20VC Keith Rabois on Why Buy Low, Sell High Does Not Work in Venture, Keith's Biggest Lessons from Prior Crashes, Why Today's Public Markets are not an OverReaction, Why Valuation is a Trap & Why Wokeness is a Function of Entitlement

In a dynamic conversation on "20 vc," Harry Stebbings and Keith Rabois, a general partner at Founders Fund, delve into venture investment strategies and the nuances of early-stage funding. Rabois, an industry titan with a distinguished background at PayPal, LinkedIn, and Square, and as an investor in Airbnb and Lyft, challenges the conventional wisdom of "buy low, sell high," explaining that venture success often hinges on identifying potential at the seed or Series A stages, where financials are typically non-existent. They discuss the importance of asymmetric information in later-stage investments and the necessity for startups to secure continuous financing. Rabois also shares his insights on the changing landscape of Silicon Valley, the value VCs can bring to a board, and the criticality of maintaining an ability to spot high-potential founders. Additionally, they touch on the impact of inflation on market valuations and the trend of in-person companies potentially yielding better investment returns.

• Harry Stebbings tweeted about classic investment advice and Keith Rabois challenged its applicability to venture capital.
• Keith Rabois, a general partner at Founders Fund, discusses why traditional investment strategies don't align with venture capital.
• The conversation revolves around the nature of venture investments, particularly at early stages, and the necessity of future financing rounds.

"I tweeted buy low, sell high, be greedy when others are fearful, and fearful when others are greedy. But Keith Rabois then went and commented, does not work in venture."

The quote is Harry Stebbings summarizing his tweet about an investment strategy and Keith Rabois's response that the strategy does not apply to venture capital.

• Investing at the seed and series A stages inherently involves buying low due to the nascent stage of the companies.
• The startups at these stages lack financials and are valued based on potential rather than tangible metrics.
• Success in early-stage investing is contingent on the company's growth and subsequent increase in valuation.

"When you invest in a seed company or a series A, the startup is a mess. It's not really even a company. Usually, it very has financials, probably has maybe some user metrics or product metrics may only have a team and a slide."

Keith Rabois explains that seed and series A companies are typically in a very early and unstructured stage, lacking significant financials or metrics.

• Later-stage investing does not follow the 'buy low, sell high' mantra due to the lack of asymmetric information.
• Most investors in later rounds do not have unique insights that would allow them to buy undervalued companies.
• The pricing at later stages is often a probabilistic bet rather than a reflection of buying at a low price.

"But typically, people who are leading these series C and later rounds have no asymmetry of information. They may have asymmetry of closing, asymmetry of deal flow, but there's no asymmetry of information."

Keith Rabois points out that by the time companies reach later funding rounds, the information advantage diminishes, and investors are more so betting on probabilities.

• Early-stage investors rely on future financing rounds to continue funding companies as they are unlikely to be profitable from the outset.
• The strategy of buying low and selling high in venture capital requires convincing others to invest at higher valuations in subsequent rounds.
• Seed and series A investors need to be aware of the landscape of future investors and their willingness to pay higher prices.

"Almost no company you or I will ever finance will be profitable on the first tranche of investment props."

Keith Rabois emphasizes that early-stage companies will require multiple rounds of investment before reaching profitability, highlighting the importance of subsequent financing.

• Keith Rabois disagrees with the notion that investors cannot anticipate the scale of their biggest winners.
• He believes that investors can and should envision the maximum potential of their investments from the beginning.
• This approach of identifying the upside case is crucial for early-stage investing.

"I think that's completely false. In fact, I just sent an email to our investment team on a specific company. I actually think that you almost always know, and you always, always know as soon as you meet the company."

Keith Rabois contests the idea that the scale of successful investments is unpredictable, asserting that investors often have a sense of a company's potential early on.

• The valuation of growth-stage companies is influenced by market comparables, which can change over time.
• A high valuation for a market leader like Shopify can justify higher valuations for similar companies in growth stages.
• However, when market leaders' valuations drop, it affects the perceived upside and investment rationale for similar companies.

"So at 160, writing a check at an early stage company at two or 3 billion might make sense. Not early stage but mid stage growth stage. With Shopify at 40, it's almost impossible to write a check for a potential shopify at a billion or two."

Keith Rabois explains how the valuation of public companies like Shopify can impact the investment decisions for similar private companies in the same sector.

• While public market dynamics are less relevant for seed and series A investments, they become important for growth-stage investing.
• Rabois prefers investing in companies that create entirely new markets.
• As a general partner at a large fund, Rabois acknowledges the need to have an opinion on later-stage rounds, despite personally leading few of them.

"Fortunately most of what I do and most of what I've been successful at are really seed and series A investments, in which case the public rules don't really matter and I don't pay too much attention to them."

Keith Rabois discusses his focus on early-stage investments where public market valuations are not a significant factor.

• Keith Rabois led the Series C round for Stripe and invested in late-stage rounds for a company called Ultima.
• He acknowledges the rarity of his involvement in growth rounds.
• The growth team at Founders Fund, including Brian Singerman and Peter Napoleon, actively consider public market comparisons when investing.

"Those three companies that had incredible asymmetry of information, stripe farm, Ultima."

The quote emphasizes the significant advantage Rabois had due to possessing non-public information that informed his investment decisions.

• General Partners (GPs) may privately express negative views on market conditions but publicly advocate for investment opportunities.
• Keith Rabois believes that the price paid for investments dictates returns.

"I speak to a lot of gps and they say privately, oh my God, this is just shit. This is terrible. And then I hear them with lps and they go, this is the best time to be investing."

The quote reflects the dichotomy between private doubts and public optimism that GPs exhibit regarding market conditions.

• Founders Fund has produced significant liquidity for Limited Partners (LPs).
• The fund's success attributed to investments in companies like Airbnb and Stripe during unattractive times at lower valuations.
• High valuation entry requires skill in timing the market and exiting trades.

"The reason why was Peter and Brian and some extent a few other partners were leading later stage rounds, Airbnb, stripe, et cetera, when that wasn't particularly attractive."

The quote explains Founders Fund's strategy of investing in later stage rounds of companies when it was not a popular choice, leading to high returns.

• Keith Rabois discusses liquidation preferences (lick prefs) and their implications.
• He believes that merely getting money back as a VC indicates a mistake, considering the opportunity cost and time invested.

"Every time you get your money back as a vc, it means you made a mistake."

The quote suggests that breaking even on an investment is not the goal of venture capital, as it does not account for the opportunity costs involved.

• Keith Rabois was taught by Peter Thiel to value time highly.
• Time in venture capital should be rationally allocated to best-performing companies, but poor performers can demand more time.
• High leverage time with successful companies can be more impactful than extensive time with struggling ones.

"Peter Thiel taught me also in 2000 or 22 years ago, that people systematically undervalue their time."

Keith Rabois credits Peter Thiel for teaching him the importance of valuing and appropriately allocating his time.

• Establishing a realistic destination for a company with the founder is crucial.
• Keith Rabois focuses on increasing the probability of reaching the agreed-upon goals.
• He allocates his time based on where he can have the highest impact, regardless of the company's success or failure.

"What do you think you want to shoot for, given the constraints? And then what I can do is help you get there."

Keith Rabois highlights the importance of setting clear objectives with founders and dedicating efforts to achieve them.

• Founders Fund does not replace founders, as per their ideology and legal stance.
• If faith in a founder is lost, the fund becomes less actively involved and may not provide additional capital.

"At that point, we're probably going to be less actively involved."

The quote indicates Founders Fund's approach to situations where they have lost confidence in a founder's capabilities.

• Keith Rabois questions the ability of venture funds to manage public equities effectively.
• He believes most LPs do not desire venture funds to manage public equities since they hire venture funds as an alternative asset class.
• There could be a legal advantage in managing companies from early stages through to public trading due to potential asymmetric information.

"I guess it depends upon the skill set of the team."

The quote reflects Rabois's view that the capability to manage public equities depends on the specific skills of the venture fund team.

• Founders Fund's analysis indicates that current market corrections are not an overreaction.
• Market multiples are at a 30-year average, suggesting a return to normalcy rather than an inflated or deflated market.

"We analyzed it recently at Founders Fund, and it's definitely not an overreaction."

Keith Rabois shares Founders Fund's perspective that the market is at a normal state despite recent corrections.

• Keith Rabois supports consistent investment in seed companies regardless of market cycles.
• He emphasizes cautious investment in growth rounds and the importance of appropriate pricing.
• The decision to invest in Series A, B, or C rounds depends on whether founder expectations and valuations align with market risks and milestones.

"I would invest in seed companies with the right team, with the right vision, all day, every day, in any cycle."

The quote conveys Rabois's confidence in investing in seed-stage companies with strong teams and visions, irrespective of market conditions.

• Investor psychology plays a crucial role in navigating market cycles.
• Experienced investors like Keith Rabois and Peter Thiel anticipated the market crash last summer.
• Younger colleagues at Founders Fund were advised against investing at inflated prices, but the advice was not entirely heeded.
• Having lived through previous cycles, Rabois and Thiel understood that markets can both rise and fall, unlike some junior colleagues who believed markets only go up.
• The baseball analogy with Brady Anderson's steroid-boosted performance illustrates how inflated markets can make everyone look good on paper.
• Real versus paper inflation: unless investments are sold at the inflated value, the returns are not realized.
• A colleague at KV sold shares in a well-performing company at the right time, which returned the entire fund's value, highlighting the importance of timing in investment decisions.

Because both Peter and I figured out this market was crashing last summer, and we really tried to stop people from investing at ridiculous prices. But even at Founders Fund, we weren't totally successful.

This quote emphasizes the foresight that experienced investors had regarding the impending market crash and their attempts to mitigate the risks for their less experienced colleagues.

Now I have a colleague at KV who was involved in one company that was trading really, really well and he was very savvy and decided to sell. That decision alone returned KV five, which is a $1.3 billion fund.

The quote highlights the significance of making timely decisions in the investment world, where selling at the right moment can have a massive impact on the returns of a fund.

• The current market correction may lead to a shift in power dynamics from employees back to companies.
• It is suggested that under stress and the need for performance, companies may become less focused on "wokeness" and more on results.
• Keith Rabois argues that the most "woke" companies are those with network effects or monopolies, implying that they can afford such cultural stances due to their market positions.

I think it has is a function of entitlement, meaning when there's no stress, no work, no perceived risk, then people have distractions and it's like a vacuum, sort of fills up distractions fill up a vacuum when people are under stress, when they have to perform, when there is no possibility of future financings, unless you get your act together, it will concentrate people's minds.

This quote suggests that "wokeness" within companies is a byproduct of a lack of stress or risk, and that a more challenging environment will refocus priorities away from such distractions.

• Keith Rabois is not particularly worried about the coherence of US policy.
• He references Winston Churchill's perspective, implying that despite its flaws, the US policy may be better compared to other alternatives.

No, not really. It's kind of like the Winston Churchill comment of compared to what?

The quote indicates a comparative approach to evaluating US policy coherence, suggesting that while not perfect, it may be more favorable when compared to other systems.

• Being an investor requires a willingness to be perceived as wrong or ridiculous for extended periods.
• Rabois values contrarian thinking and believes that being immune to feedback is a beneficial discipline for investors.
• As an executive or CEO, however, one must be more attuned to team dynamics and cannot afford to be as contrarian as an investor can be.

No, I think it's a very bad way to be an investor. At a minimum, the whole point of being an investor is you've got to be perceived as ridiculous and wrong. For a long time.

This quote underscores the importance of being comfortable with contrarian views and the criticism that may come with them for investors.

• Keith Rabois discusses the challenge of no longer having contrarian views as his previous unconventional beliefs have become accepted.
• To develop new ideas, he emphasizes reading books and consuming different content from others.
• He expresses a current investment interest in companies that operate in-person, believing there is significant potential ("alpha") in such startups.
• Being open to changing one's mind is crucial, as demonstrated by Rabois' shift from believing Silicon Valley was the best place for tech startups to now seeing it as a disadvantage.

Now everything I've believed has become correct in consensus. So I have to go back to the drawing board, and it's really scary actually, to not have any views that are considered to be absurd.

This quote reflects on the evolving nature of contrarian views and how what was once unconventional can become mainstream, necessitating the search for new, innovative perspectives.

• Keith Rabois argues that Silicon Valley is at a disadvantage due to the erosion of the network effect and safety issues.
• The migration of ambitious talent and investors away from Silicon Valley is contributing to its decline.
• Rabois shares a personal experience of a home burglary in the Bay Area, which affected his productivity, to illustrate the impact of safety concerns on work.
• Capital concentration is still important, but the geographic requirement for it has lessened, with major VC firms expanding beyond Silicon Valley.

Well, it's a bit of both. I think many of the most ambitious, talented people, whether entrepreneurs or vcs, have left.

The quote points out that the departure of key individuals from Silicon Valley is one of the reasons for its diminishing prominence as a tech hub.

• Keith Rabois reflects on his investment misses, noting that he rarely makes mistakes with founders he meets in person.
• Declining to meet with founders has led to missed opportunities in successful companies.
• There is no simple solution to this problem due to the finite nature of time and the vast number of companies seeking investment.
• Rabois acknowledges the difficulty in deciding to invest more in successful companies when he is aware of their internal challenges as a board member.

The mistake I make is not basically, almost never, possibly never have made a mistake in a founder I met in person. However, there are several unfortunately very successful companies where I decline meeting the founders in advance.

This quote highlights the importance of personal interaction with founders in the investment decision-making process and the regrets associated with missed opportunities due to declined meetings.

• Harry Stebbings discusses the approach to deciding on investment scaling such as doubling or quadrupling down on a company.
• He often leaves the decision to sponsor the investment to someone else, even if he has an opinion, to offset his own bias.

"I will typically do this. Maybe this is a surprise for people, even for companies I'm on the board of. When we're deciding to double down, triple down, quadruple down, I may have an opinion, but I'll usually lead it to one of them to sponsor the investment so I can sort of offset my discount factor."

The quote explains Harry Stebbings's method of involving others in the decision to invest further in a company, aiming to balance his own perspective with that of others.

• Keith Rabois expresses that the value added by venture capitalists (VCs) varies widely.
• Some VCs are very valuable, some provide some upside without downside, others are neutral, and some may even be negative.
• Founders with multiple successful VCs can compare and provide feedback based on their experiences.
• There are only a few VCs that truly add value at scale.

"There's probably only five to ten VCs that actually add value at scale."

Keith Rabois highlights that a small number of VCs actually contribute significantly and positively to the companies they invest in.

• Keith Rabois shares his positive experience with John from Lennar at Opendoor.
• John, as a board member with industry experience, provided excellent insights and contributed greatly to strategy and management.

"John from Lennar at Opendoor. So John is the COO of Lennar, which is a very large publicly traded home builder, and he got involved in Opendoor fairly early, actually, initially I was nervous when we sort of took strategic money and had a board member join for the real estate industry. But he's fantastic, absolutely fantastic in every possible way, insightful management, strategy, everything."

This quote describes Keith Rabois's admiration for John's contributions as a board member, highlighting the positive impact of having industry expertise on the board.

• Keith Rabois discusses his fear of aging as an investor and becoming complacent.
• He worries about losing the ability to identify high-potential founders who are not obvious choices.
• Maintaining a network and the ability to spot talent is crucial for his role as an investor.

"The biggest insecurity is I think you do not age gracefully as an investor. I think yet age is not your friend as an investor for lots of reasons. And complacency is never your friend as a successful person at anything."

Keith Rabois expresses concern about the challenges of staying sharp and avoiding complacency as an investor as one ages.

• Keith Rabois explains that mentoring allows him to scale his influence by working with talented individuals.
• Choosing proteges with potential is a strategic way to amplify his own capabilities and the organization's reach.

"The selfish version is the only way to scale yourself is to find people who can actually provide leverage and do things."

This quote underlines Keith Rabois's strategy of leveraging mentorship to expand his impact through others' talents and efforts.

• Identifying and hiring potential investors is a significant challenge for Keith Rabois at Founders Fund.
• As the current general partners age, finding the future leaders of the fund is a priority.

"Identifying and hiring potential investors as we age."

Keith Rabois points out the importance of succession planning and the difficulty of finding the right talent to continue the fund's legacy.

• Keith Rabois lists work ethic, tenacity, and ambition as the three traits he most wants his children to adopt.

"Work ethic, tenacity and ambition."

These traits are highlighted by Keith Rabois as essential for personal and professional success, which he hopes to instill in his children.

• Keith Rabois reflects on the importance of valuation in venture investments.
• He now believes that valuation is less important than he initially thought, especially in traditional venture and early-stage funding.

"Valuation just doesn't matter. In traditional ventures, even series A."

By stating that valuation is a trap, Keith Rabois indicates that other factors are more critical in early-stage investing than the company's valuation.

• Keith Rabois mentions that Airbnb might be his best returning investment.
• He invested in Airbnb during the seed round alongside Sequoia Capital.

"I've never actually exactly tracked it, but probably Airbnb."

The quote suggests that Airbnb's investment was highly successful, though Keith Rabois hasn't tracked the exact returns.

• Keith Rabois discusses the current state of the venture industry.
• He prefers limited competition and believes that the industry's size and money chasing few good founders create distortions.

"I like the fact that most ventures is mediocre."

Keith Rabois expresses contentment with the current state of the venture industry, as it reduces competition for him and implies that a smaller, more focused industry could be more effective.

• Keith Rabois agrees that large growth funds moving to seed stage will cause price inflation.
• However, he believes the skill sets required for seed investing are very different from growth or public market investing.

"The skill set required to invest at seed is utterly different and probably completely incompatible with the idea of being a good growth or public market investor."

This quote emphasizes the distinct competencies needed for seed investing compared to later-stage investing, suggesting that growth funds may not succeed in the seed space.

• Keith Rabois suggests that the future of the market depends on the inflation rate in the United States.
• If inflation does not subside, interest rates will rise, causing public market tech companies to trade down.

"The only thing you need to pay attention to is the inflation rate."

Keith Rabois identifies inflation as the key indicator for predicting market movements, linking it directly to interest rates and tech company valuations.

• Keith Rabois has not made new investments in 2022 outside of the Founders Fund portfolio.
• He co-led or led new rounds in existing portfolio companies, indicating a strategic focus on doubling down on current investments.

"I haven't made a new investment in 2022 in a company that's not already in our portfolio."

This quote shows Keith Rabois's investment strategy for 2022, focusing on supporting existing portfolio companies rather than seeking new opportunities.

• Harry Stebbings thanks Keith Rabois for the discussion and directs listeners to follow Keith on Twitter.
• Harry Stebbings also promotes Tigus and OpenPhone as valuable tools for venture capitalists and businesses.
• Cooley is mentioned as a leading law firm in the venture capital space.

"I absolutely love doing that show with Keith. We always have the best discussions."

Harry Stebbings concludes the podcast by expressing appreciation for the conversation with Keith Rabois and providing information on resources for the venture capital community.