20VC Khosla's Keith Rabois on How To Create Sustainability Behind Growth, How To Assess The Potential Of Individuals & Teams & The Biggest Takeaways from LinkedIn, Paypal & Square



In this episode of "20 minutes VC," host Harry Stebbings interviews Keith Rabois, an investment partner at Khosla Ventures, delving into Keith's transition from law to the tech industry, his experiences during the dot-com bust, and his operational roles at companies like PayPal, LinkedIn, and Square. Keith emphasizes the importance of building a talented team, mastering distribution, and learning from successes rather than failures. He also discusses the challenges of managing a VC portfolio, advising that focus within an organization is crucial, and shares insights on his approach to board memberships and the art of balancing critique with support. Keith highlights his investment strategy of backing teams with compelling keynote decks, citing examples like Opendoor and Forward, and underscores the value of seizing growth opportunities while ensuring sustainability.

Summary Notes

Introduction to the Podcast and Guest

  • Harry Stebbings introduces the podcast, mentioning his own activities including following Tim Ferriss' slow carb diet and promoting the Eight smart mattress and Full Contact contact management.
  • Keith Rabois is introduced as an investment partner at Coastal Ventures with a successful track record in tech investments and operations.

Welcome back to another week in the world of the 20 minutes VC with me, your host Harry Stebings at h stepbings with two b's on Snapchat postmarathon.

This quote is Harry Stebbings' introduction to the podcast, setting the stage for the episode.

So I'm thrilled to welcome Keith Rabois to the hot seat today. Keith is an investment partner at Coastal Adventures, where he's led investments in stripe, thoughtspot, health, tap and teespring, among many others.

Harry Stebbings expresses his excitement to have Keith Rabois on the show, highlighting Rabois' impressive background in tech investments.

Keith Rabois' Background and Career Shift

  • Keith Rabois discusses his initial career path in political science and law before transitioning to the technology sector at the age of 29.
  • Rabois highlights the timing of his career shift, coinciding with the peak of the Internet bubble and its subsequent collapse.

So I went to college, studied political science, went to immediately to law school, clerked for a well-known federal appellate court judge, then jumped into the canonical Wall street law firm, sort of like the 1880s version of a law firm, and practiced law for basically four years afterwards.

Keith Rabois describes his early career in law, which was not related to technology.

I jumped kind of cold turkey in 2000, February 2000, into the startup world, and the timing of that was pretty poor. It was a month before the market collapsed, where the Internet bubble collapsed March 20 eigth.

Keith Rabois talks about his abrupt switch to the startup world and the unfortunate timing of entering the sector just before the Internet bubble burst.

Learning from Market Downturns

  • Keith Rabois discusses the value of experiencing market downturns and how it shapes an investor's approach to evaluating startups and managing risk.
  • He emphasizes the importance of maintaining control and flexibility to adapt to changing market conditions.

I think it's a good point, which is sometimes when everything's going really well, either at a macro or micro level with respect to a specific company, you forget how fragile the ecosystem is, and that not everything is just up and to the right.

Keith Rabois reflects on the tendency to overlook the fragility of the startup ecosystem during good times.

But it also makes you a little bit more sensitive to understanding the degrees of freedom and levers that you want to have under your control when either the micro macro metrics start shifting.

Rabois underscores the importance of having control over critical aspects of a business to maintain maneuverability during market shifts.

Keith Rabois' View on Learning from Success vs Failure

  • Keith Rabois agrees with the sentiment that success teaches more valuable lessons than failure, although failure can teach what not to do.
  • He advocates for joining winning teams and understanding key elements such as distribution, metrics, and talent management to achieve success.

I generally agree with some point, like really Elon first articulated, at least first articulated in a way that I found, which is that you can't really learn from failure.

Keith Rabois concurs with the idea, often attributed to Elon Musk, that failure is not the best teacher for achieving success.

But you can't learn how to be successful just by avoiding mistakes. The way you learn how to be successful is you join a winning team, you create a winning culture, you have a really deep appreciation of distribution, a really deep appreciation of metrics, a really deep appreciation of talent and the value of talent, and how to find talent, how to recruit talent, how to close talent, how to mentor talent.

Rabois elaborates on the components of success, emphasizing the importance of being part of a successful environment and understanding various aspects of business operations and talent management.

Learning from Mistakes and Success

  • Understanding the value of learning from both mistakes and successes.
  • Mistakes provide lessons on what to avoid, while successes can help understand what to replicate.
  • Football metaphor used to illustrate that avoiding mistakes alone doesn't guarantee success.

"But I don't think you can create a formula for success by just not making a mistake."

This quote emphasizes that success is not solely about avoiding errors; it requires more proactive strategies.

"Mistakes tend to be things you can learn from. Failures are like how not to fumble a ball, but can't really tell you, doesn't teach you so much how to break off a run for 25 yards."

The quote distinguishes between learning from mistakes (failures) and learning the skills necessary for significant achievements (like a successful run in football).

Key Learnings from Hypergrowth Companies

  • The importance of talent and team building.
  • The significance of having a strong distribution channel.
  • The use of empirical data and metrics in decision-making.
  • The preference for specialized skills over general management abilities.

"The team you build is the company you build."

This quote stresses the idea that the quality and composition of the team fundamentally shape the company's identity and success.

"Value of distribution, and understanding that a product needs a distribution channel that is compelling, that has leverage that's ideally proprietary."

The importance of finding effective and ideally exclusive channels to distribute a product is highlighted here, which is crucial for a company's growth.

"Prioritization of skill in a particular discipline and the ability to do stuff yourself with your hands as really inspiring the people around you and the people that report to you."

This quote suggests that specialized skills and hands-on ability are more inspiring and effective than general management skills.

Upgrading Leadership in High-Growth Companies

  • Assessing the growth velocity of both the company and individual leaders.
  • Making changes when a leader's growth falls below the company's growth rate.
  • Leaders should ideally be ahead of the curve in their strategic planning.

"When the individual's propensity to grow falls below the company's growth rate, I think you need to make a change."

This quote indicates the need to replace leaders who cannot keep up with the company's pace of growth.

"When they're barely hanging on, they're delivering just in time."

The quote suggests that leaders who are not proactively planning but are just meeting immediate demands may not be suitable for a high-growth environment.

Sustainable Growth vs. Rapid Growth

  • The speaker challenges the idea of "sustainable growth" in favor of seizing growth opportunities quickly.
  • The focus should be on building infrastructure to support rapid growth without having to slow down.

"I think you should take growth right away."

This quote advocates for capitalizing on growth opportunities immediately rather than pacing the company's growth.

"The art is how do you create the sustainability behind the growth?"

The speaker is emphasizing the importance of establishing a stable foundation to maintain growth rather than limiting the growth itself.

Common Suppressors of Growth

  • Challenges in scaling human resources and operational processes.
  • Ensuring customer satisfaction and retention.
  • Balancing multiple business variables to avoid breaking the growth equation.

"You don't have time to build tools and software, so you throw humans at it eventually."

This quote highlights the unsustainable practice of using human labor as a stopgap solution instead of developing scalable systems.

"You have a magnet for onboarding new users, but you don't actually have the ability to deliver a delightful experience that you promised these users."

The quote points out the risk of attracting users without being able to provide a satisfactory experience, leading to high churn rates.

Time Management in Venture Investing

  • The challenge of managing time across a diverse portfolio of investments.
  • The disproportionate time spent on the least performing companies.
  • The lack of established techniques for time management in venture capital.

"The bottom 20% of the portfolio take 80% of the time."

This quote reflects the Pareto principle, suggesting that a small number of investments can consume most of the investor's time, often those that are underperforming.

The speaker indicates uncertainty in how to best manage time across a venture portfolio, acknowledging the need for tailored approaches.

Investment Strategy and Company Trajectories

  • Keith Rabois emphasizes the problems with an investment strategy that only focuses on winners.
  • He notes that most companies experience ups and downs, and not all portfolio companies will be at the same stage at once, allowing for strategic engagement.
  • Rabois prefers in-person meetings with CEOs every two weeks and board meetings from monthly to quarterly to solve problems and provide help.
  • His ability to assist varies greatly depending on the company's field and his level of expertise.
  • The level of sophistication and learning desires of founders also varies, which affects how Rabois can contribute.

"I think that causes real problems for you in the future as an investor, because by definition, the number of non super successful companies you're going to invest in is greater than the number of successful companies."

This quote highlights the inherent challenge in an investment strategy that focuses only on winners, as it's statistically more likely to invest in companies that won't be super successful.

"I like to meet with most of the CEOs I work with about every two weeks in person board meetings, depending upon the maturity of a company, between once a month and once a quarter, and then use that as a problem-solving opportunity, really, to figure out how active I can be involved, where I can be helpful."

Rabois discusses his hands-on approach to engaging with portfolio companies through regular meetings and problem-solving sessions, which allows him to tailor his involvement to the specific needs and stages of each company.

The Importance of Focus

  • Keith Rabois discusses the importance of focus within an organization to achieve breakthroughs.
  • He differentiates between management focus within a company and the role of a venture investor, which involves constructing a portfolio and not necessarily focusing on a single company.
  • Rabois agrees with Peter Thiel's view that individuals in an organization should focus on one thing for breakthrough ideas.
  • He acknowledges the time scarcity in dual roles of operating and investing but sees synergies, such as staying tactically involved to provide better advice to founders.

"I'm not as sure that it works for venture like. For example, by definition, venture investors are portfolio constructors."

Rabois questions the direct application of organizational focus to venture investing, indicating that venture investors inherently manage a range of investments, which requires a different kind of focus.

"The real scarcity is time. There's only so many hours in a week, and to some extent, insofar as one company consumes ten to 20% of your time, that's obviously very valuable and a scarce resource."

This quote reflects the trade-offs and challenges faced when balancing the roles of an operator and an investor, particularly regarding time management.

Board Member Development

  • Keith Rabois reflects on his evolution as a board member, focusing on when to provide input and when to refrain.
  • He identifies the importance of understanding the board's culture and dynamics and finding one's role within it.
  • Rabois also notes that his experience as an executive reporting to boards has informed his approach as a director.
  • Serving as both a director and an executive has, in his view, improved his abilities in each role.

"I think the art to a board role is there's two components. One is understanding and deciding when to inject yourself and when not to."

Rabois describes the nuanced skill of knowing when to contribute as a board member, which comes with experience and understanding one's own areas of expertise.

"I think you learn how to appreciate the role of a director as well, which is you remember which directors were insightful and helpful and what they said that resonated with you and what they did. That was a distraction and you kind of learned from that experience."

This quote underlines the reciprocal learning process between being an executive and a board member, where experiences in one role enhance performance in the other.

Quick Fire Round: Favorite Book and Embracing Stress

  • Keith Rabois mentions his favorite book, "The Upside of Stress," which goes against the common belief that stress is harmful.
  • He values the book for its rigorous research and its alignment with his belief that stress can lead to success, happiness, and health.

"So my favorite book is probably the title is the upside of stress. The reason why is it's so counterintuitive that most people are taught that stress is bad for you, that it causes problems, health wise, financially, professionally. And the book, written by professor at Stanford, is incredibly rigorous in its research."

Rabois explains why he values "The Upside of Stress," highlighting the book's counterintuitive perspective and its well-researched approach to the benefits of stress.

Venture Capital Mindset

  • VC thinking can become homogenized if too much time is spent with other VCs.
  • Seeking diverse sources of thought and information is crucial but requires time and effort.
  • Reading books and finding alternative data sources can prevent a VC from having average returns.

"If you spend too much time with other VCs, you start thinking like other VCs, and then you're going to have the same returns as other VCs, which is not what your goal is."

This quote emphasizes the importance of independent thinking in venture capital to achieve above-average returns. It suggests that too much conformity with peers can lead to mediocrity.

Employee Management Philosophy

  • Keith Rabois was taught by David Sachs at PayPal to push employees to their limits.
  • The goal is to find out how much complexity and sophistication an employee can handle.
  • Small successes should lead to increased responsibilities; failure should lead to reduced scope.

"What you want to do with every employee is push consistently and constantly push the parameters of their ability."

Keith explains that the management strategy involves challenging employees to grow by continuously testing their capabilities and increasing their responsibilities accordingly.

The Ice Cold Smoothie Story

  • Keith Rabois wanted to reward late-working engineers with healthy treats, specifically smoothies.
  • Previous attempts to deliver high-quality smoothies on time had failed.
  • An intern named Taylor successfully managed the smoothie delivery, impressing Keith and passing the "David Sachs test."
  • Success in small tasks leads to larger responsibilities for employees, including interns.

"But then that night, 09:00 smoothies arrive on time, and they're placed exactly in the right place where engineers can find them. They're delicious. Wide variety of flavors. I was so impressed."

Keith recounts a specific instance where an intern exceeded expectations by successfully delivering smoothies, demonstrating the intern's potential for greater responsibility.

Challenge and Growth for New Employees

  • Both interns and full-time employees should be challenged from the first day.
  • If they meet the challenge, they should be given more complicated and important tasks.
  • This process should be a daily practice for all levels of employees.

"Whether interns or full time employees, on their first day, you want to challenge them."

Keith advocates for the idea that challenging new employees is essential to gauge their potential and determine the appropriate level of responsibility they should be given.

Reading Habits

  • Keith Rabois finds the blog "Stratechery" to be insightful, consistent, and occasionally provocative.
  • He values consistent delivery of insights in tech writing.

"The only one I think that really qualifies is stratechery. I find it quite insightful, quite consistently and occasionally even provocatively."

Keith shares his preference for the "Stratechery" blog due to its insightful analysis of the technology industry.

Investment Philosophy

  • Keith likes to invest in companies based on a keynote deck and a strong team.
  • He mentions Forward, a company reinventing healthcare, as a recent investment.
  • Past investments based on similar criteria include Opendoor and Ever Album.

"I like to invest in keynote decks, like Opendoor. We invested when it was just a keynote deck and a team."

Keith explains his investment strategy, which involves backing companies in their early stages with a focus on the team and their vision, often before the product has fully materialized.

Personal Appreciation and Acknowledgments

  • Keith Rabois expresses pleasure in joining the podcast.
  • Harry Stebbings thanks Tim Chang at Mayfield for the introduction to Keith.
  • Harry also shares personal progress on the slow carb diet and promotes products that aid productivity and health.

"Oh, it's absolute pleasure to join you."

Keith Rabois conveys his enjoyment of participating in the podcast, indicating a positive interaction and engagement with the host and audience.

Product Endorsements

  • Harry Stebbings endorses the Eight Smart Mattress for improving sleep and productivity.
  • Full Contact is recommended for contact management and relationship building.
  • Promo codes are provided for discounts on mentioned products.

"Eight is a sleep innovation company with their latest product, the eight smart mattress, being a bed that literally tells you how well you slept last night."

Harry Stebbings shares his experience with a product that has positively impacted his sleep and overall productivity, suggesting it as a valuable tool for listeners.

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