Keith Rabois - If You Can’t Sell Them, Compete with Them - [Invest Like the Best, EP.115]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. My guest this week is Keith Raboy. Keith is currently an investment partner at Coastal Ventures, but has a storied and diverse background as an investor, entrepreneur, and executive. He's worked in senior positions at PayPal, LinkedIn, and Square, has led investments in companies like Stripe, YouTube, Palantir, and Airbnb, and started the company Open Door, which aims to transform the process of selling a home through technology. One fun fact about Keith is that he may have the most impressive list of bosses that I've ever seen, which we discussed during the episode. We cover a lot, but one thing we kept returning to was business strategy. Keith's frameworks for gaining and building strategic advantage helped me clarify my thinking on the topic, and his examples of contrarian thinking will hopefully make you question some commonly held beliefs. Please enjoy our conversation. I thought we would begin with a really interesting Paul Graham quote that you referenced as a succinct summation of your investing and entrepreneurial strategy. So Paul Graham said, if your technology is better, but potential customers are too set in their ways to switch, use it yourself and compete with them. So maybe using Open Door or something like that as an example, talk about why you think that's a good summation of your history. Yeah, basically, if you have asymmetric ability to perform a function,

then you should take advantage of that. And typically when an entity or a person doesn't want to take advantage of a capability, it undermines the confidence that I have anyway in their ability to have an asymmetric ability to perform that function. So for example, if you're better at, let's say, creating money off of clicks, then you want to own that entire stack. Or if you're better at reducing fraud, you don't want to sell service to somebody else. You actually want to build the full stack yourself. So vertically integrated businesses are things I like to fund where we take the entire stack and recreate it. Did that at Square. Opendoor is a good example. But fundamentally, being a component in someone else's stack doesn't usually end well. You have the adoption risk issue, and that includes long sales cycles, etc. have economic issues where you don't capture as much value as you're creating. If you're selling to someone else, maybe you capture 10% to 30% of the value you create, and that's if you're pretty good at sales and pricing. But if you can leverage that and it's really fundamental in the value chain, then you should provide the end product directly to customers where you control your own destiny, which is another feature of this strategy. Do you have any favorite examples of this outside of your own experience applying this strategy? Yeah, I mean, the quintessential example is Apple, which has always been vertically integrated, and people always used to complain and whine about why their platform wasn't open and all these critiques until Apple became more valuable than all the people running open platforms, sort of ended the critiques at least for a while. Yeah, you want to be able to control each component so that you create the ideal user experience, but that also that... If you have a differentiated advantage, let's say in battery life or in chip design, you want to ship the end product to the customer and you get more credit for that. But then you also don't want to be derivative. I think the biggest reason to do this for founders at an earlier stage is when you're derivative to long sales cycles and other customers' priorities.

You don't control your fate. Where you sell a product directly to a customer, you control your own fate. So you want typically to not outsource your fate and destiny to somebody else. And so I'd rather be able to look at somebody directly in the eye and figure out whether they're buying my product than work through some indirect channel and wait for these sales to materialize. It's a often more capital intensive strategy. It's certainly a higher risk strategy, but when it works, it really works. There's a good book that I highly recommend people read on this kind of strategic trade-offs called Seven Powers, which really isolates the only seven ways to create strategic leverage. And I think it's important and fundamental for founders, executives, and investors even to be very specific. about what strategy they're following and where is the strategic leverage coming from. And the book will force you to become concrete and tangible as opposed to abstract and non-differentiated. Yeah, it's an excellent book. And it's a good segue into the nuance around some of your investment criteria that you've got posted sort of front and center on Twitter, starting with what is anomalous in a given investment. And I'd love to hear maybe some of the detail around how you parse that idea when meeting with a team for the first time. Is it just pattern recognition against other stuff you've seen in the same space? Is it more in the realm of seven powers trying to identify potential areas of strategic advantage there? Talk about that anomalous component. is probably the most important component. The idea of starting a company from scratch, like the proverbial two kids in a garage taking over the world, transforming industries that have been around for hundreds of years with large incumbents in the Fortune 500 is somewhat irrational and certainly a heroic exercise. And if there's going to be any shot at all, there has to be something anomalous, something that's unexpected. It can be unexpected about. the team. It can be unexpected about the performance and attributes of the technology. It can be unexpected about the metrics and the reaction of the market. But there has to be something anomalous because you don't take over the world from scratch with following a standard playbook. So unless you can see something that's special and very unusual, there's no chance that this is one of the top 100 companies of all time. And that's what we're in the business of funding is companies that have that potential.

Now that said, I do believe that The strategic advantage comes later. I think it's usually a conceptual answer in the beginning of where the strategic leverage might be. So it may not be empirical, it may be more theoretical, but there's an approach, an angle, a vision of what that would be. And that's where I start talking more about the accumulating advantage. Like why does the business get easier over time? So the strategic leverage comes from the business getting incrementally easier over time versus always requiring the same energy. And the same skill and talent. Because as you scale your company, your ability to scale talent at the same level is also going to degrade. So you want a business that's actually easier to run over the years than harder to run. But it's okay if it requires magic in the beginning. But there's always this anomalous spark. Same thing when I was an operating executive for 13 years. I'd also try to... instruct and teach my colleagues that one of the things we were always doing is trying to look for anomalous data. Because anomalies by definition are sort of giving you hints of things you don't understand. They're basically an opportunity to find a paradigm shift. And it's the paradigm shifts that allow you to get 10x growth. So you can optimize your company and startup for a while and get 10x growth by doing things a little bit better, you know, a little bit better framework, a little bit better. UI, slightly better word choice, etc. But you can't get 10x growth that way. And it's the anomalies that... basically don't conform to your expectations that ask you to and compel you to ask a series of why questions. And at the end of those why questions, you sometimes have an epiphany. And it's the epiphany that creates the 10x growth. The reference to incrementalism that you just described remind me of Peter Thiel's kind of framework. And your second thing is this notion of having a secret. Could you define the difference between secret and anomaly, and then get into maybe how much a secret needs to be protected or proprietary within a business? And maybe at what stage that matters? So the anomaly is more of a spark that's unexpected and different. It can be better or worse, at least from the operating executive standpoint. Sometimes it's actually a data point that's worse than expected, but that leads you to uncover a better paradigm and a better way of approaching the problem. From an investor standpoint, the anomaly is almost always positive. It's a spark that against a lot of benchmarks. And the good news about being an investor is you do get to see sort of everybody's metrics.

And it's easier to know you found an anomaly, at least an empirical one as an investor, because people give you their decks with all their metrics. And it's not even industry specific. It's just like, for example, this company has absurdly high retention. We've just never seen a cohort curve that looks like this two years out. That probably means there's something there that's unusual. And there's potential that this company is one of those fundamentally transformative companies. So it is much easier. Like, you know, when I used to run companies, getting competitive information was really hard. It was a little bit like doing espionage in the Cold War. You didn't really know what you were getting, the quality of the information you were getting. You're using all kinds of crazy techniques to try to extract this information. Whereas like when you're an investor, you just sit at your desk every day in your office and people give you benchmarks. So the anomalies, at least the empirical ones are more obvious. The anomalies on people. are still really challenging to be able to find those incredible people early in their career that are just anomalous on some raw tenacity dimension, some relentlessly resourceful dimension. There's a lot of art there. The anomalies that come from technology require a fairly sophisticated understanding of technology. So they're equally as difficult to identify. Now talk about secrets versus anomalies. A secret is a belief system. about the world that can be proven or not that the rest of the world doesn't appreciate. And over time, the hypothesis is either validated or rejected. But you can have a secret that is independent of evidence and only time and effort illustrates whether the secret was true or false. But all fundamentally interesting companies are predicated on at least one big secret. Over time, as the company becomes successful insofar as it does, people start reverse engineering what that secret probably is. There's just enough data, enough.

former employees. There's enough evidence in the marketplace what that secret probably was so that you have to reinvent yourself every X years as a successful startup. The secrets that propels you your first two, three years or to your first billion dollars evaluation probably no longer propel you. And you have to come up with new ones for the next generation of innovation. How would you frame, for example, the secret around something like open door system? You are obviously the secret. There's several, but one obvious one was homes are much more. like a commodity than people's intuition. People's intuition was that primary residential real estate is like a piece of art and you have to see it, touch it, feel it. Oh my God, what if this other buyer has different preferences? The truth is that's just false. It's not that difficult to price a house in the United States. You need the right data and you need the right skills, but homes are much more on the scale of commodity than they are works of art. Yeah, really interesting idea and obviously a data-rich environment given the amount of homes in the US. I know you focus on certain verticals, things like financial services. Digital health is one that really jumped out at me as interesting. Something I'm really interested in where data obviously is something that I've long hoped would get a lot more attention than it does. When I think about accumulating advantage, I think one source of that is... a network effect within data. So you get more and more data that allows you to make the product better for existing past users. Maybe talk through any examples you see today, whether of conceptually or of specific companies in the digital health world that explain why you spend some of your time there. That is a classic. accumulating advantage, which is a data network effect. It's not the only one. One of the reasons why we use the term accumulating advantage versus like network effect is a network effect is a narrow species of an accumulating advantage. It happens to be a very powerful one and maybe the best one, but it's not the only one. So basically you want to answer the question, translating, getting rid of the jargon and buzzwords, just basically why does this business get better every year? and isolate that and be able to specifically identify why is next year going to be easier? And why is the year after that going to be even easier? So for example, trust can be one of those. So when you start a company in health, and in some extent financial services, people may discount your ability to perform the desired task accurately successfully. In health,

If you've been doing some version of healthcare for 10 years, presumably it gets incrementally easier to convince people that what you're doing actually works. You can do that empirically, but also just people will have references. So let's talk about Opendoor. In Opendoor's case, in the beginning, when we first launched, people were dubious that they'd actually get their money. So we can make them an offer for their house that felt fair, but they were somewhat dubious about, like, well, was this company actually going to close on time? Were they going to send me the money? Would it show up in my bank account? Now, most people in the cities we've been operating in actually know people that we've bought a house from. Like every neighborhood in Phoenix, Dallas, et cetera, Vegas, Atlanta has almost surely had people that we bought and sold houses with. So it's very easy to have the credibility. So some of this stuff isn't just purely empirical. It's kind of brand. It's like a version of brand. It's a very specific version of brand where the trust is very important. How much trust matters varies a lot by vertical. and industry. And how you solve that as a startup is one of the more creative exercises. So for example, back in my PayPal days, this is a long time ago, we were a way of moving money around and people didn't always have confidence that the money would go from point A to point B. So we did a couple of things to sort of bootstrap ourselves with credibility. One, we had a $100,000 guarantee. that if the money didn't get from point A to point B as it's supposed to, Travelers Insurance, and we used their logo because Travelers back then was a good brand, was right front and center on our homepage. Secondly, we created, we were the first ones to create a novel way of qualifying each account for FDIC insurance so that you knew that if the money was in your PayPal account up to $100,000, nothing could happen to you. And even if the company failed, you'd get your money. So we thought... fully created ways of allowing users to infer trust before we were this brand. Now everybody knows PayPal. So presumably people have a view about how reliable or not PayPal is. Yeah. Back to the digital health idea. I'm curious, maybe even specific companies to the extent you can divulge them that you've invested in or areas of that space that you find particularly interesting and maybe like the origin story of your interest there.

Yeah. I mean, I think, look, healthcare is 22% of the US economy and it's not particularly a high quality experience for anybody. I don't know anybody who says, I can't wait to go to the doctor today. So anytime you have a combination of 22% of the US economy and people have poor experiences and procrastinate and despise, there's room for innovation. So that's basically what we're looking for is how do you improve outcome? and improve experience sometimes it's easy to do both at the same time sometimes you have to sort of choose but fundamentally the world of healthcare is expensive inconvenient and there's no reason why technology which is this magic wand can't reduce the cost increase the convenience and improve the outcome and so that's what we're looking for that's the formula that drives our investment decisions a lot of that sounds like it would be just as cleanly applicable to the financial services space. But I'm curious if there's any other nuance around financial services, fintech, whatever you want to call it, that you think investors should pay mind to at the earlier stage. I think the cost structure is different. There has been innovation in technology that's reduced costs over, you know, third-party costs over the last 40, 50 years. Whereas in healthcare, costs other than like LASIK seem to be going up. And there's more direct relationships between buyers and sellers, at least typically in financial services, than healthcare, which has been intermediated through payers, insurance companies. So it's a somewhat different structure to the market. But I think the fundamental magic of technology... is that you can do all three things at the same time improve the experience reduce the cost and improve the quality whereas through no other lever in the history of the world can you do all three at the same time so for example let's talk about one health care company it's not one that i led the investment in but it's a public company now called gardent So Garden Health is about a $3, $4 billion public company. And what it basically does is use a liquid biopsy to detect and determine what kind of cancer people have instead of using a biopsy. A biopsy is a very expensive, painful, somewhat risky, invasive procedure to sample cells that may be cancerous and identify what is the cancer. So instead of having a biopsy, you can now take a blood test.

Blood test isn't particularly fun. It's certainly not everything that I look forward to in the morning, but it's a hell of a lot better than getting a biopsy. So Gardent is now a successful replacement for a lot of biopsies. It does it more cheaply all the time, less risk all of the time, and often more accurately than a biopsy. One of the things on your investment criteria list seems like it would be... decently hard to identify at the early stage, certainly at seed, but even early stage investment, which is the ability of the founder to effectively recruit talent or I guess fill out the business in ways that will allow the vision to come to fruition. So what are the ways that you evaluate that criteria when looking at a business? I think that is maybe a primary, maybe the most primary objective in assessing a founder is can they recruit the requisite talent? Every business has different challenges. For example, if one were to build a competitor SpaceX, the talent one would want is different than if one were to build a competitor Stripe or a competitor to Gardent. So understanding what is the risk associated with each company, what are the primary risks, what are the sort of real blockers affects what should be the ideal composition of the team. So the ability of a particular founder to recruit for the necessary team should show up. in prior experiences that founder has. So for example, if they've worked in any competitive environment before, it's pretty easy to call their former colleagues and say, hey, would you join this company? Why or why not? What's the hesitation? And where a founder has the ability to recruit, the answers are often, absolutely, I can't wait. I wish they would extend an offer or I can't wait until they get funding so they can pay my salary. If you hear too much hesitation, That's, you know, significantly red flagged, but the person should be a talent magnet. And you can find early in people's careers, the ability, you can see that pretty early. You've got a really interesting organic history between operator, entrepreneur, investor, board member, et cetera, that seems to kind of all flow together. How differentiated do you think those skill sets truly are? Or are you effectively applying a lot of the same models and ideas as you execute each of those three functions?

They are different, absolutely. Being an operating executive certainly has some elements that are transferable to being an investor, recruiting talent, identifying talent, assessing talent. That said, the primary goal for an executive is output, shipping things, shipping things on time with a high quality and high performance. And that's often working through other people and making decisions. is absolutely working through other people. It's a lot less about making decisions. I almost never am making a decision on a company's behalf, maybe never. And all I am is playing psychologist, which is basically giving the founder feedback. on potential avenues, maybe less obvious trade-offs, highlighting them almost like a cartoonish mirror in a horror house playing back the founder of what they're saying to me and allowing them to look in the mirror and see if they like what they see in the kind of cartoonish transmogrification of their startup. Totally different than... the exercise of being responsible for deciding most decisions in a company and a startup particularly need to be made with 70% conviction or 70% confidence. So getting really proficient at making smart decisions at 70% conviction is what makes an executive thrive. I don't need 70% conviction even when I make a decision, especially because I'm doing mostly seed and series A investing. It's a 10% to 50% kind of realm, and I'm not making the decision of what market or who to hire at all. So it's a very different exercise. But assessing a talent, roughly a similar and comparable understanding levers and trade-offs. That may be very relevant and comparable one where it can translate from investor back to executive, executive to investor. So there are some things that had some overlap and there's some things that are very different. The risk profile is a little different. I think where people struggle who have watched become investors from being successful executives or vice versa is understanding that in a company.

the risks you might take may be different in the company than as an investor. An investor, the canonical 10X upside is what everybody's looking for plus. And it's perfectly fine to have a chance of a zero with a 10X upside. In a company that may or may not be the strategy, depends upon how successful is that company, how much do you want to gamble asymmetric downside versus upside, changes over time based upon the value that's been created. based upon how much of an accumulating advantage you have. So the risk assessment sometimes varies dramatically. The power law is different within a company than as an investor. And not everybody rewraps their brain around the distribution of probabilities very well. It's a hard thing to do, actually. So I think that explains a fair amount of variance in investor and executive success. Also, an investor is mostly... I wouldn't say a solo exercise, but it's a lot more like playing baseball than football, which is every batter in baseball has their own sort of accountability and metrics. That's mostly true of an investor. Even when you work on a large investment team, like a traditional venture fund, you are out on an island yourself making a lot of decisions and then bringing people with you. Whereas an executive is mostly more like football. Everybody has to be in sync running the same play. with the same speed, with the same strategy. And those are very different skills. So one, some types of people may be much better suited to be an investor than being an executive. If you're intellectually curious, for example, being an investor is a much better job. You get paid for learning new things, trying new things, studying new things, meeting new people as an investor. Whereas in executive, you tend to be more parochial where you master things. You get really deep and solve problems in ways that other people in the world have never solved before. And that's usually going very, very deep for years, sometimes decades. One of the things that certainly is something you live by is this notion of being a contrarian, which is something a ton of people say they are, but it's something that obviously by definition is hard to do in practice. And so I'd love to go through a couple examples of contrarian thinking. Perhaps, I don't know how contrarian this is, but I've enjoyed your take on the...

notion of a lean startup. So a popular trope in building a business that I think you take good exception with to maybe walk us through your take on the lean startup movement. Yeah. I mean, I think the lean startup was a stupid idea and followed by stupid people. And I think it was like poison for Silicon Valley. That said, not everybody has a choice. There are ideas and people that would struggle to raise a lot of money. So if you don't have the option of raising X amount of dollars, coming up with a coherent strategy and a cohesive strategy that can work on less dollars is a very reasonable, in fact, very prudent and brilliant thing to do. But I think some of the best ideas that are more differentiated, that are more defensible and are more interesting tend to require capital. And I think the capital doesn't necessarily sequence behind evidence of... product market fit, which is the sort of thesis in many ways behind the lean startup, it actually can come in front of the evidence of product market fit. In the open door case, we decided that real estate was broken, a primary residential real estate was broken, that there were a lot of issues and challenges and misaligned incentives, and that we could fix it. And so we raised $10 million to fix it. And then we cast... the right people and the right roles to validate that we were right, that we could fix it with the theory and approaches that we had sort of formulated and postulated. That's a very classic fat startup approach. So I tend to think of startups are more like a movie. And the idea behind a movie is you have this inspired narrative. then you have to go figure out how to cast it properly. And movies are very different. You can imagine The Devil Wears Prada without Meryl Streep. It's a very different movie. Or Rocky without Sylvester Stallone. They probably don't work. So you have to get the right characters, the right people, the right actors, or the right executives and founders in the right places to make the movie potentially successful. Then you have to sell tickets.

And selling tickets is a function of creating a trailer, which is like a value proposition, succinctly described, powerfully described, and then marketed. And that's basically true for any product. And so in my view, you start with the narrative and vision, you cast the team, you produce it, meaning you actually raise money, then you market it. And you sell tickets and then you constantly iterate on the marketing strategy to sell the tickets. And you may go back and edit the product, which somebody can't do in a movie so easily. But it's basically a better metaphor than a bottoms up approach. So I start top down. What problem am I trying to solve? How do I get the right people to help me solve it? Then convince people I've solved it. Do you think that there's a specific set of talents or skills that people have in problem identification? So if you have to start with a problem, it assumes you've found a good one. So how do you think about that? I think it does vary. I don't know that you have to bundle the two together necessarily to be a great founder. The ability to recognize a wonderful opportunity and the ability to capture that opportunity. typically for successful founders has been bundled together, but I don't know that it needs to be. So recognition of a problem that's worth solving and that there's a theoretical approach to solve it can possibly be divorced from the ability to solve it. In the early days, there's a risk in not bundling them, which is the solution is so hard, challenging, and far off that unless it's your proposed solution, you may not have enough energy and tenacity. to conquer the difficulties and challenges. So I think if you try to isolate the two, it may backfire because people may give up if it's not their own view about how to solve it. But I think the skills may be different. One way to restate this is I do know people that I believe would be very successful founders but are chasing bad ideas or not great ideas. And it's been hard to redirect them. But I think if they got redirected, they actually could solve.

the problems and build a successful company. And maybe they just have to be the second to 20th employee instead of founder. Going back to this lean startup idea. So there's a piece underneath it, and I'm no deep expert in the topic, but this idea of experimentation, iteration, and sort of tinkering. Do you take objection as much to that piece of the idea? Absolutely. As I used to say at squares, I said, walk around the office is I want zeros on the dashboard. I don't want 10%. If you're going to take two kids in a garage again and take over the world of financial services or take over the world of real estate or take over the world of computing, 10% here and there ain't going to cut it. You need zeros. You need your orders of magnitude. Yes, at some point, once you have enough scale and enough sort of velocity and accumulating advantages kicking in, you will run out of breakthrough ideas that add 10% to your dashboards. And you'll be doing – Yeah, but I used to filter. It's kind of like a Steve Jobsian approach, which is Steve would talk a lot about. how saying no to good ideas is what allowed Apple to do the one or two or three or four amazing ideas. And it's a bit like that. If you allow people to ship 10% ideas, they're not going to find the 10 X ideas and you have to ruthlessly say no. We need 10x, not 10%. What's your take on Taleb? So he's obviously a big fan of small survivable experiments. The question isn't whether to do experiments. The question is, what's the criteria for a successful experiment? In my view, the experiment has to have a 10x upside. So can you take some money, resources, something, and show some capability of creating a 10x upside? But the criteria is, if it worked, it would be a 10x upside scenario. What are some other really bad ideas and maybe pervasive ideas in venture? Oh, there's a lot. I mean, obviously, in some ways, it's kind of an odd world to live in because most things in this world don't work. They certainly don't work as ambitiously as hoped for. But that's true for founders and it's true for the investors that back them. So there's lots of failures to point at. It's a lot like playing baseball. Great baseball players roughly get hits at 30% of the time.

So you can't succeed in baseball without knowing that roughly 70% of the time, you're not going to be happy. So this world, there's lots of bad examples. And in fact, that's part of the problem is people sometimes forget that I don't think you can easily get to success by just avoiding bad ideas. You kind of have to do the... the positive stuff too. And that requires emulating people and companies and ideas that have been successful. So for example, I've always pointed out that it is absurd in my own view that nobody emulates Apple. To me, like when you find something successful, You should ask questions, well, how are they successful? Why are they successful? What did they do? And decompose it and try to emulate that. That's how you learn to play sports, for example. You don't watch poor tennis players and try to emulate them or avoid their errors. You watch great tennis players and try to emulate their strokes. So I think more people should copy, replicate, aim to reproduce what the successful companies do. But because we're surrounded in a world that has more failure than success, it's easy to get caught up in the avoid the failure mentality. What is it about Apple specifically that you think not enough companies emulate? Well, obsession around design, and that's easy to say at a jargon level. I think translating into practical decision-making is very different than the way people make decisions. It's not empirically driven decision-making. There's a great recent book called Creative Selection that I highly recommend people read. It conveys how Apple works in a way that's specific enough that I think most other books haven't been able to capture. And the more sophisticated the reader is, I think the more one would enjoy creative selection, like the more background they have in technology and startups, the more they'll appreciate. Secondly, the vertical integration point, I think people miss all of the time, closed system versus open system. Those are like three key dimensions to start. I think people don't emulate Amazon enough either. Amazon, for example, doesn't offer employees free perks. They don't serve free lunch there. Good luck. trying to convince some startup here not to do that. But you want to be more like Amazon? Or do you want to be more like, you know, felt marginal startup? Yeah, exactly. So another really interesting area to discuss would be your take on some of these interview questions or not maybe interview ideas for identifying great talent. So maybe at the beginning, I'll just turn one of your listed questions on you, which is I really like this one. If you were a product, how would you describe your value proposition? Yeah, so I think mine shifted over the years. But in the beginning,

I was a business development person who had solid product instincts. And I'm probably choosing those words pretty carefully, which is I was very good at business development and I knew enough product to be dangerous. I wasn't a world-class product person by any means, but because I could envision what the product should look like directionally correctly, I was able to forge relationships on the biz dev front that once in a while worked. Similarly, I had the reputation of being strategic. which, you know, again, is another one of these buzzwords, but I think seven powers decomposes the buzzwords pretty well. The way I used to articulate and still articulate the criteria for an executive or employee being strategic is every business when it works is like an equation. It's X times Y times Z with some weighting and understanding that equation in your brain and be able to... manipulate the variables is the key to being strategic. So you understand that if I tweak this one over here, it has this impact over there. Or conversely, if I tweak this one over there, it has this impact over here. And sometimes you can choose a different strategy when you're kind of banging your head against the wall because you understand how to solve it from a different angle. That's what being strategic is. And I was able to do that. pretty early and was perceived to be doing that. In fact, one of the ways I teach people of how to answer this question, if they don't have an answer, particularly early in their career, is I say, go find the three or four people that like you the most and ask them to describe what they like about you and just write it down. And then look for common words, sort of. It's like a word cloud kind of exercise. And it's a fun exercise because in this case, I actually don't care what people don't like about you. The only thing you actually want to know is what people like about you and hope that there's enough common denominators that you can stitch it together. Over time, I became more able and known to be able to fuse business thinking with design, which is again, a relatively rare skill is to be able to work with first-rate designers in a way that they appreciate where though my primary... drive was to make money. Like my goal in the company was typically, how do we make more money? How do we grow and make more money? And how do we effectively turn that into cashflow? But in a way that designers who were ultimately at the front end of the product and user experience would find still valuable to them and that I could understand what their concerns slash trade-offs were. And then finally, over 20 years or so of doing this stuff collectively, I've effectively had five, I guess,

bosses in quotes, Peter Thiel, Reid Hoffman, Max Levchin, Jack Dorsey, and Vinod Khosla. So I developed a little bit of an ability to work with very ambitious founders, very opinionated founders, and help them achieve their vision. And that's a skill in and of itself. What are then the elements, in your opinion, of good design? And I'm also curious, just in general, beyond design, your take on kind of the current opportunity set. between physical and digital oriented businesses, having worked obviously at both? Well, I'm a fan of the manifestation of design and technology into the real world, which has really accelerated since 2010. So whether you look at DoorDash or Instacart as examples, or Opendoor, Uber, Lyft as examples, Square. Amazon in many ways, Netflix used to be actually in the Adams business and then got out of it and is now all digital, which is one contrary trend. But fundamentally, I actually think that the design of a company has to be different. The culture of a company may be slightly different, but that manipulating the real world through technology is more valuable. Because people are still going to experience most things in their life in the real world. This is all a post 2010 wave where founders want to affect the real world. Investors want to invest in technologies that are used in the real world. It used to be your computer was kind of an escapist. prism into a future. And so it's almost like playing a video game when you use a technology company. Now it's actually a remote control for the real world. As you know, my friend and somewhat competitor Matt Kohler coined originally, actually, the iPhone really was the remote control for the real world. And you'd press a button, expect food to be delivered, a car to show up, etc, etc. How much do you think about Different platforms using the iPhone as the quintessential example, and those new platforms unlocking a whole new set of opportunity. And is there anything like that out there today? Or is the mobile platform the one that we've got to deal with for a while, iPhone as remote? I think there are fundamental, I wouldn't call them platforms, but breakthrough technologies that will enable more innovation that are as important as the iPhone. A platform is a very specific.

articulation of a breakthrough. But every time there's a new opportunity, a new set of capabilities are introduced in the world, lots of creative people figure out in almost a Darwinistic way how to leverage that for positive behavior. So I think you're seeing more innovation at the hard sciences level now, whether it's in robotics or bioinformatics or lifespan extension, maybe healthcare. autonomous driving. There are lots of examples where new capabilities are turning into new products. And I think the next decade is mostly about that versus a new platform that people build applications on top of. Some of these new products as they come to market based upon new technical capabilities. may have the characteristics of supporting a platform, but that's like the next generation beyond this generation. What's your take on the current investing environment in terms of things like valuation? So we really haven't talked at all about price or mispriced insights, which ultimately I think is where all great returns come from. So what's your take on price in today's world, in the early stage business? The early stage business price... is roughly the same as it's been post-2015, which is about, I don't know, 25% to 33% less than it was from 2013 to 2015, which is about 2x what it was before, like 2008 to 2010, 2012 kind of error. So it's fairly stable at the early stages. The early stages are less derivative from public market changes. political changes in the ether, late stage valuations. So they tend to be more sticky in some ways and they don't move that much. They also don't matter that much in the grand scheme of things. You're mostly making money at the very early stages. And I mean, specifically seed in series A by being right, directionally right about the company, not the price.

As you get into Series Bs and later, you absolutely need to be right about the mispricing and that there's an opportunity there. But most of what I do, by that I mean 70% of what I do is a seed or Series A investment. The price is not the problem. There is a capital exposure question. So price also implies a certain amount of money that we're investing. And the capital at risk is something I do need to think about, like how much of our portfolio are we risking in various stages, industries? risk reward equations. So there's some price element to that. But fundamentally, I don't actually care. I care about whether this company is going to be successful or not. You kind of referenced it indirectly when you mentioned some of the interesting people that you've worked for over the years. But this idea of career advice, one of them being I've seen you put out there, find somebody that you can just attach yourself to that's incredibly impressive and basically just learn through osmosis. either expanding on that or adding to it, what are some other bits of advice that you would give people specifically earlier in their careers, whether investor or operator? I mean, absolutely. If you can find somebody who's amazing and work with them, you can A, learn a lot through osmosis. And I'd say most of Silicon Valley is like a craft, where osmosis is the best way to learn a craft. Secondly, if you find somebody who's amazing, they will want you to join them. They're going to do interesting things. So per our point about being a magnet of talent, if they go start something or they go join something, what's the first thing they're going to do is they're going to call you, which means you don't have to do anything except wait. For example, when I've considered various opportunities in my own career, one of the first things I always do is I call some of the people I really want to work with before I've made a decision whether to do X or Y and ask them, you know, if I do X, would you? Would you want to do this? And sometimes you can tell from the reaction that there's more energy around doing X versus Y. And that affects my decision of what to do, because I know I'll be able to more easily recruit the people I really want to work with than if I did the other option. So I lots of times will have called people.

way in advance of making a decision and got feedback on, are they coming with me or not? Or how likely would they be willing to do X as a predictive variable, how other talented people react in an instructive decision-making criteria for myself. So I think many talented people kind of work that way as they have a kind of map in their brain of people they really want to work with. They will call those people as soon as they're interested in opportunity. And so if you can be on that short list, it makes your life a lot easier. A second thing is I think just another kind of shockingly contrarian view these days is I just think working hard. It's pretty simple. If you want to get ahead in life, just put in more effort than other people. Most people don't want to do these little details. So for example, I have a friend who didn't go to a very fancy school, didn't start. you know, with a lot of advantages in classic Silicon Valley. But when he was in an early role in his life, remembered all of his customer names. So he would make a conscious effort to remember who was who and what their preferences were. And those little things stand out. And most people don't put that kind of effort into remembering a thousand different customer names. those people notice and remember. And all of a sudden, those people then therefore open up new opportunities for someone who's 22 years old from a mediocre school that wouldn't have happened had he not been memorizing everybody's names and waking up at 5 a.m., et cetera. So you can find your advantages, but they're mostly through sweat and attention to details that other people kind of know they should do but are too lazy to do. The combination of the two stands out. So what do I notice? You know, I notice people who have unusual insights. I notice people have unusual tenacity. The more I can find them, whether I hire them, invest in them, it actually doesn't matter. I'm always looking for people have, you know, some differentiation before other people notice that about them. And these things propel the, you know, you can propel yourself for 10, 20, 30 years just on a couple.

key dimensions. Another one of your really interesting contrarian ideas is we even hear this in our business as an asset manager that's smaller just in terms of headcount. We're 30-something people. And we'll say, we're pursuing some really ambitious project. And they'll say, well, how the hell are you going to keep up with firm XYZ that's got 100 PhDs? Or the equivalent in your universe would be, why are you doing this? Amazon's just going to just squash you as soon as it's a viable model. And I think you put somewhere like, does that ever actually happen? Does anyone actually question whether or not this is true? So maybe your take there. Yeah, I think it's... It almost never happens. I've asked this question and I never get a satisfactory answer, which probably suggests the answer, which is, is there any high growth startup? And I can quantify what that means, but any startup that hit escape velocity that a large competitor has ever basically beat. And you have to struggle really hard through the history of the last 30 years to find examples. And so the fact you have to struggle that hard to find examples suggests the answer, but that's often true. It's worth being consciously aware of when an incumbent has unusual leverage in understanding why your counter leverage may offset that or not. So I think being paranoid is smart. But more typically, a focused, talented team with an ownership mentality and incentive alignment will out-execute a very large entity that on paper looks very threatening. Yeah, it's a really interesting idea and an encouraging one for smaller teams for sure. Oh, absolutely. I mean, this is the excitement behind Silicon Valley. We're not all crazy. Yeah. So I was aware of those two. I'm curious if there are other big – it doesn't just need to be an investing. I mean, I like when you tweet about narrative violations and kind of tracking those ideas. Any other big narratives that you think are crazy or ideas that you think are – popular ideas that you think are just mad today that we could chat about? Yeah, I mean, I've had a bit of debate on Twitter about this, but I think the whole fake news debate is like ridiculous. I think the average American today is by any metric more informed than the average American at any time in history. And the average American is more informed by far than the average person in history, probably by orders of magnitude. So yes, you can isolate. Clearly, one can find content that's false.

But that's not the interesting question. The interesting question is given all the resources available to a human being today in the 21st century, is the person smarter or dumber than they used to be? So it's like the net effect is what matters, not like any isolated variable. So to me, the only question is like, is a voter more informed or less informed? Well, you should read about, I mean, in some ways, actually, the education system was probably better in some ways in the early 1900s in America. So there is some contrary evidence here. fundamentally the dissemination of information is so much easier. The accessibility, I mean, there are no longer cast systems in the United States where you can have access to any information you want by using Google very quickly or, you know, comparable products. And that just wasn't true in history. Even the ability to buy a book. was a luxury i mean that's why public libraries existed is like normal people could not afford to buy a book now nobody thinks about like oh my god you know how would you find information about this topic or that topic it's available for free certainly to any american there may be pockets of the world where that's not true but it's really not true in the united states like people are walking around with a library in their pocket literally So I think this debate is literally absurd. Second thing is like this is also from a foreign interference and kind of foreign government perspective is also kind of absurd. Every government in the history of the world has been doing stuff like this for centuries. If one wanted to read books, you can read the history of this stuff, of false information. But that's what governments do. That's what intelligence operations do. I don't find it surprising at all that various people, various entities have an incentive to manipulate. information. The United States does it. Other countries try to do it here. People hijack platforms for messaging always. Yeah, absolutely. I mean, Tyler Cohen has a good point, which I think I may have articulated even before he did, but I know he's put it in one of his books, is there's nothing you can say about Facebook that isn't true of the printing press. Printing press, in fact, created a whole bunch of revolutions that were actually pretty nasty revolutions. Religion, but then they became fundamental wars. And before the printing press, people didn't have access to proselytize. So one couldn't really start a religion so easily and undermine the pre-existing powers that be. That's what these platforms are, is they're like more democratic versions of printing presses. You espouse all the time.

kind of on this notion of information, curiosity, reading, et cetera. You're always posting books that you've bought, then you come back and post the ones that you like. You've talked a lot about learning through osmosis. I'm curious how you would prescribe sort of a balance between information gathering, reading, et cetera, versus hands-on experience as kind of modes of learning. I think it depends on what one's trying to learn. I think they're both very valid. I think reading serious printed materials, so not online content, but like books. is a great exercise. Your brain is basically a muscle. You want to exercise your muscle and that develops capacities, capabilities that you can leverage later indirectly in ways that you never would have forecast. And you need to invest in your brain. Just like you can't suddenly decide, I want to be a world-class sprinter. You need to have done a lot of training. And I think like reading books and high quality materials is basically giving the raw ingredients to be a world-class sprinter when the opportunity presents itself. Obviously, there are functional things that one can better learn through osmosis. Like, for example, I don't think you can learn to play guitar by reading a book. You need to either try to play guitar, try to create a sound that you can get feedback on. So there are different activities, probably in medicine, the medical field. It'd probably be a bad idea for a surgeon just to read books. Like, I think they need to actually exercise the manual, you know, sort of coordination and dexterity and practice that, trying to isolate various parts of the body under stress and pressure. There's definitely different... components to being proficient at different things. But the combination of the two is what's really trying to optimize. This is largely a selfish and one of my selfish closing questions, which is to help me find the next marginal guest for the podcast. But if you had to identify other investors that you think are doing things in a really unique and interesting way, which is ultimately the name of the game, a lot of really smart people in this space, usually smarts is kind of table stakes. What are some other investors that you think are orthogonal thinkers or taking a unique approach to venture? You know, it's surprisingly few. I think most investors forget the lessons of strategy that they would apply if they're back running an operating startup or the advice they would give their founders, which is differentiation is your friend. So I think Y Combinator, for example, has done a phenomenal job over the last 13 years or so differentiating. They have a different approach, different mentality, different economics.

et cetera, and it really works, and they have a network effect as far as I can tell, which is very unusual in venture. I don't think there's been much pioneering and much innovation at the traditional venture capital level at all. And Jason Horowitz, when they launched, definitely had a philosophy of what they were doing. You can get some allusions to it in Mike Ovitz's autobiography. Great book. Which I highly recommend reading. I don't know that anybody in the last like five, 10 years has really innovated that much. I think some people do vertical innovation. Like, so example, like, like Coastal Ventures locks capital likes to invest in hardcore technology and seems proficient at assessing it and evaluating it and funding it. But I think there's a surprisingly little innovation. in venture. That doesn't mean there's not good venture investors, by the way, just to be clear. There are definitely a few investors that if I were starting another company, I would want as board members. So there's absolutely high quality individuals that one can work with. But from an innovation standpoint, I think venture capital is lagging. Do you think that this trope of the entrepreneur as client of the venture firm with all the, again, that you mentioned the Andreessen Horowitz like support model first round, I think certainly seems to from the outside looking and do some really interesting things for their entrepreneurs. Is that a real thing, a real innovation, or is this kind of like private equity companies saying that they're doing operational improvement when they're really just levering and then deleveraging and cutting costs? I think it's an open question how much of it is sustainable because it only really is an advantage when other people copy what you're doing, it doesn't work as well. So if you just raise the cost, if all of us provide the same support services to entrepreneurs, it's just raising the cost to all of us and it may not. There are some things that are high leverage activities that we invest in. So we have operating partners here at Coastal Ventures that provide a lot of services. We have a design operating partner. We have a CFO operating partner. We have recruiting operating partners, which is pretty common, executive, technical, mid-level. So all of that we believe in or we wouldn't provide it. I think where the value comes though,

is when you can say that all constituents benefit. So for example, in our recruiting sphere, let's say you're a mid-level product manager, manager of engineering. It's actually fairly efficient to contact one of the KV mid-level recruiting team because we can figure out what you want to do, what the criteria you're looking for is, what level you're at. And we have a portfolio of roughly 350 companies. So we can matchmake very quickly for you five or ten opportunities that fit what you're looking for. Whereas if you were doing that yourself, it would take you hours of work. Maybe not even possible, but it would take you hours of research. So we can instantly matchmake people. And that's great for our companies. Our companies love it when we introduce them to high-quality engineers or engineering managers. It's great for the candidate because they get a qualified list of companies that fit the criteria they're looking for, from stage to vertical to culture. And it's good for us because we're adding value and increasing the odds of success of our companies. So that works for everybody. That makes sense, right, as a feature of the ecosystem. But a lot of other services, it's not clear that they benefit all the constituents in that way. So that's my criteria personally for things I subscribe to is, is this high leverage for KV, qua KV? Doesn't work for the founders and add value and doesn't work for the potential employees. And if it's true, then it's something we should embrace. So for another example, we do a lot of seed investing. I can see us hiring a communications partner here because at the earliest possible stages of a company, the economics of hiring a comms professional don't make that much sense. Now, our later stage companies absolutely have their own comms team. They have incredible competency at PR, comms, marketing. Could we help the earliest companies in our portfolio? Perhaps yes. And that might make sense for us to invest in because we can serve 100 companies, all which have five employees or less, but they can get better professional advice and they would be able to justify on their own. So you've mentioned a lot of some of my favorite books the last three years. And so just two quick closing questions. The first would be for a book that you recommend heartily that maybe you think is the least likely that people have heard of that you've read, say, in the last year.

Probably still The Upside of Stress is probably the most important book that one can read. It will change your life in so many different ways. It's still not a very famous book. It's written by a professor at Stanford. The basic argument, although the book is much better than I'm going to do justice for right here, is the more stress you have in your life and the more you adjust your mentality to that stress. The healthier you'll be, the wealthier you'll be, the happier you'll be. And the book is incredibly persuasive. There is no rebuttal to this evidence. The surprising portion of that for me would be health, just given like research on cortisol. Health is counterintuitive to a lot of people, but the evidence is compelling across all demographics. In fact, that's how the author discovered this. If you want to look up Kelly McDougal, she gives a TED talk before she wrote the book about the topic. And she was actually looking for the opposite that stress is bad. And she wound up finding evidence in the Boston world that people had the most stress were living the longest and then started diving in and asking questions. Well, why is that true? And came up with, well, actually everything you've been taught is wrong. Yeah. It's almost like a counter entropy idea. Really, really cool. My closing question for every guest is for the kindest thing that anyone's ever done for you. Wow. I think the kindest things are all the same actually for me. The things that stick with me are people who remember and articulate in a really succinct way the impact I had in their career or life. And somewhat random in intervals, like sometimes it's expected occasion, but sometimes it's actually not. And, you know, you have a lot of impact, fortunately, when you run large teams, build large teams, fun things, work on boards. And you don't always know. I mean, some people, you obviously can track the impact, but it cascades down a lot. You don't always get to track it. And then once in a while, it bubbles back up from people you didn't even really know that well, but that actually were inspired by particular things, learned particular things, changed their course or trajectory.

And when you get recognition back, it's usually private. Sometimes it's public. It's really super kind and rewarding and makes all the effort. All the stress. Yeah, absolutely. You can never get enough of those like emails or texts or toasts. It's true. It's very true. This has been dense and awesome. Really interesting. Thanks for your time. Cool. Pleasure. Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to InvestorFieldGuide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at InvestorFieldGuide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, O-S-H-A-G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.