High-Impact Entrepreneurship

Summit Keynote Address: Reid Hoffman, Executive Chairman & Co-Founder, LinkedIn [Video, Transcript]

Endeavor is pleased to make public the following transcript and video from a presentation at the 2011 Endeavor Entrepreneur Summit in San Francisco. The event, which assembled over 450 entrepreneurs and global business leaders, featured dozens of entrepreneurship-related presentations by top CEOs and industry experts.

Overview: In the closing keynote of the Endeavor Summit, Reid Hoffman discusses his rules of entrepreneurship (elaborating on the ones posted on Endeavor.org: http://www.endeavor.org/blog/reid-hoffman-entrepreneurship-rules) and interweaves the analogy of entrepreneurship to settling the Wild West. For Hoffman, it’s all about being on the frontier.

Full transcript:

Importance of Entrepreneurship

Entrepreneurship has always been really important. It’s how all of these institutions were started – every government, every nation. Entrepreneurship has always been important, but I think it’s growing in importance in our time. I think the reason is fairly simple, which is the future. We’re accelerating towards the future, the markets are changing more rapidly, you have the forces of globalization, you have technology change. And all of that means that how we both invent the future and adapt to it is becoming more and more important. How you create new things, how you make something – the new institution, the new product, the new organization: that’s what entrepreneurship is about.

Can you teach entrepreneurship?

One of the questions that I’ve been thinking about in the last year has been: Can you teach entrepreneurship? And I realized there’s a parallel – which is why it’s so hard to actually teach it. Entrepreneurship is also a form of education. That is because entrepreneurs, in a sense, are the modern pioneers. You can teach a variety of skills. On the business side that’s things like business models, competition, shipping a product, hiring, organizational management. For example, for a pioneer you can teach “this is how you set up a camp, this is how you wagon train across the mountains,” these sorts of things, but it doesn’t teach you how to navigate the inevitably new circumstances that you get. Because when you actually have a new opportunity that comes about from entrepreneurship – because it has to be new, otherwise it would be occupied already – how do you make those critical decisions and judgments in this new circumstance?

That’s part of what really distinguishes the ability to pull together an entrepreneurial venture. From something new, something that starts on the back of a napkin, to building a company or institution that’s offering products or services and hiring thousands or tens of thousands and having global impact.

When I was thinking about this, one of the talks that I gave earlier this year at South by Southwest and then published as a blog post this is also on Endeavor asked: what are the rules of entrepreneurship? As I was trying convey to people: what are the things to think about, how do you set your mind in order to be a more effective entrepreneur? Now I will go through some of the rules, not all of them, then answer your questions.

Hoffman’s Rules of Entrepreneurship (Complete list here.)

Rule #1: Look for disruptive change.

The reason that I said look for disruptive change is because it’s the opportunities that come about that are really new opportunities. The opportunity, generally speaking, has to be large. You know it can’t be something that has been sitting there for ten or twenty years and no one’s ever really thought about. That’s very rarely the right answer. If it’s not large enough to be something that you can make something significant out of, it’s not really high impact. The kind of pioneer parallel to this is that if you’re going actually to pack up your wagons and go somewhere, make sure that where you’re going is potentially really good. And that the algorithm by which you can think about that is that all of a sudden there’s a new opportunity: it’s a changed technology, it’s a change in the competitive landscape, it’s a change in how the ecosystem comes together.

Rule #2: Aim big.

It’s the same amount of blood, sweat and tears when you start a company whether or not it’s a fixed vertical market or whether or not it’s something really, really large. The difference is you might as well shoot for something large because you can still end up with something smaller. And part of the reason this is a rule of entrepreneurship is because if you don’t start out aiming for the big game, you almost never can get there. It’s gotta be, “How can I have a global impact?” I think all high-impact companies basically have to think globally in nature these days because of the way that the market ecosystem is going. You go, “okay, how do I play onto that stage?” Part of that in terms of the pioneer parallel is how do I go somewhere that is substantially unique.

Rule #3: Build a network to magnify your company.

How do you build a network around your company? Because as much as we tend to glorify the entrepreneur – for example, LinkedIn is the product of Reid’s brain – it’s actually brought about by lots of different people. There’s everything from your cofounders, early employees, investors, customers, and for some businesses, distribution channels. There’s a network around the company. That was true for pioneers; very rarely did one person get into a wagon and head west. That was usually a recipe for failure. One of the things that’s really important to make these things more likely to succeed is to assemble a network around them. That network helps you get intelligence, helps you get the right resources, and drive forward.

Rule #4: Plan for good luck and bad luck.

People say, what do you mean plan for good and bad luck? The idea that: I have this idea, it works out, and things keep going. Good luck actually comes in opportunities that you don’t normally see. For example, PayPal started as an encryption of mobile phones’ company. Because it was two close friends of mine I joined the board when they founded it even though I thought in December of 1998 encryption of mobile phones was not a good idea, which I told them, but it was kind of like, you back your people. And then some things happened and they were like, well okay, maybe it’s not encryption of mobile phones, maybe it’s cash and mobile phones, or maybe not just cash on mobile phones, maybe cash on palm pilots, and maybe cash on Palm Pilots and payment service on the web, and then they launched with that.

And for the first week they said, all this growth is coming though eBay, but that’s not really what we planned; we planned on people bringing their Palm Pilots around with them exchanging money. These aren’t our customers, we should figure out how to get them off, and then of course, part of Paypal’s great strength was being able to pivot fast and realize “oh no, these are our customers”; all the rest of that stuff doesn’t work, this is the thing we need to go to. And that’s an instance of what I think of as planning for good luck. Sometimes what happens when you start the journey of building a company is looking for an opportunity. You may not have thought of it when you started it. But with the pioneering parallel, you come around a corner and all of a sudden there’s a new opportunity available to you and you head very strongly to that. Good luck is not, oh look, my plan worked. It’s encountering opportunities that you can seize if you move quickly – opportunities that you could only exploit by having been on the journey.

Planning for bad luck is unfortunately a little more straightforward. Sometimes you find yourself pioneering and you can’t find your way through the mountains and you think about your plan B. One of the ways I frequently think about this that I usually have a plan A, a plan B and a plan Z. The plan A is what you were thinking of doing, plan B is okay, if that’s not quite working, what are my parameters of flexibility. I’m still trying to build the same product, the same product market fit, I’m still trying to get there but maybe I need to try this rather than that. For example, when I started LinkedIn the hope was that people would just invite each other and the invitations would work and it would grow into a big network and that would be all we would need to do in order to grow the network. As it turned out we launched the network and a couple of weeks later we were growing at 2,000 people per week: not fast enough. And we looked at the other ideas we had in mind, the kind of plan B, and the plan B was one of the questions that people most have when they come to LinkedIn is who else do I know who’s here. So why don’t we build an address book utility that allows the people to quickly find out who else they know is there. I’ll upload my address book and see who’s there. We invented that whole pattern and that caused our growth rate from to go from 2,000 a week to 20,000 a week. Without that I don’t know if we would have succeeded; maybe other Plan Bs would have worked. And then Plan Z is what happens when it’s just not working at all. It’s kind of the lifeboat plan. And that’s how you plan for both good and bad luck.

Rule #5: Maintain flexible persistence.

Entrepreneurs are given two pieces of advice with equal vigor, but if you look at them they are in contradiction. One is have a vision, plow through the wall, keep your vision, don’t allow yourself to be defocused from that, keep going. The other is listen to your customers, listen to the market, listen to your network, be really adaptive. How do you put those two things together? It’s a very difficult thing to teach others other than by the activity of going out and being an entrepreneur and making those decisions. The reason that the rule is maintain flexible persistence is because it’s both keeping a vision while being flexible. So if you think about the ABZ planning framework, it’s like, “Look, I’ve got a plan and I want to try to get there.” This is my main plan; if that’s hitting problems, if I’m not growing fast enough or I’m stalling out, here are some things I can try to keep trying to do, and if that doesn’t work, how do I shift to a different destination. That’s part of the plan Z.

Rule #6: Rules of entrepreneurship are guidelines, not laws of nature.

These rules are not rules of physics; they’re not natural gravity (gravity is not just an idea, it’s a law). They are rules of thumb by which you navigate and that’s part of what makes entrepreneurship so interesting. Usually almost every company has something of a unique pattern to how it operates. Now, sometimes a unique pattern is where it’s operating in the world, sometimes it’s a question of which distribution channels it has. One of the things I love about the consumer internet, which is what I focus on with the vast majority of my time, is that each thing defines its own unique space and what you’re really looking for is a unique pattern of getting there. Even though there’s family resemblance, e.g., how do I scale a Salesforce, or what do I do in terms of financing, how do I work with potential financiers, how do I make all that happen – and there is a skill set there – the combination and how you pull together and which is your strategy that pulls it off, that’s how new strategies are created. That’s how entrepreneurs are usually the ones that create the new strategies. Usually when I’m telling someone that something isn’t going to work, I never say, “Well, that will never work.” Well sometimes I say that, but usually it’s like, “That will be really hard and you’re really betting the farm on that idea that doesn’t strike me as it’s potentially going to work.”

Learning the Rules: It’s all about the network

These are the kinds of rules that you have to learn in the journey you take. The metaphor that I use for entrepreneurship is that you jump off a cliff and you assemble an airplane on the way down. The reason that I use this metaphor is that you have to stay really focused because the ground’s coming.

So the question is, how do you learn this? The funny thing is I get a fair number of governments and institutions asking do you know how do set up entrepreneurial education and entrepreneurship centers. These are not bad ideas because I think anything that supports entrepreneurship is generally speaking better than not having it, but the real way that this education works is through networks. It’s part of the reason why when Linda Rottenberg said “well what do you think about Endeavor,” I said, “I think it’s really important,” and she said, “will you join,” and I said, “it’s when not if.” It’s about pulling networks of the shared information and the shared contacts and shared ability to find the right resources in order to create these massive institutions from nothing. The education you that get from your network is what’s critically important.

For example, one of the things I tell entrepreneurs when they have an idea and they come and say “who should I talk to about it,” I say, “anyone who can possibly offer good feedback.” You don’t publish it to the web maybe, because you don’t necessarily get good feedback there, but ask anyone else who can possibly offer you good feedback. Because the way you have the competitive advantage is not because, “Oh, I have this idea and other people don’t have it and the moment I tell them I’m going to lose my competitive advantage.” You have it because you’re in motion with it, you’re assembling the network around the idea. You’re getting the co-founders, the employees, the potential customers, you’re moving and adjusting by talking to a number of people to getting to the right target. So just someone else having the idea, that’s not the impact.

Assembling networks and creating global impact

It’s the network that essentially provides the education. That’s one of the reasons why the thing that Endeavor does, both in terms of its global network and in terms of events like this are so critical for what entrepreneurial education really means. It’s extremely important because if you look at the ability to have high impact products, services and companies, they’re all global, and so having a global focus is extremely important. It’s interesting when I get to thinking about entrepreneurial companies and ventures. It has to start local and rooted, they have to get a team together, they have to have an idea, it has to have an aperture that they’re trying drive their strategy through. You don’t start out by thinking, how do I take over the whole globe with my new product or my new idea. You start by thinking about how do I establish this as a strongly growing ongoing concern that can fund its own expansion all the way to being a global entity, ultimately. But all of this stuff starts locally, it starts with a region – e.g., Silicon Valley, Chile, Argentina, Jordan — but how does that get onto the global stage. That’s one of the reasons why I think putting time into this is extremely important.

An Entrepreneurial Mindset

But here’s the thing I think is particularly interesting when it gets to entrepreneurial education. The importance of these means and of this learning is going beyond just founding companies. Because if you look at the trends going on in terms of globalization, accelerating change in markets, all of the institutions, not just the new companies building new products and services have to adapt, which means every individual now needs to act more entrepreneurial. It doesn’t mean that every individual has to start a company. I think actually relatively few folks go through all the different complexities of assembling and all the different problems you need to solve to found companies, but every career is now entrepreneurial. I think it’s entrepreneurial how you operate within an organization, within a company, the market is changing and you need to help the company adapt and because the market is changing means what is a career path is no longer straightforward. It used to be post-World War II that you would join a good company, work your way up the ranks. Then it got modified a little bit you would jump between companies, while still working on the career ladder. I don’t think there is any such a thing as a career ladder anymore. I think the pattern by which you develop a skill set and a set of work abilities – a network, skills and all the rest – much more mirrors how entrepreneurs live and work than anything else, and I think that part of the reason what we’re doing is important is it has global impact.

Local & Global

One of the things that I think is the most interesting and one of the biggest challenges is how to build something really strong with a local focus and then participate on the global stage. For example, we launched LinkedIn with thirteen countries on the list and I think we got to the full list within four months, because as each person complained that their country wasn’t on the list, we added it in. And the second is one of the benefits that we have starting with a local market in Silicon Valley and going out to the US is that the US gives you a very strong base. But I think that’s a skill that everyone needs to learn in terms of how you play out on the global stage. I think the sharing of information through these networks of entrepreneurs between Silicon Valley and other places in the US and other places in the world will be evolving at a very fast rate and that’s one of the reasons that we do events like this.

Question and answer session:

Entrepreneurial education tools for the bottom of the pyramid

I suspect that tools will be evolving at a fast rate, but generally speaking, frequently people say how do you create educational institutions which educate a higher skill set and then make that skill set employable and deployable across the world. One of the things that I’ve been thinking about is how do you create networks of people that educate one another. That doesn’t work if it’s a raw skill set like you need to code. Usually what happens in a region’s economic development is you do things like assembling natural resources, converting them into something, that sort of thing. I’m not sure if that’s a good answer, but it’s a question of you have to look at is there a way that you can get the growth of how the work comes together and what the skill sets are to meet regional or market needs. I don’t think that mobile phones will provide you education, but they may provide you ways to assemble people such that they can teach and learn from one another, for instance.

Dealing with uncertainty

Almost every start up has what I call a “valley of the shadow moment” where the founders and the early team is sitting looking at each other going, “why did we think this was a good idea?” So the PayPal moment was August 2000. The company spent $12 million in one month, we didn’t have a dime of revenue, and the burn rate was accelerating. We could tell you the hour at which we would run out of the $100 million we had raised a couple of months earlier. That was the definite valley of the shadow moment.

We basically decided we had the chance to do one thing that would fix the course of the business. Peter, Max, Luke and I did an offsite where we talked about it and we talked about it and decided we have to do mass to merchant business because the real exponentially increased cost lines were free credit card processing so we have to have a revenue model that matches that. We gotta try it. A lot of people thought we were going to die because other people had tried to do mass to merchant on eBay before and it hadn’t worked. So we generated every idea to make it work and we tried it, so that’s what made us successful rather than a smoke cloud.

At LinkedIn, it actually started as a fairly early day, which was interesting, because as I recommended talking to people and getting intelligence from them, I was taking the LinkedIn idea around and talking to some of my smartest friends and two thirds of them were saying you’re out of your mind, that’s a dumb idea, it’s never going to work. And I said well why do you think it’s a dumb idea? And they said, well the whole value is the network, so the first person in the network, no value, second person in the network, no value, third person in the network, no value. Until you get to some size, there’s no value for anyone in the network, this will never go anywhere, it will never launch. I said well I have some ideas for how virality and other things might pull this together. And even though a small percentage of people go, “Ooh, this is cool, I want to try this, this is interesting,” I thought we could go to the right size. If I wasn’t right about that, my plan Z was basically to shut the company down, or try to sell it and then be done. And that’s the reason that we launched as early as we could and we were focusing on the network growth as a part of that and making it happen. The months between launch on May 5, 2003 to December was all pretty white knuckled because until we actually got the growth network going the right way, was a fairly immediate and messy death.

What companies should invest in long-term

Besides the obvious things to invest in—e.g., people and technology—I guess there are two categories. One is specific to the company and its strategy. The other one is I tend to feel that one of the things that works really well while you’re entrepreneurial and a private company and one of the things that I’m trying to maintain and LinkedIn past going public is to make sure that you’re both investing in the long term and taking risks. So that means doing projects that don’t have an immediate one to three month payoff in the data that are part of a general positioning of how you think the world is changing. So for example, part of the theory initially behind LinkedIn is that every individual is going to have a professional identity online that they will transact with as the business of themselves both for their company and outside of that and that’s how the world is going to evolve. And even though there was no particular way of proving that theory back in 2002 and 2003, that that was a theory and that’s what we built into the future on. And keeping those kinds of future visions of this is what I think the world’s going to be and I’m going to take a risk that I think my theory is right and I’m going to invest in it even if I’m not going to be immediately rewarded in one to three months and doing that selectively and taking those risks is the key formula of doing investments. And it’s one of the reasons in technology companies we frequently see the company continuing to do well when it has still founder roles in it, e.g. the founders usually, but other people who are willing to take that three to five year risk and I think that’s really critical.

Investing in original – rather than clone – startups in emerging markets

For sure, we’ll see more “original” companies in emerging markets over time. The issue is as the people get confidence in pursing their theory and their vision you will see more original ideas coming out. I do think that will happen. Now part of it is that people look for how do I get on base? I frequently see entrepreneurs in some markets saying look, we haven’t seen the eBay of country X yet or the Dropbox of country Y or the LinkedIn of country Z and they say I know there’s something there and I just need to work fast and I can build out to something that works is the normal impulse. And sometimes that’s not a bad idea or getting a quick hit. But I tend to think if you’re going to jump off the cliff and you’re going to take that ride, generally speaking, the biggest idea you can think of is the one you should target and for some individuals that’s the clone and for others it’s the original idea, and I have confidence we’ll see more original ideas.

LinkedIn and recruiting talent

The high line is one of the lessons we have from capitalism: you get massive growth in productivity from market efficiency. Part of what LinkedIn is trying to do is to create better market efficiency for talent and jobs for people finding information about what people need to do in order to do their job, for finding resources in order to make your work go better, whether it’s for a company or as an entrepreneur and what not. So creating efficiency, transparency and liquidity in those markets creates more competition, makes it more challenging in certain ways, but should result in substantially more productivity, that’s what the theory is. And so, for example, it’s easy to recruit talent, so that should make companies that are doing better things, in terms of creating a good work environment, providing better products and services should make them easier to recruit talent and that creates efficiency in the whole system. That’s the high line kind of answer.

Valuing the customer experience

How do you engage your customers the right way? The short answer is you have a set of ideas about how you think things could be very valuable to them and you’re building toward them. But then, people are diverse, you have a wide range of possible reactions to things. You have to test them. For example on the email we send, we thought people would like getting both a thank you and also essentially what number they were when they signed up. We thought people would like getting that, but we weren’t sure. So we sent it for the first 100,000 and see how the response to that goes. We were looking at Twitter and a bunch of other things as a way of finding if people were going ugh, damn it, this guy Reid is putting an email in my inbox that I don’t like, or going oh, this is kind of cool, and getting a real time sentiment analysis. It was very clear in a couple of hours that the vast majority of people were going oh, this is kind of cool, I like being appreciated for being an early adopter. And part of our theory is the members make the network and it’s all about the individual members and then also knowing what my number was. And so we then sent the second batch, which was up to the first million, the thought was for early adaptors. That was a thought on thinking this through.

The last piece I’d say on this is when you’re a company you’re building all kinds of things when you want to open up the curtains and say “tada!” You want to make sure that everything that you do, because your members only see a small portion of what you do, our rule that we follow in the company is if everything you do were printed on the front page of the New York Times, everyone would be happy with us. Or at least neutral, but preferably happy. No one would go, “What? What are you doing?” And that’s part of the trust that you have when you say it’s a network of over a hundred million people and growing: how do you preserve that trust and have them go, “Yes, I think that you’ve never acted badly, you’ve acted frequently well, and the times that I don’t agree with you I at least kind of get it.” And that acts as a compass for how you drive forward.

How to decide when to take your company public

At some point when you have a group of employees and investors, everyone has invested in the company with the idea that they will have some liquidity in their stock. It’s a when, rather than an if — well hopefully a when if you’ve been successful enough. When you’re a successful company the question you’re addressing is when. So what you want to do is build in as much into the company culture, the momentum, a solid team, culture, business model, and all the rest of the stuff and you want to get all of that established. You want to make it reliable enough because one of the requirements from the public market investors is that they understand it with a fairly high degree of precision on a quarterly business, so you make it reliable enough that they go okay I can understand how this goes. And then, you choose a time a time when it’s good for your employees, when you may need to have liquidity for doing acquisitions, for expanding the business, and that’s sort of the logic of how it goes. One of the things that’s been happening in Silicon Valley in the last ten years is it used to be that the marketing event of going public was really critical, and so you got there as soon as you could because it was the way of being presented on the stage. There are probably some companies that that’s still true for. For the consumer internet companies, they already touch hundreds of millions of people. They don’t use it for that as much, for kind of marketing vehicle to get a spotlight on the stage, it’s more it’s the natural timing in the progression of how you’re building up the company.

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