May 13, 2020

Startup Advice, Stock Market Rebound, and US/China Relations | Keith Rabois on TWiST with Jason Calacanis

Check out the TWiStartups Episode page and show notes

Key Takeaways

• “When you confront a new problem that’s never been confronted before you need first principle thinkers more often than not” – Keith Rabois
  • To be a first principle thinker, ask a series of why not questions until you get to one that’s thoughtful and a grounded truth
• If you’re aren’t a first principle thinker, it’s an important skill to learn
  • “It’s a technique that a lot of executives who are very successful apply” – Keith Rabois
    • Anytime someone says, “We can’t do X” apply first principle thinking:
      • Is it that we can do X but it will require a lot of work?
      • Is it that X is literally impossible to do?
    • “What tends to get one promoted and leads to success in Silicon Valley is constantly asking the next question which is why not?” 
• Unpacking Keith’s tweet: “Formula for startup success: Find large highly fragmented industry w low NPS; vertically integrate a solution to simplify value product.”
  • Find a fragmented market that has a poor customer satisfaction
  • Then figure out how to improve the experience by creating an end-to-end solution
• Outsourcing manufacturing is smart because it’s economically efficient, but isn’t always the smart move strategically because you become dependant on another country
  • “We’ve basically not been paying attention to vulnerabilities that we created by using economic efficiency”
• “China suppressed every piece of information designed to get to the origin of the virus” – Keith Rabois
  • “Clearly there’s something to hide that they’re hiding and masking”
    • “Anytime the government expels all the journalists, bans scientific research, and jails people who are trying to whistleblow, it’s not because the government has nothing better to do”
• Keith views the unemployment of millions of Americans more as a healthcare catastrophe than an economic one
  • A lot of people’s psychological well-being and happiness depend on meaningful work; without work, a person’s health begins to plummet
    • “We need to put people back to work, we need to allow people to engage with friends and family” – Keith Rabois

Intro

• Keith Rabois (@rabois) is a General Partner at Founders Fund and the co-founder of Opendoor
  • Previously, Keith held executive roles at Paypal, LinkedIn, Slide, and Square
• Host – Jason Calacanis (@jason)
• Check out Jason’s book – Angel: How to Invest in Technology Startups

Books Mentioned

• Keith enjoyed reading David Sinclair’s book Lifespan
  • The author looks at aging as a disease and discusses ways to prevent aging, such as taking metformin  
• Keith recommends the book High Growth Handbook by Eliad Gil, for founders considering an Initial Public Offering (IPO)

Silicon Valley & Investing

• It’s a lot harder to read people, especially founders, over Zoom calls than it is over in-person meetings
  • Jason’s analogy is that a Zoom call is like online poker while an in-person meeting is face-to-face poker
• Keith views the COVID pandemic in a similar light to the 2000 recession
  • A lot of great companies will emerge from the pandemic just as LinkedIn, PayPal and several other well-known startups emerged from the early 2000s
• Since software is eating the world, anything that affects the economy, like this pandemic, will also affect entrepreneurs, investors, and employees
• Many of the founders that Keith invests in, don’t have domain expertise in the industry they’re in
  • This is actually an advantage because if you have less knowledge about an area, you have a fresh perspective and ask, “Why can’t we do X”
    • Out of the 254 people who worked at PayPal, only 3 had a financial services background
    • Out of the 300 people who worked at Square, about 2 people had a financial services background

Be A First Principle Thinker

• The companies that were most unprepared for pandemic were the incumbents because they had never seen anything like this
  • Meanwhile, smaller companies moved faster and adapted to the new situation
    • “When you confront a new problem that’s never been confronted before you need first principle thinkers more often than not” – Keith Rabois
      • To be a first principle thinker, ask a series of why not questions until you get to a thoughtful answer and a grounded truth
• If you’re aren’t a first principle thinker, it’s an important skill to learn
  • “It’s a technique that a lot of executives who are very successful apply” – Keith Rabois
    • Anytime someone says, “We can’t do X” apply first principle thinking:
      • Is it that we can do X but it requires a lot of work?
      • Is it that X is literally impossible to do?
    • “What tends to get one promoted and leads to success in Silicon Valley is constantly asking the next question which is why not?” 

Formula For Startup Success

• Unpacking Keith’s tweet: “Formula for startup success: Find large highly fragmented industry w low NPS; vertically integrate a solution to simplify value product.”
  • Find a fragmented market that has poor customer satisfaction
  • Then figure out how to improve the experience by creating an end-to-end solution
    • Keith noticed that a lot of his best investments fell into this category of thinking
      • Healthcare is an example of a fragmented market with low customer satisfaction, which is why Keith invested in Forward

US & China Relations

• The US first started working with China in the 1970s because they wanted to align more with China and have them on their side rather than the Soviet Union
  • The second part of the theory was that if the US traded with China, China would be less of a threat since they’d become a business partner
    • However, in practice, that theory doesn’t really hold up. Jason and Keith aren’t big fans of Trump, but they agree Trump was right about China being a threat to the US.
      • “On the China issue, he’s like dead-on” – Keith Rabois
        • Keith says 40-60% of his liberal friends agree with Trump on his views about China
• Having supply chains in China has made a ton of products cheaper, but the pandemic showed how outsourcing can be a huge mistake
  • “We did take our eye off the ball on the manufacturing side” – Keith Rabois
    • Outsourcing manufacturing is smart because it’s economically efficient, but isn’t always the smart move strategically because you become dependant on another country
      • “We’ve basically not been paying attention to vulnerabilities that we created by using economic efficiency”
• 70% of fentanyl is made in China
• “China suppressed every piece of information designed to get to the origin of the virus” – Keith Rabois
  • China basically jailed, murdered, or expelled anybody who was interested in researching the virus
    • “Clearly there’s something to hide that they’re hiding and masking”
      • “Anytime the government expels all the journalists, bans scientific research, and jails people who are trying to whistleblow, it’s not because the government has nothing better to do”
• Keith believes US companies will leave China for other cheap-labor force countries or even bring jobs back to the US
  • Japan is already moving factories to Vietnam and Sri Lanka
• American companies need to rethink their strategy of profits at any cost
  • If China isn’t treating its citizens with basic human rights, US companies should consider removing their business ties with China
• If China has the power to censor or block US businesses (Google, Twitter, etc.), the US should have the power to censor Chinese companies, like TikTok

Thoughts on The Economy

• Keith believes the recovery of the stock market will be repressed and protracted 
  • The stock market might go up for now, but there might be something that triggers another huge drop similarly to what happened in 2000 
    • “It wasn’t until the second drop that everybody agreed that this was a completely new world…so I think we may see another significant market correction even if right now everything looks great.” – Keith Rabois
• Why aren’t big companies acquiring startups and smaller companies right now since valuations are down across the board?
  • “I think people are scared and terrified to make big bets” – Keith Rabois
    • Another problem is that software companies often have trouble managing logistic companies since it requires better management of people
• Keith really enjoyed reading High Growth Handbook by Eliad Gil and recommends it for founders considering an IPO
  • “There is no good reason not to go public” – Keith Rabois
    • As a public company, you have more access to capital and it’s easier to do Mergers & Acquisition (M&A)
• Keith views the unemployment of millions of Americans more as a healthcare catastrophe than an economic one
  • A lot of people’s psychological well-being and happiness depends on meaningful work; without work, a person’s health begins to plummet
    • Even people who retire earlier are more likely to die earlier
    • Suicides are up 50% in Australia  
      • “We need to put people back to work, we need to allow people to engage with friends and family” – Keith Rabois
• Universal basic income (UBI) isn’t the solution because people still want meaningful work
  • “That’s why I think things like UBI are really stupid, it’s like just giving people a check is not creating self-worth” – Keith Rabois

Additional Notes

• Keith enjoyed reading David Sinclair’s book Lifespan
  • The author looks at aging as a disease and talks about ways to prevent aging, such as taking metformin 
• Keith is a former lawyer, as his colleague, Peter Thiel
• Keith is bullish on home-schooling
  • Nearly 4 million students were homeschooled last year
    • “I think the homeschooling movement will allow us to create more thoughtful, more original, more brilliant thinkers and allow parents to have more control” – Keith Rabois
• Keith is also bullish on telemedicine
  • You can get a diagnosis for 30-40% of the cost and save time not commuting to the doctor’s office