Y Combinator Startup Podcast - #107 - Vinod Khosla and Sam Altman

Episode Date: January 9, 2019

Vinod Khosla is the founder of Khosla Ventures, a firm focused on assisting entrepreneurs to build impactful new energy and technology companies. Previously he was the founding CEO of Sun Microsystems, where he pioneered open systems and commercial RISC processors.How to Build the Future is hosted by Sam Altman.***Topics00:30 - Vinod’s intro01:20 - A zero-million-dollar company vs a zero-billion-dollar company4:20 - What percentage of investors in Silicon Valley are good long-term company builders?4:50 - Who has earned the right to advise an entrepreneur?6:50 - Which risk to take when7:20 - Helpful board members8:15 - Who to trust for what advice11:00 - First principles thinking and rate of change13:00 - Evaluating a candidate in an interview14:15 - How much should a founder have planned and how ambitious should a founder be?16:30 - Recruiting great people19:00 - Building a phenomenal early team20:20 - Being generous with early employee equity27:00 - Gene pool engineering27:18 - The art, science, and labor of recruiting28:20 - How founders should think about investors31:00 - Doers vs pontificators32:00 - What does Vinod want to do in the next ten years?32:10 - Reinventing Societal Infrastructure with Technology

Hey, how's it going? This is Craig Cannon, and you're listening to Y Combinators podcast. Today's episode is with Vinod KOSLA and Sam Altman. Vinod is the founder of Kosovo Ventures, a firm focused on assisting entrepreneurs to build impactful new energy and technology companies. Previously, he was the founding CEO of Sun Microsystems, where he pioneered open systems and commercial risk processors. You can find Vinod on Twitter at V-Cosla, and Sam's on Twitter at Sam A. All right, here we go. My name is Sam. Today we're talking to Vinod Kosla. Vinod is the founder of Sun Microsystems and Kosla 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. Yeah, 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 a zero 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 set up, what deals you do, or which investors you get. In a zero revenue company, if you think zero million, you're thinking a certain way to tactically achieve a short-term goal. Zero billion dollars, you start building from day one 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 don't ever plan what you're going to do. You build a plan to make to plan. And who helps in that planning as you plan iteratively, 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 underappreciated. And is the biggest difference between the $0 million and the $0 billion company, the initial people you hire in your experience? It is the initial 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, camp two, camp three, camp four. If you get the right approach, 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 extent to Mount Everest. So you can clearly set up base camp where you get revenue, stability, cash flow break even, 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, 100 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 the team is the biggest difference, but there's also strategy differences. 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 companies? builders. As I get in a lot of trouble for saying this, we're among friends. I think 90% of investors add no value. In my assessment, 70% of investors add negative value to a company. That means

they're advising a company. This is part of team building too 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 ask me, hey, at this other firm, young people are going on boards, can I be on a board? I say, you haven't earned the right to advise an entrepreneur. So it's unfair to the entrepreneur. Just because you got an MBA and joined a venture firm doesn't mean you're qualified to advise an entrepreneur. 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. I mean, just this morning, I was talking to somebody about how many times we almost

worried about making payroll at Sun. How many times? How many times? Plenty of times. Like more than two? Yeah. And there was a period, there was a three-month period where we almost weren't bankrupt because we had a hardware problem. Monitors we were buying from Phillips were breaking every 30 days. I think there was probably a month or two when the earliest I went home was at 3am, and the latest I was back in the office was 7 a.m. It just, you know, unless you gut-wrenching, you felt that gut-wrenching decision, you can't advise none.

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 it is. If you add more people and increase your burn rate, are you going to improve or hurt your chances of getting something out? These are very uncertain, very hard cause. The biggest thing an entrepreneur deals with is rich risk to take one. When you take a financial risk of running lean,

when you take an engineer marketing risk of a feature poor product, when you take which 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 entrepreneurs, when they don't think about what they actually need, pick the wrong people. So 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, is not adding the stress. And most board members, while you're doing that, just like tell you, oh, you're going to die, 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. to like make a point. And you really just want someone who's like, you've got to take a hard risk here. It's a tough decision. Look, these things are the things

you're not qualified to advise an entrepreneur on if you haven't been thrown. There is time when panic is the appropriate response in a company. It does happen. Yeah. One thing that I think I've known as entrepreneurs that are working on hard, ambitious companies really struggle with is 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 Krause when he was starting excite was the single hardest decision you'll make is whose advice to trust on what topic. So that's the answer. You know, if you're 20 years old, do you ask your dad or your friends? Or if you have a marketing problem, do you ask somebody who's done marketing at IBM? They've never dealt with things where 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 McNeely, when he started his son, he started as a VP of manufacturing. Did I know that? Almost nobody knows that. At one point, I said, Scott, you've got to become our VP of cells because of certain types of behaviors. But his background was in manufacturing.

And you have to make those gut calls. It's a very non-intuitive gut call. So you have to make those. But back to this issue, whose advice to trust on what topic is the single hardest decision an entrepreneur makes? It's also where the right investors can really help you. I had an argument just last week with another co-investor. In a healthcare company, they wanted this healthcare person who had never dealt with change beyond 2% a year. And I'm like, experience doesn't matter.

matter, the rate of learning matters. First principles, thinking matters. Pick for the best athlete, not the person who's the most established wide receiver who knows how to run one pattern and one pattern only. 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 you want to follow up. Yeah, we will. How do you, 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? How do you know who's advice to trust tactically? So I look at not what the entrepreneur is saying, and we always have this debate inside of them too, but how they're thinking about the problem. And first principles thinking, if you give them brand new problem, so I'll often say, hey,

if you're doing this other startup, how would you approach it? and if they have to think from scratch on a brain new problem, and by the way, this is 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. Including between lots of experience.

Including learning how to trust different people's judgment? Yep. Including learning who to trust and which people to trust. And so this becomes sort of this nuanced, thing, I'm sure you've noticed. One of the things we look at YC stuff, in the three months that they've been at YC, what's their rate of change if we've had multiple points of intercept? That may be a stronger indicator than any other single indicator. That is my number one. Right? That is my number one by far. So we always say how fast did they evolve their plan, change their plan. What's frustrating

to me with other investors, they say, well, still, to your plan or are you executing in your plan? And I'm the exact opposite. Like how fast are you evolving your plan or changing your plan and learning? So my... But building that team that can, so 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 you do marketing? But that's not the most important question. If he's one of 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?

Your interview in a VP of marketing, You want to know if they're going to make the CFO better. How do you probe that? I'll often say, if you were, people often say, here's what happened at my company. And I'll say, if you were CEO, and you had to make a different set of decisions,

what would you do? Have them think under circumstances, or if you're doing this other startup. One of my favorite questions in startup world is, if I gave you $10 million 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 startup. Yeah, it really is true that I think one thing everyone underestimates when they start a startup 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 ambitious should a founder be?

Like, how ambitious were you when you started Sun? How much of Sun had you figured out? How much did that vision stay true to what happened? So I'd say I was very ambitious. I'd done one other startup before. That was also pretty successful, Daisy Systems. And they went on to go public in the 80s raised $100 million, which is a huge IP 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 a team, I was passionate about what I wanted to get done, not about the RR or the returns. answer. So I like founders who are very ambitious. Mostly because if they're trying to, if they're not ambitious, they'll hire a team to build a zero million dollar company. If they're ambitious, they'll hire a team to build a zero billion dollar company. So among the first 15 people at Sun, 15, 20 people, we hired a, a, you hired a, a billion dollar company. We hired a, a billion dollar company. And so among the first 15, Rick Schmidt, who went on to run Google. I didn't know he was going to be that capable.

We hired Carol Barts, 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 Lyon and Bob Lyon, each of which have started billion-dollar companies, Larry Golic, who nobody knows now, who started Remedy, like this, Andy Bechlechheim himself,

has started so many companies. There was such an incredible talent pool there. So this I really want to dig in on. There's only a small handful. By the way, you just want to take one small diversion. When I met Andy, he was in Margaret Jacks' Hall, at Stainford. He said, why don't you license the technology for $10,000?

Right. And he had licensed it to six other startups at 10,000, which in the 80s for a graduate student was a shitload of money. In fact, one of those companies, Simlink was funded by Kleiner Perkins and John Doer 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 in selling his incredible part of being an entrepreneur into dropping his PhD. 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 no is a maybe and a maybe is a yes. And that's sort of my job. And I get very disappointed when I can't get a yes. How long do it take you to get him from a no to a maybe do a yes? A couple of months, but Bill Joy took six months because I also had to convince him to drop his page. So two people drop their PhDs. The very best people I've ever recruited in different places in my career have all taken at least months to recruit.

Yeah. It takes way long. Because they always have something great to walk away from. Yeah. The people who don't have something great to walk away are probably the people you don't want. Absolutely, yes. Especially when you're thinking beyond this functional, then the people who do job acts well, whether it's marketing or database architecture, or whatever, are 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 are 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 their own thing. 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 a famous example. Sun's another one. What did you do at Sun 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 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. And that's an okay goal to have if that's your goal. If your goal is something unreasonable, something ambitious, really visionary, something changed the world,

then you have to take the other approach, get this pink tank of unreasonable people together, and below that layer the reasonable people who'll micro-optimized within the macro ideas that the kitchen cabinet comes up with. How do you think about the equity that it takes 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% for the founders,

in equal a slightly larger chunk for everybody else we would hire. And then investors had a minority, but a significant minority. So it was like 40% for investors after the A round, something like that. In retrospect, that was a very good idea. So when last year my son started his company, I said, keep 15% 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 scale.

But attracting people becomes who finds you attractive. And selling depends on magnets. So Bill Joy is an incredible magnet even back then. And even though open source didn't exist the way it does today, people wanted to work with Bill and Andy. And even if Bill didn't do a day of work, he was more than worth it because he helped 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-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 terminal to deck waxes? And that was an established known market. There was no graphics terminal. There was a company in Utah, evidence. Sutherland that built graphics terminals, it was easy. We wouldn't do distributed computing, and nobody had heard the term.

When we released NFS, there was no distributed file system in the world. And we open-sourced it, 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 non-the specifics don't matter. Thinking non-linearly about it is what matters and that's what the team enabled. 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 his other startup, QRI. He kept 15% hired 15%. a co-founder for 15% and then left the rest to hire 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 3, 4, 5% each. and you'd normally not think about it,

but if you're competing in an AI startup, you're not going to 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 your job, you're comparing them to them starting their own company. 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 via plan. A thing that I hear a lot is, you know, I can hire an engineer for expert basis points. So why would I ever pay like 5x or 10x? And then I always say, like, wait, and, you know, in two years, ask me again if that was the right decision. Yeah. But the quality of people you can get if you're super generous with equity. I think this is the shape of things to come. I think that the...

By the way, this is my single biggest beef with YC. Not enough option pools. Right? Not enough option pools. Not enough focus on recruiting the right goal. founders. And 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 of this than I would have expected. Because it's not intuitive. Well, also, most investors say make the option pool as small as you can. 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. Or they won't like to own a 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 own. Look, I think 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 as 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. Absolutely.

A hundred percent agree that this ends up being the single most important thing in the first six months of a company. And it's incredibly important. In fact, I've written two pieces on. One, once you're doing a startup, how do you engineer the gene pool of a company? 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 follow this process, I call 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's one part of it. And that's sort of more mechanical. The other part is instead of functional hiring, hire a VP of engineering, hire a VP of marketing, hire a CFO, hire a VPA customer support, you do hiring for this nonlinear stuff. How does your VP of marketing improve the quality of your VP of engineering

make them think harder? This sort of 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 a couple of years ago in TechCrunch also. I think the essential reading for entrepreneurs, 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. 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 equity 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 thing. There's investors who are happy with three times their money in fact, want to sell as soon as they can and make 3x, 4x, and people who care about your vision. Or people who understand the technological approach you're taking and will be much more tolerant as things go wrong.

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 law. large promise, large vision, and had hiccups along the way. When things go wrong, a wrong an ambitious path is when you can actually judge an investor. How they think about hiring. Look back in retrospect a couple of years later or talk to founders who can and say,

what worked and what didn't? Like, those are 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. But 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 you and you 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 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 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 you have to have both and neither without the other will work by the related thing I often tweet this I hate pontificators so easy to do studies

so easy to opine on things. I love doers versus pontificators. Me too. And Nassim Thalab has written Skin in the Game, but also not so much Black Swan, but his second book after

that, I don't know. So skin in the game is about doers versus pontificators. 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 Black Swan. 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 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. structure 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 couldn't I reinvent personally with technology? And I expected 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 U.S. GDP that one can't innovate on in ways that are not 5, 10% improvements, but are 100 to 1,000 percent improvements in resource inputs. 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-rich lifestyle, a transportation-rich, you get the idea. They're very rich lifestyles. Without destroying the planet, could we get 7 billion people to the lifestyle of the 700 million people, then without destroying the planet and without needing 10 necks 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 short 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. I mean, five, six years ago, when, Pat Brown said he wanted to eliminate animal husbandry, it became very clear we could change how most of this planet's usable land area is used, most of the land on this planet. And that's Pat's mission.

And I think I said yes to him in our very first meeting. We'd invest. 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 80% less material? That's why I'm so excited about 3D printed buildings. Like there's nothing from food to building to construction to rockets to all everything computation enables, from AI to it's really exciting.

And I feel like 20 years is not going to 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. Thank you very much. Thanks.

Thanks, Sam. This is fun. All right. Thanks for listening. So as always, you can find the transcript and video at blog. Dot Ycombinator.com. And if you have a second, it would be awesome to give us a rating and review wherever you find your podcast. See you next time.