Episode 41: Keith Rabois

Hey, I'm Eric Torenberg and welcome to.

Another episode of Maker Stories where we explore what makes the makers, what drives them, what they're scared of, how they make sense of the world, and everything in between. This week's episode is with Keith Rabois. Keith has been a super early executive at startups such as LinkedIn, PayPal, Square, and has invested early in companies such as YouTube, Airbnb, Palantir, Quora, Yelp, and many, many more. Part of the famed PayPal Mafia and has been an influential executive and investor in Silicon Valley. This episode we talk about Keith's story, how he came up, his thoughts on career strategy, specifically the rocket ship theory, his philosophy on hiring and why it's similar to drafting athletes, and much, much more. This episode was recorded earlier this year at the launch conference and it's a bit shorter, but Keith is one of the smartest people I've gotten to know.

In the Valley and he does not disappoint here. All right, here's Keith. For those who don't know, can you please give a brief background of who you are, what you do, and how you got to where you are?

Yeah, so I took the classic career path of becoming a lawyer and then being a litigator and doing everything wrong. And then I was like 30 years old and decided to jump out of the legal profession sort of without a parachute. It was like February 2000, so right at the height of the internet bubble. So it was good advice, good career decision, but the worst possible time. So it was a little stressful for the first year when everything was crashing and burning. Jumped into this crazy company, it was literally crazy called PayPal. Elon had just been fired. Peter Thiel came back as CEO and so I joined and we went through a two-year rocket-- and did you know.

It was gonna be a huge company at the time?

No, it had four and a half million users, which is a lot. And so it kind of cut through the clutter from a brand perspective. but it was bleeding money. I mean, it was losing $10 million a month, which at that time, in 2000, $10 million a month was a really high burn rate. Now, it's almost common. But in any event, no, it is a complete mess. Well, let me stop you real quick.

Because you just tweeted earlier this morning how a lot of people don't follow Sheryl Sandberg's rocket ship advice, which is essentially, if there's a seat on rocket ship, somebody that's blowing up, get on it. Was PayPal a rocket ship for you? Or how did you meet Peter?

How did you know? No, it wasn't obviously a rocket ship. I was thinking at the time that, well, it's kind of this brand that people have heard of. So worst thing is if it crashes, at least it'll look decent on a resume. Because the problem on a resume at the time, and it was literally a resume because it's before LinkedIn, is if someone doesn't recognize the company, it's really hard to assess you. And so I was a little nervous about that. But on the other hand, it had been in the Wall Street Journal and like four and a half million users is a decent number. And if you did a brand survey at the time, it was like the eighth most popular brand on the internet. Like, so Google was at the time, like number four, like a long time ago. So, no, it wasn't obviously gonna be successful at all. I mean, the company was literally changing. We had three CEOs in six months. So that's usually a proxy for a mess. But anyway, when Peter came back, he started fixing things and we went from very unprofitable to profitable, filed a public offering like the RS wanted to go public the day after 9/11, wound up trading and going public in February 2002. which is one of only three technology sort of oriented companies that went public that year, Netflix being one of the others. And then we sold the company. So in like two years we went from a complete mess to an IPO to an acquisition.

And then after that, well, after that.

Everybody thought the consumer internet world was dead and done. Like it's hard to even describe how much of like a nuclear winter was around like this Bay Area. Like people thought technology was dead and particularly consumer applications, consumer products, there was no future for. Fortunately, a few of us disagreed, like Peter Thiel, Reid Hoffman particularly, really believed that there was a future for the consumer internet and so they started investing in these crazy startups and there was really nobody else giving entrepreneurs money at the time. So every entrepreneur who had a consumer idea sort of went to Peter and Reid and asked for money and fortunately for them it turned out that some of them were actually decent ideas. Some of them were potentially interesting ideas that crashed and burned, sort of like Friendster. But there was another wave and being at the front of the wave was a really good investor or entrepreneur decision. And so that's sort of how my friends from PayPal sort of became fairly influential. It was sort of by accident.

And what do you think was at the time was your core competency that they really wanted? I needed Keith's opinion. I need Keith to be here and running this company with me.

Back then it was mostly the intersection of business and regulatory problems. so, you know, I'd been a lawyer, I'd been involved in politics as well, and a lot of payments, particularly intersect with, like, all kinds of regulation, and you're just kind of trying to steer around it and navigate the gray area and trying to quarterback that stuff and keep all these evil companies, like MasterCard and Visa, from killing us and eBay from killing us and using law and regulation as part of that process. It was sort of my, my real skill set at the time. And then it broadened, like, over the last, like, 15 years, but. that's what everybody wanted. So I had like 17 lobbyists, like full time, like really busy in DC, both offensively and defensively. The Patriot Act had just been passed and at one point the Treasury Department wanted us to collect a social security number from every buyer, which is insane and would have really killed us. So I had to stop that. So I had a lot of like these kind of problems and then learned to do corporate comms and biz dev and a whole bunch of other stuff.

And so at this time were you thinking, okay, my friends are about to start these huge companies. One of them is going to be rocket ship and let me join them. Or what were you thinking at this time?

Yeah. Yeah. So actually, Elon tried to recruit me to come down to La to help do the regulatory stuff for SpaceX, which was obviously going to have lots of regulatory complexity. And I didn't really want to move to La. I don't know if anybody here, but anyway, it was interested and then wound up getting involved in a whole bunch of cool new companies, like including LinkedIn, which didn't look like a rocket ship at the time either. It grew actually fairly linearly. I mean, in fact, A year and a half after launch, it only had 1.5 million users, which for a social product, a viral product, is very, very low. But it was always growing. It just wasn't growing, you know, it never had this exponential curve to it. But it had a monopoly characteristic, which is it was the only professional database that existed for normal people. And that's obviously very valuable. And so it's become an incredibly important company. But it wasn't totally obvious, either when I invested or when I joined the company, that it was going to be massively valuable. obvious that it could be pretty valuable.

And you could say that, you know, if someone hits it once, it's luck, but you've hit it with companies multiple times that maybe weren't obvious in the beginning, but you saw something in them. And you've also, you know, developed a skill to find kind of the underrated gems or the people before they're stars. What do you look for in these people or these companies? And how would you keep picking winners?

So the people's stuff is different in the company side. People stuff, I'm actually working on a draft blog post about it right now because it comes up a lot. Like everybody who's running a startup wants to recruit people. So they always want to find people to recruit that are super talented, but you're not going to be able to recruit all the people who've established themselves, who've already accomplished things. Like there's, you know, 55 billion other companies trying to recruit the same people. So the part of the art, and this is the thing Peter actually taught me at PayPal, was how do you find people that are undiscovered yet? And you've got to be able to do that at scale if you're gonna build a company from scratch. Once you get enough momentum and you're one of the top 10 companies in the Valley, you can recruit people with a magnet that have established credentials, but you've got to get there without that. And so, and I remember actually the first week I worked at PayPal going for a jog across the Stanford campus with Peter and Peter explaining this whole philosophy to me. At the time, I had no idea how to do this, actually. In fact, I was actually pretty bad. Like when I would Interview candidates and hire candidates at PayPal. It was 50/50, plus or minus, you know, some were bad, some were good. And it was really actually interfering with my career. People were noticing that I wasn't that great at hiring. So what I started to do is to recruit individuals from within the company that I knew were stars and that maybe were underappreciated. 'Cause that's a lot easier task, like when you're in the building to look around the building and figure out who's really good that people don't always notice and then recruit them to my team. and then make the team look really good. And so that was the first technique was like figuring out people I was already working with who is going to be particularly good, which is also what led to a lot of good investments was a lot of these people started companies and I was like, oh, can I invest? Then over time, I got better at figuring out what was the common, what were the common denominators of those people and try to project that in interviews. You know, a lot of the best people I've hired, almost all the best people I've hired went to fairly random universities with non-technical backgrounds that had never worked in startup world before. And they're all like 21 to 23. Um, so you it's a little bit like drafting athletes, though you're going to be wrong a fair amount of time. Like, you know, it's first round draft picks. You hope that you're picking a future star, but you're going to be wrong. It's not zero defects.

Like anybody tells you it's zero defects isn't hiring fast enough.

And is it, are there personality traits? Yeah.

That you're also looking for?

The best blog post is what Paul Graham wrote. It's called Relentlessly Resourceful. I think that's the single best blog post on recruiting people for a startup. I think there are other characteristics, but if you had that, you can build off of that pretty well.

There was one example you were telling me where something to do with smoothies?

The smoothie story. So yeah, this is sort of online at the moment. So I had an intern at Square who his first day at work, was like, well, what should I do? And I was like, well, what should I do? And I was like, Shadow me around and we'll find some stuff for you to do. And I'd been frustrated because people were working really hard back then and, you know, engineers and product managers and designers would be in the office way past 9:00 PM all the time. And I wanted to kind of reward them. And, you know, alcohol is not the best thing to reward people with if you want them to do work. And pizzas actually, which is the common default in a startup, isn't actually very good for you either. And it makes you tired. And so I was like, what could we do? It's like, well, we'll get really fresh, cold smoothies. It's like healthy. cool, they're expensive. A lot of people don't like to buy them because they're so expensive. But we could never get the office to coordinate getting cold tasteful smoothies to arrive at 9:00 PM sharp. Like something would always go wrong. Either the smoothies would be really bad because the people, the companies that would deliver those weren't the really top end smoothie places or they would shut down before 9:00 PM. They wouldn't show up cold.

They would be delivered to the wrong place.

And so like the whole point of having a treat for people just never, it always backfired. And smart people were struggling. These are smart people. Like I had, you know, our office manager was very good. My EA was very good. other people were very good in the company, but they just couldn't make this happen. So my intern's like, what can I do? And I'm like, well, I really love to have smoothies show up at nine o'clock and put them on this table where the engineers work. And he's like, oh, I'll make that happen tonight. And I'm thinking in the back of my mind, there's no chance in hell this is gonna work. Literally, there's no chance. And so that nine o'clock shows up, and lo and behold on this table, there's a bunch of smoothies, all perfectly arranged, the variety of different flavors from one of the top tier places. and all the engineers are thrilled. And I'm like, wow, this guy's got a future. So the point of this is that what you actually want to do is start with all your employees a fairly mundane task, and the people who thrive at it, you just increase the complexity and sophistication over time, like every day, every week, every month, every quarter, every year, until they show they can't handle something. And so you can find people in pretty random places that show this propensity of getting stuff done successfully, and then constantly give them more and more complicated tasks. And those are the people you build the company around.

Perfect. We're talking about people. Now let's talk about companies. Explain more about your tweet today, you know, Sheryl Sandberg's quote about finding a rocket ship, but specifically what can people do to locate rocket ships perhaps before they're rocket ships?

Or talk more about that advice. Okay, so, you know, Sheryl famously talked about this actually advice she got from Eric Schmidt when she was considering joining Google, which is, if you find a rocket ship, don't ask what seat, just get on the rocket. And I generally think that's the best career advice for people is if you find a rocket ship, you want to get on the rocket, and then all rockets have so many things going on, like per the smooth example, any high growth, high velocity startup, there's always new problems and you can't hire people fast enough to solve the problems. So there's so many opportunities to grow. If anybody has any ability in a company that's a high growth company, you just throw more and more problems at them and they wind up with like, you know, this career trajectory. That's basically what happened to me at PayBy. I started with this little one major project, which is keep eBay from killing us. Then it was like, keep Visa from killing us and keep MasterCard from killing us, then keep the government from killing us, then keep the state governments from killing us, then we don't like our PR strategy, fix that, then we don't like our business development strategy, fix that. And it's just constantly like new things that Peter was annoyed with, he just throw them at me. So I think that's generally quite good advice. The hard part is picking the rocket ship. Now if you wait when things are obvious, that's a good choice. Like so when Cheryl joined Google, it was pretty obvious it was going to be a rocket ship to anybody who like had access to their metrics. if you go early, I don't think it's a good idea. Like, I don't think it's a good career decision to try to pick a rocket ship before it's a rocket ship. I think, like, we do that. You know, the best people who do what I do are right maybe 30% of the time. That's like a Hall of Fame batting average for an investor is to pick a rocket ship. So that's a bad idea for most people to try to do. I think you should pick your boss. Like, pick your boss, meaning, like, someone you can learn from. Assume the equity value is zero, like, literally zero, and say, would I learn enough? would I enjoy this enough that I would do this job even if the net economic benefit to me was zero? That's the best thing to do unless you're gonna find a rocket ship and have an opportunity to something that's clearly established as a rocket ship. So it's like almost, yeah, completely different device depending upon whether it's an established company or an early stage company.

And what about a company that is really hot but isn't, you know, isn't pulling huge revenue? It's still, somewhat unproven. Let's just say let's say product on for example. How do you know that it's it's legit rocket ship or going to be a rocket ship and not just, you know, hype?

I you can't as an individual employee like I think like you're kidding yourself. I think you can pick do I like the people? Will I learn a lot from these people? Would I would I be willing to do this for four years even if I had no equity value? And if so, then it could be a good decision. If you're counting on the equity value being worth anything, it's a bad decision.

Right, no that's interesting way.

Not that your equity value, but-- no.

It'Ll be worth a lot. Yeah, absolutely. And even if you're the 30th employee or the 50th employee, we're hiring, by.

The way, is what I'm saying. We're hiring too, by the way.

CoSlA?

Well, CoSlA too, but Opendoor. Talk about Opendoor. Yeah, so Opendoor allows you to sell your home in 30 seconds online. So it's actually an idea I had back in 2003 to show you how long sometimes things take. And you can just put in your address and we'll buy your home from you, basically sight unseen. so you can move out and have your cash in three days. So those of you who may own a home or have ever tried to sell a home, it takes about 84 to 90 days to sell your home in most parts of the United States. And about 20 to 25% of the people who list their homes never actually sell them. So it doesn't even completely close. It's a painful process. It's an expensive process. It's time consuming. You have to paint your home, mow the lawn, clean up stuff, like, you know, maybe even move around the furniture. And so we take care of all that for you. And we're live in Phoenix. We've been doing pretty well. We're hiring lots of data scientists, if you know any of those, some engineers, some business people.

And out of all the companies you could be working for and working with and starting, why this one?

Well, so residential real estate is a massive, massive market and it's been basically unaffected by technology. This was true in 2003, which is when we started thinking about this idea. It's the biggest market in the world that's been unaffected by technology. There are things like Zillow that have had some effect but barely changed the way people, the process of buying and selling a home in the United States. But if you're right, like trillions of dollars move per year. So 5.75 million Americans sell their home every year despite all the friction and expense. Real estate agents earn about $76 billion worth of fees per year in the United States. So it's just so massive, it's so illiquid and so painful. Anytime you can add liquidity to a massive market, it's usually quite Successful.

Now that answers that. You've been in the tech game for years and years and literally decades before it was cool. And before it was hip and before it was kind of penetrating mainstream culture. How and now that we see kind of convergence of Hollywood and Silicon Valley and just everyone's wanting to get in the game. Seeing as you're one of the, you know, been since the beginning. How do you think about that?

Well, I think it has had some good effects and some bad effects. The good effects are obviously like, you know, software and technology can change the world. It can change the world for good. It's probably better that people spend their time in software and technology than in financial services and on Wall Street as an example. However, there's the Hollywood version of startups, which is like, oh, everything's gonna be easy. This is gonna work out. You know, we're gonna make a lot of money. The stuffs are actually really, really, really painful. I mean, that's one of the reasons why you need such an adrenaline rush is you have to offset all the pain. and you go through this ebb and flow, and the ebb and flow, the sine curve is sometimes every hour, sometimes every day, maybe you get it to every week, but it's pretty painful. And so I think that the celebrity culture side over the last, I don't know, six years is actually pretty bad, and it attracts maybe the wrong people with the wrong motives to some extent.

And how do you think moving forward as tech kind of plays an even bigger role in mainstream culture, that will affect politics or government?

I don't know. Eventually over enough time, there's an arc of history. There are these long arcs of history, and eventually the right result occurs eventually. And I think over time, technology and innovation will apply to government and decision making, but it usually lags by years and years and years, sometimes decades. So there's a long arc of history that, quote unquote, bends towards justice as, you know, the famous quote. I think that's true. It's just not, you can't accelerate that necessarily.

And how ultimately, five years from now, 10 years from now, even longer, how do you judge your success?

Mostly on people, you know, people that have gone, been unfortunate enough to work with me and learned a lot really fast. And what do they wind up doing with their lives? Hopefully, you know, Hopefully they've made a big difference so far, so good. But yeah, it's like working through people. It's the best part of being an investor too, is you get to work with all these cool talented entrepreneurs every day. It's almost like being a psychologist, like you sit literally all day long, it's just sitting on a sofa like this. Some entrepreneur walks into your office and you're like, so tell me your problems. And then you have a conversation, well, have you thought about this?

Have you tried this? Blah, blah, blah. Hopefully we don't prescribe any drugs.

But basically it's just like having a psychological therapist.

And what do you think as this becomes more common, what do you think education is going to look like?

Another one that seems to ignore the arc of history for a long gulf of time. But I think education will be radically different. I have yet to find a specific formula to invest in. I tend to believe that credentials matter more than people realize. And so it's not just substance, you have to have an innovation on both the credential side and the substantive education side. And most companies have attacked one or the other. And I think someone will figure out how to cleverly fuse together a new credential, new brand that conveys certain things. Like, so for example, a lot of the reasons why people go to Stanford is the perception. It's not what they're gonna learn there, even though they won't admit that publicly. But I think to break through in education, particularly higher education, you need to couple the perception with the reality that I actually am smarter, more thoughtful, more capable of doing X, Y, and Z, and there's a perception that that's true.

Are you excited about Minerva or any other tech companies that you're particularly in alt school or make school or.

I don't know if any of them are quite radical enough. I mean, Mirvano is kind of cool and interesting, and it's intriguing because it is ambitious and Capital intensive. And so they're not being, you know, they're not being wimps about it at all. Most of the online stuff. I think is great for society, i.e. like there are tools and resources out there to learn anything you want. Like for example, I was trying to learn a lot for a variety of other reasons. I was trying to learn a lot about cancer. And so I can go to Khan Academy and actually learn a hell of a lot about cancer and go pretty deep. Like it was shocking to me as someone who hadn't really tried that before of like how deep in substance knowledge you could get so that you can have a pretty serious conversation with people who are experts with just by studying.

You know, a few videos over like 10 hours. Perfect. And one last question, this one's from the audience. Describe a day in our life, or maybe your life, you know, but the average, the average you, in 10 years, how is technology gonna change someone in your situation?

Oh, wow. That's really tough. So, I mean, I should actually feign, like, it's probably shouldn't answer this question. So I am mostly, to be clear, like what I'd call bottoms up investor, meaning like, I think it's my job to have entrepreneurs explain to me the future. And then I sort of triage whether I believe that that's like a plausible, you know, outcome. Whereas a lot of investors, including like some of my partners, are very much top-down investors, and they have a strong view about the future of the world, and then they go look for opportunities that are consistent with that view. So this stuff is really hard for me because it's not just generally not how I think. That said, what I, what I do believe is that the continuing trend of math replacing humans will displace humans in almost every field. So for example, we talked about Open Door, which is really replacing human judgment about what a home's worth, either your judgment or your real estate agent's judgment, with a machine. In healthcare, which is even more radical, I actually totally believe that doctors and human expert, doctors are just as fallible as every other human expert, and that one day you won't talk to a doctor in terms of getting a diagnosis or for treatment, there'll just be some machine that calculates what you should do. And that's actually happening sort of under the surface right now. That'll happen in every single field. Like I have an investment in the legal profession that one day maybe starts drafting briefs for you based upon what the most likely, you know, best rebuttal is so that humans don't really do much work. They do 1% of the work in the machines and math do 99%. And then that'll be true in all parts of our society. Self-driving cars just as a obvious, easy example.

How do you fix the loss of jobs?

I don't know how. It's not-- Space? Sorry?

Space, Mars?

Yeah, the next Elon project. I don't know. It's not an easy problem. I think if you looked at one of the more thoughtful pieces, Sam Altman wrote a blog post recently about that and some of the implications and what technology changes tend to do to jobs. and it may take a while for that to shuffle through the system, but it's not like you can just prescribe a formula from above and say, here's the future of everybody's jobs that are displaced by math. Right.

Perfect. This has been a fascinating chat. Please everyone give it up for Keith. Thank you very much.

Thank you.