I don't think you can scale a company without the founder being able to persuade other entities or people. That's part of the job. You got to kind of create and forge a cult and you got to bring people along into the cult. You got to teach the tenants of the cult. I don't know that you can succeed without some art in persuasion.
I'm Saman Christensen and this is All Things Negotiation. Today my guest is Keith Rabois. Keith is famous both for being an effective entrepreneur and an effective investor. As an entrepreneur, he was part of the PayPal mafia and worked there in the early days. He was a COO at Square, worked with Jack Dorsey there in the early days. He worked with Reid Hoffman on LinkedIn there at the early days. So, just had an amazing entrepreneurial journey. Since then, he's been an effective venture capitalist, one of, in fact, the most effective venture capitalists based on his results. He's worked as a partner at Founders Fund. He's currently at Khosla Ventures. In our episode, he tells stories from the days as an entrepreneur. He advises entrepreneurs on how to raise capital. He even shares a secret about how to get a meeting with him or how to get a meeting at a company that you might want to work for. I think you're really going to enjoy the conversation. So, Keith Rabois, welcome to the podcast.
I've been really excited for this interview. You are one of the people that has negotiated in a context of an operator at startups as an investor and really your whole career has been in negotiations. So, we've only got an hour, but I'm going to try to pull out as many of those stories and lessons as we can. Let's start with the operations side. Do you, as you think about negotiation as part of teams or just an overall philosophy? What, you know, if someone were going to ask you, what's your philosophy of negotiation? What have you learned about working with teams? What comes to mind?
Well, on negotiation, the most important thing is clarity. What do you want? Like what's the goal? It's very straightforward, but people gloss over that. Then there's the tactical question of how do you get there? And then we talk about why and how. And typically, you know, when I'm working on negotiation, it's usually on behalf of the smaller entity with less leverage than a large entity. Startups typically are negotiating with big powers at the government, large companies, you know, distribution deals. And so the most important thing is to figure out why should the large entity care, like what's in it for them. And what you really need to do is align the goals you have for your organization with the top three priorities for that CEO. And if you can do that then typically you can find something that works for both of you. But it can be very challenging. Let's just say Walmart. So I walk in the day and I want to have a partnership with Walmart. Great. So you know sometimes people have substantive KPIs that they're trying to move out of Walmart on down, sometimes they have like optics, framing, positioning in the market, positioning in the world, positioning in the political world ether. And so again it comes down to just clarifying what are their bubbles. And that's why like even in enterprise sales, long sales cycles are an excuse. I've actually worked with a startup that closed a deal with Walmart in less than 45 days for $5 million plus. First customer. Because and then their second deal I think was with AT&T or equivalent competitor similarly closed fast because they could walk in and say hey you have this business challenge and we have a product that can actually solve that with credibility.
Yeah. So, and it's non-trivial like you know obviously parsing an organization of that scale takes skill like figuring out like what is actually on the top part. It's not like they some you can read their S1s and public filings you know and actually with some clarity you might actually be able to detect some things but sometimes you may have to map the organization and talk to a lot of people to talk to executives, board members, former employees to try to even understand what's this organization care about you can solve. Let's say for AT&T or a comparable competitor, biggest issues, churn, subscriber churn that drives their business metrics more than any other variable. If you have a credible way of improving their churn, AT&T can move fast. What would you say to an entrepreneur? Because you know, I've been on boards of companies doing enterprise sales and they'd love to talk to a board member. They'd love to talk to someone in the C-suite, but those are hard to penetrate. So, what would your advice be to how you map that organization and how you peel that back?
Yeah, I mean tools like LinkedIn work. Finding a connection in common, you know, an authentic connection in common is probably the best way. You may be able to find the connection to the C-level officer of some large public free traded company or a board member and go to the board member first and then have a conversation and then he or she can introduce you to the exact. So there's a bunch but like a tool like LinkedIn is incredibly effective. Without a common connection, it can be really challenging.
Yeah, that's true. One of the things I imagine you might be tired of talking about is some of the early companies where you were a leader and you know you were a leader at PayPal, you're a leader at Square, you're a leader at LinkedIn. But let me try to frame the question to make it interesting for you. Rather than just war stories from those companies, what were some of the things you learned at each of those companies about negotiation from your colleagues, the people that you worked with? So anything stand out at PayPal from one of your colleagues and what they did at negotiations?
Yeah, I can talk about a couple lessons from PayPal on this dimension. One was when I joined PayPal, we inherited, I inherited a lot of bad deals truthfully that were not very effective. And the drag coefficient of bad deals is something I've learned is organizations, startups only have so much energy, so many people, so many barrels. And the downside of a bad deal is not the business terms, it's the drag coefficient. And so figuring out what to do with those and how to end them gracefully or reformulate them was a lot, I invested a lot of energy. We had a bad deal with Intuit for example and I wound up spending a day a week over at Intuit's offices like actually I learned how to map their organization to just go over there, spend time with them and like become as much as they could tolerate, become an insider and then try to use that knowledge operationally to see if we could fix things. Second thing is a specific lesson from Reid Hoffman was the value of time. There's some dimension in any negotiation about time. So in any negotiation speed can be your friend or foe? Like physically is inertia good or bad for you? There are times when inertia can be good for you. So for example, let's say you're negotiating with a regulator. Maybe you kind of like the state of affairs. They want to impose more friction, scrutiny, something on your users. Time, unless they have real leverage, time's going to be your friend. More and more momentum like Uber played these cards pretty well actually back in the day. Or as a startup you are usually default dead. So typically actually time is not your friend and figuring out how to invert inertia fast because you need to grow, you need to generate traction however you measure it. And so understanding the dimension of time does affect and impact how you should approach a negotiation. For example, to be like very practical for a deal that's like call it 80% good. If I'm a startup, I might take it today. Just fine today, 80% is fine cuz I need the momentum now. And I could wait another month or two and try to get to better pricing, better X, Y, Z, but I'd rather have 80% of the benefits like starting tomorrow.
Interesting. So in those startup days, you know, one of the quotes that I saw and you have so many good quotes online, but one of them was people are irrational and at a startup you're stuck in a building with them. I just love that quote so much. You talk a lot about being relentlessly resourceful. Any stories from your early days on how you or your colleagues were resourceful in negotiating things?
Well, resourcefulness. This is a blog post that Paul Graham posted about relentlessly resourceful probably being the single best trait for a founder. YC, you know, so much famously teaches do things that don't scale to get there. It's a good conceptual framework of don't worry about whether you're going to do this forever. Don't worry about whether you replicate this perfectly. Just get there. Figure out how to get there. And I think that's the right mentality. The good news is also really effective for recruiting. Typically you can discern whether someone's relentlessly resourceful really easily in an interview because if someone is relentlessly resourceful there's data points that show you some time they're like 6 years old or 7 years old or 8 years old and if they can't give you anecdotes and explain things in a way like that it probably isn't fair truthfully. I think it's a very strong founder trait, but it's also a very good trait for the first 100 employees in a startup to hire for because basically you're trying to solve problems that other people think are either impossible to solve or not worth solving and the impossible to solve. You really need people you just don't give up. So, one of the ways PayPal instantiated this and is a kind of a Peter Thiel philosophy was Peter would only allow you to work on one thing. And by simplifying and narrowing sort of the frame of reference, let's say for a person, you didn't have the excuse of, you know, I'm not going to solve this problem. I'm going to do this or that. And so basically all your energies, all your talents were concentrated on how do I solve a very specific sometimes narrow, sometimes a little broader a goal and that created sort of a forcing function on being relentlessly resourceful. If the CEO will only talk to you about one thing, one way or the other, you're going to dial into that damn one thing until you stop. So it's a strong management technique. Now, it takes a lot of effort, energy to instill that kind of focus across the organization, but Peter was adamant about it and very effective.
Interesting. Well, that brings us nicely into recruiting. Obviously, a big part of startup is finding great people. You talk about finding undiscovered talent. How do you find those people and how do you persuade them to join you? Any stories from either of those categories?
Yeah, the second, I mean persuading to join is actually easy. It's just like you're going to learn a lot. You're going to get a lot of rope and a lot of challenge. And the best way to learn, you know, is to jump in the water and kind of see what you can do. You know, sometimes learn a little bit through osmosis as well. But fundamentally, startups are much more likely to give you the opportunity to grow than a large organization of any type. And so that's by far the best way to recruit candidates. How do you find the undiscovered talent is much more challenging. Because by definition undiscovered talent doesn't easily evince itself on piece of paper. So if you're looking for all the standard criteria on some LinkedIn profile, if the person has all the standard criteria by definition they're discovered right. So if they went to the prestigious school with a prestigious degree and all that or worked at this prestigious startup they're not undiscovered. So if you can't use paper to filter, LinkedIn profiles to filter, the question is then how? And that's really really challenging. There are like hacks that can make you a little bit more effective. One is just simply paying attention. Like I've hired people off our soccer team. Like I've hired several people off our soccer team. I've funded people off our soccer team. So like having that kind of mindset, whatever you're doing, that can be helpful. Second thing is you can, people of certain ilks tend to hang out on other groups like there's this concept that you're the average of the five people you spend the most time with which is mostly true. So you find one person who's got certain traits figure out who else shares those traits because shockingly they probably have a few friends or colleagues or partners that are very similar.
Yeah, I think that really speaks to work at a company that's, you know, a growth company, live in a geography that's a growth geography. Just who you're going to be around is going to raise your level. Look, you've probably interviewed a lot of people. Do you have a single story of an interview candidate that was just unbelievably persuasive in the interview? And you just said, 'Wow, I've got to hire that guy or that woman.'
When I hired this one guy off my soccer team. He was the goalie on our soccer team and he was really trying to escape McKinsey and he'd been at McKinsey a little too long for my taste and was a little too credentialist and I was a little nervous about it but he really wanted to escape and he's trying to convince me that he had some entrepreneurial traits notwithstanding two years at McKinsey and he talked about this futon business he built at Dartmouth and I was like exactly but good try you know like at least directionally correct but then what actually convinced me is as a goalie on our soccer team, he has the highest risk-reward propensity of the goalie I've ever seen, which is basically very high beta goalkeeping. Very aggressive and also trying to in a rather rapid way convert defense to offense and so he can be very effective. And what occurred to me is he's trying to sell me on this futon story that he'd be better off selling me on his goalie characteristics. And it actually worked. I was like, you know what? I don't buy this futon stuff, but I've actually watched you play goalie for a while and you are pretty risk loving. So, if you just apply that, forget everything you learned at McKinsey, you might be pretty good. Turned out Jeff was very good. He did very well. Thrived at Square for 3-4 years and then helped co-found a company called Fair, very promising company, COO of Fair. So I guess my goalie aptitude test worked reasonably well.
Interesting. Let's talk a little about management before we move on to your investment career. So, as you think about persuading employees to do things, you know, Steve Jobs is kind of the icon on this. People were willing to, even though, you know, and I've talked to people that were direct reports to Steve and found him abusive and were still willing to work really hard for him. What have you learned about persuading people and negotiating with employees to just step on the gas a little more, get a little more done, get more output, and you could even talk about inputs versus outputs?
Sure. I mean the magic obviously is the why and there's different versions of why like Steve's case is you want to be an outstanding craftsman. You know we stand for taste and quality and you want to be a manifestation of the best in your craft. There are the competitive dynamics like why is like we need to win that can work for some companies and some industries too. But I think there's a secret and the secret that people gloss over is just hire people who are already motivated. It's kind of a lesson that Patrick Collison taught me. I interviewed him on stage at a CEO summit in 2017. And I asked him a question that I was curious about, which is people at Stripe seem pretty happy. I was like, how do you have so many happy colleagues? And he gave me an answer I didn't expect actually but quite brilliant which is he said I just hire people who are already happy. And yeah that's a much better position honestly like so if you want certain traits let's say work ethic or motivation just hire people who are in the top 1% of motivation they just can't help themselves.
Let's talk about scaling a little bit. You know it's really different to be at a 50 person company from a 500 person company. So, how do you change the way you persuade people internally based on a scaling company? Do you have to adjust? What's been your experience? Because you've been at a lot of different stages of companies. And so, how does that change as you scale the persuasion internally?
Well, some of it gets easier, some of it gets more difficult. The easier part is the more momentum you have, the more people can see what's in it for them. Like this life changing equity like oh my god, like this could change my life, my family's life forever. And so that becomes self-propelling for a while. The part that gets more challenging is after you pass about 250 to 500 employees, you tend to hire people with different goals. They start asking questions. Well, what's in it for me? The first 100, 200, 300 you can hire on the challenge, the mission, the growth opportunities. And so you get a different kind of caliber of person and you got to stitch those together very carefully. That's why a lot of companies go through a very painful transition between 300 and 600 employees. It's a good problem to have like if you get to 300-600 employees typically the company's doing pretty well. But it's also one of the messiest painful like 12 to 18 months in any company's trajectory.
I had Andy Ratcliffe on the podcast recently and I want to, he said something provocative which is unless you're a founder you should never join a startup until it has product market fit. Do you agree with that?
From a financial perspective, you know, certainly that's down the middle of his advice. I think that's probably right, but there's other things in life that aren't short-term financial like so you might care about the mission like this is going to save the planet. This is going to change the world very reasonable set of rationals to justify what you do with your time. Second is can you learn? So you can learn a lot of things and then you can parlay that later into your financial success. It's not like you get one shot on goal in a two-year time frame. You have to maximize your ROI. It's like a 20, 30, 40 year journey in some ways. And so I would more isolate like am I going to learn from these people? How much am I going to learn? And then if you learn a lot of really cool interesting things with cool interesting people that will turn into success with a different expanded time frame. So I think he's being a little too narrow.
Last question I want to ask on ops is essentially there's a feeling often that I hear in Silicon Valley having lived there for a long time of hey you know if the person if you have the inclination that they're not doing a good job you know you should fire them quickly as opposed to try to salvage it and train it. What's your experience on turning people around and persuading them to go in a different direction they're going and be more effective than they are? You've articulated great to hire happy people, great to hire high level people, great to hire competent people, but there are those middle of the road people that you need to block and tackle. So, everyone can't be the best at everything. Experiences that you can turn people around or do you think you should fire quickly?
Well, I wouldn't be, I'm not like the biggest of fire, frankly, but I do think you can assess whether you made a mistake or not very very quickly. I usually know two weeks to three weeks in how someone's going to do. It's like really easy actually to read that. Then the question is what do you do? And in different environments, different cultures, different levels of seniority, you may fire someone in other cultures environments and seniorities you may act differently actually. It's a more complicated matrix in my mind. It's not such a simple fire. But I really believe that the first signal's almost always right. My favorite technique is usually I don't think you can fix the problem in the role the person's in. So but once in a while you can figure out well actually what this person's good at and what they're not good at is different than I thought when we hired him or her and I have a different boss that might be more suited to their abilities and strengths or weaknesses. And if you can move them, that might work. Or a second technique that tends to be more also acceptable and successful sometimes is reduce the scope. Sometimes what happens if someone's really thrashing around and kind of like almost drowning. And if you can narrow the purview and really clarify like what the top goal is, they can sometimes thrive. And then that puts points on the board, gives your colleagues confidence in this person. Then maybe you can rebrand the role.
Yeah, I think that's super helpful. So, let's shift gears to you as an investor and I'm just really in admiration of your career that you've kind of gone back and forth and done both so effectively. How important is your thinking of people to invest in? How important is it that they're good negotiators or persuasive whether that's in their pitch and their life? Do you think persuasiveness is a key skill?
Well, I think at some point you need to develop the persuasiveness. Yes. Or either innate or develop it because look you have to persuade customers, employees to join, you have to motivate employees so you have to persuade the current, you have to persuade investors like you're constantly in persuasion mode so you can fight that and deny it but one way or the other and there are different styles and techniques for persuasion it's not just like watch a movie it's not just go watch like Boiler Room or something and learn to sell like you know Ben Affleck in the movie. So, there are different styles of persuasion, but I don't think you can scale a company without the founder being able to persuade other entities or people. Like, that's part of the job. It's like you got to motivate, you got to kind of create and forge a cult, and you got to crank people along into the cult. You got to teach the tenants of the cult. And you got to get customers and often it's founder driven for a while, which is very, very helpful. But I don't know that you can succeed without some art in persuasion. So, for example, when I was younger, certainly as a lawyer, I was much more introverted. I'm still pretty introverted, but like he was more conspicuously introverted. And I remember a friend of mine from college at Stanford. And I used to have this classic Stanford kid attitude. And then I remember my friend Chris from college saying to me once, he's like, I don't know. You know, he's like sort of rejecting my anti-sales sort of philosophy. And he's like, Rob, you're like the best subtle salesman ever. And it was like really arresting because he said it that way. I hadn't even thought about that. That's what I was doing. I just I wasn't doing sales sales. I was just influencing, you know, in a different more introverted way. But he like when he locked into it, it made sense to me of like no the underlying driver is the same. I'm trying to motivate someone to do something, you know, for some reason. And I just was using different techniques than you know you might be taught in like sales training.
Yeah. I think that sales gets a bad rap. I say to my Stanford students, look, consider sales. If you look at all senior people in organizations are sales people.
Oh 100%. I mean like this is I don't know why where when this started but all the smart people you know if they went to these elite schools are told like you know you don't do sales and you know you look at like compensation right certainly enterprise company number one or number two compensation has sales. Yeah I mean if you look at who ends up being CEOs of large companies you know it tends not to be people who start in coding, people who start in FP&A, people who start in product management. Sales people often end up running the show at the end of the day in my experience. I mean I'm mostly talking about technical founders who do start coding or design driven founders but they develop the ability to be effective at sales like for example you know a couple people like Matt Lechin, Matt you know obviously started hardcore technology CTO co-founder PayPal. He can be very effective now in like any version of a sales environment, public speaking, one-on-one negotiations all that stuff. Jeremy Stoppelman also worked at PayPal, got promoted to be director then VP of engineering, used to be very insular and very anti-sales but then you know when Yelp was going public he was very effective at communicating to public market investors. So you develop like the ability like many things you have a muscle you have to develop it, practice it, get feedback etc but you realize that you're constantly selling to somebody.
