The other day, my colleague told me of a meeting he had with a first-time entrepreneur/inventor. This person built some new, cool widget that he was completely convinced everyone would buy. All he needed was investor or government dollars to get started.
My colleague began suggesting some next steps; talking to customers and learning their pains and preferences. These are the Lean Startup concepts popularized by Eric Ries and Steve Blank, and form the foundation of our advisory practice at CTI. Unfortunately for my colleague, the inventor he was meeting was not buying it. His opinion was that “Reid Hoffman didn’t need Lean Startup; he just raised money on his own”. He felt that if Reid could do it, so could he. My colleague left that meeting feeling a little frustrated, but aware that convincing this inventor to follow Lean Startup was impossible.
His experience made me ponder, “Was it true? Did Reid Hoffman achieve the impossible by convincing a group of venture capitalists to fund a first-time tech founder?” The story, it turns out, is much more nuanced, but worth sharing to give all entrepreneurs the right context on how some unicorns like LinkedIn got started.
The LinkedIn Story
Hoffman did begin his startup journey back in the 90s. His first pitches to venture capital firms did not end well. As a rookie entrepreneur, he had no experience building product, attracting customers, and operating a business. Being a recent Stanford graduate, he hardly had any professional experience as an employee. Upon learning that Hoffman had never shipped software before, he received a polite “no” from the potential investors, who then recommended he get a job first.
Hoffman took this advice and found employment. Knowing his dream was to start his own company, he approached employment with a strategy. His goal was to use his employment to gain the technical and leadership skills needed to start a business. He first worked for Apple to learn how to design, build, and publish software. After that, he worked at Fujitsu in a product management role, gaining skills in marketing and sales.
Hoffman did not give up on his entrepreneurial dream. In 1997, he left Fujitsu and started his first company, Socialnet. While Socialnet was a great opportunity, it struggled to find a working business model. Luckily for Hoffman, his close friend from Stanford, Peter Thiel, was just starting PayPal. Thiel recognized Hoffman’s talent and recruited him to work as PayPal’s VP for business development.
The move proved to be a blessing for Hoffman. Working in a senior role at PayPal taught him leadership and problem-solving within a startup context. Developing these skills while working at a Fortune 500 enterprise would be unfeasible. In addition to the learning opportunity, the move to PayPal proved to be financially lucrative. When eBay acquired PayPal in 2002, Hoffman received a hefty payout. These were the funds that field the initial development and launch of Hoffman’s next project, LinkedIn.
So what can be learned from Hoffman’s experience? What were the elements of his story that contributed to his success?
Firstly, Hoffman bootstrapped the early days of LinkedIn. While true that he had a windfall of cash from the PayPal acquisition to pump into LinkedIn, he chose not to pursue external equity financing early on. Instead, he used the resources he had available to get started and move forward.
Secondly, Hoffman had previous experience that was both significant and relevant to starting LinkedIn. He had a very unique resume, consisting of a mixture of both business and technical experience, at major multinational enterprises, and a small technology startup. He knew how to design a product with features that customers loved, and how to oversee the development and launch of that product into the market. Furthermore, his work at PayPal taught him how to scale a company fast.
Thirdly, Hoffman’s personal and business network were a tremendous asset to his ventures. His time working in major technology firms like Apple, Fujitsu, and PayPal provided him with numerous connections with business and technology leaders. In fact, many graduates of his alma mater of Stanford have become senior members of technology giants such as Yahoo, Hewlett-Packard, and Microsoft. Through this network, Hoffman could tap into not only to a deep pool of business experience, but an extended network of industry leaders for business opportunities and strategic partnerships.
So What Does This Mean for Entrepreneurs?
There seems to be a popular misconception in many entrepreneur’s minds about how startups work. Unicorn stories like Uber and Facebook, and television shows like Shark Tank, popularize the idea that the best way to launch a startup is to have a brilliant idea followed by raising millions of dollars in equity financing before you get started. LinkedIn is one of many examples of successful companies that were able to launch a product and gain traction without early investment from outside.
Rather than spend his time driving around northern California to find investors to fuel his idea for a business-oriented social network, Reid Hoffman chose to self-fund the start of LinkedIn. His conviction that the concept was viable drove him to build product instead of chase dollars. Had he waited to raise outside capital, the development of LinkedIn may have been delayed by several months or longer. Waiting for investment might have allowed other competitors to gain market traction that may have been difficult to steal.
Of course, Hoffman had capital available after the sale of PayPal. This is not a luxury that most startups have. However, the principals of Lean Startup remain valid. Do not wait, or worse rely on, outside capital to begin building your company. Use whatever resources are available to the founding team to get started. Even if the founders have very little cash to spare, there are a plethora of low cost or free activities that can be done to understand the target market and build an MVP. Moving fast and lean can make the difference between startup success and failure.
It is easy nowadays for first-time founders of technology companies to become enamoured with the story of how startup unicorns like LinkedIn grew from other to billion dollar successes. The truth about the birth of LinkedIn does not feature pitches to venture capitalists over multi-million dollar valuations. Instead, Hoffman adhered to a more traditional path – bootstrapping his venture while leveraging his personal network and mixture of business and technology skills.
This story of hard work, sacrifice, and resourcefulness is far less appealing than major fundraises, but it is the story that all entrepreneurs need to understand. In nearly all cases, chasing funds from private and government sources without customer traction is a poor use of time. Entrepreneurs are much more likely to succeed with fundraising by telling the story of how they discovered an opportunity and validated it through running a lean business. That is the story that funders want to hear.