How Keith Rabois Builds Billion-Dollar Businesses: Radical Simplicity

We interviewed Rabois for an episode of AngelList Radio, which you can check out below, and through all of his advice, one thing became very clear: He is obsessed with simplicity.

Interview with Keith Rabois: Building World Class Teams by AngelList Radio

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That obsession cuts across his whole approach to management, so we took a deep dive into how he builds such high-performing teams. We'll explore how Rabois...

• Understands his businesses
• Organizes his companies
• Mentors his team members
• Manages his employees

...all using this framework of radical simplicity.

Every Business Is Just An Equation

A company is, fundamentally, an arrangement of cost and revenue variables that dictate its success. So, most can be reduced into a simple equation. Once stakeholders have a complete understanding of their company's variables, they can start to adjust the levers that control profitability and growth.

At Square, Rabois and the team focused on isolating one variable in that much larger equation: cost per customer. They brainstormed ways to manipulate its output, like lowering incidences of fraud, reducing customer service inquiries, and renegotiating with partner companies.

By the time Square filed for its IPO, the company was reporting a 36.5% margin on its payment processing services—a number Rabois says was originally in the red.

For companies to continue to grow, it’s crucial for new hires to understand such business equations. That’s one of the most valuable skills Rabois looks for when he’s recruiting—that and the ability to use them for smart decision-making. He refers to these qualities simply as “strategy,” and if a person displays it in an interview—usually by asking questions that cut to the core of the business—he'll often hire them on the spot.

To Grow Fast, Throw Out The Org Chart

Rabois has a special title for people who display high levels of strategic thinking: barrels. While some people are great team members who can contribute to a project—“ammunition” in Rabois' framework—barrels are people who can “take an idea from conception to execution.”

You need one barrel per initiative. A barrel may be supported by many team members, but the barrel understands the broader business context of a project, is responsible for collecting the right resources, and can independently make strategic decisions. As Rabois says, “They charge up the hill, and everyone comes with them.”

Apple's popular concept of a directly responsible individual (DRI) is a great example of this metaphor. An effective DRI is, in essence, a barrel, able to own the delivery of an entire initiative, and as a result, expand the company's overall bandwidth for production.

When reorganizing a company, Rabois starts by listing its problems next to its barrels, then connecting them one-to-one. As he explained, “Among many important things that Peter (Thiel) taught me at PayPal is: You've got to get your most talented people working on the most important problems, regardless of what it does to your organization chart.”

A Simple System For Nurturing Talent

On the surface, Rabois' philosophy for nurturing top talent is simple. He gives them more and more responsibility until they either reach a point of failure or are capable of running the company.

It's an approach he learned from David Sacks, cofounder of Craft Ventures. “With every single employee, to your newest intern, you start with a very narrow scope of responsibilities,” Rabois says. “You prove their ability to discharge that, and then you constantly expand the range and difficulty of the challenges you give them.”

The key to carrying this out, though, hinges on a delicate balance: You'll need to give your employees the chance to test themselves—exactly what ambitious people want—while simultaneously reassuring them that reaching a personal point of failure is not a punishable offense. Rabois reiterates, “Everybody has some point of failure... Even someone like Elon (Musk).”

By using this system, Rabois says he's constantly shocked by which team members are able to “run things that you never would have guessed from their resume.” All employees have the chance to climb as high as they can, while still feeling safe at their limit.

A Leadership System — Not A Leadership Style

Rabois told us that in one round of employee feedback, some team members described him as a “micromanager,” while others extolled the “incredible degrees of freedom” he gave them. It made him happy because he doesn't think you should ever have just one leadership style.

Instead, he has a decision-making process for delegating work that allows him to manage employees differently depending on his confidence in their plan of action. He considers two variables—the potential consequences of the decision and his own level of certainty about what the right decision is—and delegates accordingly:

• High risk/high certainty: Step in, overrule, and take over the decision.
• High risk/low certainty: Give more freedom, but collaborate on the decision.
• Low risk/high certainty: Delegate, but treat it as a learning experience for the team member.
• Low risk/low certainty: Delegate fully.

If Rabois is convinced a team member's plan of action is wrong, and there is a high risk-level associated with the work, he takes complete control. However, if he believes in the plan—or doesn't necessarily have a better plan himself—and stakes aren't too high, he completely delegates.

He also takes into account an employee's task-relevant maturity, a concept from Andy Grove's famous High Output Management, Rabois' favorite book on management. It is a gauge of how mature a team member's skills are in a specific niche. The more mature someone's task-relevant skills are, the more Rabois is willing to delegate.

Simplicity Is Speed, And Speed Is Good

In his appropriately-titled essay "Startup = Growth," Paul Graham offered this definition of a startup: “A startup is a company designed to grow fast.”

The key to speed, according to Rabois' framework, is simplicity. “Speed comes from simplicity. The more you can get your team to be instinctually reacting with high fidelity to your goals, the faster everything will fall into place,” Rabois says. “It's easy to deluge people with data and analysis. It's hard to tell people exactly what matters, what they need to do and the simple philosophy guiding it.”

Rabois' radically simple philosophy allows him to hire quickly. It allows him to address pressing problems quickly. Most importantly, it allows his employees to grow quickly. That leads to better results for the company and a better relationship with his team.