This week the Bowery Capital team spent time discussing some key venture capital themes captured in Keith Rabois’ podcast with Invest Like The Best [Ep. 115], covering topics from his investment criterion to critiques of business strategies that have been popularized like the Lean Startup.
Like Vinod Khosla who we covered on our blog a couple of weeks ago, Keith is an investment partner at Khosla Ventures where he focuses on investments in consumer Internet, education, enterprise, financial services and digital health. Some of his major investments include Stripe, Youtube, Palantir, and Airbnb. In addition to his investment experience, Keith is also an entrepreneur and experienced executive. In 2013 he started the company Opendoor, which aims to transform the process of selling a home through technology, and has held executive roles at top tech companies including PayPal, LinkedIn, and Square. In this post we cover three key questions for investors to consider that have helped Keith identify breakthrough companies.
1. What is anomalous about this idea or company? With this question, Keith tries to understand whether there is true differentiation from the standard technology companies that currently exist. This can be something about the team, the performance of the company, or attributes of the technology. Although he talks about emulating other successful companies throughout the podcast as a sound way to avoid bad ideas, he insists that following a standard playbook will not help your company become orders of magnitude better than the competition. While spotting anomalies is a challenge for investors, Keith believes that unless you can see something special and very unusual, there’s no chance it is one of the top 100 companies of all time.
2. What “secret” is the company predicated on? Keith defines a company secret as “a belief system about the world, that a certain company holds, that the rest of the world doesn’t really appreciate.” A company secret can be rejected or validated over time. Successful startups are often tasked to reinvent themselves because these secrets evolve and require innovation. Keith dives into this concept more by drawing on his experiences with Opendoor’s secret: homes are much more like a commodity than people commonly assumed. He felt that common intuition considered residential real estate to be similar to a piece of art that had to be seen in person to price. Opendoor’s secret was to use data to challenge that notion.
3. Can the founder attract the talent requisite to achieve the vision? Assessing a founder is a critical part of the due diligence process in venture capital. Keith argues that the primary objective in assessing a founder is deciding whether they can recruit the requisite talent for the business to succeed. While every business has different challenges and requires different talent, Keith believes this ability to recruit should show up in a founder’s prior experience. One of his main strategies to investigate this is to call former colleagues of the founder and look for red flags which could be tipped off by slight hesitations in one’s response.
In line with these questions, Keith describes his investment philosophy as analogous to a movie, starting with an inspiring narrative–an anomalous idea or a secret the world doesn’t appreciate. Of course, with an inspiring narrative, it is still important to hire directors and cast your film properly in order to produce and sell tickets. In terms of venture capital, this means that assessing a founder’s ability to both set the vision and build the team are equally critical investment criterion.
If you liked “Keith Rabois’ Three Key Questions for Investors to Consider” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Special thanks to Kenny O’Brien for his help with this post.