- The founder of LinkedIn, Reid Hoffman, shared the story of how the company was founded during an offsite meeting to save PayPal.
- After selling PayPal to eBay, Hoffman realized that the consumer internet was just starting and social platforms were important.
- The first thousand users of LinkedIn were invited by the 13 employees at the time, and the growth curve changed when they introduced the feature to upload address books.
- Hoffman discussed myths in Silicon Valley entrepreneurship, including the idea that an open capital market is always good for entrepreneurs and that high valuations and large amounts of capital are the best indicators of success.
- He advised founders to focus on breaking through the noise, exploring untapped areas, and balancing self-delusion with self-reflection.

- It is important to raise more money than you think you need in order to reach a milestone that will make a big difference in the company.
- Raising too much capital can lead to inefficiency and a lack of focus.
- The amount of money raised does not determine the amount of time a company has to succeed, it is the market that determines this.
- LinkedIn raised $4.7 million in its first round of financing in order to establish itself as a separate category of professional network.
- Not all networks have a network effect, which is when the value of the network increases as more users join.
- Reid Hoffman looks for entrepreneurs with great ideas that can scale and positively impact individuals' lives.
- The investment in Facebook was initially hesitant due to concerns about integrity, but the potential of social networks as a platform convinced Reid Hoffman to invest.
- Reid Hoffman's previous experience with SocialNet helped him understand the importance of organic distribution and the concept of networks.

- The speaker discusses the evolution of social networks and the importance of real identity in platforms like Facebook.
- They also talk about the investment in Zynga and how games were initially overlooked by Facebook.
- The speaker mentions the potential of starting a new company in the mobile phone and marketplace industry, as well as their thoughts on Bitcoin.
- They share their belief that government and entrepreneurship can have positive impacts on each other, contrary to the typical Silicon Valley viewpoint.

- Reid Hoffman, the founder of LinkedIn, shared the story of how the company was founded during a meeting to save PayPal.
- The growth of LinkedIn changed when they introduced the feature to upload address books.
- Hoffman discussed myths in Silicon Valley entrepreneurship and advised founders to focus on breaking through the noise and exploring untapped areas.
- Raising more money than needed can be beneficial, but raising too much can lead to inefficiency and a lack of focus.
- The amount of money raised does not determine a company's success, it is the market that determines this.
- LinkedIn raised $4.7 million in its first round of financing to establish itself as a professional network.
- Reid Hoffman looks for entrepreneurs with scalable ideas that positively impact individuals' lives.
- The investment in Facebook was initially hesitant but the potential of social networks convinced Hoffman to invest.
- Real identity is important in platforms like Facebook, and the speaker discusses the evolution of social networks.
- The speaker also mentions the investment in Zynga and the potential of starting a new company in the mobile phone and marketplace industry.
- They share their belief that government and entrepreneurship can have positive impacts on each other, contrary to the typical Silicon Valley viewpoint.

Reid Hoffman at Startup School Silicon Valley 2014

View the annotated transcript, and add annotations of your own, on Genius: http://tech.genius.com/Reid-hoffman-reid-hoffman-at-startup-school-sv-2014-annotated

So to get started, I wanted to just ask you about how LinkedIn got founded.

I'll give this, even though I know we've come back on time, I'll give the slightly longer answer because it's entertaining.

So in September of 2000, Peter Thiel, Max Levchin, Luke Nozick and I did an offsite at my grandparents' house in Guadalajara, California, where we were like, okay, how do we save PayPal?

Because in August of 2000, we burned $12 million in 1 month without any revenue with an exponentiating cost line.

And that worked out, fortunately, that was day 1.

Day 2 was, if this blows up, we will have created a mushroom cloud of 200 million plus in venture capital going to 0, and so we might as well do something together.

So we pitched each other our best ideas, and an earlier version of LinkedIn was 1 of them for me.

And then day 3 we went for a hike, and then day 4 we got back to work.

And then what happened is we sold PayPal to eBay in October of 2002.

And Silicon Valley had gone crazy then, which is they basically concluded that consumer internet, The classic pattern for investing over the last few decades had been you have 1 big tech wave, and everyone runs out to get the big companies in those tech waves, and then that tech wave goes away, and there's a new 1, whether it's networking equipment, medical stuff, or enterprise software, or clean tech, or anything else.

And everyone concluded consumer internet was over, right?

So they'd said Amazon, Google, eBay, Yahoo, these are it, that we're done, now it's the new wave.

And what I'd realized was, actually, in fact, the consumer internet was just starting.

And in fact, the social platforms were kind of a key thing.

And so I said, well, actually, in fact, the LinkedIn idea still works.

So as opposed to taking a year off, I took 3 weeks off and then started working on LinkedIn.

What about that idea, about the particular idea of LinkedIn, had made you sure, or at least highly convicted enough that it was going to work in this world where everyone had given up on consumer internet?

Well, So I actually think that if you have at the back of the napkin stage, if you have a high conviction that's going to work, you're mostly deluding yourself.

But self-delusion is a positive attribute in many entrepreneurial circumstances.

And so for me, it was I tend to think in terms of economic ecosystems, so like how the world should be.

Now, frequently a mistake in plans is, well, if all, you know, hundreds of millions of people are using it, then this product will be awesome.

And the real question is how do you get the first million to use it?

Because if you don't get the first million, then the hundreds of millions, then it never happens.

That being said, it's like, okay, everyone should have a public professional identity.

That should be a platform by which you navigate how you work and your work life, that should exist.

And there are a bunch of cultural things against it.

There's a bunch of people just kind of, when you explain that idea, even today, they scratch their head and go, oh, I didn't really think about it that way.

And so what gave me conviction was because there was a lot less noise back then, that 1 could start an idea like this where most people even today don't really fully understand how to use the tool, then you could slowly build and ramp to that, which is much harder in an environment where it's noisy and tons of things are happening.

How did you get the first million or even the first thousand users for LinkedIn?

We just sent out, like the 13 people who were working at the company at the time kind of sent out invitations.

And that ended up at a rate of 2,000 per week, which of course is nothing on the consumer Internet.

Probably the key thing that we innovated, and we were the first people to do this, that then caused the growth curve to change was upload your address book and see who else you knew was in LinkedIn.

Because when we were thinking about what was the problem that people were trying to solve when they showed up, is like, is this an interesting place?

Well, 1 of the primary questions is who else is here?

And so that was the quickest way to do that.

And once they went, oh, Sam's here and so forth, then they go, oh, okay, let me invite some other people, let me check this out.

And so that essentially changed our growth curve.

And without that, we probably would have, we probably wouldn't be here.

When you have that that offsite when PayPal is burning $12 million a month,

And you pitch LinkedIn as your best startup idea.

You and I were talking a little bit before we started about some of the current myths of Silicon Valley entrepreneurship, and I thought that was really interesting.

So maybe you could talk about some of those.

So there's a bunch of memes going around in the Valley in the last 3 to 5 years that I think are actually harmful to how you think about these things.

So, for example, 1 of them is, let's start with that actually a open capital market is a good thing for entrepreneurs.

And by the way, it's not that it's a terrible thing, but as entrepreneurs, basically, if, the problem with an open capital market is they always think about it in terms of just my startup, like me, so oh, there's a lot more capital, that'll make my job easier.

The problem is, is if you now have as a function of open capital market, 5x the number of companies competing with you.

Not just for your actual products, but for talent, right?

For relevancy, for breaking signal through the noise, and all the rest of it.

Actually, in fact, if you do a historical analysis over the last 50 years and you say, when are the majority of the game-changing companies founded, they're actually in downturns because they have enough time to have a ramp, to aggregate a whole bunch of stellar talent around the time that they're starting and so forth.

And so, actually open capital markets are actually not the ideal time to be starting a company, unless you have an idea that you're, you know, you simply couldn't get finance otherwise.

And you know, but you start the company when you wanna start the company.

Before we leave that 1, what should founders do if they're starting a company in times like these to best counteract that?

So 1 of them is you really have to think about how do you break through the noise.

So the number of companies that really matter every year is probably between 0 and 5, in terms of the industry changing.

So if you look at an audience like this, which is what, 1,400 people?

You say it's an average of 2 founders per company, presume everyone's doing it.

And so, and that's only the people who are here, let alone everything else.

And so the question is, is how do you break through the noise is a really, really key thing, whether it's financing, talent aggregation, go to market, et cetera.

So 1 of them is to say, well, do something very contrarian.

Do something that is kind of like, not like where people say, well, you know, it's Airbnb but for dogs, right?

Or that kind of thing is not the kind of thing to do generally, right?

And it's very rare that those ever become the big companies.

The Second thing would be is to look where, really look where, and this is 1 of the reasons why both you and I are fans of Peter's question of what do you believe that other people don't, but look where other people really aren't, right?

Like whether it's hard science or if it was 2 and a half years ago, Bitcoin, you know, et cetera.

You know, those sorts of things where like, no, no, actually something could be really big here.

Because by the way, if you end up being right, you end up having access to the talent that's really focused on that.

You have a ramp to actually get a whole bunch of stuff and get a big head start from other possible competitive efforts and these sorts of things.

And then I think the last is to really focus on being, not, while, like my earlier comment about self-delusion, is 1 of the paradoxes of entrepreneurship is you do these kind of 2 things that are in contradiction in balance.

So 1 of them is you actually wanna have some self-delusion of like, yes, I'm sure I can make it work.

On the other hand, you wanna be asking yourself every day and every week, is my confidence in this going up or down, and if it's not going up, what do I need to do and learn and pivot in order to have it?

And it doesn't have to be that it goes up every week.

I mean, PayPal, LinkedIn, we've had weeks, every valuable startup has weeks and months of valley of the shadow, which is, why did I ever think this was a good idea?

And so that happens, so the confidence can go down, that's fine, but part of the reason you're asking this sort of question is in order to know what problem do I need to tackle aggressively to think that I'm on the right path?

Okay, so another 1 frequently tends to be, so entrepreneurs tend to treat financing rounds as a combination of, well, the highest possible valuation is the most expression of I'm succeeding and or I'm loved and valued, and the absolute most amount of capital, because why isn't $2 better than $1, you know, kind of thing.

It's not to say that valuation doesn't matter, and it's not to say that the amount of dollars doesn't matter, but let's take the dollars 1 first.

So on the dollars 1, the kind of question is, is frequently, what you really want to do is you want to raise more money than you think you need in order to get to a milestone where that milestone makes a very big difference in the company.

I have yet to see the company that it's actually, like literally anywhere in all of my experience where if you raise way too much capital you actually get ineffective in the way you operate it Changes a certain level of sharpness in the way you think and so you don't want to go like if you said well I need 10 raising 15 or 20 is fine.

If the track record of these companies they raise these like 30 million dollar a rounds is their first capital.

Yeah, it's completely, every single 1, train wreck.

Right, and so it's kind of like, yes, I need this amount of money, and I'll give myself some cushion, but that's it.

And then I really focus, and the whole team is unilateral.

Because 1 of the problems that happens is not just you as a founder, it's your whole team going, oh, we've got an extra 20 or 30 in the bank, so it's okay if this month the metrics and our confidence didn't go up.

So we've got a lot of time to figure this out.

Because the money isn't what actually gives you the time.

It's the market that's the question of the time.

How much did LinkedIn raise in its first round?

And was there a particular milestone you were trying to hit with that?

Yes, the particular milestone that we're trying to because part of what you do in a financing strategy is when you're raising money, and I you know, I published a series B deck of LinkedIn for some of this,

if you have not seen this read published his series B deck for LinkedIn, and we make all yc founders raising B rounds, look at it, you should definitely check it out.

So, part of what you should, when you're doing this round of financing, you need to be thinking about the next round of financing.

And part of that is what condition, like what range of outcomes can I get to to then make that next round of financing work?

And for us it was, when we raised our series A, it was during the time of Friendster.

And so everyone was like, okay, you're kind of like Friendster but for business, and we don't really get what you are.

Well, we wanted to be, as our top goal, which we got to, was we wanted to clearly establish a separate category of professional network from Friendster that we were the market leader in.

We actually knew that even though a classic thing is well, you should have revenue, we said nope, we're gonna punt on revenue, we'll do revenue post series B.

They said well, you should have really, really clear use cases.

It's like, well, it should have some, and I was aware, but we don't have to have them all.

We only have to have some of them in terms of how we're, and so it was like, get really focused on, this is what we're gonna do, because if we didn't solve that problem, no other problem worked.

So it was like, which problem really matters that then raises the confidence from us and from the investors and then we can do a good series B.

Any other myths you wanna talk about before we move on to the next topic?

Well, here's 1 that I think is actually particularly relevant.

Since when I'm normally asked, like, what do I invest in, I say networks and marketplaces, because those are the kinds of things that I know very, very well, and I think there's still a ton of opportunity in them.

However, 1 of the things that people frequently think is network equals network effect, right?

They say, if it's a network, and I can describe it as a network, it has a network effect.

That's actually not true, in terms of a tautology, an equation statement.

The reason is precisely what makes something as a network effect is the more nodes that you have in the system, in this case usually people, that it raises the value of the system in a super linear value proposition that then makes leaving more and more, you know, like, oh, this is the place I do this.

This is really where it's valuable to do that.

Marketplaces are, I think, the clearest example of this, because essentially it's like, well, if I'm offering this kind of good for sale or for rent or anything else, And all the buyers who are looking for the broad distribution of what's possible are coming here.

Well, you go to where the distribution of buyers are, the buyers go to where the sellers are, the sellers go to where the buyers are, and so it becomes very difficult to trade off in that.

I think there's all, but just because you say I have a network doesn't mean you have a network effect.

I wanna talk a little bit about you as an investor And sort of what, you've mentioned a few things throughout this, but a founder says, I want Reid Hoffman to invest in my startup.

So, For example, I'm always more interested in the great idea that I haven't thought of.

So when I say networks and marketplaces, those are things I'm interested in, but it's really a great entrepreneur with a really fascinating idea.

Frequently it's, can it get to the scale of millions to hundreds of millions of people, does it actually, in fact, when it defines that, does it define a new aspect of human ecosystem that changes individuals' lives and the group's lives in a positive vector?

Then you get to, okay, does the initial plan for how to possibly get a strong shot on that goal work?

And is the team and the founders the people that have a good shot at that?

That's roughly what the shape of it looks like.

And it's, the more that it has, like for example, when I started LinkedIn, and I went to all my, because you should go to all your smart friends and ask them, when I went to all my smart friends and asked them, they basically, 2 thirds of them said I was an idiot for starting LinkedIn.

It was like this is a crazy idea that's not.

And the reason it's a good signal is because if 100% of people think it's good, there's almost always problems that you're not seeing and that enough other people think it's good too that the competition pile around it is serious.

So I like the fact that you say, why would smart people think this is not a good idea, but actually in fact there's something that makes it a good idea even despite that.

Why did most people think it was a dumb idea?

Most people thought it was a dumb idea because all the value propositions on LinkedIn are critically, you have to get to a critical mass.

And so the question is, you have an invitation product where you have no value proposition to get to critical mass.

Then you invite me, we know each other already.

So how do you get to the first million people is the kind of key thing.

For specific, 2 specific examples I want to talk about for investing, Facebook first.

Could you talk about how your investment in Facebook happened?

Yeah, So I tracked Facebook when it was in Boston.

I went, ooh, that's a super interesting project, but because I was very busy with LinkedIn, I was like, well, it's in Boston, we'll see how it plays out.

And then Sean Parker called me and said, I got this really interesting investment opportunity.

And at the time, Yeah, it was maybe a little bit more enthusiastic than that.

But at the time, I had been a little beleaguered because I'd gotten a lot of pushback from the investment in Friends Group saying, well, you're trying to have your cake and eat it too because you're doing too, even though I view social and professional networks to be very different.

And 1 of the things about integrity is it's not only important that you have integrity, but also that you seem to have integrity.

Like the substance, the appearance matters as well as the substance.

And so it was like, look, I don't want to lead this investment as great as it is and all the rest of the thing.

I think Peter should lead the investment, and I will actually, in fact, you know, follow in.

And so we – It's a very expensive example of integrity.

I think it was – it's probably 1 of the most expensive examples of integrity I know, but since Peter's a close friend, it's all good.

And so Parker, Zuck, Peter, Matt Kohler, and I met, because Matt was working for me at the time at LinkedIn, and we're like, this is, you know, there's a lot, there's a lot that can go wrong with this.

It was very early, it was still in some number of colleges, like 10 or 12, it was some small number of colleges.

But 1 of the pieces of conviction that I'd had, which is the reason why I knew that Facebook was awesome even before that specific meeting, was that I knew that social network as a platform was intrinsic.

Now, it isn't that I had the idea for how F8 came about and the internal platform.

There was a bunch of things I learned from how they were thinking about that But the notion that your identity and your network is a platform for the apps that transform your life That was something that I already had and so once like Facebook started like saying look We were already on track for that.

That was pretty it was probably 1 of the most straightforward investment decisions

Well, you had been thinking about this since you started a company called the Social Network in 1997, right?

How did, did that experience, was that why you knew so much?

Like, Did that make you prepared for this investment?

When I started SocialNet, because part of, at a macro level, what I think of myself as doing is helping found, build, invest in, design human ecosystems, using principally software technology, internet technology as a medium.

And so social had a bunch of errors in it.

1 of them was not understanding that your distribution has to be organic, right?

So organic virality is a natural organic, SEO is a natural organic, There's a set of these techniques that are natural organic techniques.

And it was 6 degrees that actually, when I saw 6 degrees, I was like, oh my God, that's brilliant.

And so I'd had the idea of everyone establishing an identity and then having this electronic space transforming their lives.

But I didn't have the concept of a network, I didn't have the concept of real identity, I didn't have the concept of all of these things being fundamental, because when I started social net, it was still cyberspace, right?

And now it's like, no, no, this is actually the way we live.

This is this is this is part of our life.

And that was the those are the things that how social had already had me thinking about this category, but also to recognize which things would work when I got to the second phase.

I saw something from you many, many years ago where you had said that the most important thing Facebook had done that was new and innovative was real identity, separately from everything that had come before.

I think Real identity was 1 of the real, we had been doing real identity too, and Friendster had been doing a version.

Real identity is definitely a part of it.

The other part of it is that they had gotten, like the accidents of it starting was also super useful, was that it got to a high trust and real identity by starting in colleges.

Like I don't think Facebook could have established where it got to if it hadn't started in colleges.

Because everyone's like, for example, in early days in Facebook, which of course doesn't happen anymore for obvious reasons, people would post their cell phone numbers to their profiles.

Because they're like, well, this is a trusted community.

No one's going to, there's going to be nothing weird by posting my cell phone to my profile and so they would do that.

Now that doesn't happen as much anymore for obvious right.

And then the other example for an investment you made is could you talk about how you ended up investing in Zynga.

So Facebook launched the F8 platform and their description was we're a social utility it's a social graph and there's a whole stack of applications built on top of it.

Now, the question is, which of the applications are going to be most applicable?

And also, which of the applications that are going to be, that are essentially going to, because there's always a tension between apps and platform in terms of the primacy to the user.

Which apps are going to be the most important ones on the platform?

Now photo sharing was clearly 1 of them, but Facebook doesn't say we own that, we're not gonna allow anything else in that.

Now, the primary 1 that I thought Facebook was like, this is an unimportant app, it's not what we care about, we care about utility and productivity and a bunch of other things was games.

And the intersection of having Pincus, who is massively creative, right, and is kind of like an idea minute, kind of like what about this, what about this, what about this, what about this, which is awesome for this kind of, this space and games and everything else.

And the fact that Facebook was like, hey, games, we don't, games isn't relevant to us, we don't care about games.

Gave you an opportunity to build a really serious company on top of it.

So this is the kind of thing, it's a social network, people care about the social experience.

How you share entertainment, share connection, in kind of lightweight entertaining ways is 1 of the things that matters to users.

Pincus and his crew understand vibrality well within the Facebook platform, and games is actually 1 of the things that if you innovate on the business model well, you can actually make really interesting cash.

And so all of that put it together to making a very straightforward investment.

Why do you think Facebook had such a blind spot around games?

Oh, I think it's, you know, hopefully he doesn't mind me saying this on camera, but I think Zuckerberg is not himself a game player.

Like, what he's really trying to do is figure out how to make the world more open and transparent and to actually have efficiency of information and connection and communication flows.

And so he thinks a lot about those sorts of things.

And so games are kind of like, That's not the kind of thing he does.

And so he's like, no, that doesn't, like not it's bad, it just doesn't matter.

And I think that was the primary 1 that, now obviously, they've seen a lot of the utility of how to build games or the thing the right way, so that's now gotten added into the corpus.

were gonna start a new company today, Any thoughts on what you would start?

Well, since I'm pretty focused on LinkedIn and pretty focused on the investments that I've made at Greylock, I don't spend a lot of time computing that particular question.

I do think that people still probably underrate where the ubiquity of everyone having a phone means in terms of networks and marketplaces.

Now that being said, probably 2 years ago I might have done something in Bitcoin.

I don't think it's too late, but it's not a secret anymore.

Right amongst the intelligent folks, there's a whole bunch of stuff going on.

So if you're showing up saying I've got another wallet, or I've got another, you know, merchant processor, I've got another 1 of those, the likelihood that that's gonna play out well is low.

Do you have high conviction that Bitcoin will be big?

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Reid Hoffman at Startup School SV 2014