Silicon Valley Innovation in the Covid Era (w/ Raoul Pal and Keith Rabois)

Keith, fabulous to get you on Real Vision. It's really good to be able to sit down and chat with you. I'd love for you to just let people know a little bit about what you do, and then I'd love to dig into your background a little bit as well.

How you- Sure. Yeah, so I'm a general partner at Founders Fund. We're a traditional venture capital firm. We invest about $1.4 billion in startups all across the globe every three years. We try to back the most ambitious founders who have the most, incredible visions about transforming society.

So tell me a story, because you've got an incredible story as well. Give me a little bit of background of how you got to where you are today.

Yeah, it's a fairly serendipitous background. I started actually as a lawyer. I wanted to be a litigator since I was in roughly sixth grade and sort of pursued the traditional legal path. In fact, went to law school right after college, clerked for a well-known appellate court judge in Texas. and then practiced law on Wall Street in Washington, DC for about three and a half years. And at the height of the internet bubble in 2000, I sort of quit cold turkey to jump into this internet. Some of my friends from college have been actively involved in the first generation of internet companies. And over the years, they've been attempting to recruit me, extract me from law. And eventually in February of 2000, at the height of the internet bubble, I eventually gave in and joined this kind of crazy startup in Washington, DC, and Boston with a little bit of Silicon Valley office. They were off to the races. Unfortunately, what I didn't understand or project, maybe, nor did anybody, was that the market was going to collapse in March, March 28th of 2000, and then again in June of 2000. And that we'd be basically confronting a nuclear winter technology startup, Silicon Valley particularly. And so it's going to be a very interesting struggle over the next three years to make a new career for.

Yeah, I was at Goldman at that period of time and so many people were leaving the trading floor to go, this is the big opportunity. It was a total bloodbath thereafter almost immediately.

Yeah, no, in fact, Goldman, my law firm, Solomon Cromwell, our primary client was Goldman. And you could see a lot of people were leaving both the practice of law and Goldman to jump into these high flying startups. But what people forgot is the traditional institutions like high end of investment banking and the high end of litigation or law are like lockstep progressions. And once you jump off that train, it's really difficult to get back on. So I don't think my parents, for example, really appreciated the risk I was taking at the time.

No, exactly. So then, so now we're in 2000. Are you still in a job or have you lost a job at this point? Has the company you joined gone bust?

No, the company was still alive. We were running out of money and we kind of had one of these high flying companies that had been predicated on the cheap availability of capital. So we were teeing up additional rounds of financing. We'd raised about $22.5 million and we're getting ready for a 50 to $100 million round, which at the time was pretty common as sort of a pseudo pre-IPO bubble round. And as the market collapsed in March and then really collapsed again in June, It was very obvious that that wasn't gonna work. They were gonna have to adjust and help. And so we kept procrastinating basically making the kinds of bold, decisive decisions we would have needed to thrive or survive. And as that continued to evolve, I became less and less confident that the company would ever make the necessary sacrifices and decisive decisions that would potentially lead to success. And of course we were also, sorry.

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I became less and less confident that the company would ever make the necessary sacrifices and decisive decisions that would potentially lead to success. And of course, we were also running out of money. So I called up my friend Peter Thiel from college, and I basically asked his advice. I said, what do you think I should do? I don't think this startup's really going to make it for the variety of reasons, et cetera, et cetera. And he said, well, I can introduce you to lots of people in Silicon Valley, but what you should really do is just come and work for us. At the time, Peter had just recently retaken over as interim CEO of PayPal. So on September 20, 2000, Peter had been promoted to interim CEO, Elon Musk had been fired, and Peter was rebuilding his executive team. This conversation was extremely early November of 2000. And so about six weeks later, he convinced me to join the company, PayPal. And I sold my house in Washington, DC, and within 24 hours, actually it was 48 hours, I'd started surfing on a sofa of a friend of mine in business school at Stanford. and went to work with this bunch of crazy bunch of misfits at PayPal in November of 2000.

What were you doing there? What was your role?

So my initial role was I was in charge of competitive strategy, which is a fairly vague euphemism. So I was initially vice president of competitive strategy. I primarily focused initially on keeping Visa and MasterCard from killing our company. So Visa and MasterCard were very conservative organizations. They had not yet converted into for-profit. organizations. So they're basically a country club and they didn't like anybody innovating around the margins of their networks. And so PayPal processed a lot of transactions even back then through the Visa MasterCard system, as well as we developed alternative payment processing methods. And Visa MasterCard were very nervous about our goals, our ambitions, and found various ways of making our life miserable. And Peter wanted someone to stop their harassment, which was my initial job.

So what was your strategy when you, what strategy did you develop there then?

Well, it was a combination of some business strategy, some product strategy, and some legal strategy, as well as some PR strategy. So it was a fairly comprehensive set of techniques designed to put them on the defensive. Basically, we'd been incredibly reactive over the past six months, and this is what was infuriating Peter, rather than being proactive and prescriptive. Basically, they would call us up and say, stop doing this, you must stop doing this, we're gonna shoot you, do that, we're gonna find you. if you do these things, basically making everybody's job miserable, including the engineers and product people who really hate their work being thrashed all the time. It was a very unproductive way to be innovative. So basically I decided to take the initiative and start cracking a whip on Visa and MasterCard in all kinds of ways. And it was pretty successful actually. We were able to defer their interference for years, which is really the key part of the strategy as we became more and more successful as we built our internal internal capabilities, our brand externally, our network of users, merchants, consumers, we had more and more counter leverage. So basically it was time was inevitably on the payroll side if we could slow them down and prevent them from interfering and distracting our engineering and product and design teams. So basically that's what I did for two years. Over time, my role expanded. I took on a variety of different initiatives. The way Peter would manage would be basically any problem that he didn't think was being appropriately managed or handled by the current team. He basically reassigned, often reassigned to me. So I wound up with a conglomeration of random initiatives that basically became a job. So I constantly expanded. At some points, we added eBay, managing the eBay relationship, which is also becoming increasingly hostile. They also wanted to kill us, even though we were arguably providing significant liquidity and market cap. to their shareholders. We expanded our lobbying efforts viS-A-Vis the treasury regulations that were promulgated post 9/11. I took over management of our power seller relationships, our communications team, and then ultimately our financial services team and the financial services team is the pretty critical ingredient to a company like PayPal or Square or Stripe, which is basically how you interface with the underlying networks and infrastructure that already exists. What are the terms of those relationships? What are the economics of those relationships? who are the partners you interface with and integrate with. So it's actually a fairly complicated set of challenges there. So overall, I wound up probably having, I don't know, felt like about 40 different responsibilities. So it's kind of a random jumble, but a kind of fun and challenging experience as well for two and a half years.

Did you think you were going to navigate through all of this? Because you had hurdle after obstacle after hurdle in front of you.

There were better and worse days of confidence, definitely a lot of sleepless nights, because many of the risks I was confronting and personally challenged by were sort of asymmetric downside risks. So if I was wrong or we were wrong, it was potentially fatal. And those are obviously significantly more stressful on everybody, including your colleagues, than like a standard linear relationship. So the downside asymmetry of the risk, was pretty scary and terrifying at some points. And arguably, it's one of the reasons why we eventually decided to sell the company to eBay is we basically all got frustrated and a little bit burned out of navigating these risks all of the time. Some of the upside potential stuff around communications and power seller relationships was a little bit more proactive and top-line growth oriented. And that was a lot less terrifying and much more exciting.

So were you there for the exit as well?

Oh yeah, I was there post our acquisition by eBay. So we announced the acquisition by eBay July 5th of 2000 and closed the transaction roughly November of 2000 and I stayed for approximately three weeks after the transaction closed.

A whole three weeks.

Yeah, three weeks is a very long period of time. Peter was smart enough to leave the minute the transaction closed. Rohloff left a few weeks, Rohloff Spotha who's now Senior partner at Sequoia was our CFO. He left about two weeks after the transaction closed, or David Sacks also left about two weeks. So a lot of the best people in the company really didn't want to work for you, David.

So what did you do after that? So now you've come through this huge warfare. You were exhausted. What's next?

I was either crazy enough or insightful enough to go back and work for Peter again. So Peter was starting a combination of hedge fund and venture capital fund and incubation shop all under one roof. Yeah, in early 2000, early 2003 actually. And I went to work for him, working on a variety of projects, incubating new businesses as well as analyzing current businesses. We looked at even acquiring certain businesses. We were pretty broad in our mandate. So I did that as well as getting involved in some angel and angel-esque investments. Basically, most people at Silicon Valley thought this nuclear winter that sort of Transform Silicon Valley and Technology companies in 2000 was kind of a permanent reorientation. And so almost nobody wanted to start new companies and definitely nobody wanted to fund consumer and maybe not even enterprise innovation. And we were pretty convinced that there was another wave of innovation at some point that would occur in the United States. And so many of the entrepreneurs that had ideas would come to us and gravitate to us because we were willing to fund them and virtually nobody else in Silicon Valley everybody was incredibly conservative and incredibly fearful. And we were pretty aggressive and wanted to find the next generation of entrepreneurs and companies that we could finance. So we became a magnet for talent, basically as a byproduct of a complete vacuum from everybody else. And fortunately, some of those companies did well, including, I believe, Palantir was really created in 2003 internally at AquariuM. as well as many companies we funded and a reasonable number have gone public or become iconic companies.

And how did that structure work? Because I met Peter back then, I was running a global macro hedge fund and he was a global macro guy. That's a weird dichotomy of throwing all these things together or was that just because that was his interest?

Yeah, Peter basically has a fairly unique management style, which is hire a lot of talented people. let them run around and if they're talented by definition, they'll create value and not a lot of prescriptive guidance. Traditional management is not one of Peter's favorite things to do. And so the good news of being successful is you get to choose what you want to do and what you don't want to do. So he basically completely eschews traditional management and basically looks for incredibly motivated, talented people who are ambitious, gives them some rope and lets them prove that they can actually create value, whether in a company or in a fund.

So what was your role there?

I was basically incubate most primarily incubating projects. I did invest in offer term sheets in a few companies, but I knew it was going to be temporary. I wanted to build something again. So one of the companies I had Angel invested in in early 2003 launched in June 2003, a company called LinkedIn. And I was kind of watching and learning how well they would do. It wasn't so obvious that it would work. And there wasn't really a need at the time. I was basically a business person for lack of better term. And so in the beginning, the question was really, could we distribute the product? Could it grow? Could you build a network? And there's not much for business people to do. Plus, Reid is a brilliant business thinker, he's the CEO, so somewhat redundant until we proved that we could get traction. But I sort of knew that there's a very high likelihood that at some point I might want to join LinkedIn if we can get enough scale. that there'd be interesting things to do, like basically monetize, innovate, partnerships, et cetera, which is over time my core skill set. So later, I actually wound up joining LinkedIn, but I knew for the day LinkedIn launched, I was monitoring every single profile that was created every single day to kind of get a feel for the caliber of people because we knew we had to have a balance between people who had opportunities and people who created opportunities. And if we had to skew the entire project, which is really what it was at the time, it would have failed.

So how did you-- I mean, as you said, it takes some careful management in the early days of creating a network like that. What did you do? You're monitoring the skew, but how are you trying to keep a balance? I mean, because it's an organic growth thing, it's not easy to do.

Well, it wasn't truly organic in the sense of it was basically email driven. And so everybody's address book is not a random distribution of address books. So for example, if you start with very successful people, their address book is going to skew towards successful people. And if you start with unemployed people, it's going to skew towards unemployed people. So Reed very consciously started his address book with his own. And he refused to take meeting with VCs until they would adopt LinkedIn. And he also realized back then, the VCs in the sort of Silicon Valley pecking order were at the top of pecking order. They were kind of aspirational. I think that's changed a lot. at the time, they were very aspirational. So he really encouraged VCs to adopt LinkedIn and felt basically that the company that if VCs adopted the product and entrepreneurs would adopt the product because they'd want to meet the VCs and entrepreneurs adopted the product and people who want jobs, opportunities within those companies would adopt the product. And it was basically correct. That is in fact what happened. So email distribution can be very successful if you're a first batch of users. is highly curated and has the aspirational characteristics that you're seeking.

So how long did you stay at LinkedIn and where'd you go after that?

So I stayed at LinkedIn for over two and a half years. Eventually, Reid decided that he no longer wanted to be CEO. And we kind of, unfortunately, hired a bureaucrat to replace him out of Intuit, who is a disaster. But I could tell immediately, even just from interviewing this person, that the culture, the style of management was not going to be a good fit for me. So I left about a month after he joined. Reed, in fact, actually had to go fix that mistake a year later and fire the CEO and come back as CEO for a while until he found Jeff Weiner. But fundamentally, I quit and I reunited with my friend and former Hip-Hop colleague, CTO, co-founder Max Levchin. So in June of 2007, I joined a company called Slide, which Max had founded approximately a year and a half earlier that built social applications on social networks, originally on MySpace and later on Facebook, that allowed friends to interact with each other in interesting, entertaining ways. And that's basically what we built.

Wow. I mean, you've been really at almost every phase of this development of where the internet went, particularly on the social side.

Right. Yeah, that was a good three and a half year learning experience. We went through very much of a sign or co-sign wave of ups and downs of the social network popularity, the social network open or closed platforms, definitely lots of lessons there using data to try to drive the future of entertainment, which was an interesting idea and had its own sort of flaws or limitations. But it was an incredible moment to understand the evolution. You can definitely see the power of what Facebook was building. It was very, very obvious from the moment I started interviewing with Max in 2007 that Facebook was going to be the next generation, most successful company on the planet. We all knew that. And then the question was, could we build on top of it? a successful, powerful company ourselves.

It must have been an incredibly exciting time to see, I mean, because that period of kind of 2007 till about 2015-16 was an extraordinary period of change.

Yeah, my life through Silicon Valley, which basically is 2000-2020, I'd say the entire 20 years has been extraordinary transformation, just different transformations in each two to four year block. But the revolutionary power of technology, the entrepreneurial spirit has persisted for 20 plus years, probably backdating before then, before I moved back out here. But in my 20 years of personal experience, there's a refresh rate every two to four years of fascinating new interesting things. Even in my seven or seven and a half years now as a VC, I'm constantly surprised by the level of innovation, the breadth of innovation, the radical new ideas I get to meet every week.

Many of us get this feeling that obviously, there's some big mega trends that have been playing out, but in the post-COVID world, it feels that things have really accelerated. What are you thinking? How are you thinking about the world going forwards now?

I do, I mean, there's clearly some step function increase in e-commerce, you know, from call it 9% to 16% or something of that, you know, that order of magnitude. But I think the bigger changes are more subtle. The changes that are more interesting to me at least are reorienting how people live their lives because inertia has basically been reduced. So fundamentally, one of the reasons why it's so challenging and so rare to see a breakthrough company like LinkedIn or Facebook and why they're so valuable is reorienting people's time and attention is incredibly difficult to do. People have family commitments, they have professional commitments, they have religious commitments, they have hobbies. And every time you launch a new product, you're asking people to readjust and reassign time and attention to something new and novel. And so to some extent, every new product competes with Facebook, every new product competes with Instagram, every new product competes with YouTube and Netflix and soccer and your family. And so it's extremely rare where something's so captivating that it can reorient people's lives at scale. And the thing that happened, one of the most stark results of COVID is people, everything people had taken for granted for almost all of our adult lives was called into question, at least for a period of time. Like the way I would spend my time, my disposable time, I would go to dinner with friends or work out at a gym. All of these things that were significant time commitments were suddenly no longer available. So I had a lot more discretionary time. That's the positive way of framing it. The negative way to say is I was bored to death. And there's only so many books you can read, et cetera. And there was only so much content available on whether Apple TV or Netflix. And so people were willing to experiment with new things to do with their time because they didn't have the legacy opportunities that they're so addicted to for decades of their lives. And that allowed, I think, entrepreneurs the freedom to innovate. So for example, one topic that I like, it's pretty tangible. was when you typically, like two people in America, when they would go on a date, let's say a first date, what would they do? So the menu of options would typically be, well, let's go to dinner, let's get a drink, let's go to a movie, let's go to a concert, let's go shopping. You go down the list, sporting event, depending on your preferences. None of those were available as a first date opportunity for months in many cities in the United States. But people still want to go on dates. People still want to meet new people. So the opportunity to create a company and product that serves that need is significantly more possible and compelling than it would have been 10 years ago. I would have basically almost been inconceivable that I would have funded something that's a new first aid experience before COVID Could I see myself being persuaded to fund something that's a new first aid experience during COVID Absolutely. Just because all of the top eight choices are basically unavailable certainly in the Bay Area.

Yeah, I think also just that, you know, the simple fact is like, you know, I'm now running a business of 70 people or so from an island of 140 people in the middle of the Caribbean. That's an extraordinary change. I know it was possible before, but we didn't think we could or should.

No, I agree with that as well. I think a lot of barriers were more psychological than practical, but because they're psychological, the perceived downside risk of being wrong handicapped a lot of people from innovating. So experimenting with remote work, versions of remote work, distributed work, et cetera, it's not as if there were physical constraints on it. It was more of a mental constraint, but in total, there was no choice. A lot of people didn't want to confront the potential risk of being wrong and compare it to the potential upside. So I think in any part of human affairs, the crisis created opportunities to try new things, somewhat out of desperation, somewhat out of removing the traditional perceived constraints and recognizing afterwards that the constraints were in fact more perception than reality.

One of the things it feels like we're going to move towards is some kind of virtual company. I know we've got Slack and we've got Zoom and stuff like this, but that seems like that's only part of the story. Because basically the entire architecture of virtual firms can be created now. I think there's a whole different way that this is going to come out of this.

There may be, but I think the missing puzzle to me is less around productivity and there's lots of tools for productivity. we're major investors in Asana, there's Slack, there's Zoom, et cetera, et cetera. People have been focused on tools for productivity for a very long period of time and adopt and modify them slightly for this remote or distributed environment. What's more lacking is the social connections. So typically a job serves a bundle of purposes for an employee, compensation, productivity, self-worth, as well as social. Many people meet their colleagues, their spouse, many people enjoy gossiping, being part of a team, and remote work sort of fragments that, arguably phrase it or destroys it. So I think that the most interesting products and services and tools are going to be ones that allow you to recreate the emotional experience of working with people so you feel like you're part of a team. So for example, many people play individual sports growing up, gymnastics, tennis, golf, But a reasonable fraction of Americans prefer soccer, basketball, hockey, baseball, football because they're team sports and they have teammates. And I think that's the part that's most missing and starkly lacking in remote work right now, the joy of working with people as opposed to just the productivity part of the role.

Yeah, absolutely. So what else are you seeing that's interesting on the horizon? you were talking about these waves that come through in these two or four year waves of innovation. I mean, you're at the forefront of seeing all of this. What are you seeing that's either coming through or on the horizon that's fascinating to you?

Yeah. So I'll caveat this answer with it's going to be a fairly mundane, hopefully not too boring answer, but I don't really do wave based thinking. I'm a founder driven investor, so I don't try to have a lot of macro theses. I basically allow founders that are interesting to sort of pitch me and articulate their vision of the world and what's transforming. And I'm actually actively listening and learning. It's actually one of the best parts of the job is if you're intellectually curious, it's the best job ever because people teach you all day long. So that said, I think there's a fair amount of innovation going on. And how do you work in an environment where strangers may be to be more dangerous than friendly, whether it's socially or professionally. Basically throughout human history in kind of a Sapiens-esque caricature, but strangers, i.e. people you don't know well, were more threatening than positive. So humans are Darwinistically evolved to treat humans that they don't recognize as threats. socialization over the last call it 300 years has basically made people more friendly and less threatening. And we've sort of Darwinistically evolved to probably act that way. I think post COVID though people are going to regress to a bit more of their natural human characteristics where they see somebody, meet somebody that they don't know well, and they're going to react as if this is a potentially risky in Denver. So I think that change will be interesting as it plays out through the business and social world. So someone may be able to catapult the business predicated on that. There's a lot of innovation going on in real estate. People are changing their preferences around real estate pretty quickly. Where do they want to live? How much urban centralization versus decentralization? The characteristics of an ideal home? so for example, I'm now talking to you from my home office, which before COVID I barely used. Maybe 20 minutes a week, I would use this office. Now I use it all day long, every day. And so people are starting to realize that, wow, you know, a home office is not necessarily an option. It's something that's pretty important in their decision making or a backyard or a gym. And all these were features that were very discretionary and very rarely top of mind. for a purchase or rental decision. So that all these transformations allow for people to be much more innovative in reorienting space. And anybody who figures out how to do that at scale could be incredibly successful.

Absolutely. What about another thing of the one of the big problems that seems out there, and I figure a bunch of people must be trying to solve it is trust.

Yeah. Well, if you dial back to my point about strangers, friends, one of the ways you, one of the reasons why you Don't, you're not terrified when you see somebody you already know is there's an implicit trust or explicit trust there. So the question is how to recreate a trust scheme for meeting strangers and the trust and the number one traditionally, even for information.

I mean, it's, it, it's a really difficult world where nobody knows what the to trust any longer.

Now, that's true, too. So the, another Dimension. So that's obviously speaking more in real life online, let's say, what information is accurate or trustworthy? You know, I'm not sure there was ever a solution to this truthfully. I think, for example, we just use gatekeepers as a proxy. So it's very difficult to disseminate information without permission of others. So if you wanted to publish a book, there was a handful of publishers. And if one of those editors and publishing houses didn't bless your content, it wasn't possible really to disseminate a book across the world. Or if you wanted to disseminate quote unquote news, there was only a handful of media publications that would cover. So for example, even in my career when I said PayPal, if we had a story or a frame that we wanted to disseminate in the media, there's really only two choices. There was like the New York Times and the Wall Street Journal version of the story. And if it wasn't important enough and interesting enough or provocative enough for them, There was basically CNET and then there'd be like this blog that's now a little bit more famous that would cover eBay. But that was it. And so if we had something we wanted to tell people, we had very, very limited choices. These days, if, you know, let's say Open Door wants to tell its story, it could tweet, it could write a Medium post, it could publish a Substack. There's so many different options. Reddit, there's so many different places and ways and platforms to disseminate content, podcasts, et cetera. Let alone the proliferation of media, there's shrekery, there's subscriptions, information, and then there's still the Wall Street Journal, the New York Times. And so I think all of these options have allowed for a greater breadth and more people to have access to disseminating information, which allows for greater competition of ideas. But the gatekeepers used to basically have a stamp of authority saying you can trust this. I'm not sure you should have. I think if you look at the content they were publishing, it's not clearly more accurate. In fact, arguably less accurate than the stuff that's published today. But that was the proxy we used, was just narrowing the range of discourse, because gatekeepers can control everything. And the role of gatekeepers, basically, the gatekeepers are not coming back. They may be fighting the last battle. They're trying really hard to put constraints on these platforms. But it's not going to work.

And what about stuff then, the issues coming out of GPT-3 or deep fakes? I mean, these are-- I mean, things are moving very fast and people are going to spin to try and catch up with all of this. I mean, GPT-3 alone is quite extraordinary.

It is. In fact, one of my colleagues and friends, a principal at Founders Fund, used it to recreate one of his investment memos, and arguably it's better than his. I'm not, please don't tell him that. In any event, it's a quite robust, quite interesting product. Like in any technology war, though, I think there'll be competition on creating sort of fabricated content, synthetic content, and then there'll be competition on detecting some kind of content, like on the deepfake side. So there'll be some people who create new products that allow you to easily create deepfakes, and there's going to be other companies that are interested in detecting it.

It just becomes an arms race.

Yeah, it'll be all arms race or horse race, back and forth. Technology kind of works that way. So it's not really clear how much of a threat it is. I mean, in some cases, it may be more of a threat for a period of time, and then we figure out a solution, we figure out either ways of regulating or technology solutions or both. And so I'm not incredibly stressed about it personally.

So if you, obviously you've missed many deals that have come your way. What's the one that you just go, oh, idiot, why didn't I see it?

I rarely actually have that problem. My biggest problem is getting a little, well, let me backtrack. The hardest part of this job is deciding which meetings to take and which ones not to. Because you can't take an infinite number of meetings and there's effectively an infinite number of entrepreneurs, especially if you're a seed investor or series A investor. And so you have to prioritize. and the question is then how do you filter what meetings you take? When I look back over, call it 13 years of angel investing and seven or eight years of professional investing of the meetings that actually occurred and transpired, I don't regret almost any decisions I made in terms of missing something. It's the meetings that I didn't take because I filtered on some basis, obviously an artificial basis with hindsight, that I really regret. So almost every bad decision that I've ever made was fundamentally a result of not taking the initial meeting. Second, in so far as I've made a mistake post meeting, it's usually actually adhering to reference checks. The two biggest mistakes I ever made professionally as an investor were as a function of negative reference checks from quality and highly credible sources about the founder. And so I think you have to be very careful about what characteristics you're looking for in a founder. Because those two mistakes alone could easily make someone's career as an investor. So people will tell you, of course, you should reference checks, blah, blah, blah. That's a canonical advice both for hiring and for investing. I think it's more accurate and more useful as an employee than it is as a founder. And you have to be very judicious about using reference checks as a filter when you're investing. and then, you know, I spoke recently about probably the biggest just miscalculation ever was I totally just didn't understand air table. I didn't understand how they would get distribution, even if the product was superior. It just never occurred to me, like any spark of an idea of how that could work. So completely missed it. 100 raw. That, you know, that'll happen. But hopefully, hopefully I don't make that mistake too often. And that's why you have colleagues. I mean, one of the virtues of having a partnership. is that even if you don't appreciate something, hopefully, ideally, one of your partners sees that spark in that brilliance.

So, the VC world is very different to the rest of the investing world because you have to deal with zeros. How does that work in your mental framework? Because investing still is an emotional business, even though we're all told not to get emotional about it. Invest your time in something and a fixed percentage of these will-- well, not fixed percentage, variable percentage will go to zero. How do you get around that?

I don't know that that's that difficult. I think if you-- it is for.

A traditional investor, right? That's the worst thing.

Yeah, but I think it's-- well, I think in fact, if anything, it's more important to not worry about that. I think the people who get trapped actually, and don't do well or worry too much about it. I think it's the license to make mistakes and be wrong and have the company not do well that allows you to be successful. So for example, to me, the metaphor that works really well is baseball. Baseball, if you're amazing and best in the last century, you're going to be right sometime between 30 and 40% of the time. And that's what you're striving for is 30 to 40%, you're going to be successful. and many of the best baseball players ever have lots of strikeouts. And each of those strikeouts is painful. If you watch a baseball player when they strike out, they're not particularly happy about it. They can be pretty furious. They could throw the bat, they could, you know, yell at each other. It's a pretty emotional experience. Nevertheless, part of being a successful baseball player is striking out sometimes. And if you try never to strike out, you know, I'm not sure you'd be a great baseball player.

And do you think the ongoing asymmetry of risk in technology investing is going to be there. I mean, because that's the implicit bet, right? The implicit bet is technology above all things has this asymmetry to it currently.

Well, if anything, it seems like the asymmetry is increasing. If you look at public markets, if you look at the number of, let's say, $10 billion plus the market cap companies that have created in the last five years versus the prior five. So if anything, I think it's more likely to continue for a while than to decrease. Arguably one mistake a lot of investors, probably myself included, I don't primarily do later stage investing, maybe over the last 10 years, is to not realize how much upside there was on many of these companies. I think many of us thought that the market cap for some of these successful companies would be more like 4 billion to 10 billion. And it's turned out to be more like 20 to 100 bill. And so I think there's a lot of people who are very successful investing either in the public equities of a company that went public or the late stage rounds. So for example, another massive mistake I made is I could have invested in Carvana at $250 million pre or post, I can't remember. It's now a $35 billion company. So that's 100x in three plus years to complete liquidity. Unfortunately, I'm not the only person who made that mistake, but it's a very stark one. of, wow, that's 100x in the public.

Markets.

In three plus years is an incredibly great opportunity. You could retire on that and do nothing else for your life.

And so that leads to the question is, is the public markets are pretty insanely priced? What's your thought process on that?

I'm not really sure. So for example, I think part of the reason why you're seeing these valuations is The discount rate that people are applying over the next 20 years of cash flow is very low because interest rates are in fact basically zero. So if you just do your standard discount cash flow analysis, you're like, Here's the cash flows we're projecting. And there's some secular trends toward technology being adopted, but we're not even really, we're not looking at this as like a Peloton or a DoorDash where there's clearly been a transformation. We're just literally extrapolating the growth rate, so 40% a year. But the discount rate has suddenly gone to effectively zero, which by definition creates the valuation explosion. I think the volatility and risk is not being priced in, but that's always been a somewhat challenging thing to price, certainly for private investors, is virtually impossible to come up with an agreed upon empirical basis of risk. At least in the public markets, you have a sharp ratio, and there's ways of assessing performance against risk. Private markets, I don't know any way to really evaluate the risk we're taking on in early stages and compare portfolios. But the public markets, and also I've always had this belief that public markets contrary a lot of popular wisdom in quotes are not short-term focused at all. And if anything, the last year has proven that post COVID, you can look at almost any stock you like, And there's no way to argue that the public markets are short-term focused. Look at Tesla, look at Zillow or PayPal. These are all based upon transformations that are allegedly happening or Shopify. You can't do a bottoms up build of Tesla or Shopify or even Zoom truthfully and get to the kind of valuations you see. It's a long-term bet based upon a couple of predicament hypotheses that people are willing to invest. And these are all like, you know, fairly significantly traded stocks. These are not like low market, you know, low floats or anything like that. So the, the vast preponderance of investors are taking very long term Horizons right now all across the market.

Having been in the markets for 30 years or so, I do get a sense that everything has changed in some respects, that, as you say, there is a long-term element. There's a complete shift. If you look at a company like General Electric, it looks like it's going to go bust. Anything that is in the old economy that has margins of traditional margins of 10% to 15%, nobody cares any longer, because all these other businesses have margins of 60%, 70%, 80%.

Well, there's certainly a flight, a capital attractiveness of high margin businesses. But that said, one of the counterpoints would be the best performing stock or certainly the top 10 best performing stocks over the last decade is Domino's Pizza. So you think about the most mundane traditional business ever, which is producing pizzas, and literally Domino's has outperformed Google and Amazon. So to some extent, it's not totally true that you have to find a technology stock. Now Domino's is obviously taking advantage of using technology creatively within their own business, But at the end of the day, they're still making pizzas and they're making them the way they've always made.

Yeah. There's always going to be a consumer play, right? Because the virality within consumers is a hugely profitable business once people do it. What do you think about SPACs? I mean, that's a big thing.

It's become a big thing. I saw a stat yesterday that 40% of the public money raised basically in the last year is through SPAC. So if you take all the money raised in IPOs and similar concepts, 40% of them are through SPACs. So it's obviously a big deal. And I think it's going to accelerate.

Before it-- what's so special about it? I mean, isn't it just basically a reverse IPO? Yeah.

I mean, technically that's exactly what it is, is it's a reverse merger. And there's two elements I think that are particularly attractive right now to technology investors or board members or entrepreneurs. One is there's a perception of speed. So the ability to go public from zero to one is mostly true that in a SPAC process, you could probably achieve that in two to three months. And a traditional IPO is typically four to six months. I think that's a little bit mythical. I think they'll basically regress to about the same numbers over time. But right now, there's a perception that path one through SPAC can be done a little bit faster. And given that there's an election coming up and perceived volatility and turmoil, so same with that election, I think a lot of people want to be public before the election. So that's put a premium on speed. The second thing that is more substantive and maybe more permanent is because it's an acquisition, you're legally entitled to guide to about three years of future earnings or revenue potential. And that's been true of acquisitions forever. And in traditional S-1 process, you're really not allowed to guide into the next one, two, three years. So some companies, particularly like let's say a Virgin Galactic, doesn't have any appreciable revenue in the short term, but they have significant revenue in the future, can at least walk investors into here's how this translates into money. Whereas traditionally through an IPO process, you weren't really allowed to do that. And so in a COVID world, because 2020 is such a strange year, tumultuous at least in the second quarter for most businesses, if you want investors to focus on what does 2021 look like, it's easier to do that through a SPAC process than it would be through an S-1. S-1 is very constrained about what you're allowed to say about 2021. And most public investors really care about what 2021 starts looking like. They don't really care about what April 2020, which is a weird time in history, looks like. They want to see the line between 2019 and 2021. Drawing that line is much easier to do through an S4 or a SPAC process.

Although the other thing it does remind me of, there's a lot of shell companies that used to be used, particularly like Canadian oil companies, gold companies. In Australia, they did it. And a lot of people stuffed a load of shit down people's throats with it. Do you think there's-- I mean, I presume there's going to be a risk of that too in this whole process. There's going to be some chaos.

But that's been true of public offerings for a long time as well. I mean, there's high profile explosions like Enron, you know, are very well covered. I do think there's a relationship, though, between the cost of a transaction and the adverse selection. So the traditional shell companies, if you'd sort of look through all the fees and money moving around, there's a significant expense to those transactions. And as the expense goes up versus the investment banking fee associated with an IPO, you're going to have adverse selection that the only people willing to pay those ridiculous fees or exorbitant fees are people that need to. And so as they've normalized, and you're already seeing this in the SPAC process, they're normalizing where Arguably, in some ways, a SPAC process may be cheaper than a traditional process, apples to apples, including all the expenses. You're going to see positive selection bias, I suspect. I also agree with I think Jay Clayton's idea of increasing transparency around the compensation to sponsors is a good idea for stocks because then you can also see whether there's adverse selection by whether there's an inflated premium for bringing the company through this process, and that should be a yellow flag. for potential investors.

Yeah, absolutely right. So I want to ask you a final question. If there's a stock or a trend which you think people don't really get yet, what is it? If there's one thing that you're thinking, people don't really understand this one yet. It could be a negative, it could be a positive.

Wow, I'm like blanking. I'm trying to think of that.

I mean, one of the classic examples is the market was entirely split by Tesla. You know, that was a classic example of some people just said, look, it's going to the moon. Other people said, it's a fraud, it's going bust. Is there anything that you think is just-- people just aren't really seeing what you think you see?

Not necessarily. I mean, you know, maybe it's because I don't do public market investing. You know, I'm not really focused on that. I try, you know, the things I saw last year are almost now obvious. So I, for example, invested in a homeschooling company. last year. And I've been working on this for two years. I've been trying to find a company to invest in increasing the adoption of homeschooling us. And most people thought I was pretty crazy. They're like, why would you do that? What's the importance of this, et cetera? And underneath the hood, you could find lots of reasons why this would be an incredible investment. And that's why I was trying to find one for two years. And post-COVID, all of a sudden, everybody's like, homeschooling, that's the greatest thing ever. Like, oh my God, you know, like, how did you find them? And why, how do we invest, et cetera? So you move very quickly from non-consensus to consensus. And that's part of the art of being an entrepreneur. So when we started Opendoor in 2013, everybody who had real estate expertise told us it was actually impossible. And I actually have emails from some very successful people saying, this just can't be done. Now, literally everybody thinks it's inevitable. It's just a question of whether Zillow, Opendoor, or some other entity captures all the market. And there's no debate, nobody is debating whether this is the future of real estate transactions. Airbnb was similar. Everybody thought it was incredibly crazy to think that at scale, people would stay in strangers' homes. But now, inevitably, Airbnb will be more valuable than any hotel chain on the planet.

It feels to me that we've just started, I think video is an underrated disruptor. It feels to me that I think universities outside of Harvard and stuff like that, I don't think they're even relevant any longer. I mean, we're looking at education and as a disruptor, it's so easy for us now, I mean, even to spin up a university essentially, and you can collapse the cost of it for students and create really great experiences. I think a lot of this is going to change. Video does change a lot of things.

Yeah, I agree with the education. The education, university education particularly, I think conforms to my views about how inertia has suddenly been inverted. And now you can imagine things that would have been insane to really invest in before. So yes, there's some elite brands like Harvard, Stanford, et cetera, that they still be able to command a premium because of the halo effect that that credential signifies to people. And that may persist for a very long period of time. You can argue that fact that Harvard's the most valuable brand on the planet, just as a brand level statement. But the quality of education that people receive that's divorced from the actual brand halo is very mediocre at universities. It's certainly not worth $20,000, $30,000, $40,000, $50,000 a year. And so because of that and because of the difficulty these congregated environments have in just being safe, there's a lot of opportunity right now to recreate education at a lower cost, higher quality, and people will try it where they would have been terrified. How many parents would have been willing to try a novel newfangled effective alternative to university last year? Some set, but at least 10x more, possibly 20x more, somewhat out of desperation of I don't want to send my kids to this ridiculously expensive Zoom class. or I don't want my kids spending all their time in tight quarters with a lot of other young kids getting drunk all the time and therefore likely incubating more viruses. So I think because of those constraints, the opportunity to innovate on education, particularly the higher end of education, is more attractive than any time in American history.

Yeah, I think there's a huge change. And also just because student debt loads are just unsustainable, you cannot do that to the young generation and just say, well, here's your start in life. You need to pay.

That's never made any sense. Peter Thiel talked about this for like a decade. And everybody ridiculed him a decade ago in like 2010 when he started talking about the curse of student debt and how the ROI on his debt for, you know, call it 80% of the universities in the United States made no rational sense.

No, exactly. It's a mess. Somehow it's going to have to get fixed. But Going forward, we're gonna have to fix that as well. Look, it's really fascinating to speak to, and I really enjoyed picking your brains and hearing some war stories as well. I think people are gonna find it really rewarding and just to get your perspective on, you know, what's going on and what's coming up.

Really enjoyed it.

Great.

Pleasure to be with you. Ever so much for your time. Thank you. I hope you enjoyed this special episode of the Interview, the premier business and finance series in the world. For even more in-depth content and expert analysis, Visit the membership link in the description and unlock a month's access for only $1. That dollar can change your life.