Keith Rabois on Rejoining Khosla Ventures | E1102

Intro (00:00:00)

• Keith Rabois announced that he would be leaving Founders Fund to rejoin Khosla Ventures.
• Keith expressed his excitement about rejoining Khosla Ventures.
• Keith mentioned certain things he missed about Khosla Ventures.
• The combination of factors made sense for him to return.

Moving to Khosla from Founders Fund (00:00:53)

• Keith Rabois, after a five-year hiatus, has rejoined Khosla Ventures.
• While away, he co-invested with Samir and David in companies like OpenStore, Trauma, Ultima Genomics, and Fair Bungalow.
• Rabois missed the extensive partner meetings and vigorous debates that were crucial to the success of KB4, KB5, and KB6.
• He believes these debates made him a sharper and smarter investor.

Founders Fund vs. Khosla Strategy (00:06:00)

• Founders Fund operates with individuals managing their own investment strategies, requiring a certain number of votes to support an investment.
• Khosla Ventures follows a traditional approach with weekly partner meetings involving rigorous preparation and analysis.
• Keith Rabois had social capital within the firm, which he could use to pursue non-standard or controversial investments.
• While he valued critical feedback, there were times when he regretted listening to it and missed opportunities.
• Counterintuitively, some of his championed investments received even more enthusiastic support from the firm.
• The firm unanimously supported Keith's proposal for the first institutional investment company.
• OpenDoor, a company Keith incubated, was also enthusiastically endorsed by the firm after its presentation.

Investment Regrets at Khosla (00:10:01)

• Keith Rabois discusses two investment regrets he had while at Khosla Ventures.
• One regret was not increasing the valuation of a seed-stage company called Rippling, which turned out to be a successful investment.
• The other regret was not joining the board of Robinhood in its seed round, which he believes would have been a good investment.

Investment Price Sensitivity (00:14:11)

• Historically, Khosla Ventures (KV) has been more price disciplined than Founders Fund.
• Founders Fund is actually more price sensitive and disciplined than most people realize.
• Of the major firms, KV and Founders Fund are perhaps the two most disciplined in terms of price.
• Sequoia has also historically been very price disciplined but has relaxed that a bit.
• The more important topic is whether founders should care about price sensitivity.
• Peter Thiel believes that price is always a trap and that walking away from a deal due to price is a sign of a lack of conviction.
• At the seed or Series A round, paying a higher price may be justified if the company has the potential to be iconic.
• At the Series B round, paying the wrong price can significantly impact the risk-reward ratio.
• Keith Rabois' goal is to be the first institutional investor in companies, and he is willing to pay a relatively high price for that position.
• Peter Thiel understands the dynamics of price sensitivity and consistently points out that returns may not meet expectations in certain macro environments.

Lessons from Investing in Ramp (00:18:00)

• Keith Rabois, a prominent venture capitalist, shares his investment strategy and approach to venture capital, emphasizing the importance of conviction and careful consideration when investing at the seed stage, even if the valuation appears high.
• Rabois cautions against the potential risks associated with reserves and suggests a more ad hoc approach to reinvesting based on the quality of the opportunity and the founder's abilities.
• He acknowledges that the Series B stage can be challenging in terms of risk and reward but argues that the outliers in the seed range can make up for it.
• Founders should be mindful of the "card price" when considering investment opportunities, weighing the value of information gained against the cost of the investment.

Role of Operators in Venture Capital (00:31:58)

• Keith Rabois discusses the advantages that operators bring to venture capital.
• Operators can provide conceptual frameworks for founders to think through problems.
• Operators can connect founders with others who have faced similar problems.
• Operators can offer valuable insights from their own experiences.
• Keith Rabois believes that growth investing is currently broken.
• Most growth funds were bad at what they were doing because they were price-insensitive and chased momentum without understanding fundamental company dynamics.

Current State of Growth Funds (00:34:45)

• Most growth funds are struggling or dying.
• Growth investing is not a comparative advantage for Keith Rabois.
• He prefers to focus on areas where he has a comparative advantage, such as early-stage investing.
• Partner meetings can sometimes be counterintuitive and provide valuable insights.
• Samir and David encouraged Keith Rabois to invest in Stripe's Series C round despite it being an expensive entry point.
• Keith Rabois values the input and support of his partners in making investment decisions.
• Keith Rabois rarely leads growth rounds, but he has done so in a few cases where he had a deep understanding of the business and the founders.
• He led a growth round for Ultima Genomics because he had been involved with the company since its early stages and had a strong understanding of the science and technology.
• He believes that Founders Fund could be successful in growth investing due to their talent in the growth stage.

Strategies with Khosla's $3BN Fund (00:38:19)

• Khosla Ventures' $3 billion fund is divided into three categories: $415 million for seed investing, $1.5 billion for venture investing, and $800-900 million for growth investing.
• The firm has five managing directors and a team of partners who are experienced in leading seed rounds and venture investing.
• The fund size is appropriate given the number of investment opportunities, the team composition, and the firm's strategy.
• A $400 million seed fund is reasonable considering the high ownership stakes and the number of partners who enjoy seed investing.
• A $1.5 billion venture fund is also appropriate considering the potential for reinvesting in portfolio companies and competing for external investments.
• The fund size should be triangulated with other factors such as the number of high-quality investors and the fund deployment period.
• The fund size affects the strategy and should be part of a recursive dialogue.
• Founders Fund has a different allocation strategy with $900 million in FF8 and $3.2 billion in the growth fund.
• It is uncertain whether Keith Rabois would make changes to the age of the team at Khosla Ventures, as he has not worked with most of the non-partner level employees.
• He has worked with Nikita before and recruited him, and he has worked closely with Alex Morgan.

Khosla Ventures' Youthful Approach (00:43:05)

• Keith Rabois is rejoining Khosla Ventures (KV) after a stint at Founders Fund (FF).
• He believes that KV can learn from FF's rigor around growth investing.
• FF is good at valuing gross-stage opportunities and making critical decisions in later-stage funding rounds.
• Rabois feels he can apply the knowledge gained from FF to make sharper decisions in the companies he's involved with.
• FF's growth team is skilled at evaluating late-stage investment opportunities.
• Rabois learned a lot from working with the growth team and believes it will make him sharper in his own investment decisions.
• Rabois believes that the right founder-investor pairing increases the probability of success for a company.
• He emphasizes that his decision to rejoin KV is not a criticism of FF, but rather a matter of finding the best fit.

VC Firm Preferences Among Founders (00:45:21)

• Founders who have a shot at being successful are all different and require different types of VC pairings.
• A successful pairing requires a VC who is complementary to the founder and can add value while being on the same page.
• Founders should take their time to find a VC who is directionally aligned with their ambition and prioritization.
• Founders should consider whether a VC's founder-driven or technology-driven approach aligns with their own.
• FF and KV have a high portfolio overlap because they have similar criteria for successful founders.
• Founders from both firms share traits such as being opinionated, hard-working, and founder-driven.
• Examples of portfolio overlap include Eight Sleep, Vaarda, and Ultima Bios.
• Keith Rabois did not consider other options with pre-existing funds because he felt he understood why he was successful at Khosla Ventures and did not want to fix other people's problems.
• He has occasionally thought about starting his own fund but is not particularly excited about the drought coefficient associated with that.
• He seriously considered starting a fund in 2010 and 2013 but ultimately decided against it.

Returning to Khosla and Starting a Fund (00:49:45)

• Keith Rabois rejoined Khosla Ventures with a specific idea about a fund.
• His main goal is to find undiscovered founders, provide them with advice, counsel, and capital, and help them increase their chances of success.
• He believes that the initial fixed cost of starting a fund is high, but the marginal cost becomes more tolerable once the fixed cost is covered.
• Rabois enjoys meeting new founders, discovering their potential, and working with them to help them succeed.

Current Motivations for Keith (00:51:05)

• Keith Rabois, motivated by a desire to make a significant impact on people's lives, believes that success in venture capital requires a clear and differentiated comparative advantage to avoid regressing to the middle of the bell curve where returns are unacceptable.
• Rabois takes his investment criteria seriously, often passing on opportunities if he can't identify a clear comparative advantage. When evaluating potential investments, he considers factors such as his ability to assess the founders' abilities, his understanding of the industry and company, and his personal relationship with the founders.
• In cases where he doesn't feel he has a comparative advantage, Rabois may introduce the founder to another partner in the fund who might be a better fit.
• Rabois emphasizes the importance of asking questions rather than providing answers, carefully calibrating the level of conviction he expresses, and reverse-engineering the logic behind decisions.
• He rarely tells founders what they should do directly but recalls a specific instance where he advised Mike to pay for air conditioning in Miami due to the extreme heat.
• Rabois acknowledges that venture capital may not always be a great asset class in terms of returns and highlights the significance of taking advantage of liquidity windows when they arise. He admits that he made a mistake by not selling during the last liquidity era and acknowledges that he doesn't have a perfect answer for determining the optimal time to sell.