Lessons Learned from Keith Rabois
Whenever I come across a change maker who’s impacting my thinking, I put together a profile of all the lessons they’re teaching me. This Deep Dive Profile is on Keith Rabois. Keith is a legendary venture capitalist, entrepreneur, advisor and original member of the PayPal Mafia. Few people, if any, have the breadth of experience working for and alongside the legendary startup founders of today. Those include Peter Thiel, Jack Dorsey, Elon Musk, Vinod Khosla and many more. Over his career, Keith has distilled down the lessons he’s learned from them and formulated his own. I’m going to cover the top 12 things Keith has taught me about startups, investing and discovering your comparative advantage.
Failure Doesn’t Need to be an Option Mindset
Mindset will be an essential component in any challenging endeavor we face. Without the proper mindset you won’t have the fortitude to push through when everyone is betting against you. Keith’s foundation is that “anything is possible unless proven impossible.” This simple but profound thought has had a tremendous impact on my thinking. The second you begin to look through this lens, you open up an endless array of possibilities. When you believe anything is possible, you don’t limit your thinking to what is already known but you’re willing to search the undiscovered and reveal new ways of doing things. “Is there a reason why this absolutely cannot work? Point me to something that makes this impossible.” Keith adds: “If they can’t give me a specific answer, I’m totally convinced it’s doable.” Unless someone proves it impossible, don’t let it stop you. Don’t allow a failure mindset to get in your way of taking on what seems like the impossible.
Confront Problems Early
Keith believes that the right people combined with the right situations will produce solutions almost every time. This is why facing the harsh realities as early as possible becomes essential. The key is early identification of problems. Entrepreneurs often avoid facing difficult challenges or having hard conversations but the earlier you can identify a potential problem, the more options you’ll have to reach a resolution. “As you wait, your set of options gets reduced. The earlier you identify a potential issue, the greater the menu of options and levers you have at your disposal… A lot of problem-solving is being two steps ahead of the curve, so you have the entire gamete of options at your disposal.” When given the choice between two options select the harder one.
The Team you Build is the Company you Build
If you were building a skyscraper without a strong foundation you’d soon find a pile of rubble. The same is true for a startup and this was advice Keith learned from Vinod Khosla. Most startups have a 90% failure rate but Keith believes with the right people in place, odds of success are more like 30-40%. Not having the proper people in place early can lead to unfixable outcomes or a toxic culture. It would be better to hire slow and make sure those hires can be A+ performers.
Keith has a differing opinion from many founders and investors that industry expertise is not an essential component of an early employee. When they started PayPal, only 3 people knew about financial services. Elon Musk knew nothing about cars before starting Tesla and Keith knew nothing about real estate before starting Opendoor. With too much experience you stop asking the “Why” questions. “People who are experts tend to know what you can’t do very well. They’ve mastered the rules. They don’t ask enough why questions; ‘Why can’t this be done this way? Why not?’ I like people who don’t know what they’re tackling, but they’re fast learners, and they quickly find people who have the history and experience. Then, they’re able to extract the critical information out of them. They’re not blind, they’re just good at figuring out what they need to learn really fast.”
When looking for cofounders Keith tries to identify the core risks to the company and then find world-class people who can tackle each of those problems. “The most important companies are usually founded by people who don’t know much about what they’re getting themselves into.” Don’t limit yourself to industry experts when bringing on early employees but make sure they have the ability to be great. “To me, the best metaphor for creating a startup is like producing a movie.” Someone has a vision for a movie, writes a script, casts it, finances the production, markets the film with a trailer, and then distributes it (and hopefully people come to see it). This is one of the best metaphors I’ve come across for what it looks like to build a company.
Finding Undiscovered Talent
Keith learned the importance of this while on a jog around Stanford’s campus with Peter Theil during his first week at PayPal. “He basically had this point and observation that you couldn’t scale a startup by competing for the same talent that all the large incumbents wanted. At the time, that would have been Yahoo, Microsoft, AOL, or eBay. You had to be able to find people that they didn’t know how to process because otherwise, they’d be able to outbid you in terms of compensation, etc.” In order to succeed as a startup you have to be able to find undiscovered talent and let them thrive. “If you’re going to attract people with extremely high potential, the first thing you have to do is let them thrive. You have to give them the degrees of freedom to do both what they can do very well, and to some extent, allow them to make mistakes.” This can be one of the hardest but most essential elements for a founder. Embrace giving up some control in order to let others thrive and grow.
Countless organizations bring in the most talented people but they never reach their potential because they aren’t provided the space to thrive. “If you try to constrain really talented people, you’re only going to create a mirror of yourself with your same strengths and weaknesses. You HAVE to let people do stuff that you disagree with. You can’t tell how good they are if they’re just replicating what you’d have them do.” This is a mistake I’ve made in the past but when I started giving people the slack, that’s when they produced their best work. Creating a culture that can foster talent will be a key differentiator. You need to give talented people enough rope to prove what they can be great at. If you bottle them up, they won’t thrive and show their true greatness. Provide a process through which people can learn and won’t be afraid to make mistakes.
Having a deep understanding of your hire’s strengths and weaknesses is what separates average founders from exceptional founders. If you can’t distill down those traits it will be difficult to provide the necessary structure for new hires to thrive. For me, I’ve taken countless personality assessments, received hard feedback from people I respect and have done a tremendous amount of deep thinking around how I work and what motivates me. After taking in all that data I setup frameworks to maximize those. The same thought process should be done for hires. Having limited data on people can make hiring difficult but sometimes key hires can be found in the most unexpected places. Keith has hired people solely based on their tweets or their Quora answers. If you’re in some random spot of the world but can show you have insights and can clearly communicate your thinking, this can become your comparative advantage. Peter Theil taught Keith: “The only way to have a competitive advantage in life, when you’re building things from the ground up, is to get really adept and proficient at evaluating people, and evaluating them very early with very limited data and signals.” This is a skill that can be developed when you focus on it.
Manage People on Inputs, not Outputs
This was one of those ideas that smacked me right in the face. On the surface it seems fundamentally wrong but as I explored Keith’s thinking, I discovered it is a genius concept. Keith learned this from former 49ers coach Bill Walsh in his book, The Score Takes Care of Itself. The premise is: “When you focus on the inputs and get even the small things right, the output takes care of itself. Every single person in your organization should do everything precisely, accurately, and perfectly all the time (and if everyone does so consistently, success is imminent.)” Too often we care solely about the results or the outcome which in many instances is short term thinking. What Keith is saying is that if we just judge people on their outputs we will trap our people into avoiding taking on risks. In order to experience success you must be willing to take on risk and fail. If you can create an incentive method where employees compete to take on extremely ambitious tasks, that will allow your people to have revolutionary breakthroughs. If you only provide simplistic KPI’s, you will constrain your talent to staying in that box of mediocrity. Be more concerned with the creativity in their thinking and structure an environment conducive to that. If individuals have a sense of autonomy but are still focused on the collective goal, that is when you find radical breakout performance.
Accumulating Advantages
“You want to aim to build a business that’s so strong that over time, a bunch of people who are clearly only B-B+ can run the company with continued success.” Over time adding more high quality people and systems create a company that could almost run itself without anyone noticing if anyone showed up for work. An example is Google where if everyone who works on Google as a search engine stopped showing up to work, it would probably take years for their monopoly on internet search to erode. This can’t be done overnight and takes years of bringing on the best people in the world. This is something that very few companies on the planet will ever have but we should still strive for it.
Accumulating advantages isn’t something we should only focus on for our business but it’s something we can do for our personal growth. This concept is similar to compound interest, or the compounding of knowledge, and that’s something Keith puts a tremendous amount of work into. Keith credits his success to the basics of maintaining health through intense exercise, having a high priority on sleep (minimum 8 hours) and reading for an hour a day. Keith understands that if he’s able to sustain this overtime, you will be exponentially better off. Keith considers himself a voracious reader and his book recommendations can be found at the bottom. “There’s nothing more valuable than reading high-quality materials. You can tap into the best thinking of all time and become an expert in many dimensions, and forge connections from different fields.”
Do Something Important Because the Pain’s Going to be the Same
This is a mindset shift for many people because oftentimes we’re led to believe bigger is harder, which isn’t always the case.“You basically have this fixed cost of pain, so you might as well do something important because the pain’s going to be the same. You might as well get the outcome that offsets the pain.” When assessing this framework, Keith looks for things that are super ambitious to the point that they’re almost ridiculous. He receives feedback from other VC friends to assess how ridiculous the ideas are. “I want half of my VC friends to laugh at an investment I make. If half don’t laugh, it means I’m not taking enough risk, and the project isn’t ambitious enough.” A billion dollar company may be exponentially more complex, but great founders are able to put people and systems in place to manage this complexity. Keith is saying that hard work and stress is capped so if we’re going to be putting out the same amount of effort, we might as well put it into something big!
Without Feedback, We Can’t Learn
Keith learned the art of feedback during his years as a lawyer and continually receives feedback from people he respects, and more importantly people who have differing opinions. Having people to poke holes in your reasoning can provide essential insights and allow you to discover new ways of doing something. Having intelligent people poke holes in my thinking is something I implement in all of my businesses. I’ve found it to be one of the highest leverage activities you can do. One of the best ways a founder can receive critical feedback is by being very selective with who they raise money from, as opposed to only being concerned with the amount they raise. What you need to realize is money is fungible but not all venture capitalist are the same. The knowledge, connection and advice provided by a lead investor can forever change the trajectory of your business. I’d much rather receive a check for $50,000 from Warren Buffett than a check for $250,000 from my distant cousin who never ran a business. Feedback is essential but quality feedback is even more important.
Feedback can come from all different places and people, but filtering the quality of the feedback is vital. “Being exposed to law, even if for only a year of law school, allows you to ask your council a lot of interesting and arresting follow up questions that lead to epiphanies.” Great questions lead to great answers and those answers can be the essential ingredient in solving your complex problems. Lawyers are trained to identify problems and risks (everything that can go wrong), which isn’t useful for building a business: “The real art in building a business is figuring out how to solve the problems, not identity them.” Cultivate a group of people who ask hard questions, provide real feedback and will challenge your thinking.
Discover Your Comparative Advantage
Everyone has something they’re better at than most which is their comparative advantage. With investing like in life knowing what your comparative advantage is becomes essential in having an edge. When you can identify your comparative advantage and leverage it is when you not only become better, but are able to create more value for those around you. For Keith, it’s “Being able to spot 19-28-year-old people with talent, who have yet to be discovered or experience success, and project their future potential (and then go on to mentor or invest in them).” Comparative Advantages don’t need to be limited to one and Keith has a few:
- “What I’ve been able to do very well is pair with very opinionated, strong-willed, visionary founders and be their compliment”
- “The last 4 or 5 years in my executive career, I was able to blend what might be called ‘design thinking’ with empirical analysis in an interesting way”
- Keith expands: “Being able to work with first-rate designers as a quantitative empirical thinker with a business and marketing mindset is pretty rare”
- Having intimate knowledge around law became a comparative advantage for Keith – “I prefer to invest in areas that have a dose of legal or regulatory risk because I believe I have a comparative advantage versus other investors in assessing and calibrating that risk… Most investors, almost all other investors, have to actually outsource that analysis to a lawyer, and once you start outsourcing things, you revert to the middle of the bell curve… You’re deferring to other people who have a somewhat different risk profile, aren’t incentivized the same, and really aren’t motivated to probe at the edges.”
Discovering your comparative advantage oftentimes isn’t easy but a few questions you can ask yourself to discover is: What do I enjoy doing that others deem as work? What unique skills do I have that when stacked together combine into a clear differentiator? What have I spent more time on than anyone else? Find your comparative advantage and capitalize on it.
Learn through Osmosis and then Create Your Own “Custom Brew”
We’ve never lived in a time where learning through osmosis is more accessible to a large number of people. In the past you needed to be in close proximity with someone or have access to books, but today we can learn through remote coaches, youtube speeches/lessons, books, podcasts, masterclass and so many others. There is no excuse for not being able to take key lessons from the best in their field and apply them to your life. “I’m always watching and taking notes of things I find interesting, and trying to figure out which pieces of the puzzle I can use for my own custom brew.” It’s essential to take the lessons from others across all different domains and apply them to your unique self. “I don’t think you want to replicate someone else’s strategy or unique insights. You have to figure out which pieces of their success formula apply to your comparative advantages, and which ones you can leverage, and which ones you maybe even do better than them. That’s where the art is. I’m borrowing lessons I’ve learned from a bunch of different people, from a bunch of different experiences, from a bunch of different companies, and packaging them together in my own Keith custom brew.” Don’t be afraid of extracting the key lessons from those who have come before you and then mold it into your unique circumstance.
In a Startup Domain, Expertise is Less Important
The history of startups and medicine include many examples of ideas that were initially ridiculed or rejected by the “establishment,” but that later became widely adopted. “People who are experts tend to know what you can’t do very well. They’ve mastered the rules. They don’t ask enough why questions; ‘Why can’t this be done this way? Why not?’ I like people who don’t know what they’re tackling, but they’re fast learners, and they quickly find people who have the history and experience. Then, they’re able to extract the critical information out of them. They’re not blind, they’re just good at figuring out what they need to learn really fast.” Instead of trying to identify the experts in a particular field he begins by identifying the core risks to the company and then finds world-class people who can tackle each one of those problems. “The most important companies are usually founded by people who don’t know much about what they’re getting themselves into.”
With too much experience you stop asking the “Why” questions. Don’t let lack of experience or expertise stop you from going after big goals.
Your Energy is a Limited Resource, Maximize it
Keith knows you only have so much energy and therefore focuses on activities where a small injection of time can massively impact a large number of people. Many management leaders such as Andy Grove, Peter Drucker and Jim Collins have written about “What is the one decision I can make that will remove hundreds of other decisions?” This is an excellent framework to prioritize what’s important. Without this structure we will become bogged down by the non essentials that won’t move our business forward. Identify those key activities and use them as a force multiplier.
Stay curious, never stop learning, and remember momentum breeds momentum.
Sean
Insights and quotes pulled from
Invest Like The Best – Keith Rabois: If You Can’t Sell Them, Compete With Them
North Star Podcast – Keith Rabois on Accumulating Advantages
Books
Why We Sleep by Dr. Matthew Walker
The Winner Within by Pat Riley
The Upside of Stress by Kelly McGonigal
High Output Management by Andy Grove
Return to the Little Kingdom by Mike Moritz
The Score Takes Care of Itself by Bill Walsh
The Sovereign Individual by James Dale Davidson and William Rees-Mogg
7 Powers: The Foundations of Business Strategy by Hamilton Hemler
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