Ali Partovi & Eric Eldon On the Journey from Serial Entrepreneur to Seasoned Investor

Hi, I'm Ali.

And I'm Eric Helden with TechCrunch. Great. So Ali Partovi has been around the Valley longer than probably most people in this room, probably most people— most people out there in the Valley today. And he's now one of the most successful investors, especially early-stage investing, which is a particularly hard game. But he got his start doing a startup like everybody else, bootstrapping it and helping the— you know, he was the 3rd guy at a formative company called LinkExchange. And so he has a very rich story about, like, sort of what's made it work for him, going from, you know, just someone who was aspiring to being where he is today. So we're going to get into that a little bit. Just by getting— going back to your roots, you were— you— he met Tony Hsieh at Stanford. and the other co-founder of LinkExchange back in the '90s. Just walk us through what that process was of how did you get involved with them, why did you commit to it, what were some of the early lessons that you had?

Yeah. So I graduated in computer science and was at Oracle for a few years right out of college and then joined a small startup which I thought was going to become big, but within like 2 months I realized It was probably going out of business. And this is—

what year was this again?

This was 1996. I was 23 at the time. And I had a unique situation where my— I have a twin brother. And we were both at the top of our class in university. And he had gone on to become the head of the Internet Explorer group at Microsoft. So he's 23 running the IE team. And I'm 23 at a startup that I felt for sure is about to go bankrupt. So I was really depressed and feeling, you know, very insecure about how could I have in just 2 years fallen so far behind my identical twin brother. And— Well, you still have hair now. What's that?

You still have hair now, right?

Exactly. And so I'd been looking at business ideas the whole time since I had graduated from college. I knew I wanted to run my own company. Every week I'd look at new ideas and say, is this the right one? Is that the right one? But by this point now, I had a level of desperation because where I was basically was going downhill. And so Tony Hsieh had been a classmate of mine, one year younger at college, and he and Sanjay, who was also from the same college, had just started a new company and they were looking for a third programmer. I, in the meantime, was actually about to— I was seriously considering a different business idea of my own and was ready to start it. But I was like, well, I should look at what they're doing. And I got, I got together with them actually at 10:00 PM. That was my— our first interview was I was returning from a flight. They picked me up at SFO. We went back to their office, which was just a condo. And from 10 o'clock, we started talking about the company. And And I think by 3:00 AM, we had decided I was joining. And literally, I went into work the next day and said, sorry, I'm not coming back here. I'm starting a company with these 2 guys. And, you know, and from that point on, it was super hard work. I mean, I don't remember much of the first few weeks or months because I hardly slept at all.

I mean, you were basically building a predecessor to AdWords. LinkExchange was An important early way that websites were monetizing through ads and sharing links with each other.

Yeah, when I first joined, we built the web's first ad server. This was in 1996. And we were an ad network, but we started becoming really cognizant of how badly small websites needed traffic, and in particular, how badly they wished they could get onto search engines. And that was just something that there was no mechanism for. And so we began making partnerships with the big search engines, trying to help smaller websites buy ads on them.

And so just tell us briefly how the whole Microsoft thing happened, the whole Microsoft deal.

Yeah, so we were acquired by Microsoft ultimately about 2 years later. But, you know, jumping to there obviously is kind of like— there was a lot in between. I remember when we first started, we were quite young, and I was kind of the crazy one saying, we could someday be worth $10 million. And the other 2 guys were like, Jesus, that's outlandish. How could we reach that? And 6 months later, we were offered $20 million by Yahoo. And it was a really weird awakening that we all realized within 6 months we had built so much value. But we had already found something else that we loved more than making money. We were loving building something creative, and we were really addicted to the feeling of servicing customers, and people's lives depended on what we were doing. Well, not literally their lives, but people's lives were enriched by what we were doing. And we'd get emails every day saying, you know, I love your product, or I hate your product, why doesn't it do this or that?

Mm-hmm.

And the drive of wanting to fix the problems and make it better was way more addicting than anything else. And so we turned down that acquisition and several other acquisition offers. But by 1998, we were, we were in a situation where we were, we were given a much higher offer from Microsoft, which was $260 million. At the time, it would have been their 3rd largest acquisition of all time. And we were pitching them the idea of, let us sell the— let us sell paid listings on the search results for MSN Search. This was at a time when Yahoo had something like 70% market share of search, and number 2 was Excite, and I think MSN might have been 3rd place, depending on whether you count AltaVista as part of Yahoo or not. And so Microsoft loved the idea of selling advertising against search, which no one else had done to that point. And they loved it so much that they bought the company. Ironically, after buying the company, they didn't love it as much, and they didn't invest in any of that stuff. But not for lack of my effort. It was something I was very passionate about, trying to convince them to invest more in search, and specifically search advertising.

So, I mean, the market, you know, it was good market timing in a lot of ways, but you've said over and over again that it's about people first and you look for the best people. What did— I mean, what did you learn about that from your experience with LinkExchange and your sort of formative time as an entrepreneur?

I mean, it's funny, but I remember clearly realizing at one point at LinkExchange that the single most important skill one can hone is the ability to assess talent and to identify good people. And it's a weird thing because I had grown up thinking, as, you know, I went to college, I wanted to be good at doing things myself and learning how to solve problems or how to program a computer or wanting to learn about marketing or so on. And then I realized that, you know, an uber skill is the ability to identify other people who are smarter than yourself. or as smart as yourself. And this was something I began— I think it began to be something I was learning from watching Mike Moritz. Mike Moritz of Sequoia was our lead investor. And for a period of time, actually, he was our— at our request, he was our acting CEO because we wanted to have more experience in the company. And so we asked him to basically run the company.

Mm-hmm.

And he agreed to for a period of time. And— but then he also— we were interviewing CEO candidates, and so we would interview them together, and then he'd leave the room— I mean, the candidate would leave the room, and Mike Moritz would sit down with us and basically rip the person apart and say, here's all the reasons they're not appropriate or why they are appropriate. And I, from him, learned how important it is to be very— have a very high bar for people.

And so, I mean, you've invested in a lot of companies now. What were the things that you really distilled out of that experience?

Well, what I would really say, what I learned from LinkExchange was that every success of the company had to do with a person, had to do with a key person that we depended on who basically rose to the challenge. And every failure I could trace back to a bad decision in hiring.

Mm-hmm.

So I really ended up feeling like the most important thing in running a business is the caliber of the people. I then have started applying the same principle to investing. So Tony Hsieh, my partner, went on to become CEO of Zappos.

Mm-hmm.

And I was one of the first investors in Zappos after Tony himself. And it was much more a bet on Tony and the other guy, Alfred, than it was a bet on the— selling shoes on the internet was actually something I wasn't as confident I mean, you know, who knew that people would want to buy shoes without trying them on? I mean, it was a really high risk. And you have to— the scene— this is around the year 2000 or so when it was— or 2001, post-dot-bomb era. No one wanted to invest in anything internet-related, you know, because we had seen how Pets.com and Drugs.com and all these dot-bomb companies had failed.

And all the valuations were— Certainly, what, a fraction of what they had back then.

Exactly. And Zappos did not even have a cool domain name. It wasn't like shoes.com. It was weird, Zappos. And Tony had invested every cent of his own money into Zappos. I mean, we had sold our first company for hundreds of millions of dollars. He went all in and put it all on Zappos. So the reason he had to raise more money is he had nothing left to put in himself. So it was an amazing level of balls on his part.

Mm-hmm.

And the reason he was coming to me was every VC was turning him down. I mean, literally, he'd gotten rejected across the board from every VC he could talk to. And so he was kind of looking for— you know, he had mortgaged his parents' house. He was, you know, to the hilt invested in Zappos. And so I didn't really know if I believed in the shoes part. But I believed in Tony, and that was a big part of why I invested in that company. And, you know, in general, I would say looking back on my investments, usually it had to do with— where I was successful, it had to do with the caliber of the people, and, you know, whether it's somebody I already knew or somebody that I was able to really spend time and assess and, you know, figure out that they're a talented person.