S2 E2: What Keith Rabois Looks For In Founders

So the role of the CEO is always you're responsible for everything. Period. There's no excuses. There's no delegating. You're ultimately responsible for every single part of the business. That doesn't mean you literally do everything with your hands. So you have to decide where to invest your time and your energies. Where do you have a comparative advantage and what's most important asymmetrically could create upside or downside. So you want filtering what you do, but fundamentally there are no excuses.

Great. How are you?

Ready to do another? Let's go after this.

I'll try to give you real views.

Yeah, no particular reason. You named a fair variety of companies, PayPal, Square, LinkedIn. Been involved in companies like Yelp. There's no pattern. The only thing that really appeals to me is interesting ambitious problems and interesting ambitious people. Put the combination of the two together and I'm interested regardless of what it is. I've funded things in genomic sequencing. I've funded things in healthcare. I've funded an enterprise software company or two, which is not my favorite thing to do. Obviously, Opendoor is a commerce transactional engine, but I don't have any religious views about what interests me other than ambitious talented people.

I generally talk about my criteria for investing is that about half of my VC friends should think my investment's ridiculous and laugh. That's how I know I'm taking enough risk or I'm seeing things that other people are missing. And it's a good filter because you can usually tell whether your friends would laugh at you. So it works pretty well as a proxy. Diligence does vary by stage of company. Typically, I prefer to be investing as early as possible. Keynote, deck, and team. So, obviously limited to a keynote, deck, and team. There's not that much diligence you can do. Series A, there's a little bit more diligence. There may be some product metrics. There's probably not financial metrics typically. So really, if you're an early stage investor, the idea of doing significant diligence is silly anyway. But the value proposition I bring as an investor and the way I like to compete with the rest of the world of investors and VCs across the planet is by assessing the talent and the abilities of founders. So that's the only thing I really care about. So once I've made a decision about the quality and caliber of the founders, everything else is just extraneous. So the tweet I talked about was there was a time back in my day at Coastal Ventures where we were pitched by a very accomplished founder who was clearly first rate. He actually reminded me a bit of a clone of Max Levchin. So there was no doubt about his ability as a founder, but the technical challenges he was confronting were something way outside my sort of realm of expertise. And I had partners at KV who knew a lot more about AI oriented X Y or Z and they were pretty dubious and skeptical. So, I was hesitating on investing for about two weeks. Kept going back and forth and thinking about it, chewing on it. And my chief of staff at the time, Delian, walked into my office one day after a Monday partner meeting and said, 'What the hell are you doing? Like, if I've learned anything from you in like the last 15 months is that if you find a world-class founder in a big opportunity, write a check. So, stop asking questions.' I was like, 'You know what? You're right. Give him a term sheet right now.' So, you know, I forgot my own principles, which was the point of my tweet, that it's easy to get distracted with a lot of noise versus like my only job is to figure out whether this person is likely to be a world-class founder.

Well, I didn't work that closely with Elon. Elon had already been displaced as CEO of PayPal, but was still on the board of PayPal. So, really only in conjunction with board matters. Like things that would be elevated to the board level did I get to know him. I did work with him a little bit when he was starting SpaceX. I thought about joining SpaceX and actually contemplated moving down to Southern California back in 2003, but that was a very long time ago. Jack obviously I worked with very closely, but I don't think there's any crazy stories. I think Jack has an amazing set of abilities. The most distinguished thing about Jack is he is a world-class business mind, technical mind and design mind. And that Venn diagram overlap is like literally rounds to zero in the world. So that's why Jack's been so successful. So typically people have different characteristics that allow them to compete and once they isolate that they want to double down on that as much as possible. So for example, Max Levchin I remember when I first met with him in December of 2000. So after I joined PayPal about a month or two in, I presented something to him and I remember Reed Hoffman giving me this advice going into the meeting saying Max is about one of three people in Silicon Valley that is a first-rate business mind and a first-rate technical mind. So be careful and like don't think you're going to be like sharper, smarter on the business side than he is. But he's basically like there aren't people in Silicon Valley and this is only a couple months in my Silicon Valley career. There aren't people like him. And this was when Max was 23 and Reed Hoffman knew it right then and was able to articulate exactly why Max was going to be so successful. So you can pick up on these traits very early in people's career was the number one lesson from that. And then B when you find those people like Max, keep working with them. So I went to work with him at Slide as you alluded to and then helped fund, I led the first institutional round for Affirm and I'm still on the board of directors of Affirm.

I don't even know. Probably depends whether you include like angel investments in venture. 20 to 30, 40. I mean I actually can't track it. Depends whether you also need liquidity or you believe these paper markups over the last three years. So that's why it's hard to answer.

It's changed over the years but the most important thing I learned in management is hire amazing people and then you don't have to learn how to manage very well. It's like basketball or baseball or whatever.

No, I enjoy recruiting, assessing, and promoting people and working with Osmosis to teach. But management while management is boring and not that valuable. Truthfully, this is a lesson from PayPal. Peter Thiel taught me this lesson actually the first week I worked at PayPal, which was November of 2000. And we went for a jog around the Stanford campus and he asked me, you know, sort of what I thought of the company and I gave him some feedback and he articulated two theories of the world that were pretty critical for the rest of my career. One was you never want general management ability. You want to promote people based upon their discipline and their craft, excellence at their discipline, excellence at the craft. So the best engineer becomes the VP of engineering. The best designer leads the design team, etc. And so I strongly believe that when you're trying to solve problems, you want people who are extraordinary. And that's what leads to these proverbial 10x breakthroughs. So I really enjoy working with 10x people and work pretty closely with them. Like I will brainstorm, riff, remix, lots of ideas all the time. I will wake up at 3:00 a.m., 4 a.m. or 5:00 a.m. with a riff on a conversation I had that day and hopefully a good idea and a good solution. So definitely enjoy that. But the process of actual management is mostly like an error correction model. So Netflix has this famous culture deck, you know, from a decade plus ago. When they talk about it, most parts of management, most rules and processes are designed to prevent mistakes. I really don't want to be in the mistake prevention business. I want to be in the asymmetric value creation business.

Well, clarity is critical. So, one of the things I believe in is like transparency. So if you want people to make decisions, you need to be clear about what the goals are and how well you're doing. And you want to broadcast that information to literally everybody in the company as often as you can. So Jack Dorsey started at Square this process, which I really like is we would send notes from every meeting to everybody in the company so everybody had more context. You want dashboards throughout the office clearly articulating how well you're doing against your core goals. You want to draft a business equation that actually explains how all the parts, the moving parts of a business connect. And you want to teach this down to the customer support level. So one of the things I also believe in is weekly company meetings. We did this at Square. They were very well prepared where part of the goal was to teach everybody in the company so that everybody's on the same page and can understand how everything's linked. If you want people to make the same decisions you would as CEO or COO or CRO, you need to ensure everybody understands the same context, same information or they're obviously going to make subpar decisions. So clarity is critical. Motivation. There's an, High Output Management is one of my favorite sort of books about how do you learn to run a high growth company. Andy Grove, founder of Intel, talks about how do you distinguish whether you have a capability gap or motivation gap and the basic question is if this person's life depended on it, the acid test is if this person's life depended on it could he or she do this and if the answer is yes then you have a motivational problem if the answer is no then you have a capability and skill problem and so the solution to a motivational problem is different than the solution or lack thereof to a skill or capability gap.

Sure. So Open Store provides instant liquidity to longtail Shopify owners. So let's say longtail $1 to $10 million GMV is our target market. So these people start a business. It does pretty well, but they may not want to run the business forever. They may confront challenges. They may have other things in their lives. They may have other goals. And we're the only company really that provides liquidity to that market. Shopify and sub $10 million GMV. And then we stitch these businesses together into a large horizontally broad e-commerce platform with the goal of creating the first horizontally broad platform in the United States since the 1990s. So that's the goal. That's what we do. We give, if people link their data, we will give them an offer within 24 hours and they can decide to accept. We buy the businesses and then we have to run, absorb and run the businesses. So I serve as CEO. The idea behind the company was actually Jack Abraham. So, in December of 2020, after I moved to Miami, Jack had me over his house for breakfast, the day before Christmas, and he said, 'I've got this great idea.' And I said, 'Sure, I'm listening.' And about 30 seconds in, maybe 3 minutes in, somewhere between there, I was convinced it was a really good idea. So, obviously, Shopify has been a massive success over the last 15 years. Its greatest sort of untold story back then, especially because the market cap was like 4x what it currently is. And kind of under the radar like most people missed the value of Shopify all along the way but Jack was paying attention and he said there's all these really small businesses on Shopify and they're kind of stuck. They either have sub-optimal access to capital, let's say they know they should spend more on customer acquisition they just don't have the money they have to wait for the money from a sale to take their bank account and decide what to do. They don't have access to cutting edge technology. They don't have all the modern techniques of like quote unquote Silicon Valley. So there's all these limitations. They don't have economies of scale think shipping costs. So all of these things can be improved and we can provide them instant liquidity. And as he started talking about it I said absolutely that resonates with me. It's a great idea. It should definitely work and there's so many moving pieces. I like this. But it's also the combination of stuff I've done before which is longtail micro merchant acquisition, SMB micro merchant acquisition think PayPal Square etc or Yelp even. And then secondly, underwriting an asset, underwriting a business, valuing a business sight unseen is something obviously I've done a few times actually before, most notably Opendoor, but also at Square in some sort of ways. So I was like, fundamentally I'm in. I want to do this and I think I'll do it myself. So I'm currently serving as CEO of the company. We have 103 employees going to 110 imminently all based in Miami.

So the role of the CEO is always you're responsible for everything. Period. There's no excuses. There's no delegating. You're ultimately responsible for every single part of the business. That doesn't mean you literally do everything with your hands. So you have to decide where to invest your time and your energies. Where do you have a comparative advantage and what's most important asymmetrically could create upside or downside. So you want filtering what you do. But fundamentally there are no excuses like fundraising is part of the responsibility of the team, editing the team, the seams between different parts of the organization, the strategy, fixing if you don't like the model, fixing the model, figuring out what's wrong with the model, why is it people, is it process, is it data, etc. etc. So it's very refreshing and very challenging because it's always something different every day.

So, we have a team generically referred to as operations after we absorb and integrate the business that has a marketing function which has customer acquisition and retention components to it. We have a procurement and demand forecasting function. We have a customer support function. So basically functional units across all of the brands we've acquired.

This quarter, so Q4 we'd like to do more than one a week. That's the real goal. Last quarter we were just slightly below that.

Well, we do do paid acquisition marketing, but some of it's inbound. We get a lot of organic inbound. You know for example people read about Open Store and they're like yeah I run a Shopify business that'd be great and then we do paid acquisition through different channels experimentally trying different things.

First of all these businesses are pretty small sort of by definition so sales tends to work better with larger businesses. But I have a significant long-standing aversion to sales teams so I kind of throw sales people at problems after I've tried everything else.

Well, have you ever managed sales teams?

Okay. Usually most people know. So, you know, it's just a different skill set. It is very difficult to scale. It's very unpredictable. It has a different culture than like typically engineering, product, design. So, I prefer not to mix and match unless I have to.

And it becomes less mathematical. When you do marketing, you can use statistics. When you start using high-end sales anyway, you're subject to the whims of one or two closes per quarter and they all come in the last week. So, you can't really run the business with not statistics, which is how I was taught to run businesses.

We're pretty horizontally broad. So we have some exclusion criteria, but if a direct to consumer business with more than a majority of sales on Shopify targeting US customers is somewhere between call the very low end 500k and the high end about $10 million of sales. That's right in the sweet spot ideally with about a year of operating history.

The exclusions are really based on things that you'd probably guess like content policies you see all across like the internet like firearms or something like that.

Something like that. It's like legal/policy.

A few million dollars.

Low hundreds of thousands.

We have a very unique proprietary equation that I sort of literally came up with at 3:00 a.m. in the morning. It's actually a very true story. This right before Barry's. I actually have a notepad that I sit next to at my nightstand because I occasionally have these epiphanies at 3:00 or 4 in the morning and the only way I can fall back asleep is to scribble it really fast and hope that it allows my brain to turn off. So I actually had one of those at 3 a.m. about like how to value the business which we've been using. We do value inventory separately. So, we combine the value of what we think the business is worth as a business, as an operating business, and then on-hand inventory and stitch the two together and make an offer to the owner.

We basically make offers to what we call GMV qualified businesses. So above 500K, let's say plus or minus, to more than a majority and then roughly depends on the month and the quarter somewhere between 15 and 25% of them are interested in our offer and click accept. I want to do this. And once they accept that it's basically we have a very quick truncated diligence process. When I say very quick sub two weeks, sometimes it's days. So the diligence process was built from the ground up to be able to do one a day. We don't, we're not currently closing one a day, but we built everything so that we could streamline the diligence process. So, we don't ask a lot of extraneous questions. We simplify to the things we only really need to verify and then we can close as quickly as possible.

It's a mix. So one of the biggest lessons from PayPal that made actually Max Levchin really famous. He was on the cover of Wired magazine for pioneering the combination of math and people. So the things that humans and human brains are really proficient and excellent at and there's things that math is much better or AI if you like the fancy version are much better at and the systems that combine the two in some ratio are ideal. So this is how we solved the fraud problem at PayPal. How we built the fraud engine at Square. This is how we do underwriting at Opendoor is a light interaction. You call it one to five maybe 10% of humans and 90% plus of machines and then over time you're dialing up the percentage that's done with math and dialing down the percentage done by human labor.

We're horizontally broad. So we have apparel. I think right now our apparel is probably running at about low 40% which is very typical for the Shopify ecosystem. We have things like, low 40% you mean low 40% of our brands are selling apparel of some type maybe different demographic. We might have men's apparel, women's apparel, children's apparel. We have some furniture. We have like a really cute sofa for kids called Lazy Something. We have drones. So we have consumer electronics. So we're intentionally horizontal. I would like to mirror the entire Shopify ecosystem identically if we can.

It's a little bit of a Keithism which is borrowed from an Elonism which is if you're going to build an ambitious business it's almost as hard to build a hundred billion dollar business as a $1 billion business. So you might as well aim as ambitiously as possible. So we started with the goal is we want to be larger than Shopify comparable to Amazon retail. So the only way to do that is to be horizontal. And I think it's difficult if you start with a vertical orientation to expand. There are examples in the world. Facebook clearly is the most stark contrast. Started with college, went high school, then went broad. So, it's possible, but I generally think that's a bad strategy.

We actually do have a really cute onesies brand for children. So, if anybody needs holiday gifts for their kids, I highly recommend check out Open Store. And I forget the name of it. I should actually buy it because I have two kids. They're pretty much right the same age. But the way we think about it is first we can use data to separate out and disambiguate what's proprietary, what's unique and very local in sort of your framework and what's basically a standard e-commerce business. We don't aspire to ship super creative new ideas unless it's predicated on data. Now, with enough consumers and enough transactions, you do get pretty insightful data about what products are likely to work that aren't currently being built, shipped, etc. A little bit like how Netflix started repackaging other people's content, and then a decade plus later had enough data about what consumers would watch, what they were searching for that with an advantage, with a strategic advantage, they could actually create original content. So that's how we think about it is just like the Netflix formulation.

I don't know if we'll directly launch our own set of brands, but I could see being more excited about acquiring particular businesses and being willing to pay more even because of consumer data. Now we may have to if there's a gap that nobody's producing something and we see that consumers badly want X and would retain, you know, in some unique and differential way, we absolutely could produce products. We do produce some products like so for example one of our favorite brands is this brand for men called Jack Archer. It's basically like a very high quality Lululemon men's-oriented brand like think pants. Now we introduce shirts like workout shirts. So next time you go to Barry's you can wear your Jack Archer shirt.

It's a mix right now. So we keep the businesses running on Shopify but we introduce a lot of new tech like there's like a spreadsheet of 12, let's see, about 12 columns across and about eight rows deep of various, some of it's more advanced some of it's very basic some of it's not.

Some of it's more advanced some of it's very basic some of it's not.

Not really. There are some innovative things I want to do and some of them are live in pilot, some of them hopefully will get live in Q4 that brands haven't done maybe at all. Certainly not the longtail version of the Shopify market that we will do from scratch. So, for example, we're going to match longtail influencers with longtail SKUs. Right? So don't think like millions of dollars, millions of followers. Think like tens of thousands and giving every one of those influencers on any platform, Instagram, TikTok, SKUs that they can promote successfully to their audience and following. So that matchmaking exercise is something we're going to build in a proprietary unique way.

It'll be some function of sales. But the more important part is the matchmaking, the economics. Actually, there's some pretty standard ways to do that.

I think it's 40 with about 20 in various versions of diligence.

I'd say rarely. There's insights that might be applied but not really synergies. And if that's the case, then what is the goal? I once had dinner with a Thrasio founder and he's like, our goal is to buy businesses at 5x EBITDA and go public at 25x EBITDA, which is great. Good luck with that. Fantastic.

If you're like, hey, look, there are no synergies. So, we bought a business at 4x EBITDA. Is the goal, hey, look, we can increase topline materially. Is the goal like, hey, we can do the EBITDA expansion. What is the goal once you buy the business?

So let's say in the short term and medium-term. Short-term the goal is to improve things and so they might be topline growth. So for example, if they're capital constrained, we can invest more money in marketing, customer acquisition with a certain payback characteristic. Number two is economies of scale. These people are paying off the shelf off the rack kind of shipping costs. We clearly can negotiate better shipping costs and pass it on to consumers or profit or both and probably improve the speed by placing our distribution centers in the right places so that people get their goods faster. That's an example of topline growth. We can add new channels like influencer marketing that they wouldn't have done. None of our brands basically had their own app. We're going to have native apps for our brands. So there's benefits of native apps to the consumer. Obviously there's benefits to the company. So all of these things are things that very small businesses wouldn't normally be able to invest in that we obviously can do.

Well, it's a really good question. So we actually closed our first business just over a year ago. We started the company more like 16, 17 months ago, but the actual first transaction occurred in September last year. So there's not that many businesses that are, there's actually very few that are a year old. Truthfully, we screwed up pretty badly the first call it three to seven brands we bought. Meaning we didn't know what we were doing in terms of operations being as massively complicated as you said. We didn't have an ops team. We didn't know what ops teams to build. We certainly didn't know how to productize it. We didn't even have an integration absorption team which was the biggest reason why we just didn't transfer things correctly. So obviously we built the ability to transfer things correctly. That integration team is running very smoothly. They're excellent. Number two, we built a demand forecasting team or tool which allowed us to avoid stockouts. Just you learn all of these things and you build. So since March of 2022, we've been building a pretty sophisticated operations team and it's getting increasingly sophisticated. We now have very world-class people in some of the functions and we're recruiting for others. So, we're getting much much better. That's actually how I measure the business is by cohort of when we closed a brand. How well are we doing? The first cohort looks pretty bad. The second cohort looks mediocre. The third cohort looks decent. Last cohort looks pretty good. I want the fourth quarter to look perfect.

Send all those businesses to us. We'll take those businesses off your hand.

You definitely have to pay tuition learning how to do things in a startup and you can't really do it top down perfectly overnight. You don't want to overproductize, overengineer things until you really learn how things actually work. Then you want to build the product. So you want to do things kind of in a hack way a little bit with human labor and then productize it based upon insights.

The Amazon, like the Thrasios of the world, it's easy to run those businesses because they're generally not doing as much new product development. They're sort of like here are the products we're running Amazon ads and our tailwinds are actually just Amazon growing, e-commerce growing and that's going to be the tailwind behind our back that's going to fuel revenue growth and EBITDA growth. Now whether that holds true or not is unclear, but your business is someone's got to run Facebook ads. Someone's got to go into Klaviyo or some marketing platform and create an email. Someone's got to play with prices and do conversion rate optimization in a way that you could never do on Amazon. Generally that is really really mom and pop based or for the businesses that you're buying moms and pops have been doing that and often they've been doing it poorly.

Everything you just named. I'm laughing and smiling because we have a team that's doing all of those things. So, literally from integrating Klaviyo to running pricing testing to running bundling testing to lifting conversion by changing various things. We do all of that in a classic Silicon Valley way with engineers, designers, growth people, measuring and then rolling it out. I have currently I think it's 46 engineers. I'd say half of them are working on projects that are related to all those topics.