Original audio interview: http://www.venturevoice.com/2006/11/vv_show_40_reid_hoffman_of_lin.html
This interview was originally aired on November, 3, 2006.
Reid Hoffman is an entrepreneur and venture capitalist, best known as the founder of LinkedIn, a site which allows users to keep track of business contacts as they progress through their careers. In this interview find out how his goal of becoming an academic in order to change the world for the better was drawn away by the allure of the internet and how his work with startups has had an even greater impact on society.
When Reid Hoffman graduated from Stanford University his goal was to make a difference in the world. He thought he could do that by becoming a public intellectual. At the time he thought that was someone who wrote essays for magazines like the New York Review of books or The Atlantic Monthly. “I was going to be an academic,” he says, “I went to Oxford. And then I realized the problem with being an academic is you write books that 50 people will read. I wanted to participate on a much broader stage because what motivated me about public intellectuals is that you hold a lens as to who we are and who we should be, both as an individual and as a society.”
It was also around this time, in the early 90s, that computers were starting to become commonplace and people began going on this new thing called the world wide web. Hoffman recognized the importance of software and online services as a platform for media and realized that “you could go create really valuable media objects that would have a much more deeper transformative effect on society – where you hold up that lens and help people evolve to who they should be or who they want to be.” Knowing that his impact on society would be amplified many times by the power of the internet, he decided to follow that route and embark on an entrepreneurial career that would give him a larger stage to express his views.
After completing further studies at Oxford University in the fall of 1993, he went to some venture capitalists looking to get funds to jumpstart his entrepreneurship career. When they asked him for his work experience and he told them he’d interned at Xerox PARC, they said, “No, no, no. What’s your work experience? Have you shipped software before?” Sheepishly he replied, “Oh uh…no, not yet.” The VCs told him to go get a real job and once he’d learned a few thing to come back to them.
Hoffman took their advice and went to work at Apple computers, eWorld (Apple’s online service), and Fujitsu. He felt that the web wasn’t just going to be the major media transformation of the generation, but for many subsequent generations because it was the “kind of thing that creates new possibilities for how people can express themselves.”
In 1997, after he’d gained some experience under his belt, he created his first startup, SocialNet. The site was focused on online dating and matching people up with others who had similar interest as them, whether it be someone looking for a serious relationship or a partner to play a game of tennis with. SocialNet never quite took off and eventual disagreements with the board on its future direction forced Hoffman to leave the company, but in many ways the idea was just too far ahead of its time. Looking back on the company’s demise, Hoffman says that he should have concentrated on one single category, for instance dating, and done it really well instead of being so ambitious and trying to cover so many topics.
Another important lesson he learned was to not think too much like a product manager. “Most people tend to think (in terms of product). They have a product they think will change the world, they envision it. Financing strategy is more key than product strategy. Product strategy is important but basically if you can’t get enough capital to get your business off the ground, and usually it’s a successive set of influxes of capital, your business fails, and it goes away because the difference between being a dollar profitable and a dollar not profitable is immortality and death.” The dream of many entrepreneurs is to “create these organizations that may have a chance of living forever, of being a self sustaining entity” and to do that you must have a financing strategy. He wishes that he’d told the investors of SocialNet that everyone on the internet was going to join the site and raised $50 million dollars when instead they only raised a little bit of money and tried to prove out a concrete business model – “which,” Hoffman adds, “is much better to do now than then.”
In his first startup, Hoffman also learned the hard way that “venture investment is like (a marriage based) on two PowerPoint presentations and a dinner. You’ve got to be very careful who you are essentially getting married to and it’s both directions.” You have to be aware if it’s an operational partnership and how well does it work? Because if it doesn’t then it’s time to cut away from each other.
In cyberspace, the lessons from retail apply as well, but instead of location, location, location it’s distribution, distribution, distribution. “A consumer internet venture is basically only successful if you have some form of natural distribution (virality). There’s a bunch of different viral mechanisms that can work and there’s both art and science to that, but if you don’t have a natural distribution your consumer internet thing won’t work. It’s over.”
When he left SocialNet, these were some of the lesson he took with him to help out his friend Peter Thiel, the CEO and cofounder at Paypal, when he was tasked to charge of its operations and run all external affairs. Looking back, he uses the words of Thiel to describe what he learned at SocialNet, “(Thiel said, he’s) never learn so much in his life except from maybe between the ages of 2 and 3. The very first time you’re doing a startup is exactly like that. It’s like, “Oh my god!” Like drinking from a fire hose is too tame of a metaphor.”
When eBay acquired PayPal in 2002 for $1.5 billion, Hoffman suddenly found himself contemplating what to do with his career. “At the time it was kind of like, do I take the time off or do I do this professional networking thing, this vision I have of how LinkedIn can actually change the world? Because part of the idea for everything that I personally do (is there must not only be) a good economic entity and a good business (behind it) but a change the world thing, (something that) makes a difference in peoples lives.” In the end, he decided to do LinkedIn, so instead of taking time off, he assembled a small group of people in late 2002, started coding and in May of 2003 he launched.
Hoffman was very wealthy after PayPal’s acquisition and there were lots of things he could have done afterwards so what drove him to create another startup? He answers that by saying, “For me, what PayPal gave me (is) freedom of time. I made enough money with PayPal that I could go travel how I wanted to, go to movies, buy a house, all the kind of normal middle class aspirational stuff. What motivates me is big projects that change the world. I thought about it and I went alright, am I interested in writing a book? Or am I more interested in doing something more kind of organizational scale, and I realized (that’s) what really mattered to me…I’ve had this idea cooking around for a couple of years and I actually believe that there’s some really important effects that LinkedIn will have on the whole world and I think it’s a very viable business so I’m going to do that and get that deployed because part of the theme of the internet is that it’s essentially power to the people.”
Hoffman’s belief is that with the millions of people participating online, the internet has become a democratic landscape enabling people to have the best possible lives and he wants LinkedIn to continue to promote that tradition just like PayPal did by empowering individuals to “become a merchant (by hanging their) little shingle to the web and accept payment” in a process that was once reserved for businesses that had been validated by a merchant bank. “(At) LinkedIn, every person as a professional can hang a shingle to the web and they can say what kind of business they’re interested in doing and then they can find other professionals either that they already know or they want to get to know in order to connect with them and build business.”
One of the reasons Hoffman thinks this is the future of the world is that every individual has the ability to become their own business. “You have that already, people are changing gigs every 3 or 4 years…every individual is responsible for how they evolve their small business. Well what kind of things do you need? You need new clients, how do you get new clients? Well it’s people who know you and trust you. Word of mouth referral is really big, you need to be able to connect with other people when you are looking for things, either experts to help you solve problems or inside connections with companies…these all involve having a set of profiles on the web and participating and that’s what LinkedIn is about.”
One of the great challenges of finding an employee is finding the right person for the job and Hoffman thinks LinkedIn has a solution for that. “It’s the single component failure (of hiring somebody or finding someone to work for),” he says, “If you don’t find the right person it’s very bad news. How do you solve that problem? Well you use trusted referral and talk to people.” For instance, if you need to hire an interpreter you wouldn’t just hire whoever walked in, you would ask someone if they know who’s good for the job, and rely on their referral. “Using that 6 degrees of reference and trust is a way of navigating and building these key relations is kind of what (we do).”
The Business Model
Hoffman estimates that about 80% of what we see in LinkedIn today was already structured in his head before he’d built it, but he doesn’t want people to think things are always so neatly planned out. “The nuances of the idea we didn’t have when we first started. Most good consumer internet ideas start with getting traction in the market, then you work out the other things later. One of the things that I tell entrepreneurs and investors, especially if you’re in consumer internet, is I have yet to see a series A business model be the business model at the end of the company. Whenever someone says I have a business model it usually ends up being a little different than you predict or a lot different.” These words proved true in LinkedIn’s case. Initially it was thought that once the site’s user base grew, they could start charging participants for certain kinds of usage. However, they came to realize that the mass product was something that should always be free.
Hoffman wanted as many people as he could to join and use LinkedIn, even if their current business needs weren’t intense and they only used it for simple tasks like hiring employees, finding a job, or using it for a reference check. They believed that all these services should be offered free of cost. “And then when people are seriously using it – charge them,” Hoffman explains, “If you’re a hiring manager posting a job listing – that costs something. If you’re a business development person looking for inside connections with companies and you need to do it at scale – that costs something. One of the things that’s an interesting feature of the net is that most successful things have a substantial free component, they are either free altogether or a lot of the rich basic thing is free.”
One of the biggest challenges facing LinkedIn is understanding that their principal customer base is primarily over the age of 27 or 28. Hoffman explains that “it’s not actually college students or high school students (that use us). They don’t have a professional network worth a damn to help them get a job or manage their careers yet. Those are things you start building as you leave college. The thing that’s interesting is that (all these social like networks like Facebook) get all these strong accelerants because high school students and college students have lots of spare time and don’t really care about the value of their connection.” LinkedIn, on the other hand, has a much slower but steadier rate of growth “because once (the users are) above thirty, they have 3 attributes in their life. They’re somewhere between married with kids or wanting a serious relationship (that takes up) one major chunk of their time. The second thing is they have enough friends. It’s not they’re not open to meeting new friends but they have enough. And the third one is their career is starting to matter. How do I buy a house, (retire, have a family, put the kids through college)? You’re beginning to have a point of inflection in your career that the next steps really move in term of what you are doing so amongst that group LinkedIn has to persuade them that we’re valuable. So unlike, Facebook, which is ‘Wow! A place to play with my friends and I have lots and lots of spare time,’ because that’s what people (do in) those cycles of their lives. It’s, ‘Prove to me you’re valuable.’ (That’s why) it’s really a challenge to grow in this demographic.”
Spreading the Word
“In consumer internet, product is king. You have to get something that is valuable to people who are on the net so that it’s worth their time and attention. Think of how many hundreds of thousands and millions of URLs are out there. Your average consumer internet is swamped with all these things that are going on, so it has to be something valuable, that’s the key thing.” Public relations is also a really useful way of spreading the word and if you can get others to write about your site then it’s even better because consumers like content that’s been through a good editorial filter. Hoffman reminds us that “ultimately, you can’t drive a distribution strategy on PR alone. It’s got to stand on its own in some way and that’s something you got to work out. I think your average professional has not yet realized what a central role (LinkedIn) can play in how (it can) accelerate and manage your career, and that’s one of the things we’re working hard on now is getting the features and ease of use out their so (people) can see (the benefits).”
Even with the size of LinkedIn’s social network as big as it is and their loyal user following which creates a large moat between them and their competition, Hoffman admits there are things that still give him uncertainty. “The principle thing that makes me worry is communicating to mainstream users. Take the word networking. To most people, networking is a vaguely negative because it connotes people who say ‘Can I have your business card? Can you help me?’ As opposed to ‘Can we help each other?’” To get around this problem, LinkedIn is designed for users to help each other out, not so networkers can use others to their advantage. “What reference is supposed to be is I refer you to someone based on what I know about you, on my ability to say, ‘Oh he’s a good person, he’s hard working, he’s trustworthy, he’s honorable, he’s diligent, he’s a close friend of mine, do me a favor.’ The people that you think are smart and interesting, there’s a much higher percentage of the people that they’re hanging with are smart and interesting. So, the same principal applies on LinkedIn.”
When users go to other people’s profiles they can find relationships and patterns, and on the front page of their profiles they can do a foreground reference by seeing all the positive comments people have written about them and through connections to individuals both parties know they can do a background reference and find out if there are any negative referrals for that person.
Have the dynamics of starting a business changed with all the advancements in technology since the 1990s? Hoffman admits that “launching something is a lot cheaper than it used to be.” There’s less expensive equipment and there’s options like Linux, open source software, and access to search engines that weren’t available before “but, on the other hand there’s lots more entrance. (And) if you have a thousand people going out launching shit, for $100K or $200K, the one that can raise $5 million and deploy that effectively has a huge competitive advantage.”
A piece of advice Hoffman tells entrepreneurs is “do something that has massive upside. It’s going to be the same amount of blood and sweat and tears and everything else for a small upside and massive upside so focus on something that can go really, really big, because you’re basically going to dump blood into it by the buckets anyway, so the answer is, ‘Yes, it’s cheaper now (to launch) and there are new rules because of it, but it hasn’t eliminated the old ones.’ “
Hoffman believes that “part of entrepreneurship is both predicting the future and bringing it in closer. I realized that, in a sense, in the future everyone is going to have a profile on the web. The way I hope LinkedIn is going to change the world is you have a whole web of users, getting people connected to people, giving each other endorsements and being able to access each other. (Our) 50,000 foot civic mission is to make good people stronger and to make people who mistreat other people weaker. The whole idea is if we’re out there in a web of relationships where it’s easy for you to track me down, find other people who say good or bad things about myself then we should make the world a better place, because people who deal respectfully with people, are honorable, keep their agreements, when someone checks them out they find, ‘Oh cool, I’ll do business with this person,’ and people who break their word, mislead people, we can check them and go, ‘Oh, we’re not going to do business with those people.’ That’s the way LinkedIn is trying to change the world and my hope is that we will get there…sooner than later.”