Episode 45: Keith Rabois - Managing Director at Khosla Ventures

Pleasure to be with you.

Yeah, that's true. I grew up in Edison, New Jersey. I spent the first 18 years of my life in New Jersey. I went to public schools in New Jersey. I thought I was kind of on this pre-law, pre-political trajectory. So I was pretty much intending to stay on a very conventional professional path and did all the things one does to get into a good college, all these extracurricular activities. I probably was president of like somewhere between three and seven different clubs simultaneously and did a lot of debate and model UN stuff. Played some soccer, high school newspaper, blah blah blah. Crazy enough, I was even treasurer of the French honor society, everything from the sublime to the ridiculous.

Sure. So, I went to Stanford in the late '80s, finished in the early mid '90s and studied political science. On the Cold War stuff, interestingly enough, my major was political science and strategic political science, and we were covering a lot of debates about realism and idealism and liberalism and how it should be applied to military doctrine in the Cold War, political doctrine and political competition with the Soviet Union. Obviously a lot of that got obviated a few years later, although the structural strategic planning elements of political science, Clausewitz, etc., are never out of date. Nuclear deterrence strategy and things like that still apply in many ways, like how to think through in more of a multi-power world than a bipolar world, but fundamentally that stuff is really useful and still is. But again, I was calibrated towards how do I get into a really attractive law school, high credential as a high credentialist kid. I did get involved in the Stanford Review by accident, literally the first day of my freshman year. I was sitting in my freshman dorm room, and this guy shows up and delivers what was actually the second edition of the Stanford Review, September 1988. And I look at it and I'm like, what is this? And there's some cartoonish photo of Ronald Reagan on the cover, I believe. And it looks interesting. So I started a conversation with the person who was hand-delivering this to my dorm room, which is how content got delivered back then by all student organizations, flyers, pamphlets, etc. And it turns out this guy delivering to my dorm room was Peter Thiel. So I got involved, recruited into the Stanford Review, started writing for the review, editing the review, spent many years of my career in college working on the review, writing for the review, editing the review, recruiting the review. It was all very spontaneous. Got to know Peter quite well, mostly through the Stanford Review and other projects like that. I didn't really ever think it would evolve into a business connection. Peter was on the fast track. He was about two years older, I think he was a junior at the time, but he was a senior. And he was on the fast track to law school. He attended Stanford Law School, clerked for an appellate court judge in the 11th circuit, and then worked at this law firm, Sullivan & Cromwell. I thought that was my natural trajectory too, and in fact I followed most of that. I went to law school, clerked on the fifth circuit, which used to be part of the 11th, or the 11th circuit used to be part of the fifth circuit. So pretty similar. I wound up working at the exact same law firm, Sullivan & Cromwell. He was smart enough to quit after 3 months and 5 days, realized he didn't want to be a transactional attorney for the rest of his life. Probably fairly prescient. It took me three and a half years after clerking to figure out that I probably shouldn't be a litigator for the rest of my life. But it eventually wound up in the same place.

Yeah, absolutely. There was a lot of value in attending law school. I think you hit diminishing marginal returns after the first year and maybe you could justify the ROI up to two years, but fundamentally, a lot of society today, business, personal life, whatever, is regulated, overregulated arguably, but infused by law and regulation everywhere you look. So having a native, first-principles understanding of how law and regulation work, what's art, what's science, what can be manipulated, what isn't, has been very useful. In financial services, where I've been both an entrepreneur and an investor for a long time, there are a lot of constraints imposed by law and regulation, and really understanding the law and regulation and how to manipulate it has allowed for product-level flexibility and innovation, versus having to outsource that. Other areas have had success in or related to IP risk. I was a litigator as well, so I really understood that stuff from first principles. When YouTube was founded, I did the IP diligence for them on behalf of the company and their VC because I could do it all in my brain. That's pretty rare. So being able to assess legal risk and quarterback and calibrate in your own brain versus outsourcing it to some law firm or some lawyer is a very strategic advantage. It's also helpful in negotiation, being able to trade business terms for legal risk and legal exposure. You take on that risk while I pay you 20 cents more, or I don't take on that risk and you pay me less, or whatever. Usually if you have two different people working on the project, they can never speak the common language, so that's not possible to make those trade-off decisions. So it's been very strategically useful and it has been relevant to some jobs as well. At PayPal, part of my roles over the years was to use the federal government to ensure that our enemies, we had a lot of enemies at PayPal from Visa, Mastercard back in the day that tried to kill us, and eBay that hated us and tried to kill us, and later post-9/11 due to the Patriot Act, the Treasury Department wasn't our best friend. Being able to use the political and legal world to help defend the company became a core part of my job, and having the legal experience, expertise, and network of who to retain, who to work with, and why was incredibly valuable.

Everybody did want to kill us. Maybe that explains Peter's view that competition is for losers or something. He is a byproduct of his own history. So, I was working at Sullivan & Cromwell. I clerked for a year post law school graduation, which is what most highly credentialed law school graduates aspire to do. I worked for my hero, a federal judge named Edith H. Jones. It was an incredible experience. After clerkships, which are typically one year long, you go back into practice. So I became an antitrust litigator, kind of a white collar criminal defense, and to some extent IP litigator at Sullivan & Cromwell for the next three and a half years. I basically left at the height of the internet bubble in February 2000. I jumped out of Sullivan & Cromwell as a fifth-year associate into this crazy wild world of the internet, what later would be called the internet bubble but at the time was the internet revolution. I was recruited into it. I had a mutual friend from college that I kept in touch with who had been successful in the first generation of the internet with a startup that got acquired by this cool, trendy company at the time, a search engine called Excite that nobody remembers, but Excite was cool and trendy and valuable for a while. After his Excite experience, he got recruited to help start another company. He thought of me. There was such hype around the internet that density of talent was really difficult to arrange. You couldn't just hire the most obvious candidates for new startups. So they were desperate and hired recovering lawyers like me, management consultants, whatever. So I had an opportunity to jump careers. I was crazy enough or prescient enough to do it at the height of the internet bubble, February 2000. Six or seven weeks later after I started, the market collapsed. So the advice I got that I would enjoy this, that I might be successful at it, was all probably pretty good. The timing was about as bad as you can get. I left this really prestigious law firm to jump into this completely unknown startup when that was cool and interesting and everybody was kind of doing it. And then the world changed six weeks later and I had to learn to swim for myself.

Well, obviously Peter and Max deserve the credit. They did virtually all the hiring. Max hired basically all the engineering talent, who were friends or friends of friends that he either went to high school or college with at the University of Illinois, Champaign. It was very difficult to get into the engineering group unless you had strong connections. We basically didn't hire anybody that was more than two degrees removed. Peter hired most of the business people, product kind of people. So they had an eye for talent and they marshaled this critical density. Part of the reason they were successful was we hired different types of people than the more homogenized larger companies would have. Most of the PayPal people were a little odd, a little weird. Max Levchin said on stage 18 months ago that I was the most normal person that worked at PayPal. I'm not sure that's a compliment coming from him. That's partially an insult, but it's actually factually probably true. If you think about me, who's generally considered a little bit of an outlier, being the most normal person, you can imagine what everybody else is like. Peter starts Zero to One somewhere early and he talks about how of the six founding team members of PayPal, at least four of them built bombs in high school. So there's a rebellious streak. Now before you get nervous about that statement, at least three of the four of them were living in communist countries while they were building bombs, pretty justifiable.

Well, I didn't think there was any other realistic choice. I might have understood what venture capitalists did at a high level. I certainly read books written about the late '90s internet bubble about VCs, but I didn't really have enough direct exposure or enough expertise. I thought it was somewhat aspirational and I was intrigued about investing, but I started taking baby steps, and they very much were baby steps, of angel investing. I angel invested in some startups, but the reality is I was investing in startups founded by friends of mine from PayPal. If you look at my first five angel investments, one of them was LinkedIn, one was Palantir, one was Yelp, one was YouTube, and the fifth one was Zoom. Unfortunately, not with Z, but Kevin Hartz's Zoom. Kevin didn't work at PayPal, but he was an early investor in the company. So all five were derivative from my PayPal days. It wasn't like I was going out to the world and meeting all these people. I was just cherry-picking who at PayPal that was going to start a company I thought would be a successful founder. Turns out all those investments thrived. So I started four for five, which is a pretty good way to become an investor, but it wasn't really by intent. It was totally serendipitous initially.

I should just retire. I should have just retired, I think.

Yeah, once these companies were tracking well, I started scaling and doing more angel investing. I realized I liked it. I realized I had a shot of being successful at it and wound up investing and transcending that initial network. I invested with Kevin and Jav as you mentioned in Airbnb and things like that that weren't directly related to PayPal.

In many ways, joining both Zoom and, I'd say, Zoom and to some extent Yelp were probably the most formative because in both those cases, I joined the board of directors, which is a closer proxy for being a VC. In many cases, an angel writes a check and doesn't really do that much. But as a very active angel, meaning I would join the board of companies or even if I didn't join the board, I would be acting in a fairly similar way as a consigliere to the founders. I did that with the YouTube guys and Chad when they were first starting YouTube. I even hid YouTube when they were small in the excess part of LinkedIn's offices so I could meet with them quickly and easily and see what they were up to. I think that was probably more formative, not being a passive angel investor but being an active board member and participant in the company building stages, was probably a better predictor for where my career would eventually emerge.

Well, it's like a consigliere. If you watch the old Godfather mafia movies and stuff, it's just like giving advice and counsel to the primary decision maker, which in a company is the CEO. Advice and counsel can be like they might be struggling with a challenge, like I don't know what to do, what should I do? Do you have a set of ideas, initiatives, conceptual frameworks for answering this? Or sometimes it's giving them feedback that maybe other people are afraid to give, like a more obvious sense of, hey, the CEO is pretty intimidating, really successful, I don't know if this idea is the best idea. Sometimes I'll be helpful in challenging the CEO and just asking probing questions: are we sure this is right? Are we sure we're measuring this with the best methodology? Are we sure the opportunity cost here is better or worse than there? Just asking questions. And then being a founder is extremely lonely. Over the last 20-plus years that I've been in tech, I've become very close with a lot of founders, work very closely with them, sometimes for more than a decade at a time. If you get to know someone really well, you can feel the loneliness, you can see it in their eyes. So having someone who has context, who really understands the company building process and the state of the company, that can be a sounding board and just someone to talk to, almost like in a pop psychologist way, is really valuable.

Well, I think very few VCs have actually suffered through virtually every kind of challenge that exists in building a company. There are daily, weekly, monthly, quarterly challenges, and I've probably confronted them all at some point or watched, witnessed very firsthand every possible version of a good answer and probably made every possible version of a mistake. So a lot of the advice is not that the path is bad or good. It's just that the grass isn't usually greener, meaning there are significant trade-offs. Sometimes the best I can do is to point out the trade-offs, saying you can do X and it's a pretty good idea to do X because of the following reasons. However, you should be alert that these are the things that typically go wrong or the side effects or the collateral damage. So make sure you're choosing intentionally and wisely that this is definitely what you want to do. That's a benefit of a lot of experience both horizontally and over time.

I basically never tell a founder what to do. There's a running joke I have with my best friend who's a founder that I once told him what to do once, and I can remember every time I've ever told a founder what they actually should do. Usually it's more like, here's a framework for thinking through the problem, and you can see whether it's resonating by whether their eyes light up. But it's never a directive. There are times where I might react like, visibly like, do that, but then I usually take a step back and explain the reason why I wouldn't do that is I got burned doing that or I watched this person get burned doing that. So you can explain the logic and then let them chew on it, and usually they'll have a rev or two like, what if I did it this way and torqued it or remixed it slightly.

It's pretty straightforward. I meet someone and then it's like, do I have a reason to believe this person has a nonzero chance of changing the world, transforming an industry? Think about that, it's kind of ridiculous. You start a company with your friend from college or your roommate in his proverbial garage and you're like, I'm going to reinvent financial services or I'm going to reinvent all of the future of news and news consumption like X or something. It's kind of an unreasonable and borderline irrational, sometimes delusional ambition, but there are people who have a moderate chance of pulling it off. So the art of being a seed-stage investor, VC, angel, consigliere, whatever, is assessing people and understanding whether the probability, which in a normal person's hands of changing the world is zero or rounds to zero, to something that's not zero. That's the number one criteria. Is there a non-zero chance that this person is going to rearrange the world to their will?

Well, you can be successful with different advantages. I think every sustained, consistently successful seed investor has their own comparative advantage that they're tapping into. For me, it's the founder assessments. I meet this person, may have no context whatsoever, may never have met them before in my life, may not even know anything about them, and in 3 to 30 minutes try to figure out if they're going to change the world or not. For other people who are successful seed investors, they can be technology-based investors. They can see and hear about a new technology and immediately grasp the potential implications, consequences, and market opportunities. If you're extremely effective at that, that's your comparative advantage. Then you're just scouring the universe looking for new tech developments that can rearrange industries. So it depends on the person and what their unique assets are, what the right strategy would be.

It's really easy. Actually, truthfully, it's hard to describe, but easy to know. Your ears just perk up and you're just like, wow, I've never seen that before. It can be a different variable. It can be like, wow, that's the smartest person I've ever met in my life, or that's the most tenacious person I've ever met, or that's the best salesperson I've ever met, or that is the best whatever. It's that feeling of, oh my god. It's a little bit like you sometimes read scouting reports about high school baseball players or basketball players. It's kind of amusing to read ones about people that became very successful, like Hall of Famers. Sometimes the scout actually nailed it. You can just read these reports about this kid who was 16 years old and the scout's just like, this person is going to the Hall of Fame.

I know 90-plus percent of the time, I know whether I'm going to invest definitely in the first meeting. I can get talked out of it by one of my colleagues. I can get persuaded not to because of something I learn in some pseudo diligence process and some follow-ups, but 90% of the time I've already made a decision and I'm just rationalizing it and making sure I haven't missed anything. Sometimes it might be like, I'm right that this is a good thing to invest in, but the founder wants terms that just don't make economic sense for us. That does happen, pretty rarely, but it happens. Or some of my colleagues might know more about a particular person or industry or something. They might persuade me to curb my enthusiasm a bit. That does happen. But 90% of the time, X minutes into the meeting, I've already made a decision. People who shadow me, I usually have a chief of staff shadowing me, can tell. They shadow me for a year or two at a time, and the chief of staff almost always has figured out before the meeting ends whether I want to invest, and they're not even asking, 'Do you want to invest?' They're like, 'Should I send a memo around about the company?'

In an average year, probably about eight times.

Yeah, pretty close. I think I've averaged, this is my 13th year or so as a VC, I think I've averaged 10 investments a year. So there's some years, especially during COVID, that was less, some years a little higher. So maybe eight, and maybe a few at the margin I shouldn't have made. So eight is probably about right.

I think you have to sample. There's this book called Range about exploring different things in different careers. I was a lawyer, was a little bit involved in politics. Nobody would have guessed when I was growing up that I'd be a cutting-edge tech entrepreneur. There wasn't even such a thing to really be. Even if there was, because I was more credential-seeking. I remember one of my good friends from college from Stanford saying to me as he watched my career change, he said, 'Rabois, you were the most conservative person I ever met, and now you're the most risk-loving. What happened to you?' So it wouldn't have been that obvious. But I think when you sample different things, you look for common denominators of areas where you've been successful, positive feedback. I have a piece of advice that I give to up-and-coming entrepreneurs, up-and-coming executives, up-and-coming potential VCs even. They say if you're trying to find your unfair advantage, the best way to do it is find roughly five, maybe 10 people that actually really like you and then ask them why. Then just write down verbatim the whys. Don't try to edit it. Don't try to think it through. Write them all down. Once you've finished all five, six, seven, 10, and it's really easy to do because if you ask people why they like you, getting positive feedback is really easy. Just write them down. Put them in a notebook. Then look for common refrains. And that's your answer.

That's a good question. I'm not using as much of a company-specific lens as he might or others might, but what I would say in that vein is that every great company, companies that have the potential to be iconic, have anomalies. It's kind of understanding what the anomalies are. Think about it this way: if you're going to be extraordinary, there should be some outlier somewhere showing up. So what I do when I read an introduction about a company and someone's like, 'Do you want to meet so and so?' Or I read a deck, which I like, I review lots of decks. I'm looking for anomalies, something unexpected. It doesn't even mean I need to understand why it's unexpected. And it doesn't always have to be positive. It's just something that's unexpected because the forces of history are towards inertia. So you need to see something that defies your conceptual framework. That's what I'm looking for. I think exceptional companies, to some extent exceptional people also have that. But the exceptional companies almost always have it and almost always have it fairly early. You can use different vocabulary in some ways. If you read Zero to One, Peter is always talking about and prescribing more like, what's your secret? There's some difference between a secret and an anomaly, but they're close cousins.

I think there are mostly good anomalies that you're looking for in investment with people. You can look for sparks on both sides because there's a spark over here and it's perceived as negative. There might be an offsetting positive. But I think in a company, it's rare that the negative anomalies are truly positive signals, but not never. Homogenization is not your friend. If you're starting an outlier, a power law business, however you want to describe it, anything that feels bland and homogeneous probably isn't going to be one of those outliers. So I'd rather see at least some outlier than none.

It does vary by company truthfully. Critical density of talent is probably a common refrain across all successful companies. But if you go beyond that, it matters what you're trying to build, in what market, what the landscape is, what your value proposition is, is it a non-consumption market or a competitive market. So what we try to do is identify the key inflection points for the company and then tackle them in order of degrees of difficulty, which is somewhat counterintuitive. Take the most difficult ones first, not last. So it's like, okay, what are these inflection opportunities? Then can we address one or two immediately? Because that's what causes momentum, perceived momentum, investor momentum, valuation increases, and then confidence. If you know this is the biggest issue and you solve it in year one, your own personal confidence about the success of the company should be massively increased.

Yep.

They're different. There are some common denominators. I'd say the taste in founders between Founders Fund and Khosla is pretty similar. The scale of ambition for the kinds of companies both funds like to invest in is pretty similar. The biggest differences are at the company level. At Khosla, we're very highly technical. We prefer to take on technical risk. We're comfortable investing in technical risk. At Founders Fund, that's not the norm. Secondly, at Khosla, we want to be as early. Our mantra or official strategy is bold, early, impactful. Bold means we want to be the first institutional investor, and every time we're not, it's a flaw. Founders Fund is the best momentum growth investor. I believe they are excellent at figuring out which companies have a shot of really working and investing a lot of money with conviction consistently across multiple rounds. That's not been the historical Khosla style. We want to be as early, your first believer and your most impactful, influential adviser.