20VC The Opendoor Memo Keith Rabois on The Origins of Opendoor from a Conversation with Peter Thiel, Why Cash is Not a Competitive Moat for Startups Today and What People Misunderstand About Black Swan Events in Real Estate and How it Impacts Opendoor

In this episode of "20 VC," host Speaker A welcomes Keith Rabois, a general partner at Founders Fund, to discuss his journey as an investor and operator in some of the most successful tech companies. Rabois shares the story behind Opendoor, a company he incubated and invested in, detailing the initial challenges, such as convincing homeowners to trust the company's offers and the operational missteps of a distributed team. He emphasizes the importance of an accurate pricing model, a rigorous hiring process, and the company's resilience during the pandemic. Rabois also touches on the benefits of SPACs for going public and the growth trajectory of Opendoor, which has expanded to numerous markets. The conversation includes insights into the importance of sleep, Rabois's fitness routine, and his diet, along with his experience with Barry's Bootcamp, reflecting his holistic approach to success in business and life.

• "The Memo" is a monthly episode focused on venture investors who led rounds in transformational companies.
• This episode features Keith Rabois, General Partner at Founders Fund.
• Keith incubated and invested in the company being discussed.
• Keith's background includes leading institutional investments in DoorDash, Affirm, and having an operating career at PayPal, LinkedIn, Slide, and Square.
• Five companies Keith helped build have market caps over a billion dollars, and three others have been acquired for over a billion dollars or had IPOs.

Today's show, though, is slightly different. This investor not only invested, but also incubated the company.

The quote emphasizes the unique aspect of the episode, highlighting Keith Rabois's dual role as both an investor and incubator of the featured company.

• The podcast includes sponsorships from Eight Sleep, NordVPN, and Diligent.
• Eight Sleep offers the Pod Pro for thermoregulation during sleep.
• NordVPN provides secure and private internet access, especially on public Wifi.
• Diligent is a governance solution used by many Fortune 1000 companies.

Have you ever heard that you need to sleep at 68 degrees Fahrenheit? Well, it's a myth.

This quote introduces a product sponsorship, debunking a common sleep myth and promoting the Pod Pro by Eight Sleep.

• Keith Rabois conceived the idea for Opendoor in 2003.
• Opendoor was initially deferred until 2013 when Keith joined Khosla Ventures.
• The original prototype was called Home Run.
• The name Opendoor was chosen after being unable to acquire the Home Run URL.

Yeah, so I came up with the idea for Opendoor back in 2003, and then, for a variety of reasons, kept having to defer launching the company till 2013.

Keith Rabois explains the timeline of Opendoor's conception and the delay in its launch.

• In 2003, after the internet bubble collapse, funding was scarce.
• Peter Thiel was willing to fund Home Run with $5 million, but more was needed to prove the business model.
• Access to debt for technology companies was less established in 2003.

The biggest issues in 2003, this is right after the Internet bubble collapsed, was capital availability.

Keith Rabois discusses the difficulty in securing capital for new technology ventures in the early 2000s.

• The Home Run prototype included a model for valuing homes and a website for sellers.
• The team included Chad Hurley for the logo and Max Levchin for coding.
• The model projected significant revenues but was uncertain about profitability.

Let me tell you the story of the first prototype of home run, which later became Opendoor.

Keith Rabois narrates the creation of the first prototype for what would eventually become Opendoor.

• Two cohorts of homes were needed to statistically validate the home pricing model.
• The median home price determined the amount of capital needed for the cohorts.
• In 2013, Opendoor was funded with $10 million, enough for two cohorts, but only one was needed.

Well, I wanted to prove that we could accurately price homes, and so we could buy a cohort of, call it 2025 homes, and you can get some statistical validity out of that size cohort.

Keith Rabois explains the reasoning behind the number of homes required to validate Opendoor's pricing model.

• Most homes are more like commodities than pieces of art, making pricing more straightforward.
• Opendoor's insight was that homes could be accurately priced like any other commodity.
• Data availability improved from 2003 to 2013, aiding the pricing model.

The original premise of the company was it's not as hard as people think, which is proven to be accurate.

Keith Rabois shares the foundational premise of Opendoor that contributed to its ability to price homes accurately.

• Keith Rabois does not perform top-down market analyses.
• He acknowledges that primary residential real estate in the U.S. is worth trillions.
• The focus is on the product and company potential rather than market size estimations.

Well, I never did a top down analysis of the market.

This quote reveals Keith Rabois's approach to evaluating market opportunities, which does not rely on traditional top-down analysis.## Founding of Opendoor

• Opendoor's inception was based on Peter Thiel's observation that residential real estate was a large asset class untouched by technology.
• Thiel challenged Keith Rabois to start a company to address this opportunity, leading to the creation of Opendoor.
• Rabois highlights the significance of residential real estate as an asset class and the potential for technological impact.

"In fact, the way we started this company in 2003 was I walked into Peter Thiel's office, and Peter said, start a company in residential real estate. And I said, why? And he said, well, it's the largest asset class in the world that's been completely unaffected by technology."

The quote explains the origin of Opendoor, emphasizing the untapped potential of technology in the residential real estate sector.

• The core team was assembled based on the identification of the company's core risks.
• Founders recruited individuals with skill sets that provided an unfair advantage in conquering those risks.
• Rabois applied the same approach used at Coastal Ventures for investments to Opendoor's team assembly.

"What are the core risks to the company, and then find people on the founding team or immediately thereafter recruit people who have the exact skill set that gives you an unfair advantage in conquering those core risks."

This quote describes the strategic approach to building the founding team by aligning skill sets with the company's core risks to gain a competitive edge.

• Identifying "diamonds in the rough" is crucial for startups, as they may not attract established executives.
• Rabois discusses the importance of recognizing individual attributes that provide an unfair advantage.
• Talent detection focuses on finding individuals who are exceptionally skilled in critical areas.

"The way to think through that is to find what the core individual attributes are that you need and require an unfair advantage in, and then go match somebody who is top ten basis points on the planet in that skill."

The quote emphasizes the importance of identifying and recruiting individuals with exceptional skills that are critical to the company's success.

• Eric was chosen for his background in real estate and his exceptional ability to assess and interview people.
• Rabois highlights Eric's experience with data in real estate and his success in building a mobile product team at Trulia.
• Eric's talent in evaluating people's strengths and weaknesses is seen as a key driver for a company's success.

"His ability to assess and interview people is off the charts. His ability to calibrate people's strengths and weaknesses is incredible."

This quote underlines Eric's exceptional skill in talent assessment, which is vital for building a strong team and propelling the company forward.

• Opendoor faced an initial challenge where offers were not being accepted by homeowners.
• The root cause was identified as a lack of trust in the company's financial credibility.
• The solution involved leveraging PR to establish Opendoor as a credible entity, which resolved the issue and improved offer conversion rates.

"No one believed they were going to get their money from us... once we identified that as a root cause, then it was very simple to test and fix that, which is basically what we did, is PR, basically leaned into PR, local pr, national pr, so that we were this credible entity."

The quote explains how addressing the trust issue through PR efforts quickly solved a significant challenge for Opendoor, leading to increased acceptance of offers.

• Opendoor's strategy for selecting new cities for expansion was not algorithm-driven due to a lack of data.
• The selection criteria included avoiding cold weather markets and choosing large markets.
• The company chose Phoenix as the first market due to its all-weather market status and Eric's familiarity with the city.

"We picked Phoenix because it was initially relatively proximate to the Bay Area where we were building the company. Eric was from Phoenix, which helped with some things."

This quote explains the rationale behind choosing Phoenix as Opendoor's first market, highlighting strategic considerations such as proximity and market conditions.

• Rabois reflects on past debates, such as the pricing model, which was a point of contention.
• The decision-making process involved weighing different perspectives and finding a balance between consumer-driven pricing and company-set pricing.

"The one that I still make fun of JD about is how we did our pricing model, which we still basically don't do know eight years later."

The quote reveals internal debates about the pricing strategy, indicating the complexity and long-term impact of such decisions.

• Opendoor's business model was designed to withstand black swan macro events.
• Rabois believed that Opendoor would perform better in a depreciating market due to the liquidity it provides.
• Historical models and logical arguments were used to convince stakeholders of the resilience of Opendoor's model during economic downturns.

"I've always had the hypothesis that in fact Opendoor would do better in a bad real estate market, a down market, a depreciating market, than an appreciating market."

This quote highlights Rabois's counterintuitive belief that Opendoor's business model is more advantageous during market downturns due to the value of liquidity.## Real Estate Market Diversification

• Opendoor aimed to achieve diversification across 13 to 15 markets to mitigate risks.
• Historical data shows that US residential real estate markets do not move in tandem, offering protection against localized downturns.
• Diversification was a strategic choice based on a century of real estate market behavior in the US.

"Because if you studied residential real estate in the United States over the last century, had you been relatively well diversified across all markets in the US, you would not have lost money even in 2008."

This quote emphasizes the importance of market diversification in real estate investment, highlighting that a well-diversified portfolio across the US markets would have withstood the 2008 financial crisis without incurring losses.

• Early fundraising for Opendoor was straightforward, with the seed round requiring little effort.
• The team went through the exercise of creating a deck for discipline and to solidify their strategy.
• Operational challenges in 2016-17 led to a more difficult fundraising environment due to high cost structures and poor decisions regarding distributed teams.
• The company had to prove its value and correct mistakes to achieve better valuations in later funding rounds.

"We had some challenges in roughly 2016 and 17, I think we were struggling with some operational decisions, meaning we had built a cost structure that was actually pretty stupid, truthfully, and it was too high."

Keith Rabois reflects on the operational challenges faced by Opendoor that complicated fundraising efforts, specifically regarding inefficient cost structures and team organization.

• Keith Rabois applied lessons from Opendoor to OpenStore, emphasizing the importance of rigorous planning and team-building exercises.
• The decision to become CEO at OpenStore was influenced by the desire to directly manage key aspects like pricing and to avoid repeating past mistakes.
• Leadership roles are chosen based on conviction and the specific challenges of the business.

"This time I've decided to be CEO partially to hopefully avoid having to lose debates to JD on the best way to do pricing."

Keith Rabois explains his decision to take on the CEO role at OpenStore to have more direct control over critical business decisions, such as pricing strategies.

• OpenStore is influenced by Opendoor and Square, utilizing data to instantly price businesses and underwrite long-tail businesses.
• The innovation lies in providing immediate liquidity and access to infrastructure that was previously difficult for small businesses.

"The macro idea that you can price a business sort of site unseen using just data accurately, I strongly believe."

Keith Rabois discusses the core concept behind OpenStore, which is the ability to accurately price businesses using data, a strategy that has proven successful in his previous ventures.

• Opendoor negotiated funding rounds before proving market success, which raised concerns about the company's ability to be disciplined and not rely on investment as a validation of progress.
• Ensuring financial prudence is essential, especially when a company experiences rapid inflows of investment capital.

"I want to make sure that the company doesn't confuse offers to invest and valuations associated with those offers with actual progress."

Keith Rabois emphasizes the importance of distinguishing between investment interest and actual business progress, ensuring that the company remains focused on building its capabilities rather than relying on financial validation.

• Keith Rabois believes cash is not a sustainable moat in technology companies, as it should follow progress rather than precede it.
• A minimum viable amount of cash is necessary for certain business ideas, but beyond that, cash alone does not create a competitive advantage.

"I don't really believe cash is a moat. Generally across technology companies, I think cash follows progress, not really predicates it."

This quote underlines Keith Rabois's view that in the tech industry, having cash reserves is not a moat in itself; progress and innovation are what attract investment and drive success.

• Opendoor's expansion to over 40 markets has become more predictable and easier over time.
• Keith Rabois aims to replicate this efficiency and predictability with OpenStore, reducing the need for "heroic effort" as the company matures.

"Fundamentally that is getting easier and easier, faster and faster, more and more predictable."

Keith Rabois describes how Opendoor's market expansion process has become more streamlined and reliable, which is a desirable outcome for any growing company.

• The decision to go public via a SPAC was driven by the desire to become a public company as quickly as possible.
• At the time, legal and regulatory challenges made a direct listing less attractive due to difficulties in raising capital.
• The partnership with the selected SPAC provided strategic benefits, including valuable board members.

"The real reason for choosing to go down the SPAC model was I wanted us to be a public company as fast as humanly possible."

Keith Rabois explains that the urgency to become a public entity was the primary motivator for Opendoor's decision to pursue a SPAC, despite the misconception that it would be faster than a traditional IPO.## Conviction in Opendoor

• Adam had a significant increase in conviction regarding Opendoor's potential, going from a low probability of success to a high one in just three weeks.
• The team credited their board members, including Adam, for their understanding of the company's vision and the ability to articulate its growth potential.

magical way, actually. It went from like a first call with Adam probably I would have put it at a one to 5% probability to within three weeks being like an 80% probability. So give them a lot of credit for having conviction about opendoor and conviction in us.

The quote emphasizes the rapid shift in Adam's belief in Opendoor's success and the importance of having board members who share and support the company's vision. It highlights the value of conviction in a startup's potential for growth.

• A good board member understands the company's vision, uses their abilities to bridge the gap between current and future positions, and offers valuable advice.
• The company benefited from having experienced and sophisticated individuals like Adam on the board.

Well, what we were looking for was someone who actually could understand the vision and what the company could be, was willing to use their abilities, team credibility, et cetera, to help us articulate the differences between where we were and where we would quickly be, and could also provide advice and counsel.

The quote describes the qualities sought in a board member, emphasizing the importance of vision alignment and the ability to help articulate and navigate the company's growth trajectory.

• There is no one-size-fits-all solution for companies going public; options include direct listings, traditional IPOs, and SPACs.
• The CEO and board must understand the trade-offs and choose the best public offering method for their company's specific situation.
• SPACs have been successful for some companies, like Rocket Lab, and differences between public offering methods are becoming nuanced.

Don't think there's a one size fits all answer for all companies. Some startups, a direct listing may make a lot of sense. Some companies, a traditional IPo process may make a lot of sense. Some companies, SPAC process.

The quote indicates that different companies may benefit from different approaches to going public, and it is up to the leadership to make an informed decision based on their unique circumstances.

• Accurate pricing of homes was the most significant potential issue for Opendoor.
• Customer acquisition and value proposition were areas of confidence from the beginning.
• Unexpected early innovation on the buyer side of the experience turned out to be beneficial.

Well, the biggest way was pretty obvious, which is we can't price these things accurately by far.

The quote identifies the primary concern for Opendoor, which was the ability to accurately price homes, a critical factor in their business model.

• The pandemic initially led to conservative actions by Opendoor, which were later regretted.
• Once data showed the potential benefits of the pandemic for Opendoor, the company's performance improved significantly.

No. Per my point, I actually always thought that Opendoor would do better in a macro cris.

The quote reveals that despite initial conservative measures, the pandemic was anticipated to be beneficial for Opendoor in the long term, which was confirmed by subsequent performance data.

• Megan Myers, the Chief Customer Officer, played a versatile role in Opendoor's growth, handling various critical operations.
• Megan's willingness to tackle different challenges and make sacrifices was instrumental in the company's success.

Probably Megan. Megan Myers is chief customer officer today. We hired her originally as, like, an analyst.

The quote highlights Megan Myers' contributions to Opendoor, showcasing her adaptability and impact across multiple roles within the company.

• Keith Rabois did not experience a significant "oh, shit" moment as an investor or board member at Opendoor.
• Rabois prioritizes 8 hours of sleep for overall well-being and professional success.
• Barry's Bootcamp became a key part of his fitness routine due to its effectiveness and the ability to disconnect from distractions.
• Keith maintains a healthy diet without being overly obsessive.
• A memorable moment for Opendoor was the IPO speech, which unfortunately had to be conducted over Zoom due to COVID-19.

Well, I've always prioritized 8 hours sleep in my life. I think it's the most important sort of decision you can make in terms of health, happiness, professional success.

The quote underscores Keith's belief in the importance of adequate sleep for maintaining health and achieving success in life.

• The conversation concludes with appreciation for the discussion and a reflection on the benefits of learning from experienced individuals like Keith Rabois.
• Keith is available on Twitter for those interested in following his insights.

Pleasure to be with you.

The quote signifies the end of the conversation, with Keith expressing his enjoyment of the discussion.

• The host, Harry Stebbings, expresses gratitude for the insights provided by Keith Rabois and encourages listeners to follow Keith on Twitter.
• The host also promotes various sponsors and their products, including a sleep solution, a VPN service, and a governance software.

I just always so love my chats with Keith and learn so much from him.

Harry Stebbings reflects on the value of the conversation with Keith Rabois, indicating the educational nature of their discussions.