovation standpoint, I think venture capital is lagging”

Some Lesser Known Book Recommendations

  • The Upside of Stress at is probably the most important book that one can read. It will change your life in so many different ways.”

The Kindest Thing Anyone Has Ever Done For Keith

  • “The things that stick with me are people who remember and articulate, in a really succinct way, the impact I have had in their career or life”

These notes were edited by RoRoPa Editing Services

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