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few years later, although the structural strategic planning elements of political science, Clausewitz, etc., are never out of date.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.