'Fail fast' advises LinkedIn founder and tech investor Reid Hoffman
- 11 January 2011
- From the section Business
Internet entrepreneur Reid Hoffman has a simple summary of the complexities involved in starting your own business: "You jump off a cliff and you assemble an aeroplane on the way down."
It is dangerous but it allows you to judge whether you have the skills for it or not.
Mr Hoffman certainly seems to be blessed with at least some of these skills, if his track-record is anything to go by. He was a director of PayPal (the electronic payments business acquired for $1.5bn in 2002 by internet auction giant eBay), and is the co-founder and Executive Chairman of the business social-networking company LinkedIn.
He is also an 'angel' investor in many successful technology firms, and is a partner at the venture capital firm Greylock.
Reid Hoffman is a native of northern California and attended Stanford University, an institution that many say is one of the keys to the entrepreneurial success of Silicon Valley.
He went on to study at Oxford University, with the aim of pursuing a career in academia. But then he had a change of heart.
"Looking back on my life I've come to realise that what I am most driven by is building, designing and improving human ecosystems" he says.
He felt he could better achieve this goal in the world of business.
Mr Hoffman is one of the so-called "PayPal mafia" - former employees, directors or founders who have gone on to launch other businesses. Others include Max Levchin (founder of social-networking software firm Slide, recently acquired by Google), and Elon Musk (who started aerospace company SpaceX, and electric car maker Tesla Motors).
Why have the PayPal 'alumni' seemed to be so fortunate in their subsequent careers? Mr Hoffman believes it may have something to do with their attitude to risk.
Financial institutions found electronic payments an area that was challenging to innovate in. "Banks generally tend to be risk mitigation devices. They don't tend to run out into minefields and discover their way through, whereas technology entrepreneurs tend to do exactly that" he says.
Building a payments system for the internet "took enough new things that none of the banks who are traditionally the proprietors of [these] systems could essentially build it." It required entrepreneurs "who actually didn't know that much about finance" and who could start with fresh ideas to complete the task. And it is that search for new ideas which defines the successful Silicon Valley start-up.
Failure needs to be dealt with head on - and quickly says Reid Hoffman.
"There's a mantra in the Valley which is 'fail fast'…Tackle the most hard problem that's confronting your business because you need to know whether or not you can go through it", he says.
In the case of PayPal and the problems of fraud and security, the company was constantly forced to develop its business model and operating system to confront challenges.
"Good entrepreneurship is always about iteration", he says.
Mr Hoffman tried to apply the lessons he had learnt from his experience with PayPal in his next venture, LinkedIn, a social-networking company aimed at professionals and business people.
He says there was a lot of trial and error involved in finding "the right features for professionals... What are the things that they most need? How do they stay informed, how do they stay connected with other professionals and how does that all work on the business side?"
He says that LinkedIn has been unusually on target to its original model, achieving revenue and member growth more or less in line with the business plan it submitted to its venture capitalist backers in 2003.
He attributes this partly to the competitive nature of Silicon Valley and its strong 'get-up-and-go' culture. "You think you're running fast and then you look around and see how fast other people around you are running and it makes you pick up the pace."
Investor v Entrepreneur
Reid Hoffman has not been content to rely only on his own ventures. Despite the high risk of failure, he has an enviable record as an angel investor in companies such as Digg, Facebook, Flickr, Last.fm, and Ning.
He says that there is a wealth of difference between being an entrepreneur yourself and having the ability to spot entrepreneurial talent in others: "although it helps actually also having run the race myself".
Being able to tap into the expertise and experience of others is an invaluable lifeline for entrepreneurs. For this reason he believes the San Francisco Bay area has one of the best environments on earth for start-up companies.
"Part of why Silicon Valley built a lot of very big companies is because they built very effective networks around the companies - and it's that network around the company that really helps accelerate it," he explains.
Mr Hoffman says that the best investment pitches he receives are the ones that induce mixed reactions, as these show the idea is breaking the mould. He calls these 'game changers'.
But have we done all there is to do on the internet?
"I think we're just at the beginning," he says. "Every couple of years, I take stock and I think 'well, has the internet game run its course?' And I think we are literally just at the beginning."
Think big, act fast
As an entrepreneur turned angel investor, Mr Hoffman advises would-be start-ups to aim high. "It should be a big idea because it's the same amount of blood, sweat and tears between the small ideas and the big ideas," he says.
"I've heard bad ideas in every place, including Silicon Valley, and I've heard good ideas," he elaborates. "The key thing…is how do you get the huge ideas?"
Having a good panel of experts to act as a buffer can force ideas into a reality. He recommends companies "assemble as much of a network around you as you can." He says, "it's the team…and how you execute the resources that help you solve key problems."
Furthermore, he believes that when you are creating products for the internet, timing is crucial. "If you're not embarrassed by your first product release, you've released too late," he says.
"Getting engagement with members and seeing what is actually important is completely key… So you get out the minimum viable product as soon as you can."
Reid Hoffman says it's important to have the right attitude to failure. It should not been seen as "negative" or "tarring", but as "a good learning experience."
For Mr Hoffman, successful entrepreneurs are usually "inherently optimistic".