Keith Rabois: Key lessons from Peter Thiel, Reid Hoffman, and Jack Dorsey

When you learn that there's going to be a bit of ups and downs, that's kind of part of the territory. You learn to get excited by that and the challenges become positive challenges versus terrifying.

That's Keith Rabois, original member of the PayPal Mafia. And not only that, he was a key player at the startup teams at LinkedIn, Square, and was later a founder of Open Door. Keith has seen the differences and similarities between some of the greatest founders of our time, and as you will soon see, knows more about startups than just about anybody, anywhere. this is Mike Maples, Jr. And it's Go Time with Keith Raboy. Welcome to Starting Greatness, a podcast dedicated to ambitious founders who want to go from nothing to awesome super fast. When you're a startup founder, you have to channel your inner James Bond, your MacGyver, your Wonder Woman. I'm going to help you win by curating the lessons of the super performers. But before they were successful, they were just like you.

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Let's get started. How many people have built startups with Peter Thiel, Reid Hoffman, and Jack Dorsey, while later founding a billion dollar startup while working with Vinod Khosla? It would be hard to find someone with more varied exposure to startup excellence than Keith Rabois. When it comes to leadership methods, Keith has seen many great leaders in action. and synthesized his own leadership philosophies in ways that are incredibly valuable for startup founders. And through it all, he's maintained his contrarian streak, which is a key factor to his success, now in his current state as a partner at Founders Fund. Let's talk to him. Keith Rabois, thanks for coming on the podcast.

Pleasure to be here with you.

Keith, I wanted to start out with your early role on the amazing team for PayPal. You think about all those people who are there, Peter Thiel, David Sachs, Max Levchin, Reid Hoffman, Jeremy Stoppelman, and then you've got Elon Musk coming into the mix later on. That's a lot of personalities in one place. Did that ever go off the rails at all?

Yeah, we had three CEOs in six months. I guess that means going off the rails fairly often. We had a burn rate of $10 million in August of 2000 with less than six weeks of cash left. That would probably qualify as going partially off the rails.

I know it was quite a ride with that group, but were there any near-death experiences where you thought to yourself, I just don't think this is gonna work?

I had a near-death experience almost every day, literally every day. Partially, it was a huge fraction of my job in responsibility was to keep people from killing us, but we had a lot of enemies back then. Visa, MasterCard hated us, eBay hated us, the federal government post-9/11 wanted to regulate us, various states didn't like us, the state of Louisiana tried to shut us down on the precipice of our IPO in February of 2000. 2002 for practicing banking without a charter. I was managing these sort of existential threats all day long. And in fact, one of the biggest reasons, perhaps the single biggest driver of our ultimate acquisition by eBay, even after we had an IPO, was the feeling and fear that most of the executive team shared that although we'd done an outstanding job juggling all these crises, that eventually one might actually kill us and that, you know, Reed Hoffman also worked on many of these projects, as well as our general counsel, John Mueller. And although Keith, Reed and John collectively were doing an awesome job of keeping us from being shot, there was a significant fear that at some point, someone might shoot a bullet at us that we didn't correctly deflect. The Treasury Department, post 9/11, which is about as macro event as you'll ever experience in your life, was promulgating regulations that would have significantly impacted and impaired our business. And I took on the project of convincing the Treasury Department to rewrite the regulations, which everybody thought was impossible. You have to imagine the fervor. This is one month post 9/11. I actually even wasn't optimistic when I took on the project, but we figured out a set of strategies and tactics that actually did start to resonate. And then I was pleasantly surprised with the traction we got. We got so much traction that the undersecretary of the treasury at one point called me up on the phone and said, what do I have to do? And what do I have to promise you to make this stop? Because I had so many people yelling at the Treasury Department that they literally called and said, here's the white flag. to do. How do we proceed? Yeah, and that actually possibly saved the company.

Yeah, it's interesting that you bring up this idea that failure doesn't have to be an option. You know, one of my favorite metaphors comes from car racing. When you're learning how to drive a car fast, the instructor tells you to not look at the pins, but rather look at the path through the pins. And to me, entrepreneurship is a lot like that. You realize the problems are there, but you have to realize that every problem has a solution. and there's always a path out of this or through this.

I just learned this yesterday that Stripe has an adage that every problem is a leadership problem. And I kind of like that. I think that's roughly right. The right people doing the right things tends to produce solutions. And with enough time horizon, because you're as you wait, your set of options get incredibly reduced. So the earlier you identify that you have potential issues, the menu of options and levers you have under your control and at your disposal are substantially greater than any last minute development. So I think a lot of solution and problem solving is being two steps ahead or ahead of the curve so that you have the entire gamut of options at your disposal that it's, you know, choosing wisely. And it helps the team's morale too, I think.

So if something goes wrong, you just tell your employees that you anticipated it might happen and there are ways around this problem. Yeah, it also affects who you hire.

Paul Graham has a wonderful blog post called Relentless Be Resourceful, which I really subscribe to. And basically what you want to hire in your startup are people who are relentlessly resourceful. I used to use the term tenacity or tenacious, but I think relentlessly resourceful is a better metaphor. And basically it's people who, when they see an obstacle like a wall in front of them, will figure out how to go under the wall, over the wall, around the wall, make friends with the wall. They shock you with solutions. And if you have a company that's scaled on people who are relentlessly resourceful.

Not surprisingly, people walk in with answers that work. So going back to PayPal a little bit here, you obviously learned a few things from Peter Thiel. What do you think are the most durable or long lasting lessons you learned from that experience with him?

Focusing on undiscovered talent, how to scale that, assess that, and then mentor it. And truthfully, I wasn't very good at assessing it back in 2000 when we had this conversation. You must hire people who are undiscovered talents. You cannot recruit people that are already proven. The reason why is there's always gonna be large incumbents Back then it was more like Yahoo or AOL or Microsoft. Yeah, eBay. That would just basically outbid you for proven talent. They would pay more money than what you could afford to prudently spend as a startup. But if you could find people that didn't have these proof points on their resume and you could assess them accurately, you could compete in building a team that was very differentiated and didn't have to pay these exorbitant cash compensations. In practice, what we actually did was Peter recruited business people and marketing people mostly from Stanford, his Stanford Network. That's actually how I originally met Peter. And Max Levchin, the other co-founder of PayPal, recruited all the engineering talent from the University of Illinois and his network growing up in Chicago and the University of Illinois. And we married the two together, Stanford.

Plus University of Illinois, which has actually proven to be the best two possible networks for Silicon Valley. But that's also kind of interesting because it's not just about recruiting unconventional talent, but part of it is, that you know something the market doesn't know yet who's good. And so Peter knew something that the market didn't know about some of his colleagues at Stanford, and I suppose Max did at the University of Chicago.

Yeah, that's one way of hacking the system is sort of to recruit people that you have a preexisting relationship with because you have asymmetric ability to assess them. The hardest part afterwards is to manage them. There's a skill and discipline in managing people that you know well and are friends, and it's very different than managing strangers. So to be thoughtful and successful at this strategy, you have to be pretty clear-eyed about your friend's strengths and weaknesses, and not everybody can do that well.

And with PayPal, it sounds like that was more the rule than the exception. So how did you guys get stuff done when a lot of you knew each other before PayPal even started?

Peter's a pretty draconian manager. He can be very rational and very non-emotional. So he is extremely capable of assessing people around him that he's known well, and identifying their strengths and weaknesses and providing feedback. But this isn't a strategy that would work for everybody. I know people who have tried to replicate the PayPal strategy and it really hasn't worked because they get confused by their personal relationships and are unwilling to tease those apart. And so it can be phenomenally successful because you do have asymmetric ability, but you have to back that up with a very rational assessment of the people you're working with.

Now, this reminds me of something that I've heard you talk about in the past, this notion of thinking about inputs and not just outputs. particularly in the startup phase. That seems pretty important. I think people would be interested in your take on that.

Yeah, so it's not an original thought of borrowing it explicitly from Jeff Bezos. I was fortunate enough to listen to a lunch speech that he gave and without revealing things he said off the record, he basically had this philosophy that you need to manage people by inputs, not outputs. The basic rationale is, first of all, if you judge people by outputs, Nobody on your team is going to take on the higher beta, more difficult tasks because they're worried about their professional progression, your assessment of them. And so if you say, Hey, Keith, I want to go to Mars, everybody who's really talented and worried about their career is not going to raise their hand. But that may be the thing you need to do is to actually literally go to Mars. And so the way you incentivize people to try to go to Mars is you gauge the quality of their work in getting close to going to Mars. And you can tell how creative they were, how thoughtful they were, how disciplined they were, how fast they were, has nothing to do with whether they actually get to Mars. So this is the management philosophy of how you take on the biggest possible ROI projects that may have a lot of risk. I mean, I used to have this philosophy personally at Square. Then until we were very large, I used to tell our team, my team, that the only thing I cared about was adding zeros to the dashboard. I didn't want projects that could add 10% because we weren't going to be an important company unless we were 10x and then another 10x. arguably another 10x. So basically we'd go around to our product team, to our marketing team and say, I want zeros. And if this project can't get us to zero, then let's not do this. Let's prioritize something else that might have the potential for a zero. But the way you encourage and excite people to work on those 10x projects is you have to be able to assess them not based upon whether it actually gets to the zero, but about the creativity and thoughtfulness that went into the initiative.

You also worked with another pretty impressive founder in Jack Dorsey and also pre-launch at Square. What was he like and how is his approach similar or different from Peter's?

Jack's approach is actually quite different than Peter's, even though you can argue that PayPal and Square are somewhat comparable businesses. Yeah. Right. Similar markets, similar products in some ways. Certainly financial services. So it's a good comparison because other companies like Twitter are so different that I don't know if the management philosophy differences are stark. So at Square, everything was design driven, not metrics driven. The best way to win any debate at PayPal was just quantitative. Pure math, pure statistics, pure calculus. And that would be the end all be all QED, the meeting went in. At Square, everything was predicated more like Apple, where the question was, what's the best possible design? What's the simplest possible solution? Go back to the drawing board until we have a more elegant, better design product. Second thing is Peter back in his management philosophy, really believed that his job was about three or four decisions a year, and that was it. And he'd basically enable and delegate to deputies that he trusted to make every other decision. And he was basically just deciding who to promote, who to fire, and then about three really difficult decisions a year. Jack, at least during my days at Square, was a very hands-on executive and had a really deep understanding or mastery of all parts of the business and really wanted to have an opinion or perspective on many things. He certainly was excited and enthused when executives could run with energy and proactively decide things, but he wanted to be deeply aware of what was going on. I understand in the last few years he's been a little bit more of the Peter's style. So, you know, his management philosophy may have evolved as well. But it's pretty starkly different during my days.

What strikes me as a little bit similar between the two, and I guess it depends on just how you think about the word design. It feels like both founders had the same idea that you design the future. You don't just stumble into markets, instead you have like a deterministic view of what the future is going to be like, and you bring the rest of the world along with you into that future.

Oh yeah, Jack on steroids has a vision of what he wants to see in the world and how the world can be better. and then his products, whether it's Twitter or Square, maybe in the future or something else, are always designed to solve that problem. And he has a very top-down perspective. So for example, he had coined this adage at Square that we weren't, for the most part, allowed to A/B test products and services with users. And the way he explained this is our users are not guinea pigs. And so, you know, very, very different philosophy than many startups where you're not allowed to give a subpar experience to anybody because that's not treating them like a guinea pig. Everything should be treated with respect. Treat all of your customers as first-rate customers. So that was very, very different. Peter has a somewhat top-down perspective of what's important in the world and what principles matter, and he can pontificate for hours, if you allow him, on many of these topics, but not at the practical level of the product. whereas Jax would be more go down from 50,000 feet to 10,000 feet with here specifically what we should do.

In a startup team, say the first 10 folks, how entrepreneurial should the average person be? And how do you figure out if you really have what it takes to change the rules instead of just play by the rules?

First thing is I always teach that what you're always trying to do from the CEO on down to the most individual contributor to even an intern is look for anomalous data. So anomalous data is the way you discover and have an epiphany about the future. So you're always looking for anomalous data. Square, actually Jack first noticed when we first launched the product, we had a very small number of users, think roughly 20 to 50 users. We had a beautifully designed, crafted dashboard even before we launched that allowed us to track everything. And he noticed that we were subtly and very consistently though over a couple days growing. And when I say growing, I mean we're growing from like 23 users to like 26 to 29 to like 32 to like 37 to like 41. So, you know, not explosive growth. But he turned and looked at me and he said, so why is this happening? And we hadn't really done anything. We didn't have any money to spend on marketing. So there was no initiatives in the ether that would that would actually produce this. And as I started to stare at the computer, I was running through in my brain all the things that could cause this. And I finally realized that what might be happening is maybe people were seeing these little square devices in the real world and they were sort of virally adopting the product based upon encountering this cute little piece of hardware. And then to test that hypothesis, you could basically build an equation that if this were true, there should be a consistent relationship between the number of squares that we were distributing and the signups the next day or the next week. And so I had this analyst working with me run this math and, you know, because I'm not good enough at math. And so I delegated it to Ryan and he came back and it's a very high correlation, like 0.9 something, 95, 0.99, something like that. I'm like, Aha, I think I figured this out, Jack. And actually, not only did we figure it out, but it's actually really good news. Exactly 1% of all the people that were transacting at any given day were actually signing up for Square. So for every new Square card reader or every 100 that we shipped into the world, 1% would adopt Square. So you could actually literally break this down by vertical. So in a taxi, a taxi would have, I don't know, 10, 15 customers a day. so 1% of them would sign up for Square. A coffee shop might have 110 customers, 1% would sign up for Square. And so we had a growth that we discovered, basically a real world viral growth engine that allowed us to grow from no users to a lot of users without spending a cent on marketing. That enabled us to grow to enough payment volume and enough scale that we were able to raise a Series B successfully in January of 2011. Then we were able to invest some energy and some resources into paid marketing and see what the ROI be?

I think you and I probably have always seen eye to eye on the idea of what makes a market for a startup. I've always been bothered by descriptions of the market as something that you map or discover. Almost like you're Lewis and Clark and you're trying to map a pre-existing terrain accurately. But what are your thoughts on that?

Yeah, I totally disagree with that philosophy. I think you forge a market or create a market. You imagine a better future and then you go create it and then you sell tickets. So to me, the best metaphor for getting a startup is like producing a movie. So someone has an idea and a vision of what this movie could be. And then you write a script that details how this actually play out. And then you cast the movie. So you need the right people in the right seats. As we know, Coen would say the team you build is the company you build. And then you have to finance it, just like you do in producing a movie. You need to actually raise the proper capital to produce the movie. then you need to market and distribute it. So you create a trailer, which is basically a value proposition that's succinct and powerful, and then you distribute the trailer and then hopefully people buy the tickets. That's basically my vision is someone starts with a vision of how to entertain or how to improve people's lives, and then they create it and then they sell the tickets. If the vision is not necessarily incorrect, but slightly off, unlike a movie, which is incredibly expensive and difficult to refilm, It's possible to fix or calibrate the vision a bit to sell more tickets. So there is some feedback loop that's possible. So that's where the metaphor is a little bit different. But I don't think you're really correcting the macro vision.

So let's say I'm a startup founder and I've raised a tiny bit of money. You've been exposed to some of the really great entrepreneurs of all time. Is there some general advice that you'd give to startup founders about how to.

Hire and run their team? First is from Finoad, the team you build is the company you build. So with the right people, your chance of success should be somewhere between 35 and 45%, not 1 to 10%. Now that depends what the right people are for every business is pretty different. It depends what you're trying to tackle, the challenges you're going to confront the market you're in. So for example, if you were literally trying to go to Mars, you'd recruit somewhat different people than if you were building the next Airbnb or the next photo sharing company. So understanding the key risks to your company, What are the biggest three blockers or three most likely things to go wrong? And do I have world-class talent delegated and allocated to solving those problems? And I think that's the most important thing, marshaling the right talent against the biggest possible problems and solving them in the order that's most fatal to you. Another thing founders make, another mistake that's very common is to tackle problems that are easier rather than harder. I think you want to go in the reverse order. What are the three most difficult things that can interfere between now and success and take the hardest one first and the second hardest one the third hardest one, then incrementally your company gets a lot easier. But a lot of founders like to defer that problem and I think you take it on right away.

So one thing is, as we like to say, hire like your life depends on it because it does, right? I mean, what else really matters more? And so to what extent should founders worry about managing and how much managing is too much?

In the beginning, let's say the first 20 to 50 employees, I wouldn't spend much time managing. You can manage through informal processes like osmosis. When you have everybody in the same room, and I highly recommend that everybody be working in the same room at this stage, everybody should understand what the prioritization of the company is, what the business equation is, like how everything links together, and what, why things are the risk, why are things are the most important material risks, and what we're doing to try to solve them in what order. So I wouldn't over complicate things with management. I would do a company meeting once a week, every week without fail to ensure people are synchronized completely. But Osmosis will work. It's only when you basically scale beyond about 50 people that you need to create formal techniques to replace informal processes that work very well.

And what about one-on-one meetings? Did you have those from the very beginning in the startups you were involved with or part of?

Once you have people that directly report to you, the technique of a one-on-one, whether it's weekly or biweekly, is very, very valuable. There's a great discussion of this in High Output Management by Andy Grove, which I think is the canonical book on how to run a startup, how to run a Silicon Valley technology company. It was written in 1982, and I don't think anybody's written anything nearly as good since. So I highly endorse his philosophy, but you want to have a regular one-on-one with the people who report to you. It is the agenda is set by the junior person, not the senior person, and you help solve their problems. That's the fundamental notion of a one-on-one. He has a concept called task relevant maturity, which is dictates the pacing of one-on-one. so depending upon how proficient and how experienced someone is at tackling a similar problem, you may change the pacing of your one-on-one review from once a week to once a month. But ideally, it should be no longer than every two weeks, in my view.

You mentioned high output management earlier. What are the things you learned from that book that were really unique?

The most radical, I mean, actually the book has been so influential that many things that were radical and innovative in the book are now so widespread, like these one-on-one meetings. He actually innovated and created the concept of one-on-one meetings. And now most people take that for granted. But some things that are still less intuitive than they should be. The concept of what's called a high leverage activity. So basically you have a finite amount of time in your life as an executive. Where do you focus your energies? And the way you filter things is what he terms a high leverage activities. And basically the definition of a high leverage activity is something with a small injection of your time, energy or resources can massively impact lots of people. So for example, one of the reasons why I like full company meetings every week is even though it feels like kind of a distraction for the CEO to prepare for this, you can impact everybody and improve the performance of everybody all at once. So that's a high leverage activity. Another one is organizational design. this isn't quite as important for the zero to one phase that we're talking about, but later in life when you're thinking through how to array your resources, how to align the organization, whether you should have a functional organization or a non-functional organization, there's one or two chapters that are like the master masterpiece on this that I highly recommend, like people who are running 100 to 1,000-person organizations reading and really think deeply about Another concept that's very tricky for both CEOs and founders as well as executives or first time managers is how to think about delegation or decision making. And he has a very, has an outstanding framework for when do you delegate and when do you not delegate and how to think through that problem. It's something all of us encounter literally every single day. I have principals here who want to make investment decisions. Should I approve their decisions to invest in a company? Should I overrule them? having a mental framework for how to think that problem through is something I use literally every single day of my life. So I highly recommend it for just those. There's many, many other concepts, but these are the fundamental ones. We've also talked before about that book.

About Bill Walsh, the Score Takes Care of Itself. What did you take from that one, and what do you think founders can learn from that book?

This is a very different philosophy than what we used at PayPal. This is more the perfectionist philosophy that we were talking about, Square and Jack Dorsey, and a little bit Jeff Bezos, which gauge the inputs. The philosophy of the book is that by not focusing on outputs, like winning a football game, that's like too abstract a concept. How do we win football games when we're a losing team? The way you fundamentally win football games is by doing everything precisely and perfectly consistently. So you start with a philosophy of we're going to measure everything and we're going to make people accountable for being incredibly discipline focused and their attention to detail and performance. So for example, in football, you want your receivers on certain routes to run seven and a half yards, not seven yards, not eight yards. And you're going to measure that. The most interesting part of the book when Bill Walsh, famously, just for those of you don't really have a lot of football context, took over the 49ers in the late seventies and they were a miserable franchise, horrible, horrible team for several years in a row. And Bill was sort of this outsider that finally got hired to take over the team. And he tells he relays the story of one of the first things he did when he took over as general manager and coach was to teach the receptionist how to answer the phone. And basically he created a manual of here's the proper way to answer the phone when people call the 49ers. And you can think that's kind of crazy for a football team that was like 3-11, I think, which is a horrible record of football to focus on the receptionist. But this is how the philosophy of the score takes care of itself works is every single person in your organization should do everything precisely, inaccurately and perfectly all the time. And if everybody does that consistently, ultimately you're going to win games. And that's basically what you do. That's a little bit like Jeff Bezos' concept of measuring inputs. Was this done correctly? Was it done perfectly?

Was it done with dispatch? And if you have a top-down idea.

Of what kind of offense you're running? I mean, there's a whole 'nother philosophy of how do you decide that the offense that maps to your talent and vice versa. And he actually talks a fair amount about that in the book, which is kind of an interesting there are pre-existing talent bases that could apply a certain strategy very successfully. And there are others with that talent base is not the right for that strategy and matchmaking. And he talks a lot in the book about having, you know, sort of a weak arm quarterback. You have to run a different offense to succeed versus if you have a strong arm quarterback. And that's true in life. Like, if you're managing a team, you can't replace your entire team typically in a company. So you have to figure out the strengths and weaknesses of various parts of the team. and you want to run a strategy or move people's roles around so that they can execute the strategy that takes advantages of their strengths and masks their weaknesses. Part of the art and in editing the team, as Jack would describe it, is figuring out, well, this person should play second base, not first base, and then I can go get a first baseman who can hit a lot with a lot more power. And so basically you're matchmaking roles against talent. And there's a lot of discussion in Score takes care of itself that's pretty instructive as well.

In closing then, there are a lot of founders out there and they're in that lonely place where they're still trying to figure things out. What's the biggest single piece of advice you would give to them as it relates to how to lead?

That's a great question because it is a fairly lonely journey. Even when things are going well, you're on the sine wave of ups and downs, sometimes hourly. You're on top of the world on Friday and then Monday, all hell breaks loose. It's like a roller coaster ride and I sometimes joke with people that, It's a lot, startups are a lot like a roller coaster ride. If you think about what a roller coaster is, so we'd pay money intentionally to have people make us terrified and scream. That's like joining a startup or founding a startup is, or, you know, Elon Musk has the Eey Glass metaphor, but it's basically like, I'm intentionally deciding to go on this roller coaster ride. But at some point, you learn to embrace the roller coaster ride and you actually go on dates and you take your kids to roller coasters. It's a little bit like that when you learn that there's going to be.

A bit of ups and downs that's.

Kind of part of the territory, you learn to get excited by that and the challenges become positive challenges versus terrifying.

Keith Raboy, thanks for coming on the podcast.

It's an absolute pleasure.

Thanks for listening to Starting Greatness. You can follow me on Twitter @M2JR and please shoot me an email with any comments or questions to greatness@floodgate.com. I hope you'll subscribe on Apple, Spotify, or wherever you get your podcast. And if you like the show, I'd be grateful if you could leave us a review on Apple podcasts. Never let go of your inner power to do great things in whatever matters to you. And until we meet again, remember greatness is a decision.