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Photo by Antonio Cuellar / Unsplash

Host: Kara Swisher
Guest: Keith Rabois | General Partner | Founders Fund
Category: 💸 Venture Capital

Podcast’s Essential Bites:

[2:03] “I lived in San Francisco professionally for 21 years. […] But since 2017, the city has been in massive decay— crime, homelessness, housing, […] taxation, […] and then the Covid policies hit. […] So we decided to vote with our feet, which is the original foundation of this country. […] Last year, 220,000 people moved to Florida. […] It’s the fastest growing state for entrepreneurs. And capital is always mobile. Entrepreneurs have been less mobile. There was a perception of network effects in the Bay Area. But the network effects have atrophied.”

[3:15] “Part of the job of a venture capitalist or an entrepreneur is to recruit talent. And so having that density of talent around you allows you to succeed as an entrepreneur, executive, or founder or V.C. That said, there’s downsides to network effects as well. Network effects can also breed complacency and sort of a monoculture, a stereotypical way of thinking that everybody conforms to. And the people who create the best companies tend to have different views. […] You need diversity of thought. And the good news is when a network effect tips, there’s other places to build a network. This is Miami.”

[6:58] “I think people were not as bold until Covid hit. […] When Covid hit, a lot of people could experiment with very low opportunity costs. […] People […] realized there were places that were run much better with a better trade-off between cost and return. So basically, Covid really highlighted that you can’t treat people like citizens that you have a monopoly on. Citizens are now customers. They’re customers of the government. They’re customers of the state. And they’re going to look at the value proposition they receive, just like when we buy products.”

[8:57] “There’s no state income tax in Florida. And California, for wealthy people, basically charges 13% on top of the federal tax rate. So basically, you don’t get to keep half of your money if you’re wealthy in California. If I work half the year for the government and half the year for myself, the government is controlling my life. And that’s just not acceptable for me and my family. […] Most of the friends who moved from the Bay Area […] are not conservative.”

[10:37] “I believe a lot of people who power the tech revolution in the Bay Area moved to the Bay Area because there was ambitious opportunities. They weren’t born and raised there. So MIT grads […], Harvard grads, University of Chicago. […] Fundamentally, I think people overrate the importance of Stanford. We will, over time, have first rate educational institutions [in Miami].”

[12:46] “The way I think about crypto is it’s an ingredient. And like any technology, it can be used to enable and empower new value propositions […]. I founded a company called Royal, which is reinventing the music industry. It uses crypto and tokens underneath to enable revenue sharing and royalty sharing in a way that wouldn’t have made sense with traditional monetary systems. But we don’t talk to the end user like [we] were a crypto company. […] The technology only serves human needs. […] And how does technology make this cheaper, better, faster?”

[16:55] “The [Facebook] brand is tarnished on the core product. And I think that’s an unsolvable problem. I think Instagram still has room to run. And I think Meta is too far away. […] A metaphor I subscribe to is Mark is a lot like Bill Gates. […] He is someone who recognizes a business opportunity and is maybe the best on the planet at executing against it violently. Bill Gates was never really on the cutting edge of technology, and that’s why Steve Jobs […] used to make fun of him. […] He used to constantly lampoon and caricature him. So Mark is going into Meta, which is a cutting edge technology, without the skills to be a cutting edge technologist. […] Facebook was basically […] a combination of Friendster and Myspace.”

[19:39] “Apple has some of the right ingredients [to build Meta], less so than they used to, but some. […] Amazon wouldn’t be very good at creating Meta either. […] Amazon’s a wonderful company, well-run, […] but you need to tie your target and your skills together to increase. […] Apple [is best suited] of a large pre-existing company. […] Possibly Netflix, but they would have to change their culture. [Microsoft with the purchase of Activision is] not a crazy idea, actually, because there’s a use case, there’s a value proposition. A lot of things have started with gaming or sports. […] Snap is creative.”

[25:42] “At the end of the day, I think of my job as being primarily a consigliere for a founder. And the bundling of capital and advice is still very rare. Now it’s hard to scale. […] It takes an incredible amount of time to give useful advice to world class founders. But insofar as you’re in the business of doing that, there’s no competition, or there’s very few. […] It’s partially like being a pop psychologist meets a consigliere.”

[26:10] “What is happening [on VC] like [in] banking […] is there’s a vertical integration. So everybody is becoming a full stack venture firm, C financing, Series A financing, traditional venture capital, Series A and B, into growth capital. And we are the same. We write $1 million checks, and we write $200 million checks in the same week. And so if you’re not a fund that’s fully vertically integrated and compete for seed fund deals of $1 to $2 million and power money into a great company at $200, $300 million clips, you’re going to get eclipsed. And so that’s what happened to banking. These specialized banks basically disappeared.”

[27:31] “I think there’s only so many founders that you want to invest in. And giving them extra money maybe makes things worse. It definitely doesn’t make things better. […] So I would rather be scarcer with capital than more promiscuous or profligate. […] There definitely are some companies with high burn rates, prior rounds raised at high valuations based upon the prior market, where the company doesn’t have a lot of levers to control the burn rate fast. And those are going to get repriced very massively. And it’s going to be a very painful experience.”

[28:26] “The average [success rate] in venture is probably sub 10%, sub 1%. To me, it’s like baseball, you’re Hall of Fame if you could do anything close to 30 to 40% success rate at early stage investing. By the time you’re looking at the growth round, you should be 80% plus correct. And you need to be to make the economics work. But what I do is I find the proverbial two kids in a garage. They have a Keynote deck and nothing else. And to be able to do that 20, 30, 40% of the time correctly is pretty magical.”

[28:57] “The market has shifted, so entrepreneurs have a lot more power […] certainly than when I was growing up as an entrepreneur. When you were first covering Silicon Valley, often, VCs would own 40% of the company. […] That went down to 25 and then 20, and in the last two years, it’s more like 15 to 20. […] There’s different strategies that one can legitimately justify. But you have to have a fairly concentrated position in successful companies because the funds are so large. So let’s say we had in our last fund roughly $4 billion between venture and growth fund. To make our LPs happy, we need to turn that into 5-6x more money. So that’s like $20 billion of returns. And let’s say we owned only 10%, that means we need to be involved in companies that create $200 billion of value in 2 and a half years. That’s pretty damn challenging. […] You need one that’s hundreds of billions of dollars. […] And there’s very few of those.”

[33:21] “I’m always looking at the payback of a dollar, how fast does that get paid back. And I’m only interested personally in funding companies that have a very efficient return because that shows to me that there’s real product market fit. So you shouldn’t have to subsidize consumers. If consumers find your product to be valuable, they should be willing to pay for it. […] And so I think founders need to build products that consumers are willing to pay for.”

Rating: 🚀🚀🚀🚀

🎙️ Full Episode: Apple | Spotify | Google
🕰️ 41 min | 🗓️ 02/17/2022
✅ Time saved: 38 min

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