How Contrarians Think: The Early Days of Square, Yelp, & PayPal with Keith Rabois (The NFX Podcast)

So Keith, thanks so much for joining us on the NFX podcast. And you and I have known each other for over a decade now. You and I have hosted some parties together for founders at your house. We've had you talk at the NFX Guild in the past and we've connected on more than one company where we're co-invested. So you've got this powerhouse background, man. You've got so many great inside stories from some of the most influential companies in the world and so many aha moments, so many eureka moments that you were there because you're a product person. because you're a business model person, you're a person who really looks at your mental models. Whenever we talk, I always love hearing about some of the insights that you're able to glean through all these experiences over the last 20 plus years of doing these startups. Today, I'm hoping we get to unpack your brain a bit for the benefit of founders. I've got one question to ask you, a fill in the blank type of a question. Everyone we have on this podcast has unique ability to see things that others do not. that's kind of what we're all about. And you are certainly in that camp by far. So is there anything about you that you've noticed that allows you to see things that others do not? Some way of thinking, some way of learning that lets you have that superpower?

It's a great question. I mean, I think you're right. Certainly to be an investor, one has to by definition see things that other people don't see and appreciate them before other people do. Or it's very difficult to be a successful investor. Same thing is mostly true of founders. I think it's a whole lot easier to build a business when you see the world differently at first and allow yourself to kind of build traction, momentum, develop an accumulating advantage before the rest of the world sort of realizes that you're on the right track. Where it probably derives from is being surrounded by a lot of people growing up more on the political side, both in New Jersey, and then at Stanford with people who are pretty left wing and never really being a leftist myself always sort of forced me to think for myself because by definition, all the stuff I heard from my parents and all the stuff I heard from my professors and most of my classmates, I just intuitively felt was wrong. But I had to rederive, you know, from first principles and from reading history and finding my own sources. my own set of philosophies. And so that probably translated to other fields later, even though it wasn't intentional. It wasn't like, I'm going to go think differently about politics and then apply that kind of thinking to the business world. That was a byproduct a decade later, not an intentional strategy at all.

Yeah, it's interesting. We have very conservative senators with very liberal daughters and sons. And then You grew up in a liberal family and didn't naturally accumulate that type of perspective. And I can see how that would force you to start to just reexamine everything and make sure that you're questioning everybody in what they're saying.

Yeah, I think that's where it started. I remember it was really sixth grade. My parents were kind of the anti-Nixon protestor types, anti-Vietnam War, had a lot of friends and colleagues in their involved in various organizations, you know, from 1970s. And then I remember when Ronald Reagan was running for president in 1980, you know, the perceived wisdom among my parents and their friend crowd was, you know, Reagan was evil, he was going to blow up the world, he was anti-Semitic, and we were Jewish, and blah, blah, blah. And then, you know, he got elected, and some of the hostages came home from Iran, and the world didn't blow up, in fact, it probably got better, and you got safer by these most grassroots. And so you start rethinking everything once, you know, sort of the whole philosophy that you've been taught proves to be invalid.

Got it, got it. Yeah, and so you grow up feeling comfortable not seeing the world as others do. You almost probably develop an affinity for seeing things differently. I remember talking with Stan Chodoski when we were building one of our companies and, you know, the board said, you know, we've got to build a really great technical system and he says, well, the way everyone would do it is this way. So that's definitely what we're not going to do. And so, and he and I, and obviously you feel very comfortable sort of starting from that perspective. And, you know, Keith, you call yourself a contrarian, a misfit. You know, you've called yourself those things in the past. What do you think the basic principles of a contrarian are?

I think the ability to think for yourself, at the end of the day, that's what it comes down to, it's on any topic, being able to derive a set of views independent of what other people around you think, and that's very difficult to do, truthfully, because everybody's influenced by the five people you spend the most time with. There are talks of studies about this. So if you're in a BC, you're influenced by other BCs. So for example, both Co of Action is where worked and now Bounders Fun, we consciously don't spend too much time on other VCs because the average VC returns over the last forty years are not very good. So if you spend all your time with average VCs, you're going to start thinking like average VCs. So, you know, Coasta would be very differentiated in that perspective and founders fund our offices in the Presidio were geographically removed from other venture firms. It's very, a very conscious strategy to be like outsiders so that we have a differentiated perspective. So I think, I mean, I apply this to all kinds of parts of my life. I have kind of a philosophy of I'm like the anti-FOMO person. I coined this, I don't know if I coined it, but I certainly borrowed this phrase and appropriated it called JOMO. I've run my life about joy of missing out. So the more things I miss, the happier I am. So I look at Instagram and miss all these things and it makes me more happy. So you tend to apply it to all kinds of parts of your life, not just business.

That's fantastic. And when you look at companies, do you often decide if an idea is consensus, and actively avoid that idea?

Absolutely. So Peter obviously wrote a book about this, Zero to One, where he talks about secrets. And basically, what secrets does the founder have or the team have insights about the world that everybody else thinks are wrong, but proved to be accurate? I think we apply that, not surprisingly, I found respond pretty seriously. So one of the questions we always ask ourselves is what are other people just factually wrong about or what are they going to be blind to? And if you don't have a compelling answer to that, we're very unlikely to actually offer to invest. It is a first of its kind.

Yeah, got it. And you said that the Coastal Ventures often avoids being like every other VC and founders fund. You move from one to the other. And I know you wrote about how that was the most difficult business decision you made in your life. What have you found to be different at this point about being over?

So, typically, like on a scale spectrum, of all VC funds in the world, Coastal Venture Fund and Founder's Fund are closer cousins than where they're apart. There's a lot of consistency in terms of the kinds of companies, the ambition of founders we want to invest in. Some of the differences are at Founder's Fund, we're very multi-stage. So we invest from seed, I love to lead seed investments, we do Series A and Series B. Pretty common venture, but we also lead growth rounds. So we'll invest $1 million in a company and we'll invest $200 million in a company and we'll do both all day long and go back and forth. That's very uncommon in a KB. KB was mostly a seed series A, occasionally a series B investor. So higher ownership mentality, buying a lot of ownership up front and then they diluted down with other people's money over time, which is a very conventional, very traditionally successful venture for model. Founders Fund were high conviction investors. So we have concentrated positions in over 17 companies like across the portfolio where we have more than $200 million invested in the company. So that's very different. Second, probably most acute difference is we don't do Monday partner meetings. Well, now nobody does Monday partner meetings, but at the time, Founders Fund was pretty unique in not having an assembled partner meeting. We have a way of approving investments, but it's based upon a set of approvals that are custom and unique to each company. We never have everybody in the same room sit for a presentation of a company and then vote on an investment. So that's pretty different. So effectively it means that I have Mondays, or you step up Mondays, available to meet founders and work with portfolio companies for sitting in an insular meeting to make investments.

Got it. Very smart. And in that you're a contrarian and a misfit, it doesn't just apply to your investing, right? I mean, it applies to your life and whatnot. Are there other ways that you feel like it expresses itself in the rest of your life as well?

I'll give you some examples of some of the ridiculous. So the most of the life stuff, I mean, I have a sort of set of views about politics in the world. Let's skip over that for a second. Let me give you some ridiculous examples. So I started maybe seven or 10 years ago, I had like six, very different ideas about the world that were kind of considered crazy even among my friends and family. And I set about basically proving these. So one I've always sort of believed in but it's becoming a little bit more normal is that the more stress you have in your life, the better. The healthier you are, the wealthier you are, the happier you are. There's a great book I now recommend called the Upside of Stress by Kelly McGonigal, McGonigal, out of Stanford that sort of proves this. but when I started thinking this way 20 years ago, there was no research that really validated this. Secondly, on the really ridiculous side, I actually don't believe that stretching is good for you. Like if you're athletic, like I have a whole set of reasons why I don't think you should stretch before playing sports. We can talk about that. Another one that's become very conventional, but at the time, you know, I was growing up, was very differentiated. I've always believed that sleep is magic. That the more you sleep, the better you're gonna do in your life, the healthier you're gonna be, the more successful. And it's sort of always been the best my life for 40 years around sleep. So we followed we try to get eight hours sleep. Now there's a lot of research post 2009 that confirms the benefits of sleep and the major disadvantages of lack of sleep. So, you know, that's no longer prioritizing. You want to kind of a fun silly one to close with. I happen to be a fan of Apple Maps. I hate Google Maps. There's a lot of story behind this and I can give you lots of examples why but like fundamentally half my friends definitely think I'm crazy on this topic but you can wind up are out.

Yeah, those are great examples. And also, you had mentioned the politics and we don't need to go there. If you don't want it, we can edit this out later, Keith. But I'm just really interested because I felt like we are a community in Silicon Valley of contrarians or people who are trying to think differently than the larger world and come up with new things. And yet, we've created an environment that might be hostile to people like Tim Ferriss or Peter Thiel who felt like they wanted to remove themselves from the community. You've stayed here. despite your political views. How do you feel about that ecosystem that we're in and your role in it and what could be done?

Yeah, I think the ecosystem is fairly close-minded, despite what people like to think about those dolls. And you're right that a lot of people who are conservatives or Republican or whatever will, if they have the luxury of success, lock down. You need a couple of examples. I can start to think of others. And there's more on the way. but, you know, what I do for a living, I felt the best place I could be was at the center of the ecosystem of startups and founders. I wanted to work with most interesting, most ambitious Founders. And at least as of now, there's a high concentration of them in Silicon Valley. So I felt it would be professionally negligent of me to leave, even if I could find other places that would be more comforting. But that said, you know, if you're contrarian, as you're talking about, I grew up in a anti-war household that loved George McGovern and somehow managed to escape that. And then I went to Stanford, which was incredibly leftist, borderline socialist or communist when I was there, and survived that. And then I went to law school, which is full of like left-wing professors. So maybe to some extent I might go crazy if I was sitting around with conservatives all day. I don't know what I would do.

That's right, you're comfortable in that role. Yeah, that feels natural. That's great, that's great, that's good. So do you think that we should and could have more contrarians or by definition does that ruin the situation? I mean, well, it's hard, you know.

Jeff Bezos has a great quote about this, right? It's easy to be contrarian, it's extremely rare and difficult to be contrarian, right? So, you know, the consensus has a lot of truth to it, so you can mint artificially more contrarians, but unless they're seeing things that are insightful, you know, on some predictable basis or in some domain, it's not really adding that much value. I do think extending, you know, the debate, the window of debate is actually helpful in just validating truth, but the challenge of being a contrarian is not being contrarian. The real challenge is the Venn diagram overlap of right and different. Right, right.

And do you think it takes a misfit to launch a Falcon 9, for instance, to do something super ambitious like that?

Yeah, I mean, at the time, your friends are going to tell you you're crazy. I mean, I've talked about this from an investing standpoint, When I make a new investment, I really want half of my fund to be VCs to think I'm like crazy and laugh at the investment. I don't want 100% to laugh necessarily because then maybe I'm actually missing something, not them. But if none of them are laughing or 20%, then I'm probably not taking enough risk and it's probably not a differentiated enough investment. So I really do consciously think about when I hear a pitch, like A, what are other people going to miss and why? And then B, is this going to sound ridiculous to a reasonable set of smart people? Because then I know I'm taking enough risk and effectively I'll be compensated for being right, if I'm right.

And was there a time, speaking of crazy, was there a time when you were running one of your companies where you thought to yourself, this is crazy?

If I ever felt like what we were doing was crazy, I certainly would have lobbied very aggressively and hopefully persuasively to whoever was making the final decision. that we shouldn't be doing X, Y, or Z. I do think there's definitely the times that many companies have been involved in that the world thought we were crazy. So for example, back in my PayPal days, Red Herring, which at the time was the centerpiece of Silicon Valley technology consensus opinion, ran this cover story on PayPal called Earth to PayPal. And Peter never forgot this. Actually, when we celebrated our IPO, He held up the COVID and when we celebrated our acquisition by eBay, he gave another speech holding up the COVID So we definitely were considered to be weird, odd misfits at the time, but internally I'm not sure, you know, that I actually thought we were, well, I thought we were misfits, but I don't think we were wrong. Same thing, you know, I think the companies I was involved in, I think we're making for the most part quite wise decisions. and whether the world appreciated it or not, that wasn't the key criteria, fortunately, and most of the companies have worked on it.

Got it. And speaking of just quickly PayPal, and it's a long time ago, but when you look back, what were some of the things you could put your finger on today that created such a mafia, that created such a flowering of sort of a Cambrian explosion of entrepreneurship coming out of that one company? What were some of the elements that you feel were there?

Yeah, the number one credit goes to Peter Knox for recruiting. They had a philosophy of hiring and finding the right people and ultimately sourced a huge fraction of the Piton network through their personal networks. Peter through his connections at Stanford and Knox mostly hired engineers out of either his high school experience in Chicago or the University of Illinois. and really brought the two teams together and mixed them. So they deserve most of the credit because they identified people with high potential at scale and mixed everybody together. Once they're in the building, then I think there was a set of management philosophies that were very different at the time that might have enabled us to be successful both as a company at PayPal, but then subsequently. So for example, we didn't really believe in general managers. So Peter was adamant that we weren't going to hire people who skill and life was managing, we were going to promote the best person in each domain in each discipline to lead that discipline. So for example, the best engineer would become VP of engineering, the best designer would be the design team, the best product person would be the product team, the best finance person would be CFO. And that led to a building of craft, or cloning of craft, and it's sort of a meritocratic field because everybody knew that their boss was actually pretty damn good at what he or she did. And you didn't have this demoralization of, well, you know, I'm excellent at acts, but I report to a person who has no clue what the hell or what I do, or what I'm doing, or why it's so important. So I think that was pretty fundamental. And then the third thing that was pretty important was PayPal was a hard business. It was very challenging. There was a lot of obstacles, a lot of people, enemies that didn't really like us, from Visa, MasterCard, to federal and state governments at different times, eBay, et cetera. So it's sort of a trial by fire situation. And I think like the metaphor of war, you definitely bond with people in that kind of environment and you get to see who's really good under pressure and stress and who actually doesn't thrive under those circumstances. So when people subsequently went to start their own companies, I think a lot of us have perspectives on how would this person do as a founder? Because being a founder is, you know, Elon talks about all the time, it's like chewing Botox, et cetera. Not particularly fun, it's very painful. It requires a lot of self self-actualization and initiative. And I think we had a pretty good insight into who was likely to thrive in that environment. And that's why I think some of the companies did really well subsequently.

Got it. I think it would also be fair to say that you guys were sort of exiting those companies sort of five, six, seven years into the internet, which was a pretty prime time to start exiting and start new companies.

I think with hindsight, that's clearly right, but at the time it didn't feel that way. So PayPal went public in 2002. And Silicon Valley's nuclear winter was 2000 to 2003, maybe '04. And so when we exited PayPal and we're starting new, investing or starting new things in 2004 called 2-3-4-5, depending on which company you're talking about, most people didn't think that there was another wave of consumer innovation that was likely to be successful. We happen to believe that, which is why we started all these companies, funded each other's companies, et cetera. in history or record that as being right, but it wasn't obvious at the time. The reason why actually the PayPal network became kind of more essential to Silicon Valley was there's a vacuum. Most of the traditional networks in Silicon Valley were doing a lot of interesting things in 2001, 2, 3, and 4. They were afraid and fearful. And so people came to us because they didn't really have a choice. We were writing checks and willing to work on companies and join companies. that became the next generation, but there wasn't a clear, there wasn't a clear visibility into there was going to be another generation of innovation.

Got it. Yeah, that makes tons of sense. And, you know, one of the, you've founded a lot of companies. Not only have you invested in so many, but you've founded a bunch. I'd love to hear a time where you threw out the rule book or, and it either blew up in your face or it went incredibly well. Like, what are some of these stories? You and I have talked about some of these things. I'd love to bring some of these out for the other founders to hear.

In most fields, truthfully, like, so I was a lawyer and the same thing is true law. The art in most fields is understanding the rule book really well, precisely, and then knowing when to deviate. It's like knowing when to deviate. I remember learning this, this is going to sound very crazy, but I remember being kind of a, kind of a annoying high school student, but in this English class, and reading some of these great works of literature that we read sophomore junior year, and noticing that some of the best all time would occasionally violate grammar rules. And I'd be the little crazy kid and be like, well, why does my paper get marked up when I do this and so and so paper's author gets away with this? And the correct response by my English teacher was, well, when you master all the rules, you get to violate them. And there's a bit of truth to that. It's like a valley too. that deviating from rules doesn't make much sense per se. It's knowing why you're deviating from the rule. Now, obviously, if you follow the rule book, you're not going to create an iconic company from scratch. There is no rule book that tells you how to build the next SpaceX or Tesla by definition. And so you need to know what rules you're going to change. That's why I don't like the phrase best practices. Best practices just lead you to colonize your replication of something else. you can borrow best practices, but you need to know where you're intentionally not following quote unquote best practices or you'll just be in the middle of belt curve, which is not your goal. I had a kind of funny other example. In 2003, I got Lasik. And I was so hesitant to get Lasik. Where lots of obvious reasons that my colleagues were always laughing at me because I had scheduled appointments that canceled in the last minute, like for six months. They're terrified of somebody cutting into my eye with a laser. I remember what finally convinced me. I went to this doctor who's quite a good surgeon, eye surgeon, and he did all these tests on me for like an hour and a half. He walks in the room and he looks at me and he smiles and he said, I'm going to tell you something you've never been probably happy to hear before, but you're right in the middle of the ball curve. And he's like, there's nothing that will go wrong with this procedure. This procedure was made for you and your eyes. and the only possible thing that could go wrong is if I screw up. And so that led me to realize that, you know, I should go forward with the procedure, which turned out to be a good decision. But, like, that's how you kind of have to think about the world, is you don't really want it as an entrepreneur and founder, you certainly don't want to be the middle developer. You need to be, you know, extreme one percent, and then it's consciously choosing those things where you want to do differently. So, you know, I mentioned some things we did differently at PayPal, management philosophy, hiring philosophy, we hired different people, different backgrounds than what standard Silicon Valley managed and promoted them differently, etc. We used a different distribution strategy, which we talked about. So you always want to consciously violate some of the rules, but it's a very intentional strategy. It's like alcohol violates lots of rules, like closed platform. Most people, for 20 years, have argued that you shouldn't build a closed platform, etc. There's lots of intentional, they're secret. They don't let people talk to each other, like in the company that work on different teams. That's very unconventional. They don't actually use metrics for the most part to measure themselves. So all of those three things would violate most of Silicon Valley norms, but they're very indispensable to Apple's success. And there's a reason why they're, I think, the most viable company, certainly the.

Most viable technology company today. Fantastic. So you, when you were running companies and your management teams, you guys could decide which rules you were gonna violate. and which unique things to do. When you're an investor, you kind of have to take the set of violations that these founders are bringing. Do you ever get that wrong? Do you ever say, oh, you can't violate that way. You should violate in a different way?

Well, I definitely ask the question, what are you doing differently and why? And sort of like, what are the secrets and et cetera? What's special about this team and this founder? And what are they, you know, why are they likely to have unreasonable success? I mean, if you think about it, it's a heroic, almost ridiculous assertion to have two kids in the proverbial garage say, I'm gonna change the world. Raise your hand, I'm going to change the entire financial services world, I'm going to change the entire real estate world, I'm going to change this entire whatever. That's kind of ridiculous in some ways. So you need people who can kind of take on ridiculous ambition and where they have this spark and you look at them and say, you know what, there's some shot there that they might actually be right. And you kind of feel that, like, wow, I've never met somebody like that before. Maybe they could change the world. And that's what you really want to feel, especially early. in a company's trajectory as an investor. So you have a dialogue about, well, what rules are you violating and why? And that allows you to see, you know, understand how the person's brain works and the calculations they're making. The bad version of that conversation is they don't even realize they're violating the rules or they don't understand the reasons why they're deviating. It's not a very thoughtful conscious decision. That's usually a disaster. It's kind of a recipe for a mess because you don't want to be violating all the rules. like you want to select good leech. There is a Darwinistically evolution of like how humans behave and you want to tap into some, you know, learnings from history, you know, standing on the shoulders of giants sort of thing. And so if you're trying to reinvent everything, that probably means you're not really successfully reinventing anything and you're probably also creating a mess on the back side of your reinvention. So there's a, it's a great dialogue to have to filter out, you know, how Saudi an insightful someone can be.

Got it. Now in the past, you and I've talked about some of the metrics that you would use to measure the business. I think you told me a story about Yelp having discovered a metric around the number of messages amongst the Yelp elite in their local areas as being a key indicator of what was going to happen in the future in each of the cities where Yelp was expanding back in 2004-2006. That stuck with me. And Can you tell that story? And then are there other stories of other companies you've been working with, whether it's Open Door, PayPal, or the other ones that you've founded or helped start?

Absolutely. So I remember this was at either the second board meeting that I joined after I joined the board of Yelp. And I remember Jeremy Stoppelmann was finishing his presentation, the basic presentation of a board deck. And he basically gave this vision of that Yelp was really building this social product. which not everybody appreciated at the time. And it was a different social product. It wasn't the viral social product, you know, spam your friends through email or whatever. So he was setting this up and framing the vision of the company against the metrics. And I looked across the table and I said, okay, well if you're building a social product, what's the key metric that'll tell you whether you're right or wrong? Like, is it working or not? It's getting better. and he looked up without hesitation and said, it's the unique number of messages, one-on-one personal messages from one community number to another. And personally at the time, I thought the answer was ridiculous. That would be the key metric for the company. But very quickly thereafter, certainly within three to six months, I realized he was actually right that that was the key predictor for whether we were building a true community. and whether people were attending events because they wanted to be part of the community, whether they would craft reviews because they wanted to be part of the community, whether they would pray the Almighty God because they'd want to be part of the community. So he was totally right. But it was very extremely counterintuitive at the time. But that's also a good example of, you know, as an investor board member, I can ask questions about in the pro whether he's right, but he was much more right than I ever would have been, which is why it's his company and why he was successful at it versus if I had it would have been a miserable disaster. Hopefully once in a while I was able to help him craft a couple things correctly too. There's a few things along the way I helped with.

Asking good questions is often easier and more productive than trying to actually come up with a solution.

It's actually a great technique as a board member. I think 90% of the time as a board member asking a question is the right way to go. And that series of questions, it is something you learn in law school, so it's pretty native to people who are lawyers. It's like sort of the Socratic dialogue kind of stuff. A probing set of questions can get you to a better answer in a way that's more constructive than a standard debate. Yeah, I agree.

Are there other examples of metrics that you thought were incredibly powerful that helped you realize that either an Open Door or a PayPal was working or something else? Well, I'll give you the famous PayPal example.

It's been told, you know, occasionally publicly, but I think it's worth double clicking on because it's so in shocking is nobody really believed that eBay was a target market for PayPal. In fact, so there's an official list of top 10 target applications for PayPal. And eBay was right on the top 10 list. And there's documents that still exist actually that have the list. And then, well, David Sachs noticed was there was 54 sellers on eBay, which is a very small number actually. But at the time, eBay had hundreds of thousands of sellers. So 54 is a fairly small number. But there's 54 sellers who had hand typed into their listings, please pay me with your PayPal. And David noticed that. And the first reaction, by the way, of the PayPal executive team on day one was, oh my God, why are these people using PayPal and we should get rid of them? Because that's not what we're supposed to be doing. David came into the office the next day and said, Aha, I think I found our marketing. And then therefore it started to invest in productizing what was manual labor for the sellers. So we created a logo, a PayPal logo that they could insert as opposed to type. and then we created an automated way to insert the logo as opposed to manually do it and this demo listing, you sell lots of listings. It basically became both the marketing, the market for the company to focus on, as well as the guiding light for the product strategy for two years.

Got it. So that was a very small signal in a sea of data that David Sachs had the skill and the acumen to understand this could actually be a scalable platform because there's already hundreds of thousands of people who want to do transactions here. They're being underserved clearly as these 54 have indicated. And let's make that easy. Let's reduce the friction on that and see what happens. And we, you reduced a little bit of the friction and it really took off. And the next two years, you just.

Kept doubling down on that. And that's what created an HTML button, HTML button that could be easily inserted and then created what we call Auto insert, where you can Auto insert it in all your listings and that was basically the history of PayPal right there, foundation. There's other examples too. I remember thinking, so back when I joined Square, we were just launching and so we shipped about 10 or 20,000 squared into the world. And we started to grow and we weren't doing any marketing. Like mostly because we didn't have money to do marketing. Like at the time we raised our series A, But that was it. And so you didn't have real money to spend on paid acquisition. But I remember I used to sit next to Jack and we actually did have a fairly refined dashboard for an early stage company. And I remember Jack pointing to his computer, like my second week there, or fifth week out, second week out for his shifty squares, and noticing day by day we were adding more users per day. We're fairly consistent trend of five days, you know, startup trend of five days, very statistically significant. But in any event, it was like 10 days and it was like growing a little bit each day. And he said, why is this happening? And I paused because under the standard set of rules, it really shouldn't have been happening. We weren't doing anything to create this graph.

There was no viral mechanism in SNOD that you were tracking. There was no giant PR thing that was happening.

I mean, we had spiky PR, like I'm not announcing the company and things like that, but that was not in this data set. So I thought about it for a few minutes and I formulated a hypothesis and it was really only a hypothesis given the constraints. So I said, aha, maybe this is a function of people seeing squares in the real world, the actual device, and some fraction of them that see it signing up. Because it's the only thing I can think of that could explain this. So once you have a hypothesis, then the next question is, well, how do you validate that? How do you test it? So if true, there should be a ratio for every new square we shipped and every new customer and every transaction in the rate of growth. Turned out there's a perfect relationship. It was exactly 1%. So for 1% of all transactions on, let's say, day zero, we'd have 1% of signups the next day. new signs and they just were perfectly consistent. Like, this is amazing. We now have an actual viral loop in the real world. David Sax actually, I had explained this story to David many years ago and he wrote a blog post that combines the K-pop story, the square story, and talks a little bit about, I think, Byrd and his blog post. So you can read about this. But it was really about epiphany. Then once I realized that, then there's a lot of tactics that occurred to me about, well, we should do X, Y, and Z differently. because we have this observability loop in the real world that's causing growth. But it was not at all obvious. This almost never works. It's a very rare example when this actually worked.

Right, where you basically have people using the product through word of mouth, like with an Uber. You're waiting for, you're getting out of the bar, someone calls an Uber, you get into the Uber with them and you said, how do you do that? He says, let me show you the app. And then it's word of mouth. sort of hand-to-hand combat, if you will, it grows by word of mouth in the real world.

It was the aesthetic appeal of the device, the consistency of the device with the names that you could remember. You see the Square, Square, remember it goes sign up. But it worked, and it worked for like 18 months. There were things later that you changed the equation a little bit, but fundamentally, 18 months where we definitely would not have had enough money that we could have raised just to grow on paid acquisition. Obviously, payments is not the highest margin business. Your payback cycle is a little long. so paid marketing at best is a complement for Square, it really can't be the primary driver.

Yeah, got it, got it. Those are great examples. So do you have a kind of mental checklist? I'd love to dig into some of the mental models that you like to use when you're making decisions. Do you have mental checklists or approaches for decision making?

Yeah, I mean, I think everybody does. I mean, you kind of have to if you're making decisions, whether it's an executive to make decisions all day long every day. Or as an investor, you're pretty much making decisions one way or the other, which meetings to take, even if it's not an investment decision it actually effectively is. So absolutely, I have a set of mental models for a whole bunch of different topics, how to hire, what companies I like to invest in, et cetera, et cetera, et cetera. And actually, that's mostly how I work with founders post investment. The really great founders don't ask you you know, should I do A or B? That's a pretty rare way to frame a question. What they actually say to you, and this is almost verbatim, will be what's the best conceptual way to approach this problem? Can you give me a framework for deciding between A and B? So, you know, I try to focus on how do you frame an approach to solving a problem. And then that's nice because it scales.

And so what are some of your favorite ones that you find yourself repeating more often than not.

Yeah, so I gave a whole lecture at Stanford sponsored by Y Combinator in 2013 on how to run a company. It's called How to Operate and walked through a lot of philosophy and conceptual frameworks on when to delegate, when not to delegate, how to think about different organizational structures, et cetera. So I highly recommend that. There's a transcript of it if you don't like watching a full boring YouTube lecture. reading the transcript is actually pretty good. It's pretty high fidelity with the slides especially. Secondly, framework on when to hire someone with experience versus when not to, when to hire someone like up and coming talent, when to promote versus slay or somebody. I've tweeted my favorite investment formula. So I try to distill things. I don't use the Peter Thielian two by two grid very often, but if you read zero to one, he's got some pretty good frameworks in there as well. I only have one two by two grid I ever use. But yeah, I try to develop these. And then, you know, I have my former chief of staff who's now principal founder, Shon Delion has a set of blog posts that try to distill some of these so that, you know, founders can read these. He's like, you know, called lessons for Keith. And here's a bunch of different topics. He's, you know, written really excellent stuff. that a lot of founders really appreciate. So I highly recommend those as well.

That's great. Those are great resources. Thanks for doing that. You've also said that every problem is a leadership problem.

I bart, well, I didn't actually coin this. This is a Stripe philosophy. But when I read it, not surprisingly, it makes a lot of sense. It's like the version, the Netflix version of the same is every problem is really a context problem of like when people make poor decisions or decisions that you don't agree with, It's probably because they don't have the same context to you, so you want to give people as much information transparently as possible so that the rest of the organization will make the same decisions the CEO would. This is the stripe version is obviously the right person doing the right things, you tend to get the right answers.

Got it. And one of the things I've heard also is a lot of the problems that we think we have boiled down to recruiting problems, which I guess then translate into the leadership problems.

Yeah, it's a little bit like I happen to like sports or used to like sports, you know, right now it's hard to watch sports, but fundamentally, sports is a lot about fielding the right players in the right position. People who would thrive, you know, as a second baseman, would be terrible as a first baseman. And part of the art is putting people in the right places so that they can thrive. And understanding that occasionally you're going to be wrong, and then maybe the right answer is to try moving them around. and see if, for example, the best relief pitcher of all time started as a starting pitcher. He might have been a pretty good starting pitcher, but he wouldn't have been a first ballot Hall of Famer as a starting pitcher most likely. So someone had the epiphany that maybe he should be our relief pitcher and a closer and the rest is sort of history.

Yeah. I think one of the things that I thought you said so well is you said that the team you build is the company you build.

Yeah, so I learned this from Vinod Khosla. Vinod was on my board at Square. And he said this. And at first, honestly, I found it a little surprising because typically people think about technology and technical advantage and IP, and then they think about distribution advantages and distribution strategies and network effects. They often forget the people. and the way he expressed it was just so simple and cut through the clutter. And the more I thought, it's one of these things that every minute you think about it, it gets more and more powerful and insightful. So now, you know, for a boss, this is, he probably mentioned this to me eight or nine years ago. Now I think about it every day. It really is the team you build really is the company. And with the right people, you wind up with a phenomenal company. But a lot of people, you have an unmitigated disaster, and most companies are somewhere in between.

This plays a little bit into this debate that is coming up more and more about remote versus being in Silicon Valley. Traditionally, if you look at the total returns in tech, 85-90% of all the returns have been in this Silicon Valley area. But increasingly with the remote technologies and people say stuff like, Look, now I can go hire the best people no matter where they are. How do you come down on that when you think about the company is the people you hire?

I think it does depend upon the company, what the company is, both vision is, how predictable is the vision, how linear is it, and what skill sets you need. For example, the benefit of being co-located is mostly extemporaneous conversations, dialogues that wouldn't have happened by scheduled meeting. I'm in the office late at night, I'm in the office on a Sunday afternoon, Some random individual in the company who probably doesn't even report to me walks up to my desk and says, Hey Keith, I've got this idea. And I look up and I say, you know what? That's actually pretty interesting. It's not exactly what we should do, but what if we treat it this way and we can riff on it? That could be a pretty good idea. And some of those ideas are really 10x ideas. Those are very difficult to schedule, like by meeting, by fiat, by calendar and by remote. So that said, some companies have a very linear roadmap. It's very obvious what the value proposition is, it's very obvious what you need to do, what the sequence is, and the innovation cycle isn't required in small doses of time. That might work pretty well overall.

Got it. So maybe with a B2B company or an enterprise software on that end of the spectrum and then a consumer thing on the other end.

Yeah, but it's the step function innovation that I do worry about remotely having watched it PayPal, a lot of Really good ideas came from spontaneous meals together, spontaneous late nights, almost like borderline, they fool around, you know, like over a drink or pizza. Some ideas that definitely got filtered out like over the pizza and beer, but like pretty good ideas too. And the same thing at Square, in my experience, some really good ideas hop in in like, you know, random time intervals. And so I do think that you will lose some of that innovation for the companies that need that step function innovation and want to consistently compete on that basis.

Got it. So as you're looking at your investment portfolio over the last two years, some of the companies are more remote, some of them are less remote, or do you find yourself just saying, look, if you're under 30 people, I want you all in the same office because we need an innovation curve that's going to give us the 10x, which will lead to the 100, the 200, the 400x returns on the investment. Or are you saying, you know, in this area, I'm okay with remote because.

Of its nature, its linear nature? I think in some areas, I'm okay, but I'm not necessarily thrilled. So for example, the criteria that would lead me to be work at. If there was a co-founder who already had a pre-existing relationship with the CEO and was going to open an office where he or she has a network, okay, I can buy that. So for example, one of the companies that have been involved in for years now, it's doing really well, it's called Fair, F-A-I-R-E. They've always built their engineering team in Canada because one of the three co-founders lived in Canada and, you know, But he's a co-founder and so they've been able to scale their engineering there at half the cost, less entitlement, all the benefits. But that works because he has a very significant pre-existing relationship with his other two co-founders. A lot less problematic. Now, interesting enough, a lot of the product innovation actually does come from the Silicon Valley office and from the CEO on down. But it made it work, but that's one of the rare circumstances. Secondly, I think a lot of people are trying remote for the first time right now. And they're finding it's not that bad, but remember there's a lot of pre-existing relationships for the companies that suddenly switched on remote because of COVID And I do wonder about what would those conversations look like and how high fidelity would the debates, dialogues be if there was no pre-existing relationship from the real world before they had to go remote. So for example, I sit in a lot of board games. Four meetings these days are all done by Zoom call. And I do five plus four meetings a week. They've been moderately effective, actually. There are some differences. There are some things that are better, some things that are worse. But one of the reasons why I believe they've been moderately effective is in almost every case, I know the executive team and the other board members quite well, sometimes measured for decades. often measure for years. And so the social cues and various things that are more difficult to glean from a conference call, there may be other ways and pre-existing relationships may offset that versus joining a new board from scratch with people I've never worked with before, whether they're investors or entrepreneurs and executive team. So we'll see how that sorts out as me and other people start making investments where there's a whole new, you know, Punchdrum from scratch. That's remote.

Set of relationships, a whole new set.

Of relationships that are outside the existing framework. I work with a lot of, you know, I have fortunately co-invested with a lot of great people. I enjoy working with a lot of investors from other funds that serve on boards. And we, some of us have worked together as entrepreneurs, some of us have co-invested together for a decade plus, some of us are social friends, so there's a lot of pre-existing relationships. that we're tapping into on these Zoom board meetings that I think make them significantly more constructive than if we were just throwing together a random assembly of people and say, okay, now make this work.

Yeah, yeah, I agree. It's funny, I'm sensing a growing sort of religious religiosity about remote that's coming from a certain segment of the founders. And I think in part it's in reaction to religiousness around VCs only investing in Silicon Valley over the last 20 years.

But where we started and also dial back to where we started, knowing the rules, I think there are some advantages to being co-located in one headquarters, think Apple, Amazon basically. But knowing when to violate those rules again is part of the art. GitLab has done phenomenally well as a non- only company from the very, very beginning. I remember at KB when we let this be ground, There was some debate about it, but it is very clear that the CEO had a very specific strategy. It was very thoughtful and very intentional and had a differentiated value proposition and it reinforced some value proposition. But it's been phenomenally successful. So it can work, but I think it's a conscious decision to make it work and being very attuned to what one needs to change derivatively to support that structure.

It's interesting what I'm hearing so often from you today as I have in the past. It's just we've got these playbooks, but they can become too formulaic and each company is individual, each time is individual, each market is individual and you have to make the right decisions for every new circumstance in order to make things grow really big and do really well.

Every successful company is a custom group. Culture, distribution, product. And when it really works is because they become synergistic. Like they tap into each other, you know, like they reinforce each other. And so there is no prescribed formula. There are prescribed trade-offs like I think one of the other things that the human brain can do in a little bit of experience that board members can do is constantly highlight the trade-offs. There's the glass is half full reader. There is a, you know, natural reaction of all humans to the next step option. and look at the one you're not doing and say, oh my God, that would be magical. Everything would be perfect. Usually nothing's perfect. There is no free lunch and there's trade-offs. So one thing I try to do is highlight for founders, like yes, you can do that. Just know that the following two or three things may not be ideal. And so make sure that you really care about this one thing you're gonna achieve versus the trade-offs you're gonna sacrifice. And that's why you often see founders actually switch back and forth. among strategies and distribution strategies and organizational costs is they realize that they need to tune one of the disadvantages and that leads to decision making trade-offs. Some of the more savvy founders I work with actually will ask me that question point blank saying, how will I know if this isn't working the way I want it to? What should I be looking at in advance that would be the signal that things are a little bit of a mess? before they are really.

Yeah, and maybe the superpowers of the founders end up boiling down to what things for them aren't painful that would be painful for another set of founders. And so they can balance in a different way than other people.

They can, and they should also be for the point about the teeny builds the company deal. They also should be complimenting themselves with people who find things they find painful to be not to be painful. That's a great way to need to discuss is not force me to do things I don't want to do. I'm not very good at. I hate to do I have prostate to do. find someone who likes to actually do those things because it turns out like there's enough people in the world that probably for everything I don't like to do, there's someone who actually enjoys it and is quite proficient at it. And maybe I can be very happy doing what I like to do and find someone who wants to do the other stuff and then we can both be both 1+1=3 but also be more intellectually and emotionally satisfied.

Yeah, yeah and if the company in general has that capability, then the competition won't, you can excel. You know, when someone works with you, Keith, after a few years, what do you think that they feel like they've been learning from you? What's that experience like? Boy, now that I've been working with Keith for four or five years, I've learned this. I've learned, what's the thing you think you bring to people when you're coaching them that they might have gotten elsewhere?

Good question. It's really important to me. You know, I think it's easier in a company as an executive to have people learn about osmosis. Watch Shadow and pick up various things. We can talk about what they like, learn. As an investor, it's more challenging. It's very difficult to bring people with you in a fully immersive way all the time. There's a lot of constraints on that. So it's harder to teach as an investor and hence maybe harder to scale a venture fund because of that. So as an executive, though you can work with people quite closely. And what you want them to learn is like, you know, one of my colleagues worked for me for six years or worked with me for six years used to say there's like the rally boot camp, which is like a lot of early feedback of like what's not working and why. And then people can learn sort of independently, you know, they can learn through socials. Not everybody learns through socials really well. Some people are like prefer to learn through us, actually, and some people are just really don't like it. They don't like specific principles. But the most important things, I think, the people who pick up the best are what makes my brain work, underlying sort of principles. Sometimes they actually can extract it in a more sustained powerful way than I can, which is really amazing to watch. I have definitely had interns and former colleagues in direct reports who can play back to be my answer or my philosophy better than I ever articulated it before. It's surprisingly insightful to hear yourself thinking and someone communicate it better than you ever would have. But then you lock that in your brain and you realize that's the right way to describe it. Also, occasionally, like, I'll borrow, I'll see something or a way of expressing something, and I'll kind of steal it and then scale it. like, you know, like someone might say something in a microcosm and I'll sort of realize that, wow, that's actually extractable to all kinds of problems. We're going to apply it across the organization. I'm going to talk about it on podcasts, you know, et cetera. So sometimes it's also learning from them, having an eye on, you know, what they're doing or saying that's interesting or different, and realizing that it might be something that actually is leverageable for everybody or a lot of people. and platform either because you're running an organization or platform because you have Twitter followers or whatever to scale that philosophy. It actually works both ways. But ultimately, the number one skill that people who have observed the former deputies of mine that have gone on to do interesting things on their own is they can hold a business equation in their brain. Every business is like an equation in my view, and that's what I think the word strategic means is that you understand the connection between the variables. It's x times y times z equals 6. And sometimes the reason why it's important to hold all these in your brain is sometimes the right move is not to try to force x to be greater because you've actually hit the mission marginal returns on where you can move the x to it's actually change the y or change the z. So let's talk about it in a tangible, let's develop conceptual approach. Think an enterprise software company. Often enterprise software companies have issues with sales velocity. We're not selling our customer, you know, customer cycle thinking forever, blah, blah, blah. Well, there's an interesting set of questions there, which is are we targeting the right customer? Are we targeting the right decision maker in the customer? Are we pricing the product correctly? Are we framing the value proposition correctly? Or is the product actually the right product? There's a set of like six or 10 of these questions. And the art is knowing how they all relate to each other and knowing what order to change the dial. And that's what a good CRO, for example, or CEO, actually has a feel for, an intuition for, of how do these all connect and which one should I toggle when I'm not hacking the results? So I think the first step for a founder is to write out the business equation, because every business equation is different for each company, and understand the weighting of the variables, and then try to get the variables into the right places, and then figure out if you're not happy with the results. where to tune, in what order to tune. And most of the people that I've worked with closely can do this after a year or three years of working together. They do it quite well. And it's actually surprisingly rare of skill. I've had other people sort of point this out to me that, you know, I bet so-and-so and not surprisingly can do, he or she can do this.

Nice. That's a good way to say it. And is there a myth of the founder archetype Keith? and is that archetype static? And what I want to get at here eventually is sort of how you think about the founders that you choose to work with. And one of the things you've said is that the good founders will not ask you about should I do A or B, they should ask you how should I think about this set of decisions. That's a founder archetype or a behavior that you might find in the archetype you're looking for. Do you have a founder archetype that you've articulated for yourself or or not yet?

I think there's three comments. I think there are attributes of founders that tend to thrive, but not an architect. So for example, the way Peter Thiel expresses this, I think it's really powerful, is you would not want Elon to be running Airbnb and you definitely wouldn't want Brian Chesky to be running SpaceX. So I think it depends on what's the company trying to achieve, what's the hardest challenge or hardest, one of the really core challenges for that company. and does the founder have world-class inside talent at those times? So I think it matters like what's the product, what's the market, what's the kind of landscape, about what's the best possible founder and founding team for that specific psychology. So that's always critical. There'd be times when like literally I will invest in a founder because they're working on, oh my god, this is the perfect problem for you. And it's just so obvious that they have world-class abilities at tackling the single biggest source of friction. And then there'd be other challenges and other companies maybe they wouldn't be perfect for. There's probably some set that are perfect for everything, but that's pretty rare. And then third answer though, I think there are like more essential casting quote unquote key founders where it's very clear when someone meets them as an angel investor, someone another investor meets them, I meet them partner mine, them when they were just like, yeah, you should work with Keith. There is a set of people that you just instantly communicate in a very efficient, extremely productive way. But I think that's the least important. The most important is, is this founder going to be highly unlikely and possibly a positive rate of success of this problem because of something about their heart? And then B, am I the right partner for him or her? Maybe, and if not, I'll go find a partner, you know, at a KB or a partner at Founders Fund that might be a better fit.

Got it. So you actually take the time to think about that personality fit as you think about decisions.

Yeah, I think there's a way, I mean, this is like, it is like as you know, lots of people talk about, but in some ways it is like a marriage. And it's certainly a long-term relationship that goes through trials and tribulations up and down. and you want someone that A counterbalances you of a day. You don't want the same. They're not like chronically thought about or chronically described. Like, so if I'm super stressed as a founder, the last thing I want to do as a board member is out stress. I actually want to comfort you and relax you a bit. And then there's times when I think founders may be too connected. I may fall off the whip or crack the whip a little bit. this movie will flash, you know, like that's the time when you want to ask the big question. So it's understanding the founder's psychology, their framework, and then being like a cushion for them and then sometimes being, you know, more demanding. And it's not always obvious which to be. Like when things are going well, actually you probably want to be more demanding. When things are going badly, you actually probably want to be more supportive, that piece of the paradigm. So I think it's not just a personality fit, it's just Can you be constructive dialogues where one plus one really feels like three?

Right, and so what are those things about people that you won't give up on? I mean, what makes for great raw material? Because you could be an Elon personality, you could be a Brian Chesky personality, but still there's some commonalities that you get a sense of and that you're, you know, the founders find people say, oh, this guy's gonna love Keith and Keith's gonna love him. What are those things?

Yeah, tenacity, Relentless Super Source, I like the Paul Graham formulation better than my old formulation of capacity. Fast learner, very quick pickup speed. I'm fairly impatient in explaining things, meaning I like to explain things once and expect that people immediately grok it. There's probably nothing that frustrates me more in life, socially even more so than professionally, is repeating myself. It drives my friends and Partner's crazy. I just really like to have a very, you know, blast or whatever trained with a very good memory. So if you have a conversation with me once, we're never gonna forget that, that conversation. I can recycle conversations I've had 30 years ago easily. So it drives me crazy to repeat myself. People who tend to like pick up really fast, fast pickup speed. People who like, people are ambitious definitely. I mean, There's ambition and vision. There's like different levels of ambition. We would never fund something that either KDB or Founders Fund doesn't have some level of ambition. But I tend to like the outrageous, the ambitious people. Borderline a little crazy. I can, you know, when people say Keith Ballinger, it means implies often that Keith can deal with a little bit of craziness. People who want to change the world or, you know, have a screw somewhere usually. There's a famous Steve Jobs Apple commercial about think different. There's a bit of truth to that, I tend to have worked well, I've certainly worked with and worked for a lot of people that get that DNA so it doesn't bother me. I expect that that's part of what makes the person super impressive is that they're going to see the world differently and they're going to occasionally have very strange reactions to the world and that isn't a problem for me. I can work with that. And so that's not for everybody. The people who really want to walk through the walls, you know, walk through that wall one way or the other, that's basically the most important. And then the IQ and horsepower to understand why they're walking through that wall. Right.

To understand the playbook and understand where to deviate, that sort of thing. And so if you're thinking about these Olympic athletes that are out there trying to change the world and they're highly ambitious, the difference between number one and number 20 is actually fractionally small. What's the sense that you have that what happens differently for that number one person? Because that's the business that we're in, right? We're looking for that monster outlier.

It's actually going to be one of two things. It's either they're outrageous and they really good at one thing, and I mean outrageous, and we'll talk about this like often we're in fast. it would be an isolate that one dimension. I have never seen somebody who's like asked before. Like they're the top 10 basis points to ask you, top 10 basis points of top 10 basis points of something. So extremely world-class on one key dimension and then, you know, lots of world-class in other places.

Or.

They, so they're either extraordinary, extraordinary in that sense or I was thinking about another model that sometimes works, oh it's the compounding. Since the rate of learning across many things, it compounds. You know, it's a 365 days a year, times X years. It's actually one of the hardest things to do as an investor too, because what you're ultimately doing when you meet a founder, especially for seed investment or angel investment, is project not only is this person capable today, but what's this person going to be like in 10 years? And that's a rate of growth question. So you're looking for a sustained rate of growth. But sometimes when you have to make a decision, you don't have a lot of pre-existing history with a founder. It's very hard to make a judgment call on a 20-minute, 40-minute, 60-minute meeting about the rate of growth over the next 10 years. You're applying a line on one data point, which is impossible, it's not going to be possible. There's actually a lot of fruits to that. So that's what you're trying to do though. And so the more data points you have, the better. So it's a whole lot easier for me to just like when I meet a founder that I've known before, if the person's worked with me, worked in a company I was involved in, pitched me at some point, you know, earlier in life, drawing that line is actually a feasible task and a realistic, you know, goal for me is what's that slope look like? Plotting a slope on one initial meeting, you know, like that's like almost like a fool's error, but you kind of have to do it. So, like, for example, the easiest way to make it today would be to say, okay, great. I'm going to fund a space company. I want to find the next Elon. The last way you want to try to do that is to go look at Elon today and try to retrofit today's Elon or today's Max Libby or whoever into what you're trying to fund today. Because neither Elon nor Max looks like what they do today when they were 22. And what you're really trying to do is find out someone who looks like the 22 or 24 year old Max Libby today. Not the 40 year old.

With a compounding rate of growth.

Exactly. So that's the most, that's the other thing is either, if they're not these single batches of the world at some dimension right away, they have some compounding rate of growth that looks absurd. And then, you know, you work with them over five or ten years, you just throw on for the ride and get to watch. It's amazing.

Well, I think it's very well articulated as always, Keith, and I really appreciate you spending time with us. It was a great day today. and thank you so much.

It was an absolute pleasure.

Yeah, yeah, we'll see you soon.