The Price of Excellence Most People Won’t Pay | Kaz Nejatian

26:09Shane Parrish:What does it mean to be a market maker in housing? Yeah, so if you look at the history of assets, the way assets grow on the internet has been basically similar. First, someone solves the discovery problem. I need to find X. Craigslist is the best example of this. Then someone comes and says, okay, you know what? I can build trust. Now you have found something. You know who you're dealing with. I build a trust layer. PayPal is a great example of this. Actually, eBay, Discovery, PayPal, trust. I will allow you to trust your counterparty. And the third player almost always tends to be someone who says, great.

26:48I will help you both find something, trust the counterparty, and underwrite the risk on both transactions. Amazon. And usually in the marketplace of like the internet, the third player wins because they reduce the friction so she can have a much more volume, right? If you go back to 2002, everyone thought eBay was going to win against Amazon. Yeah. But clearly has not happened. Amazon won because it solved the full problem. Now it's a much harder problem to solve. So the job of a market maker is to stand between two people who want to transact and allow them to transact with you such that they don't have to try to look for each other and find them.

27:30And that's our job for housing, right? The largest problem in housing is people want to move and they can't because they have not found a buyer for their home. And our job at Open Door is say, we're that buyer. We will buy your home. Come to opendoor.com, type in your address. We'll buy your home at a fair price and then we'll sell it to someone whenever that person is available.

27:49Shane Parrish:So how does Open Door make money then? Like how do you become insanely profitable doing that? We make our money in two ways. First, we make money each transaction, relatively thin margins on each transaction. But we make our real money from the first derivative of the business, which is mortgage, insurance, talent escrow, all the things that go with the home. So our job is to buy and sell the home at fair prices as fast as we can and make our money on the services that you get. This, by the way, is how we build Shopify. If you look at Shopify, you can buy Shopify, the software, for$1. And it's$1 because it can't possibly be less.

28:29The credit cards won't let you charge less than$1. And Shopify makes most of its money by you succeeding on Shopify, by its services it provides you. And this has always been true. People misunderstand how businesses work. It has always been true that some of the biggest companies in the world have been built on the first derivative of the core business. Google does not make money from you searching for things. Google makes money from showing you ads while you're searching for things. How did you learn this concept? I've just been always interested in the history of companies. It just seemed relatively obvious to me that that's what had happened in the world, that these ancillary businesses, their core business had become a real thing.

29:08Because if you look at how software grew, the way software used to be sold is you came to me, for software i wrote some code and handed it to you and it ran away because i would make all my money from like the implementation right and then sas came along and sas companies said hold on i will make money from you over a very long time from the relationship and then shopfly came along and said cool i will make very money from you for a very long time over relationship but from services right and that pattern has always held true in every business because there is a word for people who make all their money from you up front and never talk to you again.

29:47We call them carnies. Like they come to town, they get to take your money and run away. Yeah. Right? That's not how businesses work. No one trusts someone where you know that the second this relationship is over, you'll never see me again. But that's how the largest asset people have transact. That's crazy. It is insane that this is how we deal with the largest asset class in the world. You would never trust a stockbroker that made all their money from you from one trade. You would just never trust that person. It is very real that for the good of a relationship, it is important that you and I be committed to knowing each other for a very long time.

30:30Shane Parrish:I built an AI version of myself with HeyGen. Today, I'll have a dig up an old prediction I made and we'll each grade it. Let's give it a shot. Hey Shane, you once predicted that long form would beat short form for anything that actually mattered. Create that prediction today. Hey, I was directionally right, but I underestimated just how much short form would become the front door to long form content. I agree you were right, but for the wrong reason. You thought attention spans would recover. They didn't. People just got better at choosing when to go deep. Right call, lucky logic. Well, I got the right answer with the wrong math, but I'll take it.

31:08Shane Parrish:That's HeyGen. Record yourself for 15 seconds and get an AI avatar that delivers professional video on demand. Your first three videos are free at heygen.com slash TKP. That's H-E-Y-G-E-N dot com slash TKP. Ever hit 3 p.m. and feel like your brain just quit? For a lot of people, that's not caffeine or sleep. It's electrolytes. And water alone won't fix it. That's why I drink Element every day after lunch. Zero sugar, no dodgy ingredients, just a real dose of sodium, potassium, and magnesium. I know you're all thinking electrolytes are for athletes, but you don't have to be an athlete to benefit from it.

31:50Shane Parrish:And it tastes great. Stay sharp in the afternoon and grab a free eight-count sample pack with any purchase at drinkelement.com slash TKP. That's drinkelement.com slash TKP. So one of your principles was sort of say the thing, but I was surprised another one was get shit done. Yeah. Why do you have to tell people to get shit done? So let me tell you a story. Toby Luke is among the most thoughtful people on the planet. There's a reason why people call him the founder's founder. if you walk the offices of Shopify first of all they're incredibly thoughtfully designed but they all say on the walls do things tell people

32:38and I always find that was odd I actually haven't had a conversation with Toby about this but like I realized that like in most companies the order is reversed like it's most companies is tell people then do things in most companies this is what happens you have an idea you spend a lot of time writing memos about that idea to get buy-in about that idea before you can have a meeting someone that can approve that idea and the whole process that takes many months before you can do the thing the chain of command designed to minimize risk and there's two ways to deal with that chain of command the first is to do what amazon said amazon became a default yes most Most companies are default no.

33:23The chain of command is designed to reduce risk and say no to many things, right? That's what it does. Amazon said, no, no, no. We're a default yes company, which worked incredibly well for Amazon. But I think a better way to deal with this problem is to not have the chain of command, like to minimize the number of people who can say no and only have people that you want and trust to do things. This, by the way, is not a theoretical thing. I want to give you this very specific example. I got to Open Door and I realized that for a substantial number of homes we had bought, the person who was supposed to manage it would show up and the power would not be on in the home.

34:11And when this happened, the person who was managing a home would get a note saying, hey, power isn't on. And this person would go to Salesforce, flood a form. That form would get emailed to someone else. They would look at it. Then they would ask for permission from the manager to turn the power on. Then they would call the utility company, turn the power on. They would mail, and there would be a back and forth that involves three or four managers. And I thought this was the nuttiest thing ever. So we literally gave everyone corporate cards and said, hey, if you see a home whose power is not on, if you type in the address into slack you will get back the phone number you're supposed to call the account number you're supposed to say and the credit card number you can give them to turn on power we're the largest buyers of home in north america and but open door was not run by uh unintelligent people they were highly credentialed people but the general incentive inside every company is to reduce risk as much as possible.

35:11And the way you reduce risk is more process, more people in the path. So do things becomes actually difficult.

35:19Shane Parrish:I think of this as like, nobody would want to wake up in that state, right? Like you would never create the end state that they were operating in as like the goal. So somewhere it just gets like one degree off course, you know? And that one degree starts to compound as time goes on and on and on. There's a thing I'll use in our pilot example. I want to be a pilot. My wife won't let me. Smart. Listen to your wife. I have a bunch of plain analogies. But there's a very real thing that happens to new pilots. New pilots go into clouds and they turn slightly, slightly, slightly, slightly. And people say you'd be surprised by a number of new pilots who come out of sky clouds fully inverted because you basically end up upside down one degree at a time that's basically what happens to every company this is a very good sign that your company is upside down if you have acronyms if you have lots of acronyms the odds are you're upside down as a company because acronyms are things that people do when they want to create in-cultures and out-cultures by definition.

36:35So if you have acronyms, the odds are what you have done is create so many in-groups and out-groups that no one can tell if anyone else is inverted. And the only one who can tell if someone is inverted is someone above the chain who can look at both of these things. Unfortunately, most corporate CEOs don't go that deep. They manage the dashboards.

36:55Shane Parrish:This comes back to sort of like trying to touch reality and being in the weeds and having a bigger context window. I've literally turned on utilities. I've fixed work orders. I've like, because you have to do it. Otherwise, I don't know how you, like, I mean, Elon famously sleeps at the factory and people think it's like a meme. People think he does it for show. I don't think he does it for show. I think it's literally the only way to do things. Well, that sort of begs the question, How important are the words that we use to communicate ideas? Like, how do we make ideas more transferable in a company?

37:34Yeah. Early on in my career, I used to ask everyone who worked on my team to read Orwell's essay, Politics in the English Language. It's an incredibly good essay. Because in it, he talks about how English is among the most powerful tools ever invented by humanity in the English language. And I say that someone who was not, English is not my first language. But Orwell says, English is in trouble because words have lost their meanings. And the word he uses is fascism. In the essay, he says, fascism doesn't mean anything anymore because everyone's a fascist. Like everyone gets called a fascist. Anyone I don't like is a fascist.

38:18Therefore, fascism doesn't mean anything anymore. I usually share this essay with people I work with because in order for language to be useful, we must hold it properly. And English is an incredibly powerful tool if you speak simply. And that is an incredibly important thing to learn inside a company. And it's incredibly hard to guard against it because most business talk is designed to confuse the listener, deliberately confuse the listener. I challenge anyone to find any sentence that includes the word leverage that means anything. Like, it just means almost nothing all the time. And there's a series of these words that are very common in the corporate world that are designed to have a low density of information to words.

39:11Shane Parrish:And they're sort of ambiguous, right? So it's like, I can weasel out of whatever happens because this word can mean multiple things. Yeah, it's very... And there's another one, by the way. the passive tense is another example of this very the passive tense is very bad but even the worse is um othering of facts let me give you an example legal decided that x would be true i have a rule at open door that people decide things not teams yeah so whenever someone says legal decide x i'm like who legal doesn't get to decide thing like was a name of the person because if you named a person what you were doing is you cannot round the edges of what they said this is how you end up uh mutating everything into bad by taking away specifics of the situation and living with generalities.

40:12Like you're a pale pink imitation of everything.

40:16Shane Parrish:When I look at a company, I sort of look at it through strategy, operations, capital allocation, and people. How do you look at a company? Products, man. I think of products first. I really do. I think most people overemphasize strategy. I must say strategy isn't important, but it's usually not that complicated. There are very few businesses where strategy has been the cause for the win. Usually it's exceptional execution by the one company that shared the same strategy as seven other companies. It's just the best executor one. Google's strategy was not meaningfully different than the other 25 search engines.

40:58Its execution was different. I think strategy is important, but far less important than people think it is. I think what tends to be very important and far more important than people think it is, is the product. Like, is the product deeply useful to the end user? Can you find 1 ,000 people who love the product? And if you can, you have to be on the right track. If you can't, all the capital in the world won't save you.

41:30Shane Parrish:How do you think about risk? A lot of people think, you know, for instance, that delaying a decision reduces risk? I think it almost always does the opposite. Like, there are very few decisions that gathering more facts will help. I actually did this the other day. I was in a meeting, and one of her colleagues said, hey, we're going to run this A-B test and then decide what to do. And I said, great. Guys, I'm from the future. I'm from six weeks from now. The A-B test was 51 % positive. Tell me what you're going to do. What most tech companies end up doing, and I put A-B tests are like the most, because people misunderstand statistics and misunderstand like what mean average error means and the compounding nature of mean average error, people misunderstand these things.

42:34What, for most tech companies, A-B tests have done have been the safety blanket for management.

42:43Shane Parrish:I don't have to make a decision. Like, this is like, Google famously A-B tested some like 400 different shades of blue. Yeah. I'm like, dude, it didn't matter. I promise you, it didn't matter. It reverted to the mean. It could have been any shade of blue. it would have been fine. I'm not saying that A-B tests don't matter, to be clear, I'm not saying that. But what I am saying, I'm saying A-B tests matter a lot, but they cannot replace human judgment. Of course, yeah. And if you sit in a room and tell me, like, a one slight deviation of shade of blue matters, I just don't want to be in a room with you.

43:27Shane Parrish:There's a lot of people in life that I feel there's a parallel here. There's a lot of people in life who feel lost, maybe a little bit rudderless. The North Star is not there. They know they're capable of so much more. And the parallel to me is this is like open door when you come into it. You know, things aren't working as good as they could be. There's still a heartbeat, and you're sort of going through the motions, and you're on this slow road to death. Like, how could somebody apply these principles to their life outside of the corporate structure. If you know anyone who's had a problem with alcohol and their life is draining away, what usually happens for them to turn around is an intervention.

44:13It's a deeply uncomfortable moment of truth. Yeah. The first step is taking ownership over the problem, right? ownership I understand are things I can do right there's a reason why AA works so well because you do things you track your accountability like day one week one month one you track over and over again thing your accountability and you do the right thing over and over again and the score tends to take care of itself over a very long period of time and I think that pattern tends to be one that is repeatable over and over again. If you look at yourself and say, I am to blame for my problems, it's hard, and as someone who does it more frequently than the average person, it can feel lonely.

45:16Luckily for me, I have an incredibly supportive family. so those days where i say hey i made a mistake i am to be blamed i have uh my wife and my kids and that makes a world of difference i also pray more than the average person so it helps me find the ability to look at the mirror and say you screwed up you should do better you can't do better. And then just like feel that I'm not holding my past self guilty, but just do better. And I think that pattern is as repeatable in companies as it is in people.

46:01Shane Parrish:How do you not hang on to that? A lot of people go through that. They make a mistake. They'll even admit that they made a mistake and then they become paralyzed by fear. I have high degree of sympathy to people who do that. I really do. One of the best parts about being a founder, which is why I think founders are such unique characters. Basically, every founder I know has had to look at a bank account statement and count how many payrolls they are away from not being able to make payroll. Yeah. And that usually shakes you pretty good. Yeah. Because if you do nothing, you're dead. Paul Graham has this essay where he calls it Default Dead.

46:43And you just have to do something. like action creates information you have to do something and like so i think that allows founders just to act differently than other people would but i don't i don't want to pretend like i know i know all the answers but i can tell you this you will find that the first thing to fix will is easy intuitive and makes you feel good and people who win tend to win over and over again so the analogy i use internally at open door is this chemical spills are notoriously difficult to solve and clean up but if you arrive at the site of a chemical spill the first bit is really easy to solve just grab a shovel yeah the last bit requires a bunch of microscopes and shit but the first bit is shovel territory man it's like your grandfather's wisdom right when you

47:40Shane Parrish:find yourself in a hole, stop digging. Yeah, yeah. Yeah, no, it's real. It's interesting you sort of mentioned not making payroll, and you know what that made me think of is the moment Steve Jobs, if there was one moment where Steve Jobs became the Steve Jobs that we all remember, it was the 93, I think it was bankruptcy, of the hardware division at Next. Yeah, yes. Like, that was the moment where he started to change his behavior. In the movie, there's this very famous scene where, where Steve Jobs had fired the Apple II team. And Boaz is like, you have to recognize these people. Like, they worked hard.

48:19You have to recognize that they worked hard. He gets angry. He's like, you almost bankrupted the company. Like, there is a very real thing that if you have come close to death, and if you look at a balance sheet, you're like, holy God, I only have X number of payrolls left. you do not care at all what it looks like. You just care about what it is. You realize that you can put up with more pain than you think you can. Like everyone has a higher pain tolerance than they think they have.

48:49Shane Parrish:Is part of that sort of not caring what other people think? Like the courage to be disliked and thinking. So many people optimize their life in order not to be disliked versus on mission or towards a goal or... First of all, courage to be disliked It's an excellent book. Everyone should read it, but it's a very real thing where most people's limitations are self-imposed. We're capable of so much. Yeah, we're capable of so much. Everyone is. And everyone's pain is more imagined than you think it is. And you intuitively understand it when it comes to everyone else, but in yourself, you have a hard time dealing with that.

49:30Running a public company is incredibly difficult if you care what the Wall Street Journal says about you. I just don't. I've never cared.

49:41Shane Parrish:Is that learned? Or something you just... I just think what happened was I immigrated from Iran. My family fled Iran. And when we moved, I was a teenager. And I didn't get into any clubs. And by the time I was, I'd grown up and I could get into clubs, I cared way less about them. So I just grew up making a feature out of necessity. And that, I think, has played a very large role in my life. And there's the second thing which is very real. I played rugby in high school. And I am not a big dude, but I'm fast and have a high pain tolerance. and I really, really enjoy winning as a team. Rugby's actually a special sport for this.

50:41It's crazy. It tends to be a sport that if you play in North America that basically never has an audience. Like, no one goes to watch rugby games in North America, really. So you do it for your friends, you do it for your teammates, not for the audience, but you get something better out of it, which is, like, this idea of, like, being in pain while winning as a team. there's like something very deeply joyful about bleeding out like out of your knee while winning

51:08Shane Parrish:as a team this episode is brought to you by Accenture when your advertising operations fall out of sync everything else follows Spotify and Accenture are working together to reinvent the rhythm of ad sales using automation analytics and smarter workflows to simplify campaign delivery and access better data across the business the result Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Isidore Sharp, who founded Four Seasons, said, excellence is the capacity to take pain. Do you agree with that? Yeah.

51:48Yeah, over a very long period of time, by the way. The person who can hold their hand over the fire the longest tends to be the winner. The difference between doing something incredibly well and doing it poorly is not that high, but people just give up too soon. Fortunately, I think the sugar rush of easy satisfaction in the modern world has underprepared people for pain.

52:16Shane Parrish:We always end these interviews with the same question, which is, what is success for you? I have four kids. They're seven, five, three, and two. And I care a great deal about what they say to their kids that their dad did. When my wife and I got married, we agreed that we would optimize our marriage for putting a dent in the world. That's what we would spend our time on. And that would be our definition of success in our marriage. so I try to wake up every day and think what is the most the thing I can do that leaves the biggest dent on the world like I think most people in my position would have looked at the open door opportunity and not run at full speed but I ran at full speed because this feels like a problem of a shape that I should be able to solve for the world.

53:22And my team and I should be able to solve for the world. So that's what I want to do. I want my kids to grow up and be able to be proud of their dad's career because, and this is important, because they are sacrificing a part of their childhood and for my career. I'm not around as much as I should be. I don't put them to bed every night. And it matters that that time away from them is used for the good of the world. So I hold myself accountable. And thankfully, my wife also holds me accountable to that end.

54:09Thank you.