Lenny's Podcast: Product | Career | Growth
01:00:57 · Lenny Rachitsky, Keith Rabois
[01:00:57] S1: There's also this concept of the ugly baby in Creativity, Inc., I don't know if you read that book, Ed Catmull, about every idea at Pixar, every great idea starts as this ugly baby that no one wants to help and pay attention to and just, "Get those out of here." [01:01:11] S0: It's like a startup. I mean, that is actually the startup. I use this prism as an investor, which is when I make a seed investment or series A investment, let's say, I want half of my friends who are VCs to laugh at me. Literally laugh because I know most of the people I compete with pretty well. And so I'm running this algorithm through my brain. Are these people going to laugh? If so, this is potentially a great investment because it's an ugly baby. And ugly babies are the ones where there's real alpha. [01:01:37] S1: That's so interesting you say that. I did some research recently on what are signs. We interviewed, this is me and Terrence Rohan. I don't know if you know him, VC. We interviewed early employee, people that have joined early generational companies many times. They joined OpenAI early before anyone knew about it. Palantir, really early, Stripe. And so we asked them, "What did you look for?" And there's three patterns. And one of them was exactly that. The idea, people laughed at them. They thought it was crazy. This is never going to work. Palantir, for example, OpenAI, for example. [01:02:08] S0: Yeah. My parents used to laugh at almost all my jobs in tech. It used to be very funny. They thought I was going to be homeless because most of them did not make sense to them.
01:02:08 · Keith Rabois, Lenny Rachitsky
[01:02:08] S0: Yeah. My parents used to laugh at almost all my jobs in tech. It used to be very funny. They thought I was going to be homeless because most of them did not make sense to them. [01:02:17] S1: That's classic parents. No idea what the hell people do in tech. Yeah. [01:02:22] S0: They did appreciate Stripe though. My mom always appreciated Stripe. [01:02:23] S1: That makes sense. [01:02:26] S0: And always tried to lobby me to invest, and I finally listened. [01:02:30] S1: Nice. Good job, Mom. She earned her keep. Okay. We just shifted perspective because Keith's iPad was dying. Classic, that's maybe the downside of the iPad [inaudible 01:02:41] [01:02:41] S0: The downside of the iPad is I use it too much. [01:02:44] S1: That's product market fit. Okay. I want to actually follow up on this discussion we're having about just finding great companies. A lot of people are starting AI companies now. There's so many launching. As an investor, I'm just curious, what's a sign that this is a worthwhile idea considering the endless number of startups launching? And maybe what are some just flags that are like, "Okay, maybe don't work on that idea"?
01:03:09 · Keith Rabois, Lenny Rachitsky
[01:03:09] S0: Well, the existential question that everybody talks about these days is are the foundation labs just going to be so proficient that there's no oxygen? Because if you're building a successful startup, you need to build for eight to 20 years into the future. Whether you just discount a cap flow analysis or some other prism, it doesn't matter. Ultimately, you have to build for something that's durable for decades. And the rate of progress by the foundational labs, not just one, multiple of them, really does start creating questions about the sustainability of even companies that look like they're thriving in the short term. So that's one question. The second question I'd ask is very typical. I've always asked this question for 25 years, which are, what are the accumulating advantages of this startup? You do want to believe that over time you create an unfair advantage. And there are different species of accumulating advantages. The one that people immediately gravitate to, but it's only one illustration of a set of options is network effects. But you want something that, over time, makes the business better and better and better, arguably easier and easier at some point. [01:04:18] S1: Do you see those sorts of things at the beginning when you're seeing a seed stage startup?
01:04:18 · Lenny Rachitsky, Keith Rabois
[01:04:18] S1: Do you see those sorts of things at the beginning when you're seeing a seed stage startup? [01:04:22] S0: Yeah, it's a great question because I think people can conflate two things. There's a difference between seeing it and understanding the potential. So what I'm looking for when I need a founder is can they articulate where the accumulating advantages can be in theory conceptually. They don't have to have demonstrated it. Yes, there's an occasional example. Once every five years you might find one where early you can actually point your finger on it empirically, but that's way too strict as a bar for an early stage investor. But I personally want the founder to articulate to me where they can build accumulating advantages and maybe even sequentially identify when they would start either taking advantage of them, leveraging them or measuring them. [01:05:14] S1: So when you're evaluating startups these days, I know this is a very hard question to answer, but just is there anything in particular you're looking for that you get really excited about?
01:05:14 · Lenny Rachitsky, Keith Rabois
[01:05:14] S1: So when you're evaluating startups these days, I know this is a very hard question to answer, but just is there anything in particular you're looking for that you get really excited about? [01:05:24] S0: I'm a founder-driven investor. So the only thing I really care about is, does this founder have a non-zero chance of changing an industry or the world? And if they do for a seed or series A investment, I'm in, period. Don't ask any other questions. That's all I need to identify. Not every investor who's been successful has the same algorithm they're running. There are technology-driven investors. I would say Marc Andreessen's probably someone like that. Vinod's a mix. He's both founder-driven and a technology-driven investor. There are investors who are products/market-driven investors. My colleague, David Wyden, I'd say is that. I think Alfred Lin at Sequoia is mostly that. So you can have different approaches, mental models, paradigms. But for me, it's, is this founder extraordinary? Do I have reason to believe that this founder is the next Brian Chesky? [01:06:19] S1: You mentioned that you're an investor in all these companies you listed are doing incredibly well. And you're on the boards of a lot of really successful, incredibly good teams and companies. Is there just something they are doing the way they operate that is different from companies that are not as successful?
01:06:36 · Keith Rabois
[01:06:36] S0: I think the subtle signal, let's say very early, is speed. And it's one of those things that's easy to say, but let me try to be more concrete. There's a tempo, an operating tempo that a successful company develops that develops very early in a company's trajectory and is incredibly impressive. I remember when Roelof Botha was on my board at Square. He led the series B. So he joined our board. And six months in, so two board meetings in, he said to me, he's like, "I haven't seen this kind of tempo since our PayPal days." And he'd been a VC at that point for nine years. And I was curious, I said, "What are you noticing?" And he's like, "At board meeting X, you guys identify an opportunity or problem. And by the next board meeting, you've shipped solutions, addressed it, featured just constantly, consistently." And I think that's right. So the time between the seed and series A at Faire was pretty tight. And I remember at the time my chief of staff was Delian Asparouhov. And Delian said to me after the second fare board meeting that he shadowed me at, he said, "If there's one company in Silicon Valley that would cause me to leave being the VC, it'd be Faire." And I was like, "Interesting. Why?" And it's like, "The pace of execution." And his answer was exactly the same as Roelof's. He's like, "There is something slightly off. And by the next morning meeting, not only have they identified the root causes, but they've shipped and reacted and measured the impact of the solution. And that compounds, that speed really does come out." So that's just one trait, but you see it. It did lead me to, for example, preempt the series A of Ramp. So I led this seed in May-ish of 2019 and gave a term sheet to preempt the A in September. So pretty quick. One of the two signals was how fast Ramp was able to be on the precipice of shipping the cards. I'd been working in financial services for a long time at that point, 19 years or so. And there's just a lot of moving pieces to ship a card. You need these program managers, you need the sponsoring bank, and you need this and this and this. It usually takes nine to 12 months. Best case, nine. Ramp was on the precipice in three months. And I was like, "Oh my God, I've just never seen that velocity." That was one of two, maybe three inputs.