Keith Rabois Interviewed by Dan Primack | Upfront Summit 2020

I'm thrilled to be talking here at Keith Rabois, now at Founders Fund. The title, if you look in your programs, it is building, I think it says, building a VC firm from scratch. You've never done that at all, or even tried to and failed.

I have a lot of opinions that I've never done, so. Fair enough.

So let me talk about the, but you've been at two VC firms. You were at Coastal Ventures, now you're a Founders Fund. And those who know you, or say, follow you on Twitter, know that you are fairly strong-willed, very opinionated, opinionated. Both of those firms, Khosla and Founders Fund, are led and were founded by people who are strong-willed and very opinionated. Do you just gravitate towards working for those sorts of people?

Well, if you look also through my, you know, 13 years as an executive, I worked for Peter Thiel, Reid Hoffman, Max Levchin, Jack Dorsey, kind of similar people. So yeah, I've been a pretty good complement, even though I have my own opinions. I actually work fairly well with people who have their own center of gravity and have very strong opinions and aren't shy at expressing them.

Do you have interest ever in launching your own VC firm? Or are you very happy being part.

Of an existing partnership? Not really. I always had a set of criteria with my friends of what would it take to launch my own VC firm. And the simple transparent answer was, if I couldn't make the investments I wanted to make, and I couldn't work with the people I wanted to work with, I would go find a way to do that. But obviously at KV, I had the license to make the investments I wanted to make. and I was working with people that were actually very challenging, you know, in terms of challenging my own thinking and teaching me. And I found it was fun. You know, I knew everybody I was joining. I'd worked with everybody for five to 30 years. And we've been able to hire, so I obviously like the people I'm working with and, you know, I've been able to make the investment decisions I wanted to make.

So there's no real reason to. What was the best and worst parts.

Of working with Vinod Khosla? Well, the best part is he taught me when he's on the board of Square. So how I got to know Vinod pretty well was he was on the board of Square for a few years. and he coined this phrase, which is the team you build is the company you build. And a lot of people talk about talent and people in this business or as executives, but it really distilled everything to one simple sentence that explains so much of life. Everybody, a lot of times, gravitates towards products and technologies and everything except the people. And in that pithy statement, he really clarified my thinking over 13 years. And so then, you know, as we worked together, in investing, the same thing is true of like my criteria as an investor is always based upon the quality of the founder and the founding team. And so I think that was the most important thing is he actually helped teach me things. And the same thing is true of Peter, we can talk about at length. Most of the things I've learned in life about professional investing and startups are from Peter originally. So I tend to like to work with people who teach me things.

And you're now speaking here today in Peter's new adopted home, so that's fantastic. Let me add, you talk a lot and complain a lot, I think, about kind of echo chambers. What do you think kind of within the particularly the venture capital ecosystem call it right now, what is the kind of the biggest echo chamber that you that annoys you or that you think is missing the boat?

Well, the good news is actually both firms I've worked with are pretty good at staying away from that and culturally both from a DNA perspective, from the kinds of people we hire and even take certain steps. Like if you look at where Founders Fund is based, like our headquarters, it's in the Presidio, it's intentionally removed from everybody else. and maybe more people are copying us and there's a couple of firms trying to get real estate there. But the fundamental principle is we don't want to spend time with other investors. And the same thing was true at KV. Actually, we had a philosophy of not.

Spending too much time with other investors.

That was not in the Presidio, though.

That was in the heart of San Francisco. We were in the heart of San Francisco. Hard to find, though, by the way.

It was a very hard office to find. You knew where it was. It was near that Starbucks, but it was covered in trees and kind of like a bat cave. Yeah, maybe. But in any event, I think you have to have a discipline about this. which is most investors are not very good at producing returns. Most investors are more of a, you know, sort of a herd than original thinkers. And if you spend all your time, like there's these studies about you have the habits of the five people you spend the most time with in your life. You develop the values and habits of the people you spend the most time with. The same thing is true with investors. If you spend all your time with other investors who are not doing what you think you should be doing, by definition, it clouds your thinking. So, you know, we were very conscious at both places and probably maybe among major institutional investors are probably the two best at staying away from the crowds.

Let me ask about the crowds though. And this kind of, Josh Kalbman was up here earlier and he got asked, you know, why they never created second round capital, third round capital. And he, Founders Fund though is raising a fund you can't talk about except to say that it is a growth fund.

Can you talk about it? Well, it's been reported that we were.

Raising a growth fund.

Right.

That seems to be in part following the crowd, no?

No, I think we're gonna do it, well, let's put it this way, insofar as we have a growth fund, we will use the capital differently than other people, which means we will-- use it differently.

You give it to a founder and they spend it on things.

That is true, especially a founder's fund, because obviously we don't control our founders. We give them the most license possible. But no, I think you'll see the investment strategy out of any new funds be distinct from other people who have run growth funds. Founders Fund has historically made written very large checks. I mean, a lot of the best investments in the history of founders fund are later stage investments. So it's not as if we're taking a very small fund and all of a sudden going to do growth rounds. We've been doing growth rounds for a long time. You know, I think Airbnb led a growth round. We've done multiple rounds of SpaceX. A lot of the best investments that.

Have produced the returns that people like are not early stage investments that founders fund. I'm curious, do you feel you I've been speaking to people here over the last day and trying to figure out kind of what the next shift is in venture capital. And when you think of of last year, 2019. It seemed to be a little bit of kind of, it was kind of the peak of the, call it the SoftBank peak, but everything that came along with that and then it seemed to kind of crash down around WeWork and now everyone seems to be waiting for.

The next big thing.

Is there a next shift of venture capital or do you think that kind of that valley after WeWork, that wasn't really a valley, that was one company, SoftBank's got problems, but kind of that.

Very late stage pre-IPO massive investment, that's still a thing? Well, we're still excited about leading growth rounds, call it 50 to $200 million checks from us and, you know, multiple the round may be substantially larger and looking for those opportunities all across the globe. I have partners who prefer to be doing those deals and would love to find more of them. It's just a quality of company thing. So I don't think that world has changed. SoftBank was inflating the valuations on companies and always paying, you know, a premium over what other people were offering. But at them, that was more at the margin, like maybe 20% premium. That didn't radically change Silicon Valley.

Now, the emphasis on maybe you don't.

Think SoftBank radically changed.

No, I think it's a rounding error in many ways. Rounding error, they had as much money as every person and firm in this room combined and then money.

Rounding error and influence in terms of impact and changing behavior. I don't think it really changed many people's behavior. Like I'm involved in a few companies that took SoftBank's money and I don't think they changed the behavior of the company. I think there was a culture generally where maybe people were dismissing payback time. So if the founders fund we're pretty disciplined and at KV we're extremely disciplined about time to pay back hack. I have my own internal rules and everybody, all my partners know what they are and there's a certain payback time that I'm just not interested in the company. It doesn't matter what they do, it doesn't matter who's running the company. And there's a time where there's a judgment call and there's a time I'm super excited. And we've had that discipline at Founders Fund for a while, which is an internal consensus of what a good payback time is. I think a lot of investors got removed from that or were looking at.

Other metrics like pure growth and other things. But at SoftBank certainly wasn't the only offender. Tell me I'm wrong, actually, is there anybody from SoftBank in the room? Great, okay. So you have, and I base almost all of my questions to you. Except you're shy if everybody knows that. I base almost everything off your Twitter feed. If I am reading your Twitter feed correctly, you are not the biggest fan of what SoftBank Vision Fund did. Leave aside whether you think it was a corrupting influence in value, just generally speaking. But as you said, two companies you're very, very involved with, Open Door and DoorDash, they did take money, particularly Open Door, which you co-founded. Were those companies wrong to take their money?

Well, I think this is an important distinction. I'm not the CEO of Open Door.

No.

If I was the CEO, the company would not have taken SoftBank's money. But I know my job is to give the best possible advice.

I'm sorry, I'm going to come back to this. Your technical role is executive chairman, right?

That was until October.

Oh, until October.

It's no longer.

I was going to ask what the executive chairman actually does.

Yeah, that's a good question in and of itself. But let's go back to this. My role as an investor at Board board member is more like a contiglary or pop psychologist. Like I'm basically asking a lot of questions to the founder and playing back what I hear almost in a cartoonish way. I'm never, almost never making a decision. A founder's fund almost purely never making a decision because we don't fire founders. At KV, the only true decision that you would have to make is are we firing the CEO? Once you have a CEO, the CEO is responsible for the decisions of the company, not not the investor board member.

Interesting. So why wouldn't you have, if you had been in charge, you wouldn't have taken their money, why not?

For multiple reasons. First of all, I would, I just, you have a whole bunch of political sort of moral objections. Secondly, you know, there's questions about how much money you raise at different sequences in time, and that's more of a judgment call of how much money do you want to raise in this tranche against what milestones you can achieve. I would have, Finance the company slightly differently, but it's also a risk return or kind of a risk profile question. You know, you can gamble that you can get to the next Milestone where the capital gets cheaper. And sometimes other Founders would prefer to have more money up front. And, but that's, that's definitely an artistic judgment call. The, the other company, not open door.

But the, and I'll come back to it. But door Dash, can you give me the basic argument for how the economics of food delivery can ever work?

Well, they're profitable in 35 markets, so. That, I mean, they're gonna be- But.

They'Re raising, they're trying to raise a bunch of debt right now.

Yeah, but one thing- When you say they're profitable in 30 months, profitable meaning they're cash flow positive.

No, no, I understand that.

Is that including the overhead?

Is that including the over- All expenses included.

Including the HQ and their pro rata.

Of HQ and all that?

Well, not of the engineers at HQ. But that's a big part of the company.

Yes, but nobody counts that way.

But there's literally no- No, no, no, no. That's not true.

When they go public, they damn well will count that. Nobody counts the city profitability and includes.

Engineers back and- No, you, to get profitability.

You take all the expenses and all.

The revenue, and then you do a very basic calculation. Profitable calculation. But anybody who's ever talked about a.

Market being profitable has never included the capitalized expenses. No, I know, but isn't that why when people-- I mean, as a reporter, you hear this all the time, which is, oh yeah, well the company's not.

Profitable, but the unit economics are great. Who gives a shit? If the company's not profitable, then it's not profitable. Well, one's in-- okay, I'll be pretty precise. One's a necessary but not sufficient condition. If your unit economics are upside down, the company's never gonna work. Right, you fundamentally have to transform that. Once you get to the point where each incremental transaction sends some money back against your fixed cost of running the business, you're in a good place, because the faster you grow, the more money you're going to send back.

Dartmouth is in that-- Unless the fixed.

Costs keep rising off-- Yes, absolutely true. But let's assume that your fixed costs are relatively stable or completely stable. As long as you have more contributing dollars coming back to you, you want to lean in and grow. If your unit economics are upside down, stepping on the pedal is probably the worst thing you can do in almost all cases. Do you think, you know, GrubHub, which.

Didn'T have the DoorDash model, they get kind of lumped together, but it wasn't actually doing deliveries. Basically recently decided it was going to. When the CEO decided to, he wrote what I can only describe as the first ever suicide note I've ever seen from a CEO, corporate suicide note. Basically saying, we are going to follow.

Uber Eats and we're going to follow.

DoorDash and we're going to do this.

It's going to destroy us, but we're doing it anyway.

Was he wrong?

Wrong to copy?

No, not wrong, well, not wrong to copy, but wrong in his analysis of-.

His analysis is clearly wrong. DoorDash is clearly going to be a.

$10 billion plus public company sooner rather than later.

By the end of this year? I don't know. I actually don't even know. I'm not on the board of the DoorDash, so I can speak more freely. But I do know the company's fundamentals, I know the team pretty well, and I know why they're doing well versus their competitors.

I mean, I'm also in an awkward position, a founder's fund, we were investors.

In Postmates, which isn't doing nearly as well.

No, is somebody gonna buy them?

I have no idea. We intentionally don't tell me anything about Postmates.

They intentionally don't. On Open Door, what's the, is your belief that someday Open Door also becomes public company?

It's my belief Open Door should be a public company. I really would like them to be a public company today. I've had this long-standing view that very few people other than Bill Gurley have really shared, which is that companies should be public as early as humanly possible. I have a whole chapter in Eli Gill's High Growth Handbook that explains why. So again, you know, definitely Open Door has the scale, the momentum, the vision, and the market opportunity to be a public company. Is there a reason why, from your perspective, why the public markets, if it.

Were to go public, wouldn't basically value it like a re- yeah, look at Zillow's valuation.

So we have a kind of a perfect experiment right now. So Zillow- Spencer, are you here? No.

Okay, he's somewhere. Oh yeah, hi. Okay, say hello.

All right, so Zillow basically copied Open Door. as a public company. So you can see what's happened in both the ups and downs, but you can see how they're valued. And that's a part of Zillow's valuation. Yeah, but it's basically what people are betting on now because the current CEO is certainly not shy about they're transforming their business. Whether or not that's a mistake you can argue with, but fundamentally that valuation is being supported by the potential earnings of the company over the next 20 years, which are going to have to come from making money on home sales. And so, or I'll give you a better maybe example, even though you have to change transform industries. There's a great public company that nobody likes, even though it's a $13 billion public company. It's in Phoenix, nobody pays attention to, which does what Open Door does but does it for cars. It's been publicly traded for two years and you should look at the stock price.

It goes like this.

What company? It's called Carvana. Oh yeah. Yeah, not lately.

It went public like two years ago.

Yeah, two years. You have a stock price that's gone literally like this. They went out at like maybe five and they're trading at 13. And it's the exact same thing Open Door does. And in fact, most of our metrics are better. When I say most, I mean like 85% of our metrics are better than.

Are they the ones that have like the vent to car vending machines? Yep.

Exactly. That's really weird looking, but cool. I wish I had invested. I actually didn't invest in their last private round.

And now there's that massive mistake. There is a rumor that, so you co-founded Open Door while at VC at Co-Founder and then went over to Founders. There's a rumor that you've got, that.

You have now co-founded another, or in.

The process of co-founding another company in the FinTech world. True?

Not in the FinTech world.

Okay, let's try again. No, no, that's what I had heard. But you say this and I'm guessing it's something in the nutrition fitness world.

It's closer to that. There's a very specific idea, which it's actually not super secret at all. I've talked about on many podcasts actually. I've been kind of working on this for two years of trying to-- it took me open door actually literally 10 years from idea, from beta test of it, like the first pilot website that was live to actually launching the company. So I'm kind of ahead of the curve on this one. But for two years, I've been talking publicly about a startup I really want to exist. And I've been trying to find the right people to kind of co-found it with me and haven't exactly got the right CEO leader, product leader yet.

I have someone in mind, but I haven't been able to persuade him to do it. Given your background, your personal background as being an operating executive and your interest in founding companies, if you found the.

Right people to do it with, why wouldn't you want to just go do that full time? Well, there's a lot. I mean, Jeff Jordan talked a little bit about this. There's a lot of advantages to this job. There's some downsides to being a venture capitalist without a doubt compared to running something. But if you're intellectually curious, this is, I think, the best job on the planet. Literally every meeting every day, almost every hour every day, I learn new things about the world. It's like when I was growing up, I used to have this bad hobby or good hobby depending upon your perspective of reading the World Book Encyclopedia every day. So I'd go home and literally read a volume every day. I think that's my job today. I get paid to learn new things. and I don't think there's any other professional like that other than maybe journalism actually. And then secondly, you can argue with you get paid in journalism, but you get the opportunity to learn new things.

If you want to give me a.

Call and founders, I'll take it and then we'll be good. We can work out a deal probably. But the second thing about this job is I get to work with the most talented people on the planet, the most ambitious and talented people. It's a little bit like, you know, Jeff also talked about sports. I basically get to work with the people who are NBA all-stars. or if they're not NBA All-Stars, they're pretty damn close. And when you're operating, you're running a large organization, you're talking about ratios of people with different ambitions, different goals in life, different talents. And it's very rewarding to work with the best people in the world, and once in a while, be able to see their eyes light up because you've.

Been able to add some value to them. Can I ask, let me ask about that. Any time, not any time, often when Founders Fund does something and there's a headline, the headline is Peter Thiel's Founders Fund, and at least one of your partners, if we ever do it, which we do, texts me annoyed. I'm wondering, very annoyed. Can I ask, Peter's got a lot of other things going on. Can you give me a sense of how involved he is in Founders Fund and particularly in the investment decision process?

Yeah, I mean, we have a very simple way of approving investments, which may or may not be perfect, but at different threshold dollar sizes, different numbers of partners and different numbers of GPs need to prove an investment. So for investments that are meaningful within our $1.4 billion fund, Peter definitely needs to approve the investment.

What's the actual, what's meaningful?

It's lower than you would guess. I'm not sure we've ever shared the exact numbers publicly, but it's not a very large number. It's somewhere between a series A and B.

You've said, Coy, I want to get this right, you said when you do a new deal, and this is kind of the contrarian, you say, I want half of my VC friends to laugh at the investment I make. Do you want half of your partners to laugh at it too?

That's trickier. Maybe not half, but like 25%.

25%.

No, I mean, all the best investments I've ever made in my life is either an angel, as an entrepreneur working on a company, or as a VC. A reasonable number of my smartest friends thought was like ridiculous. And that's because things look really ugly or different, or you know, there's this phrase about being a toy, whatever. fundamentally the companies that become like Airbnb when I invested in everybody thought was absurd. Like actually Brian will tell you the story but Brian tells the company all the time that I was the only person who liked the idea. Like other people liked him, I actually liked the idea and nobody else liked the idea and all the really good investments feel like that. Now the key is to change, Open Door actually, you know, Spencer definitely didn't like the idea when he first heard about it but it changes pretty quickly. Like two to three years you should be able to go from like ridiculous absurd to a lot of people appreciating you, to everybody appreciating you.

Essentially, am I right in saying everybody, not all your partners were founders or executives of companies, right? I guess let me just ask, you know, generally speaking, if you go back, say, 20 years, most venture capitalists came out of Wall Street or came out of a consulting firm. And that obviously changed a lot over the past couple decades. You came out of an operating background.

Peter, obviously, came out of a consulting firm. Peter obviously came out of a consulting firm.

Brian both worked at Google and started a company. How, from your perspective, if you were, say, starting a venture from scratch, how much weight would you put on the idea of a prospective partner or even lower level having had operating experience, whether as a founder or not?

I think it's pretty critical. Like I did an analysis of there's a lot of successful investors who do not have operating experiences. Just before everybody tweets about so-and-so and such name, for people who started in this job after 2007, there's very few examples. So I think it's a generational thing as you started the question, which is there's, I think, two really good investors who started their career after 2007 who do not have an operating who are your two? Well, I'm not gonna name them.

No, because you said there were only two.

I know, but it's gonna exclude everybody else if I give you those two names. But it's pretty obvious who at least one is super obvious. And so I think that right now it'd be very difficult to compete without that experience. I think, for example, you're just gonna lose to a lot of people who have a different way to frame the value proposition they offer. Is it impossible? No. Could I see us hiring someone? Absolutely, yes. Would we promote, would we hire them at senior level? Probably not. Could they get promoted?

Absolutely. Speaking of losing, there's been talk in the Valley, and particularly among folks who you're kind of associated with, either literally associated with or philosophically associated with, that you can't speak, particularly when it comes to things that are either political or socioeconomic, that you can no longer speak your mind in Silicon Valley, which is where you're based, or San Francisco, where you're based, and that if you do, particularly as a venture capitalist, you will lose business. You will lose deals or prospectively lose deals. You don't seem concerned by that, judging by how open you are about your views, including political views.

Why?

Why are you not scared of what some others seem to at least claim to be scared of? Well, I think that's true many things in life.

A lot of people are fearful of things that they probably shouldn't be fearful of. So I think-- so are they wrong?

In other words, are they behind the covers and wrong?

Well, I think there's some-- Like many things, there's truth, but courage requires the ability to ignore other people's-- to ignore your own fears and other people's fears. I mean, your boss moved to L.A. to avoid them, right? Well, L.A. is not exactly like running away. I know, I'm just saying. hour flight in the same state with the same state income tax. So it's not that different. But fundamentally, my job is to give someone the best possible feedback. And that's why the people who choose to work with me choose me, is like I will give them feedback that hopefully is useful to them at some point. If I'm shy in expressing my opinions, I can't do my job. And so the people who usually come to me are people that want that candid feedback. And I've actually found that it actually helps me win investments that are very competitive. I mean, I like to do ridiculous investments that are not competitive. And then the ones that are competitive that we do well, both the Founders Fund or me personally, people appreciate the Founders Fund style is to be candid and honest and that we will take a position even if it's not popular.

Speaking of which, let me, I'm curious, I do want to ask you, not necessarily when you're making investments, when you look long term, at your portfolio, at Founders Fund portfolio, general state of tech, general state of business. When you think of the election this November, what's the mo-- for anybody in this room, what do you think is the most-- not the candidates, but the most important thing to watch for or the most important thing that could come out of it?

From a kind of business economic perspective? Well, I think who the candidates-- who the Democratic nominee is will affect potentially the economic environment. And you want it to be Buttigieg, right? Am I right? Well, it certainly would be my preferred Democratic nominee. Fundamentally, will you vote for Trump?

Well, who I vote for in California doesn't even matter.

Do you not vote? I didn't vote in 2016. Okay, if you lived in, I don't.

Know, if you lived in, I'm now can't come up with state, Pennsylvania. If you lived in Pennsylvania, who would you vote for?

Trump versus who?

Trump versus Biden.

Trump versus Sanders, actually I'll make it better.

Trump versus Sanders is easy, like, which is Trump?

I would definitely vote for Trump. Trump versus Biden. That'd be a closer call.

And when you have to-- But I.

Would, yeah, I would clearly vote for Trump over Sanders or Elizabeth Warren.

Trump over Sanders or Elizabeth Warren. Final question. So I tweeted out yesterday while I was on the plane, I said if you were gonna ask, I've got Keith on a whole bunch of interesting questions. There was a bunch, but I got a lot of D.M. ones. In part, so I got a lot of D.M. ones, and they all came around to a central theme. And I wanna set this up. So when I was also on the plane, I was trying to find something to watch. There was a documentary on Mike Wallace. And the beginning of the, so with Mike Wallace, Morley Safer sits down. It's like right before he dies, asks him. And he looks at him and says, so I wanted to start with this. He said, why are you such a prick? So I was asked by a bunch of people on Twitter a very similar question, which is, is Keith's personality on Twitter an act? Is it sincere? And do you care that a lot of people on Twitter view you as a prick?

Well, in reverse order, I definitely don't care. I think it's fairly sincere. I mean, it may not be representative, meaning you can pick out a tweet, right? And it's out of context or it's out of someone who you spend time with, you probably see X hours a week or whatever. And so you can pick out a tweet that's one sentence that would be like spending two minutes with somebody and saying, oh, that's what it's like to be in a relationship with them for seven years. So obviously, it's distorted in that sense, but all the tweets are sincere, but they may be not like, The jumble of you spent an hour in a board meeting or three hours in a board meeting or 10 hours in a partner meeting or whatever, probably isn't necessarily the exact distribution.

Well, you've been very nice here today. Thank you very much for coming.

Thank you.

Thank you.

Thank you. Thank you. Thank you.