Keith Rabois

Talking 1099 Workers (and More) with Redpoint’s Ryan Sarver

Last week, the California Labor Commission found that a San Francisco-based Uber driver should have been legally classified as an employee, and not a contract worker, by the company.

The ruling could be a very big deal for Uber and many other on-demand companies that argue they’re an appealing alternative to people who want to work flexible hours and to be their own bosses — even if they aren’t paying them unemployment, workers compensation or health benefits, all of which would cost such companies roughly 30 percent more per worker.

The ruling could also be a big deal for investors who’ve poured hundreds of millions of dollars into such companies, though at a dinner last week with partner Ryan Sarver of Redpoint Ventures, it was clear that Sarver isn’t concerned about Uber and its ilk losing this fight. We talked at some length about the case, as well as what types of on-demand companies Sarver wouldn’t be inclined to fund, regulatory tussles notwithstanding. Our chat has been edited for length.

You’ve invested in a number of on-demand companies, including [the peer-to-peer car buying and selling marketplace] Beepi and [home-cleaning service] Homejoy. If contract workers are reclassified as full-time workers, what happens to them?

It’s so hard to predict where things are going to go. There’s a huge new class of people who really want flexible work, and that shift is happening and it’s growing and it’s not going away. You’re then trying to match regulation to them that was written in the 1930s and hasn’t been updated since. I don’t know where we land, but we need regulation that maps to those trends.

What if we don’t get it? How big an impact would that make on, say, Luxe [an on-demand valet service that Redpoint has also backed]?

It’s hard to say until we know what the rulings are going to look like, but labor is really important and Luxe is competing for it with Uber and Beepi and other [on-demand services]; it’s competitive. And [success] will come down to who can attract and retain that labor.

Toward that end, what should these companies’ priorities be? Helping their contract workers land health care? Educating them about savings? Beyond the break room and free snacks, how do you win the labor race?

Churn on the supply side is a big problem for a lot of these on-demand companies, so many of them are focused on hiring, training, and retaining [contract workers]. I think you need more than [break rooms], I agree. What Luxe is doing is giving employees a career path. If you become a really good valet, you become a shift captain. If you become a good shift captain, you can move inside Luxe’s operations center and become a full-time employee. I think smart companies are telling these employees: maybe you want flexible schedules now, but down the road, if you want to move into a full-time position, we’re also going to offer that to you.

A new layer of companies is emerging to cater to these contract workers, providing them with shift-management software and other things. As an investor, do you think they’re interesting?

The on-demand labor market is still pretty small; even with a million or so [on-demand] drivers around the world – that’s still a small labor force. As it continues to grow, maybe it becomes more interesting over time, but I think it’s a little too early to tell [what the potential] of those services will be.

What’s the craziest business you’ve been pitched?

Well, I did see bodyguards on demand. [Laughs.]

Are you interested in telemedicine or these other on-demand startups that don’t require big city rollouts?

I’m a big Doctor on Demand user and I love it, but it’s super infrequent. You’re going to use it in the moment, not every week [because it costs $40 for a 15-minute consultation]. There’s another startup, Better, that gives users access to “personal health assistants” that you might use on a more frequent basis, like, “Hey, our little guy has a rash, what should we do?” I think eventually, there will be a blending of the two, so that you can touch a service in a lightweight way and escalate [to the doctor level] if you need to.

[Most consumer spending] goes to transportation, food, and housing, though healthcare is also an enormous one.

Housing is interesting. What do you think of OpenDoor, the on-demand online home-selling service?

We [invested in] Beepi and they’re very similar models from what I know. OpenDoor will take inventory and buy it from you and fix it up and resell it. Beepi won’t fix up your car, but they’ll send in a mechanic who has a very structured checklist and goes through the service and gives you a price to buy it that day and take it off your hands and bring it into their inventory. Then someone can buy it sight unseen because they trust that the mechanic has done the work and priced it properly.

I think OpenDoor is doing something very similar, but they’re trying to increase the value of the homes. It’s really interesting and much more complicated than what Beepi is doing. It’s a very big swing.

Opendoor Raises $20M for Its Audacious Home-Buying Business

Opendoor, a year-old, San Francisco-based company, is on a mission to make residential real estate liquid by making it simple to buy and sell it online.

Investors are buying what it’s selling. This morning, the company is announcing $20 million in fresh funding led by GGV Capital, a round that brings the company’s total outside funding to $30 million.

Consumers are also buying Opendoor’s pitch. The 20-person company is now buying one house per day – sight unseen — in its test market of Phoenix. Home owners need merely give it their address and some basic details, and using public market information about historical home sales and Opendoor’s own proprietary data about market conditions, the company arrives at an offer price that’s just one to three points below what the seller might fetch on the open market roughly three months into the future. (That’s the average time, it says, required to sell a home in the U.S.)

The big question now is whether the whole operation is sustainable. Certainly, the risk and reward associated with what it’s trying to pull off is enormous.

Consider: After Opendoor acquires each home, it must ensure the home is up to code in order to resell it. The repairs alone can likely get complicated, as any homeowner can attest. But each home is also given numerous cosmetic upgrades that will give it so-called curb appeal. Think everything from new kitchen cabinets to light landscaping.

Opendoor can (and surely intends) to sell its homes at a premium, based on those upgrades. But it’s a lot of work, the kind that involves contractors and lawn maintenance workers, in addition to Opendoor’s growing team of developers. More, hanging on to that inventory in the meantime is a huge risk. Though the company’s equity certainly helps, as does a partnership with a bank that gives it debt to use, the housing market is highly sensitive to interest rates and other macroeconomic factors. In Phoenix, for example, where Opendoor has been testing out its service for the last several months, up to a quarter of the homes that are listed for sale are eventually taken back off the market.

CEO Eric Wu — a serial entrepreneur who cofounded Opendoor last year with investor-operator Keith Rabois — acknowledges the challenges, but he seems convinced that none are insurmountable. Partly, that owes to the progress Opendoor has made as a software company, whose platform can now (Wu says) seamlessly address everything from property assessments to quickly presenting offers to potential customers to handling the payment of the house to overseeing the infrastructure involved with holding and reselling it.

Wu also knows that there’s tremendous pain associated with home buying today, and where there is pain, there is opportunity.

In fact, Wu is already envisioning the day that Opendoor both buys homes, then resells others it owns to those same customers, creating one of those virtuous cycles that the digerati like to talk about.

“Longer term,” says Wu, “we’d love to have a path where we transact 5 to 35 percent of all homes. Once that occurs, this business really starts to evolve into us solving pain points for homeowners, from [allowing them to easily sell their homes] to helping them [purchase] another with high-quality renovations. We definitely think we can touch both buyers and sellers.”

The company could even get into the financing business eventually, Wu suggests. There’s “lot of headache and stress in securing mortgages today,” he notes. Opendoor has enough work ahead of it right now, but it’s “something we’ll look at down the road,” he says.

Keith Rabois on the Tricky Business of Multi-Stage Investing

Last week, at a StrictlyVC event in San Francisco, investor-writer Semil Shah interviewed Keith Rabois of the Sand Hill Road firm Khosla Ventures. There, he asked Rabois how Khosla manages its multi-stage approach, and whether Rabois anticipates that more firms will raise different-stage funds to capitalize on today’s go-go market.

Rabois — who speaks at a rapid-fire clip that keeps listeners on their toes — made several interesting observations, most notably that investing across stages is a very tricky business that, done properly, involves different teams, different skills, different compensation, and different bets.

Perhaps unsurprisingly, he thinks Khosla Ventures has the model down.

Noting that the firm has a seed fund (“a very large seed fund, [at] $300 million plus,” he said), as well as a “main” fund that has historically been roughly $1 billion in size, he went on to explain that Khosla’s seed fund “isn’t necessarily designed to do the same things the main fund is designed to do. The seed fund is designed to take risky experiments and provide capital to entrepreneurs who want to prove things and validate that something is technically feasible . . .” Meanwhile, he said, the main fund is “not a growth fund,” but rather a “standard venture fund” that invests in standard Series A and B deals.

It’s an important distinction, he implied. It minimizes the potential for the conflicts of interest that can arise with the new breed of growth funds to be raised in recent years by Union Square Ventures, Foundry Group, Spark Capital, and Greycroft Partners, among others.

Said Rabois: “What I detect from other funds is everyone is trying to raise a growth fund. Everybody who is a good Series A or Series B investor is like, ‘Wow, we have great asymmetric information about how well these companies are doing. Wouldn’t it be great if we could invest more money and take advantage of that information and of that relationship with the entrepreneur?'”

It’s an understandable impulse, he said. Investors have long resorted to special purposes vehicles, which are time consuming and can be “painful” for the entrepreneur left managing his or her increasingly complicated cap table. But Rabois also warned of conflicts of interest, pointing to the storied firm Sequoia Capital to illustrate his point.

Sequoia “fundamentally [does] Series A and Series B [rounds], and they do Series A better than anybody else and have for a very long time,” Rabois said. But Sequoia’s growth-stage fund, which typically invests between $10 million and $100 million in companies, has “now cherry-picked a couple of those [early-stage] investments,” including, most famously, the messaging app WhatsApp.

That investment proved highly lucrative for Sequoia and its limited partners. In fact, WhatsApp’s exit last year was the largest ever for a still-private venture-backed company. (Sequoia invested $8 million in the company in 2011, then elbowed aside other investors to sink another $50 million into the company in 2013.)

Still, “if you do that too often,” Rabois continued, “no one wants to fund your companies because they see your selection bias. It’s the same signaling problem [that can plague earlier-stage companies] just applied [to maturing companies]. It’s very challenging to run a true growth fund and a Series A fund and fund some [of your startups] but not all, or fund X percent but not Y percent, without people reading into it.”

Obviously, said Rabois, “If Sequoia thinks a company is amazing, they’ll proactively offer from their growth fund to double down on it,” he continued. But “if they don’t, maybe I should be reading into that when I get an introduction from them to a Series B [deal]. Maybe I should be cynical about what’s going on at this company [laughs]. Why are you sending it to me? Why aren’t you funding it yourself?”

Before moving on to another topic, Shah asked Rabois if it were any less dangerous for larger funds to “move down the stack” and invest in younger companies than they’ve traditionally funded. The hedge fund Tiger Global Management, for example, has recently led a number of Series A deals, including, most recently, in the India-based news aggregation startup News In Shorts.

Rabois’s take: “I’m not sure it’s going to turn out that well. Early stage is just a very different skill set. Later stage is more science and early stage is more . . . I don’t think you can use metrics to assess most seed and Series A investments. The [metrics] just don’t exist, and you’re kidding yourself if you think that they do in any statistically valid way. You might be able to tease out something from some cohort, but [that’s it].”

Keith Rabois to Startups: Go Public Already

Last week, at a StrictlyVC event San Francisco, investor-writer Semil Shah interviewed Keith Rabois of Khosla Ventures in a wide-ranging chat. Among the issues raised was why companies are staying private longer, and whether founders, investors and the institutions that finance venture capitalists should be concerned.

Rabois – a former lawyer who’d earlier served as COO of Square, and was an executive at PayPal, LinkedIn, and Slide — didn’t equivocate. He said he thinks companies that delay their public offerings are making a mistake, and he traces the trend to “his PayPal friends” and specifically to PayPal cofounder Peter Thiel.

Said Rabois: “My views are a little bit more like [fellow VC] Bill Gurley’s than Marc Andreessen’s or Peter Thiel’s, [which is] that companies should go public earlier rather than later [for] a variety of reasons. One is that you actually get a lot of cash, and that cash gives you leverage to do things. Secondly, you have a currency, and you have a price on your currency and you can acquire things, which is very difficult to do as a private company.”

Continued Rabois, “Some of the reasons that people don’t want to go public are just excuses. The founder doesn’t want to have scrutiny, doesn’t want transparency.” Other oft-cited reasons that management teams give for pushing off an IPO include concerns over employee retention and flagging morale, said Rabois, who called all of them “bad reasons” not to go public.

As for the common complaint that employees begin obsessively watching their company’s ticker after a public offering, for example, Rabois noted that companies’ shares “go up and down” and that staffers can “get a little miffed and annoyed” by those gyrations. But he added that management can also respond proactively to those swings, saying that they’re ultimately among a long list of “soft things” that affect employee satisfaction.

“If you actually manage people, you know the things that are going to distract the people in your office [are things like] the food you serve,” Rabois told the gathered attendees. “I actually had a revolt [at a former company] because I took away bacon because it’s not good for you. All the engineers barfed [at the move] and I didn’t know why they were all annoyed at me until someone asked a question [about my decision] at a company meeting.”

As for retention, Rabois shared a story about the online review site Yelp, on whose board of directors Rabois served for roughly eight years. (He stepped down in January 2014.)

According to Rabois, Yelp co-founder and CEO Jeremy Stoppelman — who’d worked as an engineer at PayPal earlier in his career — “was very nervous about going public because he’d gotten all this advice from Peter [Thiel] and my PayPal friends,” who had themselves gone through a “searing experience” when PayPal staged its IPO in 2002.

“[PayPal] was one of two companies in technology that went public that year – the other being Netflix – we [filed our S-1] the day after [the terrorist attacks of] 9/11, and people had a lot of emotional reactions to all the things we went through,” said Rabois. “The state of Louisiana suspended us the week before we went public [owing to customer service complaints. We had numerous other issues]. So Peter and other friends of mine started telling everyone that it’s terrible to go public,” and the “Facebook crowd kind of bought into that,” he said.

So have a lot of other entrepreneurs, said Rabois, characterizing today’s accepted wisdom about the dangers of going public as a “derivative sort of consequence” of that “mess.”

It’s a shame, suggested Rabois, who said that once Yelp did go public, in March 2012, it became “the best thing ever for the company. Morale improved, actually, the year before we went public. Retention post going public is significantly better than the two years before going public. I’d argue that innovation [at Yelp] is better. We’ve also been able to acquire a couple of strategic assets, one in Europe, one just last week . . . one maybe could have been done as a private company but the others surely couldn’t have been.”

Said Rabois, “All the most innovative companies on the planet are public. Apple – nobody is more innovative than Apple — Amazon, Google. If you have the right founder, you can innovate. Every other answer is an excuse.”