Keith Rabois formula

Here’s a blog on one of my favourite tweets on this platform. This tweet teaches you on how to find winner Startups in a cacophony of Billion Dollar valuations. (originally a thread)

Keith (@rabois) was involved early on in companies such as PayPal, Linkedin, Square and Yelp - either as an investor or as an executive. He has consistently picked winners in an industry full of hype and bubble. He tweeted out a concise version of his method- Formula for startup success: Find large highly fragmented industry w low NPS; vertically integrate a solution to simplify value product. Let’s pick it apart piece by piece.

(1) Find large highly fragmented industry: Highly fragmented industries are industries not dominated by a few company (eg Search - dominated by Google, eReaders by Kindle) or a few entities (eg Indian Railways, English language tests for non-natives dominated by ETS). You’d have to find industries industries with no central leaders - eg Point of Sale (PoS) softwares, there’s a few, but a Google search gives you “A list of 25 best PoS softwares” - this isn’t ideal. Now, PoS might not be a good example because of another keyword in that sentence: “Large”. I’m not sure if PoS industry counts as large in Keith’s view, but take an example of PayPal - Payments before PayPal were fragmented (and Networking before Linkedin depended on Facebook).

(2) “w low NPS” - NPS is a metric of customer loyalty and satisfaction. You ideally want to find a massive industry with little monopolization, but the current solutions should also have a low Net Promoter Score (NPS). Selling a home is a massive problem - lack of liquidity, ill-acting agents, bad valuations - etc. Very few services offer a good customer experience here. Keith came up with OpenDoor and it solved a bunch of these problems - “9/10 customers recommend us”

(3) “Vertically integrate a solution to simplify value product” - Vertically integrating means owning majority of the steps in the making of a product - from production to distribution. Samsung for examples makes hardware and software. Apple does this too to some degree, which is why upon vertically integrating they give this tight ecosystem experience and have managed to maintain some market control despite being the odd one out.

Conclusion : Of course there’s more to picking a winning startup than just these 3 pointers - but Keith has a pretty solid background in Tech (duh). This tweet was one of those that made me look at companies differently, a red pill of sorts. Anyway, thanks for reading!