20VC Exclusive Keith Rabois on Rejoining Khosla Ventures

Summary Notes


In this episode of 20vc, host Harry Stebbings interviews Keith Rabois, who recently made a significant career move from Founders Fund to Khosla Ventures. Rabois, known for his successful investments in companies like Stripe and OpenDoor, discusses his motivations for rejoining Khosla Ventures alongside Vinod Khosla, highlighting both professional and personal reasons for the shift. Rabois reminisces about the collaborative and intellectually stimulating environment at Khosla Ventures, where rigorous debates during partner meetings sharpened his investment acumen. He also delves into the importance of having a competitive advantage as an investor, the art of reserve allocation, and the nuances of growth-stage investing. Additionally, Rabois touches on his investment philosophy, the impact of becoming a father on his worldview, and the future of the venture landscape amidst market fluctuations and regulatory changes.

Summary Notes

Keith Rabois' Career and Personal Decisions

  • Keith Rabois reflects on his successful tenure at Kosla Ventures during KB four, five, and six.
  • He acknowledges missing certain aspects of Kosla Ventures that contributed to its success.
  • Personal aspects outside of professional ambitions also influenced his decision to return.

"There's certain things about, you know, KB that led to that successful track record in KB four, five and six that I kind of missed. And then there's several personal things that just were more appealing to me as a human, you know, aside from my professional aspirations and goals and ambitions. And so the combination made a lot of sense."

Keith is indicating that his decision to move back to Kosla Ventures was based on both professional and personal reasons. He missed the elements that made KB funds successful and found personal appeal in the environment at Kosla Ventures.

Venture News and Keith's Move to Kosla Ventures

  • Harry Stebbings announces Keith Rabois' move from Founders Fund to Kosla Ventures.
  • The discussion will cover Keith's motivations, plans with Kosla's new funds, and his investing lessons.
  • Notion and Digits are highlighted as helpful AI tools for workflow automation and accounting.

"This is 20 vc with me, Harry Stebings, and this Wednesday we had some of the biggest venture news in a long time. Keith Rabois, legendary founders funding Lester, who'd backed the likes of Stripe, Fair ramp and others, was leaving founders fund to rejoin Vinod Kosler and Kosler Ventures."

Harry Stebbings introduces the significant venture capital news about Keith Rabois' move and sets the stage for discussing Keith's reasons and future plans.

Keith's Relationship with Kosla Ventures and Founders Fund

  • Keith Rabois spent six years at Kosla Ventures, contributing to stellar returns.
  • Despite leaving, he maintained significant contact with Vinod and other partners, co-investing frequently.
  • He felt a stronger bond with Kosla Ventures partners in the past five years than during his official tenure.

"I never really left in some senses, because after I left, I stayed in really significant contact with Vinod, Samir, and David particularly."

Keith explains that his connection with Kosla Ventures remained strong even after his departure, which contributed to his decision to return.

Partner Meetings and Investment Debates at Kosla Ventures

  • Partner meetings at Kosla Ventures involved vigorous debates about new investments and portfolio analysis.
  • Keith felt these debates sharpened his investment skills and informed his decisions.
  • Learning about deep tech and hardcore technology was a valuable educational experience for him.

"We had very extensive partner meetings every Monday for hours at a time, and we vigorously debated new investments as well as the impact and the potential upside of the current portfolio."

Keith describes the intense and thorough nature of Kosla Ventures' partner meetings, which he believes improved his investment acumen.

Different Investment Strategies at Founders Fund

  • Founders Fund operated with individual investment strategies, unlike Kosla's collaborative approach.
  • Keith found the preparation for Kosla's partner meetings to be dense and substantive, missing this rigorous process at Founders Fund.

"Founders Fund, especially when I joined, was very much people running their own investment strategies think of as like a PM running their own investment strategies."

Keith contrasts the independent investment approach at Founders Fund with the collaborative and debate-heavy approach at Kosla Ventures.

Decision-Making and Social Capital at Kosla Ventures

  • At Kosla Ventures, partners have autonomy in investment decisions, but they must consider social capital within the firm.
  • Successful controversial decisions can enhance a partner's social capital for future investments.
  • Keith reflects on times when he should have had more conviction in his investment decisions.

"The way it really works, in a way the rubber kind of meets the road is sort of like a certain amount of social capital."

Keith discusses the concept of social capital at Kosla Ventures, which influences the decision-making process and the dynamics of partner autonomy.

Investment Regrets and Learning from Experience

  • Keith shares instances where he regrets not having more conviction in investment decisions, such as with Rippling and Robinhood.
  • He also reflects on moments when he chose to invest despite concerns, like with Fair, and it paid off.

"I knew that I was on the edge of consensus and I was going to burn a lot of social capital, mostly on should I increase the valuation of a particular offer."

Keith provides examples of how he balanced social capital with conviction in investment decisions, highlighting times he wished he had pushed harder for certain investments.

Price Sensitivity in Venture Capital

  • Keith notes that Kosla Ventures has historically been price disciplined, but has recently relaxed its stance.
  • He agrees with Peter Fenton that price sensitivity can indicate a lack of conviction in early-stage investing.
  • Price becomes a more significant factor in later-stage investments, where the risk-reward balance is critical.

"Historically I'd say KV has been more price disciplined than Founders Fund, but I think Founders Fund is actually more price sensitive and more disciplined than most people give them credit for."

Keith acknowledges the price discipline at both Kosla Ventures and Founders Fund and the importance of conviction over price sensitivity in early-stage investments.

Understanding Macro Environment Impact on Investment Strategy

  • Peter Thiel emphasizes the importance of recognizing how the macro environment affects expected returns.
  • Adapting investment strategies to current entry prices is crucial.
  • High entry prices necessitate a different approach than the usual strategy.
  • Straying from the norm can be beneficial at times, as demonstrated by successful investments like Ramp's seed round.

"One thing that Peter Thiel is really disciplined about is he totally understands these dynamics really well and is always pointing this out internally, sometimes externally, that your returns are not going to be the same as what you expect when that's what's going on in the macro environment."

The quote highlights the importance of understanding and adapting to the macroeconomic environment when it comes to investment returns. Thiel's discipline in this area is emphasized as a key factor in successful investing.

Assessing Investment Courage and Strategy

  • Investing in companies with high entry prices, like Ramp's seed round, can be controversial and risky.
  • Having in-depth knowledge of an industry allows investors to identify potential winners despite high entry costs.
  • Courageous investments can pay off significantly if the investor has a strong understanding of the space and the company's potential.

"No, in fact it was quite controversial. I sometimes think that it might have been the most courageous investment I've made as a vc because everybody was so addicted to this breath nonsense and typically not the best strategy to fast follow another startup that has traction."

This quote reflects on the courage required to make an investment that goes against the grain, especially when the market is fixated on a different approach. It underscores the importance of conviction and industry knowledge in making successful investments.

Investment Conviction and Capitalization Considerations

  • Evaluating conviction levels is essential when concerned about the price of an investment at the seed stage.
  • Considering a company's future capital requirements is important to ensure its success and ability to reach milestones.
  • High entry valuations can be detrimental if they do not align with the company's growth and funding needs.

"You do have to take into account what kind of company is this? How much capital is it going to require to achieve certain milestones and depends on what the company is aspiring to do."

The quote emphasizes the need to consider a company's capital needs relative to its goals and the milestones it must reach. This strategic approach can affect the probability of success and is a critical aspect of investment decision-making.

Venture Capital Reserve Strategies

  • Reserve strategies in venture capital vary widely and are more art than science.
  • Some firms adopt a disciplined, top-down approach to allocating reserves for investments, while others make ad hoc decisions.
  • The decision to reserve or not can depend on various factors, including the investor's style, the company's traction, and the founder's abilities.

"At KV. There is a more disciplined, let's say, approach to reserves. That doesn't mean better, by the way."

This quote points out that while some firms have a structured approach to managing reserves, it isn't necessarily superior. The implication is that reserve strategies are complex and firm-specific.

Series A Investment Dynamics

  • Series A investments offer a potentially strong risk-reward ratio but are highly competitive.
  • Leading seed rounds is preferred due to less competition and the ability to shape early-stage companies.
  • Seed investments allow for significant influence over company direction before it solidifies, which is more challenging to change at later stages.

"I think the risk reward can be really strong. It's hyper competitive."

The quote acknowledges the competitive nature of Series A investment, suggesting that while the potential returns are attractive, the level of competition can be a significant challenge.

Growth Investment Outlook

  • Many growth funds have struggled due to price insensitivity and a lack of fundamental company-building understanding.
  • Growth investing requires a different skill set, which may not align with every investor's strengths.
  • Successful growth investments often rely on the investor's unique insights and experience in relevant industries.

"I think that growth is pretty broken. I think most growth funds were pretty bad at what they were doing."

This quote criticizes the performance of many growth funds, attributing their struggles to poor investment strategies and a lack of fundamental understanding of company growth.

Fund Sizing and Portfolio Strategy

  • The size of a venture fund should align with the investment stage, number of opportunities, and team composition.
  • Different portions of a fund may be allocated to seed, venture, and growth investments based on the firm's focus and expertise.
  • A fund's size influences the number of investments and the average amount invested per company.

"Sizing a venture fund is one of these other complicated arts in the industry."

The quote conveys that determining the appropriate size for a venture fund is a complex task that requires balancing various factors to align with the firm's strategy and capabilities.

Venture Fund Portfolio Strategy

  • A good portfolio for a venture fund typically contains around 30 to 50 investments.
  • The number of high-quality investors in a fund is typically small, resembling a micro power law within a power law.
  • Fund size should influence investment strategy, which must be adapted based on the team and fund weighting.
  • Founders Fund, for example, has different allocations for its funds, with varying strategies for each.

"the guidance I learned and I don't know this is as rigorous as many things, but roughly a good portfolio for a fund should be about 50, 30 to 50."

This quote outlines the typical size of a healthy venture fund portfolio, suggesting that a range of 30 to 50 investments is advisable.

"How many people are going to be high quality investors do you have at any given time in a fund? It's usually a smaller number than you think."

The quote emphasizes the scarcity of high-quality investors within a fund, which affects the fund's strategy and performance.

"Ultimately your fund size does affect your strategy or should. It has to be a recursive dialogue."

Here, the importance of aligning fund size with investment strategy is highlighted, indicating that strategy should evolve based on the fund's capacity.

Experience and Team Dynamics at Investment Firms

  • Seniority and experience of team members are important when considering changes within an investment firm.
  • Keith Rabois has worked with the same senior partners at KV and has limited experience with newer team members.
  • Team composition and familiarity with colleagues can influence the dynamics and decision-making within a firm.

"The four people that are most senior or know the official mds at KV are the same people I worked with when I was there."

Keith Rabois comments on the stability of senior management at KV, acknowledging that he has a history with these individuals.

"I haven't worked with most of the people that are not at the partner level at KV."

This quote reveals Keith Rabois' limited interaction with the less senior members of KV, which affects his ability to fully assess the firm's dynamics.

Growth Investing and Decision-Making

  • Learning from other funds can enhance decision-making, especially in growth-stage investing.
  • Founders Fund has a strong approach to valuing growth-stage opportunities, which can inform prorata decisions.
  • Understanding when to invest further in a company's subsequent funding rounds requires analytical rigor.

"I think the rigor around growth investing actually I've learned this personally."

Keith Rabois acknowledges the importance of a rigorous approach to growth investing, which he has learned through experience.

"the growth team is very dialed in to evaluating those opportunities."

This quote suggests that the growth team at Founders Fund has a methodical process for assessing investment opportunities, which has been educational for Keith Rabois.

Founder-Investor Relationships

  • The compatibility between a founder and an investor can significantly impact a company's success.
  • Investors must understand and align with a founder's vision and philosophy to provide effective support and feedback.
  • The importance of finding the right investor match for a founder is likened to a matchmaking exercise.

"every founder who's successful, every founder who has a shot of being really successful is different."

Keith Rabois highlights the individuality of founders and the necessity for investors to adapt their approach accordingly.

"Being in line with his views allows me to be more effective because when I'm channeling feedback, we're not debating first principles ever."

This quote explains how alignment with a founder's principles can streamline the collaboration process, making the investor's feedback more impactful.

Portfolio Overlap Between Investment Firms

  • Similar investment criteria between firms like KV and Founders Fund result in high portfolio overlap.
  • Both firms may share ownership in the same companies due to convergent views on what constitutes a successful founder.
  • This overlap is evidence of a shared understanding of the traits that make a founder likely to succeed.

"KV and FF have almost exactly the same ownership. In trauma I believe in Openstore we have the same preferred ownership, KV and FF."

Keith Rabois points out the significant portfolio overlap between KV and Founders Fund, indicating similar investment philosophies.

"A lot of people at KB are founder driven."

This quote suggests that both KV and Founders Fund prioritize founder-driven companies, although KV may also focus on technology and innovation.

Career Choices and Starting a Fund

  • Keith Rabois considered starting his own fund but ultimately decided against it due to the high initial effort and preference for working with founders directly.
  • The desire to support and guide founders is a primary motivation for Rabois, rather than dealing with the operational challenges of starting a new fund.
  • Understanding one's strengths and preferences can guide career decisions in the venture capital industry.

"I have occasionally thought about, should I start a fund? There's definitely a lot of drag coefficient associated with that, that I was not particularly excited with."

Keith Rabois expresses his reluctance to start a fund due to the operational complexities and distractions from his core interest in working with founders.

"I don't think you can get rid of the drag coefficient, certainly from scratch."

This quote acknowledges the inherent challenges in starting a fund from the ground up, which can be a deterrent for someone focused on direct founder engagement.

Personal Motivation and Impact

  • Keith Rabois is driven by the desire to have a meaningful impact on people's lives, particularly through his work with entrepreneurs.
  • Financial success is not the primary motivator for Rabois; instead, he seeks to be a significant influence and help in the success of others.
  • The legacy one leaves through personal relationships and professional achievements is a reflection of one's impact.

"I really want to have impact in people's lives. And that they really think about it, that it was that impactful, that their life would have been completely different."

Keith Rabois shares his aspiration to be remembered for the profound impact he has had on the lives of others, particularly through his professional relationships.

"That's what motivates me every day."

The quote emphasizes Keith Rabois' daily motivation to make a difference in the lives of founders and entrepreneurs.

Comparative Advantage in Venture Capital

  • Having a comparative advantage is crucial for a venture capital firm's success, especially in a competitive market.
  • Investors must have a clear and differentiated reason for why founders should choose to work with them.
  • Keith Rabois believes in assessing his own competitive advantage before making an investment decision, to avoid mediocre returns.

"You have to have a comparative advantage, period. And you need to isolate it for you and your fund."

Keith Rabois underscores the necessity of having a unique edge that sets an investor apart in the venture capital landscape.

"If you don't have a strong answer to why you have a comparative advantage, you're going to regress to the middle of the bell curve."

This quote warns that without a distinct advantage, investors risk achieving only average returns, which are not satisfactory in the venture capital industry.

Fund Collaboration and Founder Fit

  • Within a fund, collaboration among partners can lead to better founder matches for investment opportunities.
  • Funds must be willing to refer a potential investment to the partner who can offer the most value to the founder.
  • The practice of matching the right partner with the right founder is an intentional and systematic process at some firms.

"I think at a fund, the first instinct is, do I have a partner who would be a really good pairing?"

Keith Rabois discusses the initial consideration within a fund to identify the best partner to support a particular founder.

"At Founders Fund, we did it, too, but more on an ad hoc basis, not systematic."

This quote contrasts the systematic approach to partner-founder matching at KV with the more ad hoc method at Founders Fund.

Influence and Guidance in Board Roles

  • Venture capitalists must be cautious about exerting too much influence on founders and should guide through questions rather than directives.
  • Communicating the level of conviction in one's advice helps founders weigh the input appropriately.
  • The ability to explain the logic behind recommendations allows founders to understand and evaluate the advice given.

"As a board member, one of the best ways is to ask things in terms of questions, not in terms of answers."

Keith Rabois explains that posing questions rather than providing answers allows founders to arrive at their own conclusions, maintaining their autonomy.

"I almost never ever tell a founder what they really should like. I almost never say, you must do this."

This quote illustrates Keith Rabois' philosophy of avoiding prescriptive advice, respecting the founder's decision-making authority.

Venture Capital Asset Class and Liquidity

  • Venture capital is not always a high-return asset class.
  • Liquidity in venture capital occurs during brief windows.
  • Missing these windows can result in poor returns, even for top investors.

"Actually, when you look at the historical data on distributions, there's very small windows where liquidity is apparent and strong."

This quote highlights the sporadic nature of liquidity events in venture capital, emphasizing the importance of timing in realizing returns.

Decision Making on Selling Investments

  • Timing the sale of investments is challenging.
  • Early-stage investors do not need to be perfect in their timing.
  • Vinod Khosla's decision not to sell shares in Square was based on key dimensions and led to better returns for Khosla Ventures.

"Obviously square went public when sell. The market didn't really appreciate square fairly for a long time."

Keith Rabois reflects on the internal debates at Khosla Ventures regarding the timing of selling shares post-IPO, highlighting the importance of strategic decision-making.

Vinod Khosla's Unique Insights

  • Vinod Khosla is a visionary technologist.
  • He foresaw the impact of AI on various sectors.
  • His work ethic and engagement with founders and academics contribute to his success.

"He really does see the implications of a new technology way before other people do."

Keith Rabois emphasizes Vinod Khosla's ability to predict technological impacts and his dedication to his craft.

Keith Rabois's Takeaways from Founders Fund

  • Distinguishing between fundamental and optional decisions in venture capital is crucial.
  • Exposure to different funds provides unique insights.
  • Learning about growth investing and decision-making processes is valuable.

"There are fundamentals about our business that are basically baked into the business, and then what are optional decisions around culture, decision making, hiring."

Keith Rabois discusses his learnings from Founders Fund and how they influence his approach to venture investing.

Parenthood and Responsibility

  • Early childhood experiences have lasting impacts.
  • Parents must be thoughtful about the inputs they provide to their children.
  • The challenge of raising non-entitled children despite having resources.

"People are much more baked and impressionable at earlier ages that dictate how they are when they grow up."

Keith Rabois talks about the formative nature of early childhood and the importance of parental influence.

Balance Between Success and Presence

  • Success often requires trade-offs.
  • Achieving top-tier success may conflict with personal time, such as family dinners.
  • Observing successful individuals across various fields reveals common traits, including hard work.

"People who have irrational success, top ten basis points, one basis point in any field are absolutely making trade off decisions, hopefully intentionally."

Keith Rabois discusses the sacrifices and trade-offs necessary for exceptional success.

Keith Rabois's Views on Bitcoin

  • Bitcoin adoption is inversely correlated with the rule of law.
  • Political events can influence Bitcoin's value.
  • Future stability or tumultuousness will impact Bitcoin's appreciation.

"My theory was always from 2013 or 14, that the adoption of bitcoin would globally be inversely correlated to the rule of law in a specific market or specific country."

Keith Rabois explains his perspective on the factors influencing Bitcoin's adoption and value.

The Future of IPOs and Public Markets

  • IPO windows are always open but with varying success criteria.
  • Companies benefit from going public early.
  • The market environment dictates the timing and conditions for IPOs.

"I don't believe that IPO windows really close or open. I think just the criteria for success is different."

Keith Rabois expresses his belief that the opportunity for IPOs is constant, but the standards for success fluctuate.

Improving as an Investor

  • Deciding which meetings to take is a challenge.
  • Mistakes can be made in declining potential opportunities.
  • Balancing the number of meetings with maintaining sharp decision-making skills is difficult.

"The hardest part for me is deciding which first meetings to take."

Keith Rabois discusses the difficulty in filtering investment opportunities and the importance of making informed choices regarding initial meetings.

Keith Rabois's Future and LP Relations

  • Keith Rabois will not be retiring or starting his own fund.
  • He may consider ventures outside of technology in the future.
  • He values interactions with limited partners (LPs) and enjoys their insights.

"I will definitely not be chilling and I will not do my own fund."

Keith Rabois shares his intentions for the future, indicating a continued engagement in the venture capital and technology sectors.

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