Vinod Khosla on How to Build the Future

my name is Sam today we're talking to Vinod Khosla the note is the founder of Sun Microsystems and Khosla Ventures he's been involved in the creation of dozens of billion-dollar companies and I think it's one of the most interesting thinkers that I've ever spoken to about how to build an ambitious company and team and everything else you need so thank you for taking the time to talk to us today great to talk about it I want to start with the very beginning and how to think about the idea and the mindset for a company one thing you've said before that I really love is that there's a huge difference between a zero million dollar company and is you're a billion dollar company and maybe you could start with just explaining what you mean by that to me when you set out on a journey your mindset determines who you bring on board how you approach it what you setup what deals you do or which investors you got in the road revenue company if you think 0 million you're thinking a certain way to tactically achieve a small short-term goal 0 million dollars you start building from day 1 the company and the people you'll need to build the company one of the things people seldom realize when they're starting up you you don't ever plan what you're going to do you build a plan to make to plan in who helps in that planning as you plan iterative life as you evolve your strategy and your tactics that team which I call the kitchen cabinet of a company is the essence of what your company will become so one of my favorite tweets I like tweeting out is a company becomes the people it hires not the plan it makes and that's grossly under appreciated and is the biggest difference between the 0 million and the 0 billion dollar company the initial people you hire and your experience it is the initiative people you hire but also how you approach the initial tactics my other great analogy if you have a large vision you're climbing Mount Everest it's never a straight line nobody's climbed Everest in a straight line you get to base camp you get to camp one came to camp three camp four if you get the right approach you keep your you're obstinate about your vision which is Mount Everest but you're flexible about tactics as things change as you zig and zag when you pivot these are all things on the way to staying with the vision now you can also do the same tactics without worrying about the vision and my big beef with a lot of investors is they want revenue they want to meet plan as opposed to collect assets for this larger ascent to Mount Everest so you can clearly set up base camp where you get revenue stability cash flow breakeven the ability to raise more money in the wrong place if your goal is to get to Everest but you still get the revenue you might have 20 million 50 million hundred million of revenue but it doesn't help you get to Everest or you can take a little longer a little harder get to the base camp that lets you get the resources to keep the journey to your vision there's a huge difference in in the team is the biggest difference but there's also strategy differences when you by the way investors in my view matter a lot in this because you make short-term versus long-term trade-offs what percent of investors in Silicon Valley do you think are good long-term company builders as I get in a lot of trouble for saying this or among friends I think 90% of investors add no value my assessment 70% of investors add negative value to a company that means they're advising the company in the sport of team building to find for entrepreneurs they're advising a company when they haven't earned the right to advise an entrepreneur so some of the junior people here when they asked me hey at this other firm people young people are going on boards avianna board i say you haven't earned the right to advise an entrepreneur so it's unfair to Darnell know just because you got an MBA and joined a venture firm doesn't mean you're qualified to advise not from now the biggest piece of it not the only way is have you built a large company have you gone through how hard it is how uncertain it is how traumatic it is to go through and just this morning I was talking to somebody about how many times we almost worried about making payroll at Sun how am I going bankrupt plenty of times like more than two yeah and there was a period there was a three-month period where we almost went bankrupt because we had a hardware problem monitors vo buying from Philips were breaking every 30 days I think there was probably a month or two when I the earliest I went home what's that 3m and the latest I was back in the office was 7 a.m. it just you know unless you've got rent you felt that gut-wrenching decision you can't advise not if now I hate board members who sit in a board meeting and say oh can you improve quality and then five minutes later can you ship faster and five minutes later spend less money and they've never gone through really hard trade-offs and how uncertain that is if you add more people and increase your burn rate are you gonna improve oryx your chances of getting something out these are very uncertain very hard cause the biggest thing an artwork deals with is rich risk to take one when you take a financial risk of running lean when you take a engineer up marketing risk of a feature poor product when you take rich risk do you want to take and it's like whack-a-mole and ambiguity is so hard to deal with but it's the essence and frankly it's one of the areas where aren't knows when they don't think about what they actually need be the wrong people see if somebody's never dealt with this decision making under ambiguity and then big company they're not qualified to help you one of the things I hate about board members is when you're doing that making these deciding which risk you want in the stressful environment the thing you most want as an entrepreneur is a board that you feel is calming you down is supporting you yeah it's not adding the stress and most board members while you're doing that just like tell you oh you're gonna die like your company set like the thing I hate the most is when an old board member of mine used to send me like press clippings of competitors all the time yeah to like make a point and you really just want someone is like you got to take a hard risk here it's a tough decision there look these things are the things you're not qualified to advise an entrepreneur on if you haven't been through there is time when panic is the appropriate response in a company yeah one thing that I think I've noticed entrepreneurs that are working on hard ambitious companies really struggle with its figuring out who to trust for what advice so how do you think about that so my big advice and the first piece of advice I gave Joe Kraus when he was starting excite was the single hardest decision you'll make is whose advice to trust on what topic so the answer you know if you're 20 years old do you ask your dad or your friends or if you're a marketing problem do you ask somebody somebody who's done marketing at IBM they've never dealt with things with market isn't established it's incremental year to year 5% improvement is what they're shooting for they're not qualified to invent whole new markets whole new approaches to markets so those are really hard decisions and that's where nuanced advice of which employee would be better you know the funny story that's actually not known very much is Scott McNealy when he started son he started as a VP of manufacturing I didn't know that almost nobody knows that one point I said Scott you gotta become our VP of Sales because of certain types of behaviors but his background was in manufacturing and you have to make those cut cause it's a very non-intuitive gut call so you have to make those but back to this issue whose advice to trust and what topic is the single hardest decision and aren't know makes it's also where the right investors can really help you an argument just last week with another co investor in a health care company they wanted this health care person who had never dealt with change beyond 2% a year and I'm like experience doesn't matter the rate of learning matters first principles thinking matters pick for the best athlete not the person was the most established wide receiver who knows how to run one pattern and one pattern only but there's two things I want to follow up on so we'll get to the athlete in a second we'll keep running into things yeah we will um howdy so I agree it's like really hard to know whose advice to trust but a 20 year old entrepreneur comes in here no work experience you decide to back them you have to give him or her advice and say here's how to do this what do you say like how do you know whose advice to trust tactically so I look at not what entrepreneurs saying and we always have this debate inside of them too but how they're thinking about the problem in first principles thinking if you give them brand new problem so I'll often say hey if you are doing this other startup how do you approach it and if they have to think from scratch on a brand new problem and by the way this great interview question that they've never dealt with they don't have an experience with how do they approach it is probably the best indicator of how fast they will learn if I pick between lots of excellent learning how to trust different people's judgment yep including learning who to trust in which people to trust and and so this becomes sort of this nuance thing you I'm sure you've noticed one things we look at YC stuff in the three months that were there that they've been that YC what's their rate of change if we've had multiple points of intercept right that may be a stronger indicator than any other single story number one right that is my number one by far right so we always say how fast did they evolve their plan changed their plan what's first saying to me with other investors they say we'll stick to your plan or are you executing in your plan and I'm the exact opposite how fast are you evolving your plan or changing your plan and learning so my building that team that can should this brings up a related issue we should talk to since I want to focus on people when you hire a VP of Marketing and I've said this to you before one question the functional question is can he do marketing but that's not the most important question if he's one of the top five people in the company the most important question is what are the questions he will ask how will he make the CFO better or the VP of Engineering better through the questions they ask which then prompt this kind of thinking which then leads to a better kitchen cabinet the people you coalesce around your dining table when you have a really hard ambiguous uncertain decision to make and how do you evaluate that in an interview you're interviewing a VP of Marketing you want to know if I'm gonna make the CFO better well how do you probe that I'll often say if you were to sue people often say here's what happened at my company and I'd say if you were CEO and you had to make a different set of decisions what we did you have them think under circumstances or if you're doing this other startup one of my favorite questions in start-up world is if you if I gave you ten million dollars today what startup three startups would you consider and what are the reasons as an investor you wouldn't want to invest in those like you suddenly get how they think about a new problem which is what you face every day in a star yeah it really is true that the I think one thing everyone underestimates when they start a start-up is just how little of the problem they've already thought about and how much more is going to reveal itself every week so I often tell entrepreneurs a business plan is completely irrelevant other than to judge how somebody's thought about a problem not what they're going to do speaking of that how much do you expect a founder to have figured out early on and how like how ambitious should have founder be like how ambitious were you when you started son how much if son had you figured out how much did that vision stay true to what happened sure I'd say I was very ambitious I'd done one other startup before that was also pretty successful Daisy systems and that went on to go public in the 80s raised a hundred million dollars which is a huge IPO in those days so I was very ambitious but because I was much more passionate and passions and important ingredient we should talk about especially in the team I was passionate about what I wanted to get done not about RR or the returns or so I liked founders who are very ambitious mostly because if they're trying to if they're not ambitious they'll hire a team to build the zero million dollar company if they're ambitious they'll hire a team to build a billion dollar billion dollar company so among the first 15 people at Son 15 20 people we hired Eric Schmidt who went on to run Google I didn't know he was gonna be that capable we hired Carol Bartz who ran Autodesk and then Yahoo hired bill joy who wasn't part of the initial founding team we recruited him as a founder after the fact we hired so many other people guys like Tom lion and Bob Lyon each of which have started billion-dollar companies Larry garlic who nobody knows now who started remedy which big like this any vector chime himself has started so many companies there was such an incredible talent pool there so this I really want to dig it on there's only a small handful but the way you just want to take one small diversion when I met Andy that's he was in Margaret Jack's Hall at Stanford he said why don't you license the technology for ten thousand dollars right and he had licensed it to six other startups at ten thousand which in the 80s for a graduate student was a shitload of money in fact one of those companies sibling was funded by kleiner perkins and John doar was on the board so but they took the license I said Andy I want the goose that laid the golden egg I don't really care about the golden egg because it will be irrelevant in a couple of years I didn't know why but part of it was I just loved interesting people but I gave him half the equity just to join and then I did a sales job and selling his incredible part of being an entrepreneur into dropping his ph.d now best decision I ever made best decision he ever made but it was a hard sales job to convince him I sort of say in recruiting a noise maybe and maybe as a yes and that's sort of my job and I get very disappointed when I can't get him yes how long did it take you to get him from a node maybe yes a couple of months but bill joy took six months because I also had to convince him to drop his PhD so two people drop their PhDs the very best people I've ever recruited in different ways in my career have all taken at least months to recruit yeah it takes wait because they always have something great to walk away yeah the people who don't have something great to walk away are probably the people you don't want absolutely yes you know especially when you thinking beyond dysfunctional in the people who do job acts well whether it's marketing or database architecture or whatever or thinking linearly if they're broad thinkers which is what's key to that kitchen cabinet that helps you evolve a plan you need people who's so full of ideas they're always triaging down to the thing they can do and people like that always have great opportunities so it's hard to get them to join as an employee because they can start there and you chase them forever so this is actually what I wanted to go to next there's a handful of companies that have been able to get those people in the early 10 20 30 employees that could go start their own company and that go on to later PayPal's the famous example sons another one what did you do it son and what has happened in other companies where you've seen this where people build this phenomenal early team that goes on to be wildly successful well it's always about you know entrepreneurship is a funny thing because vision is impractical if you're reasonable you won't do unreasonable things it's just by definition yep right and and so if you have great managers good process people they will work against allowing the company to become great they'll take a great idea and turn it into a good one and execute a decent idea at lower risk that's more reasonable more sensible if you're trying to end and that's okay goal to have if that's your goal if your goal is something unreasonable something ambitious really visionary something change the world then you have to take the other approach get this think tank of unreasonable people together and below that layer the reasonable people who micro optimize within the macro ideas that the kitchen cabinet comes up with how do you think about the equity that it takes to step to attract these kinds of people so I see this as a major problem nowadays people aren't allocating equity widely enough I think among the first three or four founders at Sun we kept less than half of the common which was just the total was something like 25 to 27 percent for the founders in equal a slightly larger chunk for everybody else we would hire and then investors had minority but a significant minority so it was like 40 percent for investors us after the around something like that in retrospect that was a very good idea so when last year my son started his company I said keep 15 percent for yourself instead of 45 he could have done either number try and hire one or two people at 15% even though they're coming later even though they didn't come up with idea but that would be incredible resources especially magnets to attract other people or bring essential skills can you say what you mean by a magnet to attract other people so if you believe a company becomes the people it hires then your key task becomes attracting the people there's also using them productively that's a management skill but attracting people becomes who finds you attractive and selling depends on magnets so bill joy is an incredible magnet even back then right and even though open-source didn't exist the way it does today people wanted to work with Bill and Andy and even if bills didn't do a day of work he was more than worth it because he helped her attract Eric Schmidt I don't think Eric would have come work for me as a 25 year old other than I did have self a convincing power of why this was going to be large we discarded for example the notion that which most investors said why don't you be a graphics add-on term nerd codec access and that was established known market there was no graphics terminal there was a company in Utah evidence in Southland that built graphics terminals those easy.you ndu distributed computing and nobody had heard the term when we released NFS there was no distributed file system in the world and we open sources and people first said one who needs distributed computing and the second question was if it's important why you giving away all your intellectual property so thinking on the specifics don't matter thinking nonlinearly about it is what matters and that's what the team enabled right and and so full circle back to equity as much as leaving 30% of the pool to non founders so Neil took 15% he recruited in in his other startup Keira he kept 15% hired 15% a co-founder for 15% and then left the rest to hired great employees now it is dependent on the area you're working in he was working in AI he wanted the people who were all making million dollar salaries at Google and uber and other places as engineers so you had to give them three four five percent each and you'd normally not think about it but if you're competing in an AI startup you're not gonna get the best talent without and especially if this issue we talked about earlier if somebody can do their own startup they will so they're not comparing them to some your job you're comparing them to them starting their own company and so and if you don't do that you're including only the people who couldn't start their own company who won't help you evolve we apply a thing that I hear a lot is you know I could hire an engineer for expert basis points so why would I ever pay like 5x or 10x and and then I always say like wait and you know in two years ask me again the right decision yeah but the quality of people you can get if you're super generous of equity I think this is the shape of things to come I think that the way this is my single biggest beef with YC not enough option pool i right not enough option pools not enough focus on recruiting the right co-founders right in I was fortunate Neil trusted me so I could Shepherd him into sort of a very different approach I think he may have had the highest option pool in his batch yeah look I think it's great I have found that it's harder to convince founders that this than I would have expected yeah because it's not intuitive well also most investors say make the option pool as small as you can yeah because neither investors nor founders want to they'd like to own as much as possible and it sounds really good and until you felt it it's hard to convince them but I'm or they won't like to own the higher percentage but the pie is much smaller and if you sort of say I'm maximizing the size of the pie plus then it doesn't matter what percentage you're on look I think this is this is the most important piece of advice that we've talked about among many important things today I think being super generous with early employee equity and getting founder quality people is the first 10 employees I think all the evidence is on the side of doing this and yet almost no one does so there's like a huge edge if you're willing to do it and absolutely a hundred percent agreed that this ends up being the single most important thing in the first six months of a company and and it's incredibly important in fact I've written two pieces on one Wentz once you're doing a start-up how do you engineer the gene pool of a company and and there's an important part you sort of have to have a process you know I find it silly to advise people to hire the best team because everybody says that it's not actionable but when you processed to follow this process I called gene pool engineering you are trying to maximize your chances of success and you're minimizing the risks you're taking on by virtue of the team you're building and that one part of it and that's sort of more mechanical the other part is instead of functional hiding hide a VP of engineering hire a VP of Marketing hire a CFO hire PPO customer support you do hiring for this nonlinear stuff how does your VP of Marketing and improve the quality of your VP of engineering make them think harder this sort nonlinear thinking is and I've written a different piece called I think the labor of love the art of hiring something like that on our website that's a long piece about this and both these were couple years ago in TechCrunch also I think the essential reading font knows in my view even if they don't follow the advice it'll change how they think about the problem we will add the links to our website one final question one area to wrap up on we've talked a lot about how to pick your employees your team members I think it's almost as important to pick your investor as well so how do you advise founders if they're trying to build a significant company that's going to do something very disruptive be around for decades how should they think about their investors so I think every piece of I puddi you do the money you get is the smaller part of what you get advice and the right approach is the much more important part a simple time there's investors who are happy with three times their money in fact when a sell as soon as they can and make 3 X 4 X and people who care about your vision or people who understand the technical logical approach you're taking and will be much more tolerant as things go wrong right so those are the factors I suggest people optimize for and how do you tell how do you know if an investor truly cares about your vision talk to other founders especially founders who've gone through a large promise large vision and had hiccups along the way when things go wrong around an ambitious path is when you can actually judge an investor how they think about hiring look back in retrospect couple years later or talk to founders who can and say what worked and what didn't like those aren't the key questions I think an investor is an employee who you can't fire and that's how you should think about it otherwise all the same principles apply I get very frustrated with investors because they mostly detract from value like most investors are negative value add to a company that's trying to be ambitious if they're just trying to get to liquidity as soon as possible then there's plenty of investors who do that well have you had founders who come pitch in and say that's too ambitious I've never had that happen I have had the following conversation that's ambitious that's awesome build a team for it now what is step one two and three and let's be thoughtful about how you how you discover the risks on the path to the vision because frankly achieving a large vision is first about discovering what's hard what the problems are what else influences success along that path once you've found the problem and which you can only discover by doing things then you can the only recipe I've ever seen work for making really impactful companies is both a giant vision and a good step one two and three yeah you have to have both and neither without the other World War I the related thing I often tweet this I hate pontificate errs so easy to do studies so easy to opine on things I love doers versus pontificating each and Nassim Taleb has written skin in the game but also not so much black swuan but his second book after that so skin in the game is about doers versus pontificate errs and then he has another book about the right kinds of asymmetric risks to take that he wrote after the Black Swan that I feel is more important than one one thing that has just worked for me again and again in my career is I happen to like I love doers and I don't love talkers and I just got lucky because I biased the people I surround myself with so far in that direction it's been great final question what are you most what do you hope to get down in the next 10 years what are you most excited about doing now so I'm 63 I actually at 60 defined what I want to work on for 20 years I wrote a piece called reinventing societal infrastructure with technology it's about a 50 page document and it was the following exercise and I won't go into the details because we don't have enough time I said if I took the u.s. GDP what parts of the non-governmental GDP cont Irene mind personally with technology and I expected addicts I'd come up with a small part of the GDP that was open to working on turns out there's no part of non governmental huge US GDP that one came in a wait on in ways that not 5 10 % improvements but our hundred to a thousand percent improvements in resources notes so I sort of decided if 7 billion people on the planet want the lifestyle that 700 million people the top 10% have and that 10% has an energy rich lifestyle a health care rich style education rate lifestyle a transportation rich you get the idea the very rich lifestyles without destroying the planet could be get seven billion people to seven that lifestyle of the 700 million people then without destroying the planet and without needing 10x of everything could you do it and I could think of a way to do it in every major part personally only thing I'm sure is entrepreneurs and so I subtitled this document a call to entrepreneurs it's amazing because no part of the GDP is immune to innovation five six years ago when when Pat Brown said he wanted to eliminate animal husbandry became very clear we could change how most of this planets the usable land area is used most of the land on this planet and that's Pat's mission and we I think I said yes to him in our very first meeting we didn't last I didn't even need to know the details it was just a vision too big to not attempt so hamburgers to rocket labs doing rockets which we did about the same time to my new passion could you build buildings with eighty percent less material that's why I'm so excited about printed 3d printed buildings like there's nothing from food to building to construction to rockets to or everything computation enables from AI to it's it's really exciting and I feel like twenty years not gonna be enough I hope I stay healthy I hope you do too I'm sure you will that's a great place to leave it people can read that document and call you up yeah thank you very much thanks thanks Sam this fun

Channel: Y Combinator

Views: 108,335

Rating: 4.9216666 out of 5

Keywords: YC, Y Combinator, How to Build the Future, HTBTF, Sam Altman, Vinod Khosla, Khosla Ventures

Id: TYt5yuiGk9E

Length: 34min 32sec (2072 seconds)

Published: Wed Jan 09 2019