Keith Rabois - If You Can’t Sell Them, Compete with Them

**Patrick O'Shaughnessy** (0:04)
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.

**SPEAKER_1** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:47)
My guest this week is Keith Rabois. Keith is currently an investment partner at Khosla 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 OpenDoor, 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. 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. Maybe using OpenDoor or something like that as an example, talk about why you think that's a good summation of your history.

**Keith Rabois** (1:55)
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 an entire stock or if you're better at reducing fraud, you don't want to sell a service to somebody else. You actually want to build the full stock yourself. So vertically integrated businesses are things I like to fund where we take the entire stock 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 like long sales cycles, et cetera. But you also 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.

**Patrick O'Shaughnessy** (3:15)
Do you have any favorite examples of this outside of your own experience applying this strategy?

**Keith Rabois** (3:20)
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 then 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.