Episode 45: Keith Rabois - Managing Director at Khosla Ventures

0:00This week on Generating Alpha, I sat down with Keith Roaz, one of the most influential operators, investors, and builders in Silicon Valley history. Keith is a managing director at Coastal Adventures and a founding member of the legendary PayPal mafia. He's been instrumental in building some of the most important companies of our generation, serving as an early executive at PayPal and LinkedIn, and later as COO of Square during its hyper-growth phase. As an investor, he's backed companies like Airbnb, DoorDash, YouTube, Yelp, Affirm, Ramp, among many others. For over two decades, he's operated the highest level of company building, product development, and venture capital, shaping entire markets and mentoring the next generation of founders.

0:45In our conversation, we talked about how Keith thinks about identifying and backing breakthrough companies, what he learned working alongside Peter Thiel, Elon Musk, and Jack Dorsey, the principles that separate world-class operators from everyone else, his contrarian views on talent, culture, and scaling, and much more. If you enjoyed this episode, please follow the podcast and rate it to five stars on Thoughtify, subscribe on YouTube, and share it to anyone who you think might find it valuable. Thank you, and I hope you enjoy listening. Thanks, Keith, for coming on. I really appreciate it. Pleasure to be with you.

1:16Well, I want to start off where I always do, at the beginning. If I'm correct, you grew up in Edison, New Jersey. Tell me a little bit about your childhood, what your early environment looked like. Yeah, that's true. I grew up in Edison, New Jersey. I spent the first 18 years of my life in New Jersey. I went to public schools in New Jersey, thought I was kind of on this pre-law, pre-political trajectory. So was pretty much intending to stay on a very conventional, professional path and did all the things one does to get into a good college, all these extracurricular activities. I probably was president of like somewhere between three and seven different clubs simultaneously and did a lot of like debate and model UN stuff, played some soccer, high school newspaper, blah, blah, blah, blah, blah.

2:07Crazy enough was even like treasurer of the French Honor Society, like everything sublime to the ridiculous. us. And after high school, you went out west to Stanford in the late 80s, during a very interesting time in kind of Stanford history, during which the Stanford Review started, also during kind of the tail end of the Cold War, where I'm sure many of those controversies kind of got brought up on campus. I'm interested in just how that time shaped you as a person, how you got to meet those people early on at Stanford that ultimately ended up kind of you working with for the rest of your career.

2:37Tell me about that, like four years at Stanford. Sure. So yeah, I went to Stanford in the late 80s, finished in the early, mid-90s, and studied political science. On the Cold War stuff, interestingly enough, we were covering, a lot of my majors was political science and strategic political science, and we were covering a lot of debates about realism and idolism and liberalism and how it should be applied to military doctrine in the Cold War, political doctrine, and political competition with the Soviet Union. Obviously, a lot of that got obviated a few years later, although the structural strategic planning elements of political science, Clausewitz, et cetera, are never out of date.

3:24The nuclear deterrence strategy and things like that still apply in many ways, like how to think through in more of a multi-power world than a bipolar world. But fundamentally, that stuff is really useful and still is. But again, I was calibrated towards like, how do I get into a really attractive law school as a high credentialist kid? I did get involved in the Stanford Review by accident, sort of. The first day, literally the first day of my freshman year, I was sitting in my freshman dorm room. And this guy shows up and delivers what was actually the second edition of the Stanford Review. uh this is september 1988 and i look at it i'm like what is this and there's some photo of like cartoonish kind of photo of ronald reagan on the cover i believe and it looks interesting and so i started a conversation with the person who's hand delivering this to my dorm room which is how basically how content got delivered back back then by all like student organizations flyers pamphlets etc and it turns out this guy delivering to my dorm room was peter teal So I got involved, recruited into the Stanford Review, started writing for the review, editing the review, spent many years of my career in college working on the review, writing for the review, editing the review, recruiting the review.

4:47And so, but it's all very spontaneous. Got to know Peter quite well, mostly through the Stanford Review and other sort of projects like that. didn't really ever think it would evolve into a business, you know, kind of connection. Peter was on the fast track. He was about two years older. I think he was a junior at the time. He was a senior. And he was on a fast track to law school. He wound up attending Stanford Law School, clerking for an Apollo Court judge in the 11th Circuit, and then working at this law firm, Sullivan Cromwell. I thought that was my, like, also natural trajectory. And in fact, I followed most of that.

5:24I went to law school, clerked on the Fifth Circuit, which used to be part of the Fifth Circuit, so pretty similar. Wound up working at the exact same law firm of Solon or Cromwell. He was smart enough to quit after three months and five days, realized he didn't want to be a transactional attorney for the rest of his life. Probably fairly prescient. It took me three and a half years after clerking to figure out that I probably shouldn't be a litigator for the rest of my life. But eventually wound up in the same place. Did that time clerking feature anything? I think because I interview a lot of people who went to law school and who worked as lawyers for a little bit before they pursued their careers in various types of investing.

6:02And they say kind of taught them how to think. Was there any value in that for you? Yeah, absolutely. There was a lot of value in attending law school. I think you had diminishing margin returns after the first year. And, you know, maybe you could justify the ROI up to two years. But fundamentally, a lot of the law for better for a lot of the society today, business, personal life, whatever, is like regulated, overregulated, arguably, but infused by law and regulation everywhere you look. And so having a native, you know, kind of first principles understanding of how does law and regulation work?

6:36What's what's art? What's science? What can be manipulated? What isn't has been very useful in financial services where I've been both an entrepreneur and an investor for a long time. And there's a lot of constraints that are imposed by law and regulation. Really understanding the law and regulation and how to manipulate the law and regulation has allowed for product level flexibility and innovation versus having to outsource that. Same thing. Other areas have had success in or related to IP risk. I was an IP litigator as well. So I really understood that stuff from the first principles. When YouTube was founded, I sort of did the diligence, the IP diligence for them on behalf of the company, on behalf of their VC together, because I could do it all in my brain.

7:19And that's pretty rare. So being able to assess legal risk and quarterback and calibrate in your own brain versus outsourcing it into some law firm or some lawyer is a very strategic advantage. It's also helpful in negotiation, being able to trade business terms for legal risk, legal exposure. and you take on that risk, well, I'll pay you 20 cents more. Or don't take on that risk and I'll pay you less or whatever. Usually, if you have two different people working on the project, they can never speak the common language. And so that's not possible to make those trade-off decisions. So it's been very strategically useful.

7:55And it has been relevant to some jobs as well. At PayPal, part of my roles over the years when I was working at PayPal was to use the, most of the federal government to ensure that our enemies, and we had a lot of enemies at PayPal from Visa MasterCard back in the day that tried to kill us and eBay that hated us and tried to kill us. And later post 9-11, due to the Patriot Act, the Treasury Department wasn't our best friend. Had to be able to use the political and legal world to help defend the company became a core part of my job and having the legal experience, expertise, and network, truthfully, of who to retain, who to work with, and why was incredibly valuable.

8:43And so we'd love a little bit more clarity on how you went from Sullivan and Cromwell to PayPal. And then ultimately, I'm interested in how your time there shaped your thinking on competition. Because it seems like everyone wanted to kill you. Everybody did want to kill us. Maybe that explains Peter's view that competition is for losers. or something. He's like a byproduct of his own history. But yeah, so I was working at Solomon O 'Connor. I clerked for a year post law school graduation, which is what most sort of highly credentialed the law school graduates aspire to do. I worked for my hero, this federal judge named Edith H.

9:20Jones. And it was an incredible experience. And then after clerkships were typically one year long, after that, you go back into practice. So I became became an antitrust litigator, kind of a white collar criminal defense, and to some extent IP litigator at Sullivan and Commonwealth for the next three and a half years. So basically left at the height of the internet bubble of February 2000, I jumped out of Sullivan and Commonwealth as a beginning fifth year associate into this crazy wild, wild world of the internet, what later would be called the internet bubble, but like at the time was the internet revolution.

9:57And so I jumped in it. I was recruited into it. I had a mutual friend from college that I kept in touch with that had been successful in the first generation of the internet with a startup that got acquired by this cool, trendy company at the time, search engine called Excite that nobody remembers. but Excite was cool and trendy and valuable for a while. And so after his Excite experience, he got recruited to help start another company. He thought of me. There was such hype around the internet that density of talent was really difficult to arrange. So you couldn't just hire the most obvious candidates for new startups.

10:34So they were desperate and hired like recovering lawyers like me, management consultants, whatever. So I had an opportunity to jump careers I was crazy enough or pressing enough to do it in the height of the internet bubble February 2000. Six weeks, seven weeks later, after I started, the market collapsed. So the advice I got that I would enjoy this, that I might be successful at it, was all probably pretty good. The timing was about as bad as you can get. So I left this really prestigious law firm to jump into this completely unknown startup when that was cool and interesting. And everybody was kind of doing it, so to speak.

11:12and then you know the world changed six weeks later and had to learn to sort of swim for myself and you were talking about how kind of it was really hard to create talent density in that internet bubble how did in the wake of that internet bubble how why do you think what was unique about that pool of talent at paypal and why do you think like the members have achieved such successful outcomes well obviously peter and max deserved the credit they did virtually all the hiring um max hired basically all the engineering talent were friends or friends of friends that either went to high school or college with at the university of illinois champaign um and so it's very difficult to get into the engineering group unless you have strong connections we basically didn't hire anybody that was more than two degrees removed peter hired most of the business people product kind of people um so they you know had an eye for talent and And they marshaled this critical density.

12:06Part of the reason they were successful was we hired sort of different types of people than the more homogenized larger companies would have. Most of the PayPal people were a little odd, a little weird. Max Levchin said on stage 18 months ago that I was the most normal person that worked at PayPal. And I'm not sure that's a compliment coming from him. It's partially an insult. But it's actually factually probably true. So if you think about me, who's generally considered a little bit like an outlier somewhere, being the most normal person, you can imagine what everybody else is like. Yeah, I think Peter starts zero to one somewhere early.

12:44And he talks about how of the six, you know, sort of founder, founding team members of PayPal, at least four of them built bombs in high school. So there's a rebellious streak. Now, before you get a little nervous about that statement, at least three of the four of them were living in communist countries while they were building bombs. Pretty justifiable. And after PayPal, if I'm correct, among other things, you spent time at Square and LinkedIn and BizDevOps. I'm interested, why being operator? You were kind of in this very interesting place at PayPal where a lot of the people ultimately became founders.

13:18Why being operator? Well, I didn't think there was any other realistic choice. I might have understood what venture capitalists did at a high level. I certainly read these books written about the late 90s and the internet bubble about OPCs, but I didn't really have enough direct exposure or enough expertise. I thought it was somewhat aspirational and I was intrigued about investing, but I got to start taking baby steps and it truthfully very much were baby steps of angel investing. And I'd angel invest in some startups, but the reality is I was investing in startups founded by friends of mine from PayPal.

13:55So if you look at my first five angel investments, one of them was LinkedIn, one was Palantir, one was Yelp, one was YouTube, and the fifth one was Zoom. Unfortunately, that was Z, but - Yeah, the Kevin Hart Zoom. Yeah, Kevin Hart. But Kevin didn't work at PayPal, but he was an early investor in the company. So all five were derivative from my PayPal days. So it wasn't like going out to the world and meeting all these people. I was just cherry picking who had PayPal that was going to start a company I thought would be a successful founder. Turns out all those investments thrived. So I started like sort of four for four or five for five, which is a pretty good way to become an investor.

14:42But it wasn't really by intent. It was totally serendipitous initially. It's absolutely incredible. I'm an incredible portfolio. And I mean, starting off going four, four, four, or five for five. I should have just retired, I think. You're going on top. It's like Sandy Koufax, you know, leave all your ads. And you also started, like you angel invested more kind of, you did more volume angel investing in the late 2000s, if I'm correct, with Kevin. Yeah. Yeah. Once these companies were tracking well, then it started scaling and doing more angel investing. I realized I liked it. I realized I had the shot at being successful at it and wound up investing and transcending that initial network.

15:29I invested with Kevin and Javid, as you mentioned, and Airbnb and things like that that weren't directly related to PayPal. And what do you think were the most formative investments over that period that made you kind of think, oh, I want to be an investor full time or really just shaped like your philosophy on investing in early stage companies? You know, in many ways, joining both Zoom and I'd say Zoom and to some extent, Yelp probably were the most formative because in both of those cases, I joined the board of directors, which is a closer proxy for being a VC. In many cases, an angel writes a check and doesn't really do that much.

16:08But as a very active angel, meaning like I would join the board of companies or even if I didn't join the board, I would be acting in a fairly similar way as a consigliere to the founders. I did that with like the YouTube guys and Chad when they were first starting YouTube. So I even hid YouTube when they were small in the excess part of LinkedIn's offices. So I could kind of meet with them, you know, quickly and easily and, you know, see what they're up to. But I think that was probably more formative as not being a passive angel investor, but being an active board member and participant in the company building stages was probably a better predictor for where my career would eventually emerge.

16:50And in your eyes, what is being a consigliere to founders mean? Well, it's just like a consigliere if you watch these old mafia movies and stuff. It's just like giving advice and counsel to the primary decision maker, which, you know, in a company is the CEO. And advice and counsel can be like, they may be struggling with the challenge. Like, I don't know what to do. What should I do? Do you have a set of ideas, initiatives, conceptual frameworks for answering this? Or sometimes it's giving them feedback that maybe other people are afraid to more like an obvious sense of like, Hey, the CEO is, you know, pretty intimidating.

17:27He really successful. I don't know if this idea is the best idea. You know, sometimes I'll, you know, be helpful in challenging the CEO and, you know, just asking probing questions. Are we sure this is right? Are we sure we're measuring this with the best methodology, you know, et cetera? Are we sure like, you know, the opportunity cost here is better or worse than there? So just asking questions and then, you know, founder, being a founder is extremely lonely. You know, over the last 20x years that have been in tech become very close. A lot of founders work very closely with them, sometimes for more than a decade at a time.

18:01And you see, if you get to know someone really well, you can feel the loneliness, you can see it in their eyes. And so having someone who has context, who really understands the company building process and the state of the company that can be a sounding board and just someone to talk to almost like in a pop psychologist way is really valuable. And how do you think the counsel and advice you give to founders is like more well-educated or better in a sense than the majority of VCs like yourself? Well, I think very few VCs have actually suffered through virtually, there's virtually every, I've probably suffered through virtually every kind of challenge that exists in building a company.

18:43And there's like daily, weekly, monthly, quarterly challenges. And I've probably confronted them all at some point or watched, you know, witnessed very firsthand every possible version of a good answer and probably made every possible version of a mistake. So, you know, a lot of the advice is it's not that the path is bad or good. It's just that the grass isn't usually green or meaning there's significant trade-offs. And so sometimes the best I can do is to point out the trade-off saying you can do X and it's a pretty good idea to do X because of the following reasons. However, you should be alert that these are the things that typically go wrong or the side effects or the collateral damage.

19:23So make sure you're choosing intentionally and wisely that this is definitely what you want to do. And that's a benefit of a lot of experience, both horizontally and over time. So it's more about getting those mental frameworks rather than telling them exactly what to do. I basically never tell a founder what to do. There's a running joke I have with my best friend and that like who's a founder that i once told him what to do once and like i can remember every time i've ever told the founder what they what they actually should do um and like so usually it's more like here's a framework for thinking through the problem and you can see whether it's resonating by whether their eyes light up but it's it's never a there's times where i might react to like, you know, like visibly, like do that.

20:11But then I usually take a step back and explain, yeah, the reason why I wouldn't do that is I got burned doing that. Or I watched this person getting burned doing that. So you can explain the logic and then let them chew on. And usually they'll have a rev or two, but what if I did it this way and torqued it or remixed it slightly? And we've talked about advising seed stage founders before you get the chance to advise them, you first have to invest in them. So what are the things you look for or index most highly on in seed stage founders? It's pretty straightforward. It's like I meet someone and it's like, do I have a reason to believe this person has a non-zero chance of changing the world or transforming an industry?

20:51You think about that, it's kind of ridiculous. You start a company with your friend from college, your roommate in his proverbial garage, and you're like, I'm going to reinvent financial services or I'm going to reinvent all of the future of news and news consumption like X or something. It's kind of an unreasonable and borderline irrational, sometimes delusional ambition. But there are people who have a moderate chance of pulling it off. So the art of being a seed stage investor, VC, angel, consigliere, whatever, is assessing people and understanding whether the probability, which in a normal person's hands of changing the world is zero, rounds to zero, to something that's not zero.

21:31That's the number one criteria. Is there a non-zero chance that this person is going to rearrange the world to their will? Before we go back to the episode, I want to take a short break to talk about my sponsor, Roe. The Generating Alpha podcast is presented by Roe, the all-in-one banking platform for startups. Thousands of startups like Perplexity, Product Hunt, and more use Roe. You get everything you need to manage your startup's cash. Fast banking setup, cards with a 2 % cash back, and yield that turns company cash into extra runway. All super important in the early days of launching. But the thing founders really love about Roe is their team.

22:07They're obsessed with helping founders disrupt the status quo and will go to the end of the earth to help them to do so. And exclusively for Generating Alpha podcast listeners and viewers, you'll get a$1 ,500 statement credit plus a ton of exclusive perks when you manage your company cash with Roe. terms and conditions apply to learn more visit rho.co slash generating alpha rows of fintech not a bank checking in card services provided by webster bank member fdic see reward terms for details thank you and back to the episode what should a seed investor be good at sorry what's it a what should a seed stage investor be good at well you can be successful with different advantages, let's say.

22:50I think every sustained, consistently successful seed investor has their own comparative advantage that they're tapping into. So for me, it's like the founder assessments. I meet this person, may have no context whatsoever, may have never met them before in my life, may not even know anything about them. And in three to 30 minutes, try to figure out if they're going to change the world or not. For other people who are successful seed investors, They can be technology-based investors. They can see and hear about a new technology and immediately grok the potential implications, consequences, and market opportunities.

23:27And so if you're extremely effective at that, that's your comparative advantage. And then you're just scouring the universe looking for new tech developments that can rearrange industries. So it depends on the person and what their unique assets are, what the right strategy would be. And in that first three to 30 minutes, what are some examples of that X factor kind of bubbling up to the surface in founders you've met? It's really easy, actually, truthfully. It's hard to describe, but easy to know. Just like your ears just perk and you're just like, wow, I've never seen that before. And it can be a different variable.

24:01Like it can be like, wow, that's the smartest person I've ever met in my life. Or that's the most tenacious person I've ever met. Or that's the best salesperson I've ever met. or like that is the best whatever it's like that feeling of oh my god um it's a little bit like you sometimes read scouting reports about like high school baseball players or basketball players and it's kind of amusing to read ones ones about like people you know that they became very successful like hall famers and sometimes the scout actually nailed it you can just read these reports about this kid who is 16 years old.

24:37And the scout's just like, this person is going to the hall of fame. And how much time do you spend with founders before you make an investment on average? I know you made three minute investments, but on average, what does that look like? I know 90 plus percent of the time. I know whether I'm going to invest definitely in the first meeting. And I can get talked out of it by one of my colleagues. I can get persuaded not to because of something I learned in some pseudo diligence process and some follow-ups. But 90 % of the time, I've already made a decision and I'm just rationalizing it and making sure like I haven't missed anything.

25:19So, and you know, sometimes it might be like, well, I'm right that this is a good thing to invest in, but the founder wants some terms that just don't make economic sense for us. That does happen, unfortunately, pretty rarely, but it happens. or some of my colleagues might know more about a particular person or industry or something. They might persuade me that I should maybe curb my enthusiasm a bit. That does happen. But 90 % of the time, X minutes since the meeting, I've already made a decision. And people who shadow me, like I usually have a chief of staff shadowing me, can tell they just shadowed me for a year or two at a time.

25:59And the chief of staff almost always has figured out before the meetings ended whether I want to invest. And they're not even asking, like, do you want to invest? They're like, should I send a memo around about the company, blah, blah, blah, blah, etc. And how often during – in a month or in a year do your ears perk in one of those meetings?

26:21Average year, probably about eight times. Do you make only eight investments or – Yeah, pretty close. Yeah. I think I've averaged, so this is my 13th year or so as a VC. I think I've averaged 10 investments a year. So there's some years, especially during COVID, that was less. Some years a little higher. So maybe eight and maybe a few at the margin I shouldn't have made. So eight's probably about right. And you were talking about kind of having comparative advantage. How do people find their comparative advantage early in life? I think you have to sample and do, you know, there's this book called Range and about, you know, exploring different things and different careers.