Top Lessons in Building Great Teams from Keith Rabois, Partner at Founders Fund and ex-COO of Square

Please welcome managing partner, Khosla Ventures, Keith Rabois, and Boost.ai co-founder, Lloyd Lobo.

Is everyone having fun so far? Hey, I need a louder noise here. We got one of the best speakers in the house, Keith Rabois. Give it up, ladies and gentlemen. [FOREIGN LANGUAGE] So when they asked me to do this session, I was in complete awe. I've been a fan of Keith since 10+ years. And as soon as I saw him, I completely forgot his entire history. And I'm asking Keith, I'm like, tell me what you did. Keith is one of the most well-known people in the Bay Area, one of the most well-known investors, early teams of PayPal, LinkedIn, Square, and now GP at Khosla Ventures. How you feeling today?

Great. It's great to be here. Happy to talk about how to build teams because that tends to be the number one question I get asked by founders.

Awesome. And you've been on the early teams at several companies now. LinkedIn, PayPal, Square.

Started Opendoor from scratch.

Yeah. And now with Khosla, you see thousands of companies and you're advising them. Hundreds.

I don't know about thousands, but tens to hundreds.

Tens to hundreds. And you've seen teams from all the way to seed stage till exit. So tell us, perhaps walk us all the way back to your journey in the early days. What does a team look like for a company? What is the minimum viable team? A company is just starting out. They have an idea.

Well, it does matter depending upon what you're trying to do in the world, what the ideal composition of a team is. So let me backtrack for a second. When I was an executive at Square, Vinod Khosla, founding partner of Khosla Ventures, was on my board at Square, and he had this expression or adage that the team you build is the company you build. And at first, it didn't totally make sense to me, but then it locked in my brain, and it really became like the operating principle for when we invest and how I invest, which is people focus a lot on products and markets and technologies. but ultimately the only thing that really matters is the people. And it really, we learned this lesson at PayPal. We had an incredible density of talent, a critical density of talent in one building in mostly Mountain View. And it was a heroic sort of mission. Like, that was a company that absolutely should have failed, but for the extraordinary efforts of a couple hundred people and really 20 to 40 people that were absolutely amazing. And so you can get distracted and in love with this awesome product or this, you know, great design or this breakthrough technology, but if you don't have the people that can take advantage of that and leverage that, particularly for 5 to 15 years, you're not going to build an iconic company. So as an investor and as a board member and now as a VC fund, we obsess on the— what is the core team? And what is the core team for this specific type of project? So for example, if one wanted to compete with Elon and put rockets into space, you would want a very different team than if you were building a competitor to Facebook. There might be some Venn diagram overlap there, but there, there's definitely some differences in the ideal composition of the team. The other thing someone said to me that, um, really resonated and has become an important lesson is you can raise the odds of success in any startup from the very early days from something like the proverbial 1 to 10% that people talk about to probably 30 to 40% just by changing the team composition. We even joked a little bit that Founders Fund should sort of rebrand as Co-Founders Fund. And what they should actually be doing, or what someone like them should be doing, is matchmaking founders with other co-founders that have the missing DNA. So for example, sometimes we'll meet entrepreneurs when they're really the two kids in the garage sort of thing. And we'll say to them, this is a great idea. You guys are awesome. But you really need a quote unquote co-founder. You're missing some skill that's indispensable to success for this company. And we're going to help you go recruit this person. But you're going to have to allocate real equity. And that's why we call them a co-founder. Founder, otherwise you're not gonna be able to get someone with the appropriate level of talent. And so in today's world, that can be an AI co-founder if you're building a company that leverages data science, or it can be an engineering co-founder or hardware co-founder or, you know, business co-founder even. But what we're doing is helping diagnose, diagnose the difference, the delta between where's the team today and what success looks like and what are the key variables. That the team itself doesn't really have good sort of air cover on. And one thing a good VC can do is have a network that may have some of these people sitting within it. So typically when people start companies, depends on how old and how experienced someone is when they start a company, but typically they have a network that looks a lot like themselves. And that's really good when you're scaling part of the team that looks like yourself. So if you're an engineer and you need more engineers, Having a network of engineers is an awesome thing. But when you need a CFO, let's say, or you need, you know, a VP, an outstanding VP of engineering, or maybe a VP of sales, which is even more difficult to find for an engineer, you don't know who these people are. You don't know where to find them. You don't know how to interview them. You don't know how to assess them. And that's one thing a good VC board member can do is I have a network of all of those people and I sort of have done reference checks on many of them and can kind of triangulate Well, here's a good one that would be a great fit for you. Why don't you interview this person? And so that, that's what we try to do is a lot of that matchmaking with an early team with a great idea and the missing pieces. Awesome.

Let's shift now to the dynamics, or rather the stages of a startup, right? What's the smallest deal you've done? Because you've done a lot of angel investments in your time as well.

Well, so, so from 2003 to 2013, before I joined Coastal Ventures, I was a pretty active angel investor in Silicon Valley. I probably invested in 80 or so, maybe 85 companies. Those would be fairly small investments ranging from like $30,000 to $200,000, kind of a classic angel Silicon Valley type. Since I joined Coastal Ventures 6 years ago, rarely would I invest less than $500K. Typically, it's $1 million to $3 million, and I would call that, or we would call that, a seed. So we like to do seed investments at Coast Lab. We like to get involved as early as possible. So we like to write $1 to $3 million checks as frequently as possible, partially because we can help with the team building and help ensure that the foundation of the team is as strong as possible rather than try to fix things later. So culture and team building are a lot like concrete. So when it— when concrete's liquid, in liquid form, it's very malleable and you can shape it really easily. And once it solidifies, it's a real pain. Like, you have to take a jackhammer. It's very noisy and expensive. So we like to be involved before the concrete solidifies. We don't always have that choice, and we do invest in Series A's and Series B's, but I'd prefer to be writing a seed check if I can.

Definitely. So from those 30,000 investments that I'm more interested in, Let's reverse engineer a unicorn. I'm sure you have one or two unicorns in there, right? So let's reverse engineer the team of a unicorn at $30K. Maybe you can walk through an example.

Yeah. I think typically the most important thing in the earliest possible stages, so whether as an angel investor, where you're right, I've probably invested in 15 to 20 unicorns, and as a VC, probably 5 to 10 so far. The thing that stands out is there's at least one founder who has this ridiculous spark of, you know, you're in the presence of, like, potential greatness. It's like finding a high school basketball player that looks a little bit like LeBron James. You can tell that the person looks a lot like LeBron James in high school. Doesn't mean they're going to be LeBron James. They might get injured. They might, you know, all kinds of things can go wrong. But there's this spark, and the person may be only 18 years old or 19 years old, or they may, you know, be out of some field, like I came as a lawyer, so they may be totally off central casting, but you see this spark that you just don't see in normal people. And for me to make an investment early before there's a product or before there's metrics, there's a spark. And I just like, I'm saying, I don't even know if I buy the idea, but man, this person is incredible. And I, you know, sort of be lucky to work with them. And so that's what usually leads to a very early stage investment versus a more mature Series B, which is based upon fundamentals, business fundamentals, metrics, cohorts, all the classic analysis.

So I don't know if you want to take names, but who was one such unicorn? And maybe we can walk through their journey as they grew as a team.

Yeah, I'll give you a couple of non-famous ones because the revisionist history on the famous ones, I'm not sure is that useful because people have so much color commentary there. A couple more recent ones. So I funded what would typically be a crazy idea, which is a new autonomous driving startup with a very differentiated approach. Obviously, there's lots of people who are doing autonomous driving startups, and there's lots of funding and funded companies there. And this was only 6 to 12 months ago. And the approach may or may not work, but it was very obvious to me that the founder was a world-class founder. And as I was hesitating on investing, actually, because of the crowded space and all the capital that SoftBank and Google and other people and Uber had invested, my chief of staff, who's worked for me for about 2 years, came into my office. And he's like this brilliant, at the time, 23-year-old, probably 24 maybe, came into me and said, like, Keith, why are you hesitating? Your whole philosophy is find an outrageously talented founder in a potential big market and don't ask any more questions. That's your explicit strategy and you're hesitating on this investment. What the hell are you doing? And so I had him yell at me and I was like, you're right. Why the hell am I hesitating? Okay, we need to invest. Another one, actually, there's a company called Fair. Used to be called Indigo Fair. It's now a moderately high-profile company out of Y Combinator about 18 months ago. It's raised a couple, certainly over $100 million now. And when I met the founder, the founder had worked for me at Square, so I knew him pretty well, but I didn't really, actually both, two of the four co-founders had actually worked for me and been actually soccer colleagues of mine, soccer teammates of mine. Um, when I met them, they pitched me the idea, and I actually didn't really love the idea. Um, in fact, my direct quote was, "This is not an obviously terrible idea." And so they wrote that down, and they sent me an email after the meeting and said, "When we become really successful, we're gonna put that quote up in our office. Not an obviously terrible idea." But it turned out I liked them enough that I actually gave them a check. And then I gave them another check, and another check. And, you know, now we're the largest shareholder in the company, and they'll be a billion-dollar company. They'll probably be the best YC company ever, actually. But I didn't love the idea. I later learned to love the idea because we discovered some things in doing the idea and pursuing the idea that were bigger opportunities and more related to the specific DNA and skill set of the founders than the initial idea seemed at a superficial level. Sometimes you don't have to really like the idea or understand the idea even to know that the people are still worth backing, and then that gives you opportunity to embrace the idea later.

What was their minimum viable team like? What was that early team, and how did it evolve from the first check to the next check? What were some key things that changed there?

The core team at, let's say, Fair had worked on Square Capital. So the engineers and data scientists had done the underwriting model behind lending money, effectively lending money to micro merchants and merchants to allow them to grow their business. So they learned how to use data to underwrite long-tail businesses in the real world. And a lot of what Fairr does today is underwrite merchants. So what Fairr does is it tells very distributed businesses, gift shops, et cetera, what inventory they should stock and take some of the risk so that if you're running a local business, you don't have to think. You can just stock these mugs or something like it and guarantee they're going to sell. They have the data science capabilities in underwriting the risk of inventory and the long-tail risk of merchants failing. Then they had the product design chops from the core part of the Square business and the logistical competency of having run Caviar, which is a food delivery business that Square had acquired. So some of the core team had also run operations for Caviar, and obviously food has to be delivered perfectly on time, or it's very soggy. So the operational chops, plus the underwriting ability, plus the product design chops were pretty ideal for this business, actually.

And how many people were they? Like 2 or 3?

Oh, it was 2 to 4.

2 to 4 people.

It's really 3 to 4.

And then how did that team evolve between the next round of funding? What were some of the key How many next hires did they make? And how should we think about it as sort of seed stage founders? I'm a seed stage founder. I have an idea. I got some early traction. I'm not sure I'm at product market fit yet. I got like maybe 100 people who like it, who might be paying for it. Anyone I pitch to tells me, well, show me more traction. How do I— how does my team evolve? The people I need to hire in the beginning?

I, I think I would plot, I'd take a whiteboard and plot the key risks in order of degree of difficulty. So every company has 2 or 3 or 4, hopefully no more than 5 really core things that you have to conquer and solve to be successful. So like Elon wants to go to Mars and he almost surely has written out on a whiteboard somewhere or a piece of paper Yeah, all the things that have to happen to put a human on Mars. And so you want to decompose each of them and put a name against each of those 5 things. And that person, you better have conviction, is about as good in the world as you can get to solve that specific problem. And if you don't have a name or you don't have conviction around that person, you better go find one. So that's the key thing is it's like, okay, we are here and we want to go there. What are the 2 to 5 5 most likely problems that we're going to encounter? How do we address them or validate them as fast as possible? And do we have the right person who's like what I call the DRI, borrowing from Apple, directly responsible individual, that's responsible for delivering that? And if not, I got to go find that. The earlier you have the 3 to 5 people mapped against the 3 or 5 most important things, the more likely you are to succeed.

And so maybe one of the, one of the things in the early days is I need to get to product market fit, or maybe I need to get to $2 million ARR, and then you identify I'm missing someone on the go-to-market or growth side. How should one think about those early hires? Say you are an engineering founder like myself, and you got one engineer, one UX person, you're missing that whole element of growth or go-to-market. How do you think about that?

[Speaker:JASON M. LEMKIN] Well, certainly for consumer product, Without consumer adoption, there is no startup. Like, that is always the number one risk for any consumer product, like, period. Like, there is no substitute for that. Like, 99% of consumer startups just are not, are not going to succeed because they cannot interrupt normal people in the middle of their day and convince them to change their behavior to, to put basically their new product on the home screen. So any consumer has 24 hours in their day. They already have a lot of commitments. They have work. They probably sleep, you know, hopefully 8 hours. They have a job, probably. They have friends, family, and other commitments. So the only way you can be successful as a consumer startup is you have to rearrange a lot of people's lives. You have to get them to substitute from something they've been doing for years and substitute into your new product. That's pretty rare and very rarely works. So until a consumer startup proves that it can do that, at least in some micro scale, there isn't any value creation. So I wouldn't— I would start with, truthfully, I would start with— I wouldn't even launch the company without some degree of insight of how I'm going to do— I wouldn't launch a consumer company, to be specific, without knowing how to do that.

On the B2B side, probably the similar learnings as well.

B2B you can brute force. B2B you can absolutely brute force. To a certain level of traction, which is you can handhold a certain set of customers or potential customers into solving their problems and hope that you can extrapolate from that and make it replicable. You can definitely isolate from your own experiences of products that are broken or market inefficiencies and triangulate. You cannot brute force a consumer startup.

You can't. So let's stick to the B2B side. Side of things, given most of us are probably in the B2B space here, when's the right time to hire a few things? One, a VP sales, one a COO, one a CFO.

Well, all slightly different, and they do vary by business type within the general, let's say, enterprise businesses, even within software-based, you know, SaaS-based enterprise businesses. A VP of sales, is a misnomer. You need someone leading sales, obviously, if you're gonna not have a direct, complete self-serve kind of direct model, which is atypical that that works at scale. So you typically have someone quarterbacking sales, but that person doesn't have to be a VP. The person is typically actually more like a sales manager, maybe even a sales, hero, where the person's doing a lot of the sales or all of the sales, closing all of them, him or herself. And then you eventually have 2 to 5 people running around and they need someone to organize them and quote unquote manage them. So you have a micromanager or executive, but you don't need like a VP of sales. You need someone who knows how to sell and can close deals. And then once you start showing that you can close deals, then you may replicate this and you may replicate it by geo or industry or some other dimension, but you don't need an executive. You may need someone who can get the appropriate attention of a decision maker. So if you're selling $5 million databases, you're probably not selling to a very junior person in the organization.

Yeah.

So you probably need a sales representative who's capable of holding his or her own with the comparable buyer. So you are identifying who's the buyer, what's the price of the product, and making sure that whoever the decision maker is, you have a representative of the company that's appropriate for that level of sophistication and seniority. So maybe the CEO may need to do the sale because the only person who's able to hold his or her own with a very senior person in a larger organization is the CEO, but that's okay. Then you learn how to repeat and then you replicate. CFOs you don't need in most businesses for a very long time until you're like roughly $10 million in revenue, partially because most CFOs are only going to add about 10% value. So like if you take the revenue line, multiply by 10, that's about the value creation. Level that they can handle. So, you know, 1 million times 10, you're gonna be underwater in terms of what you pay a CFO. There are some businesses— I'd say Opendoor is one, Affirm is another— that use capital as a source of oxygen. So we take debt, we lend money to people, or buy an asset in Opendoor's case, and then we get more of it back. People need to give us that oxygen to be able to do this rapidly. So in companies that use a lot of oxygen or have very complicated capital structures or arguably very low margins, CFOs and VPs of Finance and VPs of Finance and Strategy can be very valuable very, very early. But those are rare. Same thing with the general counsel. Typically, you would not hire a general counsel until much later. That said, Stripe's 8th employee was their general counsel. Given the regulate— given the regulatory complexity of what Stripe aspired to do and their ability to simplify and desire to simplify some of the underwriting and regulatory requirements, having a general counsel in the first 8 employees was brilliant. And Stripe probably wouldn't exist today without, you know, the efforts of that GC in the very, very earliest days. So depending— again, depends on what you're trying to achieve when you need certain executives. But typically you would defer general counsel or CFO.

And then you were CEO at Stripe. What— when did you come into Stripe, and was it the right time?

Square, but people get them confused often. Square. Ah, great.

Spilled water too.

This is perfect. Anyway, I was the 20th employee, which is actually pretty early for a senior executive of any type, let alone a COO. Typically, you're better off off at that stage hiring operating executives.

Yeah.

Until there's too many seams or decision-making complexities that you need someone to roll up various trade-offs to. So growth versus risk, et cetera. Customer support and product, things like that. Sales and product sometimes. But the company needed a, a business-minded, somewhat literate financial services person to complement Jack's product and engineering and design jobs. And so it was more of a complementary, find a complement, and the COO role was the right way to do it, sort of in terms of being attractive to people. But typically, I have a whole different speech on when you should hire a COO and when not. Typically you're talking 50 to 250 employees before that's a likely move. Cool.

Got a couple minutes. I got a couple of questions for you. One, as you've grown, now you've come across this team, you've funded it, the first check at a $30K, written a $500,000 seed round. They're at a Series A or B stage. What is that team making? Makeup look like apart from the revenue? You see $10 million ARR, you want to fund them an A round. What does the key team look like there? And then a follow-up question to that is internal promotions versus external hires. How do you think about it?

Well, since we have a minute and 15 seconds, I don't think I'll be able to answer both very well.

So let's take the latter one.

The latter one. Internal promotions, external, it depends on the velocity. So every individual in a company has a growth curve. and every company has a growth curve, you can only promote people internally if their personal growth curve is exceeding the company's growth curve. So perversely, the faster a company grows and the more, sort of, iconoclastic the company is, the less you can do internal promotions. You just, people just can't learn at this curve. Fortunately, most companies, even very most successful companies, grow at more like this curve. So you have a chance of keeping people keeping the people that are growing faster in the company and promoting them, grooming them, mentoring them. Certainly less risk in the sense of cultural transformation, but you have to have a way of teaching and mentoring to do that successfully. You probably wind up at best with a ratio of 50/50, of 50% internal promotions. That's very healthy if you can do that ratio. 50% external hires. That keeps most things like working pretty well, but it takes a lot of to be able to survive with that ratio. On the team building, again, by Series B, the metrics are kind of speaking for themselves, and so you can identify what parts of the team sort of need upgrading almost empirically. Series A, you're still taking a leap on a story, a narrative about why we're gonna change the world, we're gonna conquer the world, and what are the gaps in that story is really where the hiring comes in, like what doesn't seem credible, like why should I back this one team to change this whole industry, and where do I feel uncomfortable, and that's what I would look for.

I'm gonna ask one question, it'll probably take 10 seconds. As COO at Square, what were one or two things you did to encourage that internal promotion, or how did you view that?

Yeah, so I got, we basically got people mentors. When I joined the company, we had 17 engineers of the 20 21 of us, and none of them had ever managed a single human being before. So they were all individual contributor engineers. They were all flatly reporting to Jack, which is obviously difficult for the CEO. And we had to figure out how to get engineering managers. So we recruited a mentor to take our 5 highest potential engineers and over a year turn them into engineering managers. So that's how we survived.

And by the end of it, how many people were each of them managing?

Each of them had done very well, so they each had teams of 3 to 10. One of them eventually became a director of engineering and managed the whole thing. But there was no other choice, really. We tried to get an external hire, but it's like doing blood organ transplants. You're subject to so much risk. Awesome.

Well, we're out of time, but give it up for Keith Rabois.

Thank you.