Ali Partovi on Silicon Valley and Embracing Risk Spain Startup Investor Summit) Silicon Valley V

Help me to welcome Ali Partovi. Hola, me llamo Ali y Voy a hablaros de Silicon Valley. I am here to talk about not Silicon Valley the place. Silicon Valley has two meanings: it's a place, but it's also a philosophy—a philosophy of embracing risk—and I live in Silicon Valley the philosophy. Before I talk about risk. I want to talk about people. So I have 2 messages today. One is about people and one is about risk. Are my slides up? Yeah. Here we go. Okay. Ah. I'm gonna try to talk about some of the stories from my own life and my own path to succeeding in Silicon Valley. When I was 23 years old, I was running my first company with 2 other guys who were also 23. And by the time we were 26, we had successfully sold the company to Microsoft. At that time, my twin brother wanted to start his own company, and he asked me, could I give him 3— my top 3 pieces of advice, 3 lessons that I've learned to help him with his company. And I said, that's easy. Number 1, hire great people. Number 2, hire great people. And number 3, hire great people. And I was completely serious. I had already learned that everything that had gone well for us was because of somebody in our organization who was really outstanding, really smart, really hardworking. And everything that was— had gone poorly was because of somebody in our organization who was bad or who didn't fit or was in the wrong position. And I have since been successful not only as an entrepreneur but as an investor, not because I can identify good ideas. In fact, I don't think I can judge ideas any better than anyone else in this room. A lot of the things that I thought were terrible ideas turned out to be big successes. I'm good at judging people, and I have found that the best way to be successful, not just as an entrepreneur, but as an investor is to invest in people. And so my first message to anyone here who is either an entrepreneur or wants to be an investor is focus on people. So I'll give you a few stories of how this has helped me. My co-founder in my first company was a guy named Tony Hsieh. And by the time we had sold our first company, we were 26 now. He was raising money for His next company. His next company was a company called Zappos. I did not really believe in the idea of Zappos. I'm not somebody who buys a lot of shoes. I'm still wearing the shoes I bought 3 or 4 years ago. And I definitely didn't think people wanted to buy shoes without trying them on. And this was a time, 1999, the internet was so slow it took a few seconds just to see the photo of the shoe. Who's going to buy shoes without trying them on and wait so long to see the photo come up? Basically, nobody wanted to invest in Zappos. The whole Valley was rejecting Tony. I didn't really believe in the idea, but I knew Tony as the person, and I decided to invest in Zappos because I believed in him. And I thought maybe he will stop the shoe part and do something better. But Zappos went on to become very successful. It was acquired by Amazon for almost $1 billion. And this was a very successful investment for me. Another example, an entrepreneur named Dan Yates was running a company called EduSoft. And I was an early investor in EduSoft. And EduSoft was a small success. But during the 3 or 4 years that I worked with him, I began to really admire him and learn that he was a very talented, very hardworking guy. When he came to start his next company, it was not a technology company. It was an energy company. I'm not really familiar with energy. I mean, I've seen the movie Inconvenient Truth, but I didn't really know anything about the dynamics of the green tech or clean tech. But I did know Dan Yates, and when he told me he's starting a new company, he didn't have a name for the company. He didn't have a bank account yet. He really didn't have anything, but I wrote him a check, a blank check, and I said, once you know the name, just fill it in here, because I was such a strong believer in Dan Yates. The company he founded is now called Opower. It's worth hundreds of millions of dollars and has saved over 1 terawatt-hour of energy. It has reduced more greenhouse gas emissions than the entire solar industry combined. And so this was, again, one might say, a very lucky investment for me. But really, for me, it's more a continuation of the same philosophy. The last example starts with a Kenyan engineer named Makinde. Makinde was a student at MIT, and my brother and I were trying to recruit him to join our last startup. My brother and I were running a company, and We were 5 or 6 people, and we— my brother had worked with this guy at Microsoft and knew he was a really great engineer. So we were trying to convince him to join us. But he was young, he didn't know if he wanted to join a 5-person company. He was trying to get a job at another company in our portfolio called Facebook. This was 2006, and Facebook was about 100 people, and we could tell that he really wanted to join a more established 100-person company like Facebook. And so we stopped trying to recruit him. In fact, Hadi said, look, I'll help you get a job at Facebook. I'll help you join this company. That's what you need to do. In return, though, I want you to introduce us to the top engineers in your class at MIT. Maybe one of them will join us, or maybe we'll invest in their startup. And so he introduced us to the guy that he said was the smartest student coming out of MIT that year, a guy named Arash Ferdowsi. And Arash and his partner were just starting a brand new company called Dropbox. And this was how we met Dropbox before they had finished the Y Combinator program. And we invested in Dropbox because we loved the people. I mean, we liked their products, but this was not a new idea. In fact, 10 other companies were doing the same thing or had already tried and failed at the same thing. And it was not a new idea. It was that these 2 guys had built a prototype that was more elegant than anything else out there, and they were great engineers. And we grilled them on their engineering skills just as if we were going to hire them to join our company, and then we decided to invest in them. So my message here is that I've been successful not by investing in good ideas, but by investing in good people. And this is not the norm— normal philosophy for Silicon Valley investors. It's— this is the philosophy I've adopted. But if I look back at all of my own successful investments or at all the really big successes of, you know, the last 2 decades in Silicon Valley, all— every single big company, whether it's Google, Facebook, Microsoft, they were all founded by a core team that included at least one really, really great engineer. And so I've tried to focus my investments around investing in the core team, and in particular in the starting engineer. So my second message today is about risk. And this is a message that really focuses on not all companies, not all startups, but Silicon Valley startups. And by that I mean the startups which are trying to change the world, to do something disruptive, to do something brand new. If you want to be successful in Silicon Valley, you need to embrace risk. Most of us are taught to try to figure out ways to reduce risk. A great way to reduce risk is diversification. We are taught that diversification is a good way to kind of Balance your risk so that you're successful without risking failure. And if you are an investor, that's a good idea. If you're an investor, you should invest in 10 things, and you're diversified. If you're a big company, that's also a good idea. But if you are a startup, why would you want to reduce your risk? Your risk is actually one of your biggest advantages. It's that you are willing to do something that the big guys are afraid to do. You should not diversify, because then you're becoming like the big guys. You're slowing yourself down. As a startup, I would encourage you to take as much risk as you can and avoid the temptation to reduce your risk. I would say as a startup, you should not diversify. Concentrate your risk. Have only one brand name. Have only one product. Don't have 3 revenue streams. Have one revenue stream. That way you can do one thing really, really well and move faster than anybody else. You're not guaranteed to succeed, but I can tell you if you diversify, you have even less chance of succeeding. Because people have limited attention, and when you are small, the basic thing is you want people to remember who you are and what you do. And your customer has limited attention, your employees have limited attention, you have limited attention. If you're running a company, you need to just think about one thing day and night. And I don't mean just when you're at your desk. When you're brushing your teeth, when you're taking a shower, your mind is thinking about your company. And if you have 3 products and 4 different strategies, then your mind is switching back and forth, and you can't do— you can't be as effective. If you're focused on just doing one thing really well, that's when you have a chance of becoming a Silicon Valley success. And a great test of this is when you have a company, can you describe what that company does in just 30 seconds. I'm going to list some companies that you can describe not just in 30 seconds, but in 1 or 2 words. To give you a sense, some of the most successful companies of Silicon Valley and the most promising new startups can be described with just 1 word. Airbnb: place to stay. Amazon: books. Dropbox: storage. eBay: auctions. Facebook, college friends. Google, search. PayPal, payments. Pinterest, photos. Skype, phone calls. Twitter, tweets. WhatsApp, messages. Zappos, shoes. Now I'm sure you're thinking, well, Amazon doesn't just sell books, and Facebook isn't only for college. But for the first several years, that's all they did. And I'm sure that there was somebody at Amazon who in the first year said, why are we only selling books? We could also sell these other things. And those companies were disciplined enough to say, no, we're only going to sell books for now until we do that really well, and then we will diversify. And I know this firsthand because I'm very active with Dropbox. There's always people saying, why doesn't Dropbox do this or that? You can do 10 new things. And the company is very disciplined saying, no, we're only going to do this really, really well. Because that's our path to becoming successful. And once you're successful, then you can diversify. So today Google has Gmail and Docs and other services, but for the first several years, Google just did one thing. So to give you a counterexample, how many people here remember a company named iLike? Raise your hand if you remember a company named iLike. Just as I thought. I think there's 3 people with their hands up. I Like was my last company. And we were actually, for about 6 months, we were very successful. In 2007, we were the first app on Facebook. We were the number one app on Facebook. And we were 6 months old and we had already had like 20 or 30 million users in 6 months. It was an unbelievable success. But then, Facebook started changing their platform and undermining our features. They started changing the terms of our relationship, and basically we were fucked. We needed to figure out something else. So what did we do? We were scared. We were at risk. And so we did what anybody else would do. We diversified. We invested in our— Plugin for iTunes. We built an app for Orkut. We built an app for Hi5. We built an iPhone app. We built a plugin for Windows Media Player. We built a partnership with Ask.com. We built an app on Bebo. We built an app on MySpace. And we built an artist dashboard. Phew! By 2009, even I couldn't describe in 30 seconds what iLike did. We had diversified so much that we didn't do anything really well. We were lucky that we were able to sell the company for $20 million. But really, we had turned something that was very focused and very successful into something that was very spread thin and didn't do anything really well. So I have firsthand experience of how dangerous it can be to diversify. Now, people diversify because they are afraid, because they don't want to have the risk, they don't want to fail. But my advice is embrace the risk. You have to be bold, you have to be brave. So to give a couple of examples, I'm going to go into 2 specific questions that I have heard a lot from the entrepreneurs that I work with and advise. The first one is a question I hear all the time from companies that are beginning to make their plan, and they're wondering, how are we going to make money? And what revenue streams should we pursue? One option is a primary stream, organic endemic revenue. Get your user to pay. Get the consumer to pay you. And then another option is various forms of secondary revenue, of get the advertiser to pay or sell data. Find somebody else who will pay us to do something. So when faced with this question, I have actually 2 answers. First of all, it's not revenue streams, it's revenue stream. Just do one thing really well. And then second of all, you don't want to have 2 different customers. You want to have only one type of customer and try to figure out how you can get that customer to pay you. Otherwise, you're going to have 2 different groups. And you're going to have your company split up into the people who are supporting one group and the people who are supporting the other group. And they're— sometimes they're going to have different interests, and you're going to have to have trade-offs of how many people to be assigned to X and how many to Y, who's more important. It just makes you slow down and harder to do the one thing really well. To illustrate this, I'll describe a company here in Madrid that I met with. has a really cool idea. It's a company called Nomadders, and their idea was to be sort of like an Airbnb for tour guides. So if I'm going to visit Barcelona, I can go to this website and find somebody in Barcelona who is a local hero, and they will take me around the city and not take me to Sagrada Familia, but take me to the restaurant that no one else knows about that's a wonderful local gem and give me the authentic experience of being in Barcelona. This is a cool idea. So I asked them, how are you going to make money? And they said, well, we have 3 or 4 revenue streams and one of them is to get local merchants to advertise on the website. The problem there is, who's your customer? Is it the traveler? Is it the tour guide? Or is it the local merchant? And also, The whole premise, what makes this idea great, is that you can have an authentic travel experience. But if it's funded by advertising by the local merchants, that's the opposite. That's not authentic, that's commercial. And so I said to them, even if it's difficult, figure out how you can get the traveler to pay money. Maybe it's based on a donation after they use the service. They have an option to leave a tip for their guide. And just that is the way you make money. This may or may not succeed, but you can do one thing really well, which is focus on the one user that you are trying to please. So have only one revenue stream and have only one type of customer. Of course, there are some people who have succeeded doing it differently. Google is a great example, and Facebook. Both of these are advertising-supported companies. But Google did not do any advertising for its first 3 years. They had the fortune of being able to go for many years without advertising, and they focused exclusively on the consumer. And Facebook, I believe, would actually do even better than they have done if they found a way to get their users to spend money with them, because there's almost a billion people who are addicted to Facebook. If they found a way to get those people to pay even a little bit of money, it would be a bigger success than it has been today. By trying to make money off the advertisers. So the second question that I hear very often, this is a question I commonly hear from a company that has already started, it's already got some traction, and they're preparing to raise a round of financing. And they say, what do investors want to see? Do you think we should first try to grow our traffic and, you know, become very big without making any money? And we'll figure out how to make money later? Or should we focus on how to prove that we know how to be profitable, focus on how to make money even from a small user base, and then we'll raise money and then we will scale, then we will market and figure out how to grow big? And it's a difficult question. My answer is, it doesn't matter. Pick one of them. Either way is fine. What is your identity? What do you want to be? What do you think of yourself as? That determines which direction you take. Whichever way you take, somebody will like that. Not everybody will like it, but somebody will like it. And so it's also— it's not what do investors want to see, it's what do you want to see? What do you believe in? If you do what you believe in, somebody else will also believe in it, and that's who will invest in you. And I would actually say this is more general advice. Don't build something because you think investors want to invest in it. Build something that you are passionate about. Even if you're crazy, do what you believe in. Because somebody out there, somebody is already out there who is just as crazy and who likes what you're doing. And then your challenge is just to find that person. So you don't need 10 investors. If there's just one person out there— That's right. who likes your crazy idea, you're all set. You can get their money. In fact, I think it's more difficult if you diversify. If you have 3 different strategies, then you need to find an investor who likes all 3 of your strategies. That's more difficult. That's less probable. It's easier to have just one strategy, even if it's kind of crazy, and there's somebody else out there who already likes it, and it's just a matter of how to find them. and raise the money from them. So I'm going to close with a few more general statements like this. Oops, wrong direction. Hello. More broadly, I'd say the best entrepreneurs aren't building something because they want to make money. They're building something because they want to help people. Money is not something you can create. You don't wake up and say, today I'm going to create money. But you can create value. You can create something that people will want. And if you succeed at doing that, you will make money. The best entrepreneurs, my favorite businesses, are where the founder is creating something that he or she wants. And the example of this is Drew from Dropbox. The way Dropbox started is Drew found— was somewhere without his computer and he needed his files. And he was upset because he had forgotten his— I think he was on a train and he wanted his files and he had forgotten his USB drive at home. So he was stuck on this long train ride, he had forgotten his USB drive. So he was, what should I do on my train ride? Well, I'm going to write a software so that next time if I forget my files, I don't need to go back home for them. I could access them from anywhere I am. So he began writing Dropbox on the train. On the train because it was something he needed. And obviously, he created something that a lot of other people needed as well. And some of the best companies in the world and the best products are created by people who are building something that they themselves want. So my next piece of advice, and this is really if you want to be a Silicon Valley startup, don't do something that is just going to make the world 10% better. Do something that will completely change the world. In Europe, I've met a lot of companies that are afraid to do something too bold, too risky. A lot of companies here are cloning American companies. Oh, this idea already worked in America. We'll do it here in Spain. That's a successful strategy. I'm not saying that you will fail. But that's not a Silicon Valley startup. A lot of companies here are trying to make a 20% improvement. You know, we found a way to make the travel industry 20% profitable, or how to make, you know, some business 10% more profitable. That can be successful, but that is not a Silicon Valley startup. To have a Silicon Valley startup, you need to think of a crazy, completely new world and then create that world. And the best example for that is Airbnb. Airbnb is the idea that instead of going to stay at a hotel, they didn't think, how can we make hotels more efficient? They said, why do you even need hotels? Just go stay at some stranger's house. What? I mean, that's a crazy idea, but they thought, we'll make it and we'll see if it works. And they did it, and it has worked. And in New York, Airbnb today rents more rooms per night than the entire hotel industry of New York combined. I have met companies here in Spain, in Madrid, that do have crazy ideas like this. But I often find that they are afraid to do only their crazy idea. So they have one really cool, really exciting idea, but they also do 2 or 3 other things that pay the bills. Well, we do this exciting thing, but we also do this, and this is where we make some money, and we also do this other thing, and we need to do those things because we need to pay the salaries. And it's a difficult problem, how to get out of that situation. But if you want to be a Silicon Valley startup, my advice is just do one thing, even if it's really risky and crazy. Raise the money to do the thing rather than doing multiple things. Hello. And my last piece of advice, I've talked a lot about risk and how to succeed. But this is actually very important. If you are going to fail, you want it to happen quickly. The worst fate for an entrepreneur, and I can say this because this happened to me, the worst situation is if you survive and you survive and 4 or 5 years later, you have survived your way into becoming— into oblivion. You either succeed or you fail. And if you can do that quickly, Then life is good because if you fail, you still have time to do something else. It's much worse if you survive for 5 years and then fail because in those 5 years you could have done 3 other things and one of them might be successful. I do think diversification is a good way to reduce risk. As a startup, as an entrepreneur, diversify over time. Try one thing. If that failed, try something else. If that fails, then try something else. But if you just do one— if you diversify on your first startup, you're not going to succeed or fail. You're just going to survive and stay around. And after 4 years, you haven't had a chance to do this diversification over time. So my advice is do one thing, focus on it. Hopefully it's successful. But if it's not successful, you'll find out quickly. and you can fail quickly, and you have time to move on to the next thing. Thank you very much, everybody. Thank you.