Keith Rabois on How He Invests, Forming a Founding Team, and Funding “Ridiculous Ideas” – Venture Stories, Hosted by Erik Torenberg

Check out the Venture Stories podcast page

Key Takeaways

  • Keith’s ideal founder: Someone who has a specific idea they HAVE to pursue that they can’t stop thinking about
  • “Startups have roughly the same amount of pain to go from 0 to 1, regardless of whether 1 is a $1 billion company, $100 million company, $10 billion company, or a $100 billion company. You basically have this fixed cost of pain, so you might as well do something important because the pain’s going to be the same. You might as well get the outcome that offsets the pain.” Keith Rabois
  • “I tend to like things that are super ambitious, that are almost ridiculous” – Keith Rabois
    • Just how ridiculous? – “I want half of my VC friends to laugh at an investment I make. If half don’t laugh, it means I’m not taking enough risk, and the project isn’t ambitious enough.”
  • When selecting a co-founder/group of co-founders:
    • Consider the core risks to your company
      • Then, find people world-class in each of those risk areas (make sure you have word-class talent to battle each of the core problems)
    • Make sure they agree with you on first principles
  • In a startup, domain expertise isn’t all that important
    • “People who are experts tend to know what you can’t do very well. They’ve mastered the rules. They don’t ask enough why questions; ‘Why can’t this be done this way? Why not?’ I like people who don’t know what they’re tackling, but they’re fast learners, and they quickly find people who have the history and experience. Then, they’re able to extract the critical information out of them. They’re not blind, they’re just good at figuring out what they need to learn really fast.” – Keith Rabois

Books Mentioned

Intro

Keith’s Advice for People Who Know They Want to Be Founders, But Don’t Yet Have an Idea

  • “Generally, I don’t like these types of founders. I like people who have a specific idea that they want to pursue and can’t stop thinking about it.”Keith Rabois
    • Keith’s talking about those people who think so much about an idea that they can’t sleep at night – it’s something they HAVE to do (it’s just a question of with whom should they do it)
    • That said, this doesn’t always have to be the case for Keith to write you a check
      • For instance, say you’re closely tied to the problem you’re trying to solve (but it’s only come on your radar in the past few months), that’s a huge plus (for example – if your brother just came down with a rare disease, and you start a company centered around finding a cure)

Investing in the Ridiculous

  • “The general filter I use: the more ambitious, the better”Keith Rabois
    • “Startups have roughly the same amount of pain to go from 0 to 1, regardless of whether 1 is a $1 billion company, $100 million company, $10 billion company, or a $100 billion company. You basically have this fixed cost of pain, so you might as well do something important because the pain’s going to be the same. You might as well get the outcome that offsets the pain.”
  • “I tend to like things that are super ambitious, that are almost ridiculous” – Keith Rabois
    • Just how ridiculous? – “I want half of my VC friends to laugh at an investment I make. If half don’t laugh, it means I’m not taking enough risk, and the project isn’t ambitious enough.”

On Total Available Market (TAM) Analyses:

  • “The real issue with the TAM is not having something that creates enough economic transformation, so you don’t capture enough value. It’s not that there aren’t enough people or enough customers, it’s just that you capture such a small amount because what you do is so marginally valuable that it’s hard to add up to be a massive company. The value proposition is basically too weak.” – Keith Rabois
    • Therefore, as a founder, ponder: “How do I make the value proposition more compelling?”
      • (By making the value proposition more compelling, you capture more of the market)

How does Keith think about company pivots?

  • Typically, you pivot when either the velocity of growth or sales isn’t as expected
  • But, before pivoting, run through everything you can think of to save the company
    • “Sometimes you have to suffer a little bit with a problem before you’re willing to take alternative ideas into account” Keith Rabois

How should you go about finding co-founders?

  • On average, just like marriages, co-founders have roughly a 50% divorce rate
  • For one, know that startups are HARD, and co-founder relationships only get more challenging as companies evolve
  • When looking for co-founders, consider the core risks to your company
    • Then, find people world-class in each of those risk areas (make sure you have word-class talent to battle each of the core problems)
      • So, essentially: “Marry someone who can help you solve a core risk”
  • Another essential criteria: Agree on first principles
    • “Always work with someone who agrees on first principles. You cannot be debating first principles all the time in a startup. It’s incredibly destructive.” – Keith Rabois
  • “You cannot build a company where the two most important people in the company are fundamentally disagreeing about the value of various other people in the company.” – Keith Rabois
  • Another piece of advice when searching for a co-founder: Find your compliment

Keith’s Bungalow Investment

  • Keith is a recent investor, spurred by Peter Thiel‘s advice to “find something interesting to do in primary residential real estate”
    • One of the reasons why: It’s the largest asset class in the world that’s been unaffected by technology
    • One of Peter’s requirements: The investment had to be in a company that was differentiated enough to immediately cut through the clutter

Homeschooling

  • Keith is currently on the lookout for homeschooling companies to fund
    • “Under the radar for the last 30 years, it’s probably been one of the biggest public policy victories in many ways that no one knows about. Roughly 10% of Americans are homeschooled these days.” – Keith Rabois
  • A few problems with the homeschooling market:
    • It’s a TON of friction on parents
    • Many parents don’t have the confidence that they can do a good job
    • Most parents choose to homeschool their child to take control (they have specific perspectives they want their kids to learn)
      • But the problem with a product is it homogenizes things: How do you have something that applies and makes your life easier as a parent, but doesn’t undermine the whole point of homeschooling – customization, personalization, learning at an individual speed, etc.?

When is it essential for founders to have domain expertise?

  • “Typically, I don’t like domain expertise”Keith Rabois
    • With Paypal, early on, only 3 people (of 250+), had any financial services expertise
      • “To me, that’s the right ratio”
  • “People who are experts tend to know what you can’t do very well. They’ve mastered the rules. They don’t ask enough why questions; ‘Why can’t this be done this way? Why not?’ I like people who don’t know what they’re tackling, but they’re fast learners, and they quickly find people who have the history and experience. Then, they’re able to extract the critical information out of them. They’re not blind, they’re just good at figuring out what they need to learn really fast.” Keith Rabois

A Question Keith Likes to Ask the Experts

  • “Is there a reason why this absolutely cannot work? Point me to something that makes this impossible.”
    • Keith adds: “If they can’t give me a specific answer, I’m totally convinced it’s doable.”

On Remote Companies

  • While at Khosla Ventures, Keith funded GitLab, a remote company
  • “I think it depends on the shot you’re taking. If you know what you need to build, it might work fine. The more San Francisco messes things up with crazy policies and people, the more it’s going to force this, and it might not even be a choice anymore. If you know what you’re building, you can probably do it remotely.” Keith Rabois
    • HOWEVER – keep in mind that lots of company-building results from serendipitous conversations that lead to new ideas

Margins Don’t Matter as Much as You Think

  • But cash flow DOES
  • An example:
    • Imagine you have a business that kicks off at 10% margins, but it grows to be 10% of everything on the planet – that’s a BIG business
      • Going deeper, imagine you could capture 1% on every hiring decision worldwide 

2020 Predictions

  • “I don’t think Warren will be the Democratic nominee… I think Buttigieg is going to be the nominee.” – Keith Rabois
    • Keith actually called this back in February 2018
    • “If Warren is the nominee, she’s definitely going to lose

How does Keith maximize his own learning?

  • “Fundamentally, the way I learn new things is mostly reading. It’s such a high-leverage activity… It’s easy to eat up junk food with meetings and workouts and other things; reading is the substance.”Keith Rabois

Additional Notes

  • “I think journalists are jealous of tech companies… They’re direct competitors, and they’ve lost their gate-keeping role.” – Keith Rabois
  • Keith is a huge fan of Barry’s Bootcamp 
  • Keith just funded a meditation company (but he couldn’t talk too much about it)
  • “80% of the negative feedback about VCs is a function of a co-founder dispute that somehow or another ends up on the desk of the VC” – Keith Rabois
  • Keith prefers to invest in U.S.-based companies – it’s hard to work with founders from a considerable distance and with time zone differences
  • Keith estimates he’s led more investments over the last 7 years than any other VC “by a lot”
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