Spotlights on Reid Hoffman — Best strategies, valuable lessons, the PayPal mafia & creating early social networks

Reid Hoffman, Greylock Partners

If it wasn’t for his low profile and humbleness, Reid Hoffman would be widely recognized as one the true legends in today’s tech world.

Not only he worked at Paypal with Thiel, Musk, Sacks earning his badge as a fellow of the Paypal Mafia; he later founded Linkedin turning a backup idea into one of the first and greatest tech unicorns, now bringing in almost 3 billion in revenues. He also put money in the first investment round of Facebook and in the series B round of Instagram, 3 days before the company was acquired. To top that he’s also written two books: “The Startup of You” and “The Alliance Managing Talent in the Networked Age” and he’s a partner at the VC firm Grelock Partners.

In this episode of ThisWeekInStartups (audio, video), Jason sits down with him and asks him what he did before Paypal with his failed social network, Socialnet, what he learnt at Paypal, how came up with the idea of Linkedin, how he solved the network effect problem that every new network has to hack, his opinion on Zuckerberg, Musk, Thiel… and more.

This episode is considered by many one of the best ever in the TWiST 6 years run. You should really take the time to listen or watch it twice, so much to learn from such a great guy.

Quote of the episode: “Networks are what amplifies your learning and what gives you access to opportunities, it’s what gives you the information and the intelligence to know what to do”

Forget to subscribe to the ThisWeekInStartups podcast on Itunes at your own peril.

How he came up with the idea of Linkedin

• In August 2000 Paypal had lost 12 millions
• They were offering free credit card processing with exponential-growing transactions volume: they were losing money on every transaction and the transaction volume was going up like gangbusters
• They had one shot at fixing Paypal: they became master merchants and it worked out
• But if they didn’t , they wanted to have a backup plan so Reid pitched Thiel and his fellows at Paypal the idea for a basic Linkedin , a network where people could upload have their real identities online, uploading their resumes and find jobs
• Social networks were still in their infnacy: the only other social network at the time was 6th degrees, other than that the Internet was a sea of only message boards

Elon Musk

• At the time Elon was out of the company, he was power struggle-ed out — he wanted the whole system to be moved .net
• Elon is a brilliant man who ignores the word risk; he’s super smart and believes in boldness and taking broad jumps,; he has no fear gene — he just says “I can do it”
• There’s a problem with genius and madness, how much can you pull it off?
• He can’t just have been lucky: Tesla and SpaceX are solving very hard science problems

Reid Hoffman before Paypal

• He’s a native of California (sons of an attorney, grand-son of a Santa Clara DA)
• He founded Socialnet, a social network for dating
• It was a failure, they returned the capital

His inspiration for working in technology

• “How do we make softwares that make us much better as a group?”
• That’s what got him into tech entrepreneurship, he believes he is a designer who improves human ecosystem

6th degree, social network

• 6 degree was the very first site with a viral loop that allowed user to invite others into the network
• They wanted to create a social network like Friendster or a Facebook, but digital pictures at the time were too hard to get (there were no digital cameras back then, only through scanning pictures you could post them online)

Linkedin early days

• Linkedin was pretty simple at the beginning: you could put in your resume and said who you knew and that’s what grew and keep growing the business today
• His advice for founders: don’t keep ideas close and never tell nobody because of fear of the idea getting stolen
• You should talk with people that aren’t your direct competitors about your idea, getting feedbacks is invaluable for a startup in the early stages
• Your competitive advantage is not the idea, but assembling the intelligence around how to make the idea successful (team, strategies, etc)
• The friends he told his idea 2/3 thought it was a bad idea: a network like Linkedin becomes valuable when you have a couple of million people in it
• They questioned his idea by asking “why the first person should join? No value for him. Why should invite the second person? He already knows him”
• He agreed but thought that some people could believe in the potential of a network of professionals, that they would invite other people, even if they were not getting value in the immediate but to build a network that could be valuable in the future

Luck

• It wasn’t a secret that a professional network was gonna be valuable, they weren’t the first one trying
• None of others had better ideas than them, being the first to have those ideas is a matter of luck
• Whoever stumbles upon the growth feature first will just run with it
• Because of 6 degrees, he became a student of virality (in 2003 he had a list of all the people that understood virality, not more than 20 people and talked to all of them)

Tactics he came up with to grow Linkedin

• “Upload your address book and see who else’s on there”: you could send invitations to get people you know on the site and in their your network
• Time coefficient matters in virality: if I’ve just been invited and the first thing I see on the screen is a request to upload my address book, it’s strange, I’m not ready, I don’t know you and I don’t trust it
• But if you have them adding the address book the first time they use the product and they do it, it will speed up the curve of growth and virality (it was important to get to critical mass quick)

Most critical mistake at SocialNet

• As an entrepreneur, you have to think both short term and long term: solve a problem now but building a product for the long term
• They told him not to but financing and strategy is something you need to figure soon, you need to make money
• Product distribution is always almost as hard as building the product (people think that if you build it, they’ll come)
• So focus on getting the product ASAP (if you are not embarrassed by it, you’ve waited to long) to get feedbacks and iterate

Linkedin plan for revenues

• They thought recruiting and job seeking could be the #1 way to monetize a network of people’s real identities
• The idea of browsing through candidates instead of soliciting was paradigm changing
• They didn’t expect companies to knock on their door asking to use it to recruit, but they did

Advice for entrepreneurs

• Focus on building the product and the distribution at first (how to get from 1000 users to 100k to 1 million to 10 millions)
• Have in mind what business model you’ll have and how it will make sense for your business (if it’s ads-based, what will it make interesting for advertisers)

Investing portfolio

• As a VC he invested in Instagram (B round, Instagram sold 3 days later) and they doubled the money
• Jason: Were they happy or would they have preferred if the company became a 10 billion dollars company?
• VCs and entrepreneurs have different interests: entrepreneurs may want to sell early to get a big cheque and change their lives while VCs are looking for the hugely successful companies that make the fund
• At Greylocks Parnters, they are partners of the entrepreneurs: they listen to them, talk with them, advise them but ultimately let them choose what’s better for the founder and accept their decision

The value of strategic assets

• The really valuable startups are those that become strategic assets: when the very large companies believe that a specific asset is central and key to their strategy to win over the next 10 years they will fight for that asset, bidding more
• Strategic assets could be owning a messaging client on the shift to mobile, payments assets for companies like Ebay
• If you are in between Google and Facebook competition, you are very valuable

Mark Zuckerberg

• When he met Mark Zuckemberg his first impression was that he was extremely quiet
• He’s quite cause he thinks a lot
• He’s a learning machine, he asks questions all the time

Facebook

• Facebook was so valuable to colleges that it grew without growth hacking, people just wanted it
• 6 weeks after they launched, 80% of the college students were checking it multiple times a day (relationship status and photos and messaging)
• He invested in FB at a 6 million post evaluation for a company that’s now worth more than 200 billions…

Value of a MBA in Silicon Valley

• It can be valuable to get you a network, but you’d get the same value by working at interesting companies with smart people

Biggest mistake of his life

• Thinking of becoming a product manager instead of getting in the building no matter how (he should have gone at Netscape, he believed in the Internet but as a product manager, he couldn’t since he had no experience)
• Networks are what amplifies your learning and what gives you access to opportunities, it’s what gives you the information and the intelligence to know what to do

Why the Paypal mafia was so successful

• At Paypal Peter Thiel and David Sacks hired highly-intelligent, highly-driven, competitive young guys who want to win and who can learn quickly even if they had no experience in banking, payments (against traditional practices of hiring people with experience)
• It was a short run: they were young, they made money they could invest in building other companies and they kept working together, discussing ideas, helping each other through out the years (they apparently still do it)
• Networks are amplifiers: they had money, they knew people, they shared info between each others

Reputation

• He’s one of the nicest people in Silicon Valley, he holds himself to an high standard and always tries to treat everybody good.
• Reputation follows you around, it’s important to have a good one
• Interestingly, reputation is also the basis of Linkedin

Peter Thiel

• He’s a contrarian thinker and stick to it religiously
• In the book “Zero to One” there’s a question he always asks: “What do you believe to be true that others don’t and you are right about?”
• He’s a smart guy, so if he believes he’s right, he’ll follow his ideas and invest accordingly
• He’s biased towards individualism

Problems of society

• We’ve lived through great times in the past 60 years, a lot of progress on every area has been made, how do we keep it up?
• We should make sure everybody has the same opportunity in a meritocratic society
• There should be some kind of safety net for those who can’t get ahead
• Artificial intelligent should be regulated, according to Musk, he fears the “robocalipse” and sooner or later, due to Moore’s law, we could get to the point where AI can be a threat

Anonymous commentary products

• He didn’t invest in Secret, he’s weary of those
• The incentives are to talk shit and hurt people instead of talking the truth

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