Reid Hoffman | Calculating Risk: Evaluating, Mitigating, and Leveraging Risks During Covid

Hi, I'm Chris Yeh, the co author of Blitzscaling and I'm here once again with my co author and old friend Reid Hoffman, the co founder of LinkedIn and investor at Greylock Partners. Now Reid, one of my favorite nuggets from our book Blitzscaling is that sometimes the greatest risk is not taking enough risk. Now there's always going to be risk, especially in entrepreneurship, especially when blitzscaling. But now in addition to all those usual risks, the events of the world around us have layered on the additional risks associated with COVID 19 and an economic downturn. So what should the poor entrepreneurs do? How should they take into account the current situation as they think about these risks? Is it any different than previous downturns like the financial crisis of 2008?

Well Chris, in some ways it's like 2008 and in other ways it's substantially different and actually substantially worse. In the ways it's like 2008 is you have uncertainties around the capital market and what volatility will matter there and liquidity. You have questions about talent, being worried about stability of job or not. And you have generally speaking a kind of uncertainty about what the future looks like. Now where it's a lot greater is that you know the, that there's massive downside in the future. You have the asteroid that's hit the travel industry and the service industries and a bunch of other things which then not only has those specific jobs and those specific businesses all in bad shape, but all of the knock on things like where does it affect real estate, where does it affect supply chain, where does it affect all the other parts of the business? And you don't really know where that's going to work out. And similarly to 2008 you've got a government which is trying to fix it through fiscal stimulus, but then you're not sure how much of the fiscal stimulus it'll create liquidity and all the rest, which is good. But how much of the fiscal stimulus will work through in terms of your business numbers? And so the high lines for looking at these risks are one is what's the risk on capital, your ability to raise money, the speed at which you raise money, the volume or dollar which you raise money, who you raise money from. Obviously a bunch of factors kind of change in that because typically most investors at the earliest stages, seeds and series A's like to establish trust with the founders because there's all these other areas of risk. So the okay, we get some sense of each other and some sense of going into this really highly risky endeavor of creating a business from scratch together. And then you also have the kind of question of like, well, it's already pretty risky. What's the patterns by which you establish this? So you know what's going to happen with getting your first team in, establishing your company culture, establishing how you operate. And now, of course, one of the things that's very substantially different from 2008 is what does the market look like, what is how people find and what's the way you bring your product to market, your product or service to market press works differently, partially differently, like important differences than it did before. And then obviously this affects all of the other things that kind of go into forming a business. Now, the overall good news of this is that because downturns or risky things, if you can make all these happen, usually you have less competition and that less competition tends to have higher predictive outcomes, that if you can survive all of these additional landmines and your competition is therefore thinned out or doesn't start or anything else, you have a much greater chance of making successful businesses. This is of course, one of the reasons why myself and my partners at Greylock and the firms that we're friends with are all actually, in fact very, very active in the seed and the series A investing side. Because we know that this is actually kind of one of the times where finding those interesting businesses that start now, they get the Runway, they get the ability to generate speed and momentum with copycat competition coming much later, with more parameters of an ability to ab test what's going on. And so while all of these are substantial additional risks, what they are saying to prospective entrepreneurs and early stage companies is say, look, you have a bunch more landmines that you're gonna need to be really active on and really need to navigate. But if you can navigate them, it's a much better time to be doing entrepreneurship. Even as we go into a pandemic that's so badly mishandled that, that it's going to cause deeply persistent volatility, public health, in terms of hundreds of thousands lives and an industry collapse and economic turmoil and maybe even, you know, substantive recession, all is part of what you're going into. But on the other hand, of course, the only place that new businesses and new jobs will come from really is entrepreneurship.

Yeah, and I think I've seen the statistics. If you look in the United States, at least, pretty much all of the job creation takes place with companies that are less than five years old. So we're really going to count on entrepreneurs who are willing to go ahead and start companies and take on these risks, who are willing to do the work of identifying and mitigating the risks to pull us out of this recession.

No. Exactly. And it's. Are existing firms going to hire a whole bunch? Probably not. Or even if so even as they hire be slowly. And would you want government hiring a bunch? Well, you might want a new deal like the green deal, like new roads or infrastructure or new the greening of buildings and so on. That's useful, but that's not what you really want as a persistent state. So it's entrepreneurship and especially scale entrepreneurship. What endeavor refers to as high impact entrepreneurship, we think of as scale or blitz scale, size of companies. Those are the things that are gonna create a bunch of the new businesses, the new jobs that are going to be super important over the next decade.

Now, you lived through the Great Recession, the financial crisis of 2008 over at LinkedIn and you were very much involved on a day to day basis. I know that one of the things that happened on the capital side is that your very wise friend and investor and now partner at Greylock, Dave Z. Had recommended you raise money that was part of the capital. What else did you guys do in order to adapt to the situation as the economy unwound then?

We didn't know that the 2008 was specifically coming. But this is actually one of the things that, as you highlight in the question, that's really useful about getting great venture capital investors and their networks around you. Because what happened is David had been talking with his partners and they said, look, we see a bunch of signs by which the market's overheated that we think that a substantial correction could happen that could dry up liquidity for even great companies. And so we think it's a good insurance bet right now to raise money, have the balance sheets that get you through downturns and volatility. And so we just basically said, okay, we agree with you. And then we went out and raised our Series D to have a combination of a war chest for playing offense and a war chest for defense is not quite the right word, but dealing with market downturns and volatility and fortunate for us for having David Z. From Greylock on the board and pushing us to do this. We completed all this about two months before the financial crisis hit and we didn't know anything. We didn't know, oh, it's going to hit at this time. You could have done a whole bunch of things differently. And so we didn't do really anything else other than because that's the generic de risking is having a pile of capital. We didn't slow down hiring, we didn't adjust budgets and plans. We didn't think about like what would happen in a downturn, like would advertising be cheaper to buy and maybe you should do more during the like. We didn't do any of those things. That was basically all we did. But by the way, that's the to some degree, when you're an entrepreneur private company thinking that you may be going into either a substantial downturn or into volatility, having essentially a war chest is the very first thing if you can possibly do it. So that's essentially what we did at LinkedIn.

And having that war chest, as you point out, there's a sort of risk compensation element to it where that's generically useful in a time of turmoil and that relieves you of some of the need to do those other things up front. Now you probably ended up doing various things around team and hiring and market once the recession was underway. But that meant that you had the margin of safety, as Benjamin Graham would put it, to be able to take the time to think it through.

We'll win. The financial crisis 2008 hit. Our then CEO super smart guy guy named Dan Nye went to this presentation that Sequoia put on Rest in Peace Good Times, which was the end of the world is here. And so came back and said we need to do a layoff. And I was actually pretty opposed to it because I think that when you get to doing layoffs, the problem is it's kind of a break of the compact that you're like, hey, we're a growth business and anyone who's doing well here will get to will have their job growing as we're growing. And that's part of the way that you can attract great talent to these blitzscaling or fast scaling companies. My feeling was that anything you really wanted to manage, you could manage on a performance. You didn't need to signal a layoff saying, hey, we're fiscally responsible. I think that's one of the classic things where managers try to signal to their investors to say we are disciplined because look, we went and did a layoff. And it's actually in fact the much more important thing is what your compact with your employees is. And so sometimes you should have layoffs. There are definitely like, look, we've got a major correction. Business isn't working. We're going to be upside down for a while on this stuff. And it is the coherence and health of the business to do it. But to do a small layoff just on the symbolic side, I think is a mistake. And I think it was partially because of the rest in peace, like the world is coming to an end. I think you can probably still Google it and find some of the stuff that was kind of really shaken up. And I was like, look, I actually think that we're going to hit a. It's going to be a fierce, hard correction, but then I think it'll be back to business as usual pretty soon afterwards. And so we did do some other things at LinkedIn as part of this, but I actually think what we should have just done is kind of slowed hiring a little bit while we were uncertain, measured what was going on in terms of the talent, solutions and other kinds of businesses, which tend to get more hit by downturns, and to see if we should adjust some priorities, some product plan, some roadmap, some strategic initiatives. Now shifting a focus to other things if the recession was going to last a long time, that kind of thing versus the other things that we actually did do some of at LinkedIn. And it's kind of part of the thing is these are always hard calls and hard calls and in a risk circumstance, but every call involves risk. One of the things is, as per your opening that people frequently do is say, well, this one's the less risky one than this one. And it actually really depends. You have to factor in a lot of parts of risk factors. Sometimes that's the case, but you have to think of which other risks you're taking by also choosing a particular path.

And one really important point that comes out of that LinkedIn story is that just because there are risks and you've identified them doesn't mean you need to spring into action just for the sake of doing something. It is the case that in terms of risk mitigation or addressing risk, sometimes you've already done the work in advance, as you did by raising the Series D. Sometimes you can afford to wait and get a little bit more information, even if everyone else is screaming for you to jump.

Yeah, and that's, I mean, again, one part of risk assessment is how important is it to move on this right now? And that doesn't mean delay. One of the things you learn in startups and entrepreneurial land is you have a default action. So it isn't a can I delay? Is that actually the thing? The question is, why should I delay? Is more often the entrepreneurial answer. But when you're facing something big. Sometimes the answer is what's like, you start with this kind of frame of what's the time frame in which I need to make this decision? And that time frame in which I need to make this decision then sets the set of decision analytics, who you need to talk to, which risk boundaries, which risks you can take, which things you might take as big risk, which way you might try to work to mitigate risk, or to measure things as part of making a decision as opposed to after making a decision. And those all fit into what's the time frame of this game. And this is actually, I think one of the really important things that moves between people who are capable across a number of different scale of organization and a number of different types of organization is to actually realize that the default decision window is different in many different organizational and market cases, but also different in different types of decisions. Sometimes you're like, well, if we can make this decision at all today, that's the most important thing to do. Sometimes it's, well, we need to make this decision in the next three months, right? And you say, well, it's better if we make the decision this week, but we really have to make it in the next three months. And by the way, in the next six weeks we can really figure out between A, B and C which one really should be the plan A or are there really big risks that we're not factoring into it. And that's kind of frequently the difference between a startup which is massively dependent on speed and moving fast, including correcting. And frequently large organizations which need to harmonize major budgets, major organizations get a coordination of the assets across them. And so you have to look at it now, sometimes large organizations don't realize that they're competing or they need to be making decisions that need to be enabling the decisions that are made on today, this week kind of basis. And sometimes startup organizations or scaling organizations go, our normal thing is make the decision today and that's the only thing. And you go actually in this one, then let's play out a month and let's see what happens. Let's see if the market conditions change or not. Right? And I'm not saying that as a Covid time because I do think that one of the key things in Covid is because we have a government that is if it was trying to handle the pandemic worse, it would have to work at it. You have to anticipate a lot of future volatility, which means you can't presume you know, here we are in July. Oh, in September, it'll all be normal. All be back to normal. That's the thing that I can guarantee you is not going to be the case. It may still be that the financial markets are open, the stimulus has the public markets at a really high level and capital investments happening. And that could be really going in September, and it could be completely reverse. The thing is, planning on it being stable is a mistake.

I think that it's so important, this concept you've just introduced of the decision window, because it is far too often, and I really blame Hollywood movies for this, as well as sort of the natural emotional desire to get off of uncertainty as quickly as possible. Where entrepreneurs and other decision makers seem to think they have to make the decision immediately. Right? There are very few decisions that need to be taken in less than 24 hours. It's not like you're gonna get more data in the course of 24 hours, but. But you'll have a time to maybe think more carefully and to talk to other intelligent people. You're not going to have a definitive answer, but you'll have had the time to really think through the decision. And in contrast, of course, we see people in movies stride to the front of the bridge of the starship or what have you, and confidently make the decision. And somehow we believe that that's how we need to run our lives as well.

Although I'll add in, you know, you yourself have been a serial entrepreneur, so you know this. But I. I'll add in an asterisk for this, which is one of the things that I learned from my early days in entrepreneurship is what I think of as startup speed. And part of startup speed is when I'm confronted with a decision, I first say, okay, if I were to make that decision right now, however big a huge decision could be, the. Are we going to be an enterprise product or a consumer product? You know, that kind of thing. What decision would I make if I had to make that right now? Because one of the mistakes that people make in decision making is they go, oh, I'm uncomfortable. I feel like I haven't thought about it enough and so forth. And you have to get through that discomfort. You cannot allow that discomfort being the reason I want to sleep on and I want to take 24 hours, et cetera. That's a waste of 24 hours. It's just trying to get to emotional comfort. You should acclimatize yourself to the discomfort of making decisions fast now. Then you can go, okay, so that's how I would decide now, then the question is, well, what specifically would I want to go think about? Or who would I talk to? Or who would I go learn? Or what kind of questions would I want to analyze? What kinds of things would I want to do in order to figure this out? And by the way, sometimes you go, look, it's just so thorny. I'm going to really need to think about it a lot more. Like, I'd want to have had myself locked in a room for an hour where I was throwing everything, or locked in a room with three people that I really trust, my co founders, where we're throwing everything against the wall and then see what happens. Okay, fine. Because then you say, okay, these are the kinds of things that could potentially change this decision. And then what's the cost of getting them right? So you begin to look at, like, what's the cost of this measurement? You know, me and my co founders getting in a room, the building to sleep on it. The ability to go talk to a key board member or key VC or advisor or someone who knows something specifically about them. What are all those things? Or measurement of a certain set of numbers, or to do some experiment. What is the cost of doing those things broadly? And do those fit within the decision window, time frame, and would they make potentially a big enough swing that it's worth getting those before you make the decision? And then you delay the decision kind of actively. The reflex that entrepreneurs sometimes learn, as you're saying, is, oh, I just should make it right now because of Hollywood and everything else. It's that trust your gut, trust your intuition, take the shot from your hit, and you're like, well, sometimes you're going to need to do that. It's a good tool to have in the chest. But sometimes you need to go, okay, I'm reflexing that way. But actually I'm going to do the following three Learning, de. Risking things as fast as possible to make that decision still in a speedy way, but not this second.

And since you've already had the discipline to say, this is the decision we're going to go with right now, if we have to make it right now, if something comes up, if a new emergency arises, if something triggers it, you're like, we've already made the decision. Okay, let's go this way. And you can move decisively despite leaving yourself the opportunity to potentially make a better one.

Exactly. Yes. And one of the things that classically happens with a lot of entrepreneurs, it's like, it's like, okay, two days later you go, oh, I now have a better idea. And then what you have to think about is what's the cost of shifting to that better idea and are you likely to be shifting anyway and when and so forth. And so I have seen entrepreneurs thrash their teams by too often, oh my new idea. Oh my new idea. Oh my new idea. And you have to have a certain persistence of inertia and attack on a problem and seeing what the results are, because then next time you make a fast decision, they don't trust that that already be the decision. They think the next day or two something else will come and that creates a non coherence to the actual way that you want to operate as an entrepreneurial organization.

Yes, there's a hidden cost to inconsistency, one which we can say playing out in the governmental response to COVID 19 as we speak.

Yes, although that one, as I mentioned earlier, is almost like if you were trying to cause a bigger public health crisis and a bigger economic impact, you would have to be working at it. So, so for example, like, oh, don't send the data to the CDC to have it publicly reported, send it to the White House so that we can hide it and we can lie about it so that people can't respond to the data. So that if we are on an exponential curve, when that hits us, it just hits us with a big wave versus an ability even try to respond to it, even that necessary Week earlier.

Yes, it's truly, truly remarkable and not in a good way. Now, in thinking about this current environment, we've talked about a lot of things that become riskier. Are there any things that have become less risky? Are there ways that entrepreneurs can really take advantage of the current situation?

There's a number one of the central rules about entrepreneurship, and it isn't that you should rotate on your competition. But one of the things I've really learned is that a lot of what happens is based on how much competition, what kind of competition, what is the framework of that competition. And then of course, part of why you have an advantage of being in Silicon Valley or in China is that you have a set of assets that your competitors don't have. Those assets could be capital, those assets could be talent, those assets could be current, cutting edge market know how or technological, know how all of these things give you those edges. But that's all indexed against what does the competitive space look like. And as you know, Chris, we wrote Blitzscaling in part to try to get this entrepreneurial knowledge of what's being developed Here in Silicon Valley as a living playbook, as a living network, as a living, you know, kind of strategy and tactics to get it out to all the other areas in the world. There's a lot of entrepreneurial talent, a lot of tech talent, and say, look, this is what we're learning here as competitive edges and how to build these companies and how to go to market and how to deploy this technology and, and let's make that available all around the world for entrepreneurs and also, of course, for entrepreneurial large companies as well. But all of that is indexed against competition, right? So just like you choose, the blitz scale is indexed against competition. The success path is usually indexed against also what competition is. And too often people think, oh, my competition is the big companies. That's actually pretty rare because big companies still have a limited number of things they're really focused on. So if you're launching a new everything store where you build all the warehouses yourself, well, then you better have a very good plan about Amazon and Walmart. But if you're like, oh, actually, in fact, I have this whole new idea for a platform marketplace where all of these different E commerce people can come in like Shopify, that works just fine. And actually, in fact, while you pay attention to what they're doing competitively, you have this ability to build out this kind of amazing new kind of platform area. So when you look at a pandemic, a crisis like now, it tends to thin out your competition. It tends to mean your competition has a bunch of the difficulties that now you also face, which is fundraising, talent acquisition, speed of motion, et cetera. And if you have a differential edge here, you can apply that differential edge. You can make more headway, you can move farther along the path before the competition realizes that you may actually, in fact have discovered an oil well, that this area is the right product market fit. This is the thing you need to be doing. So you have the time and scope in order to go do that. And so as we talk about blitzscaling, because sometimes people say, hey, is it still blitzscaling? Because we're now all doing this stuff from home on teams and meet and zoom and so forth. And the answer is actually yes, because it's differential speed. And the differential speed is what matters now. The other thing, of course, that a lot of folks have going for them is that we have the whole market conditioning. As Satya Nadella of Microsoft said in each month we're seeing a year of digital transformation of the importance of using these new software tools again, teams meet, zoom, et Cetera, but also partners productivity tools like Coda or Figma or Entertainment, Roblox and Discord. I mean, all of these things are being enormously accelerated. And by the way, that may mean that markets that otherwise weren't going to be open or too hard to do or something else may now be open because of the market conditioning, of the fact that everyone's like, I need to learn these new things because this is the way that I need to operate. And so that also creates an opportunity and a lower risk and things that entrepreneurs can take advantage of.

And this is one of the things I think, I hope people really appreciate, which is, in many ways, this is an even greater opportunity than normal. There's been essentially a decade's worth of progress compressed into a very short number of months. And what that also means is that as a result, there's this tremendous progress, but there aren't incumbents that have already been there all along. Everyone's starting off from scratch. And so there's tremendous opportunity for new entrants and for startups.

Exactly.

Now, on top of everything else, we've talked about the risks associated with a pandemic, with a global recession or depression. On top of everything else, we're in a US Presidential election year, which always makes for an interesting time. How should entrepreneurs and CEOs think about the political risks that are out there right now here in the United States? Are there lessons we can draw from previous elections?

Well, I don't know if there's lessons we can draw from previous elections. Most typically, what I have told folks in earlier elections is just to be aware of how the news cycle gets dominated from September through November, roughly. And, you know, it persists somewhat past November as people start trying to figure out, you know, if there is a new administration, what does that mean? But that, that there's kind of a global or a national focus on that. It's not in America, like, for the U.S. i think there's even something of a global focus because there's an impact on the rest of the world, but a national focus. And so that means, like, look, if you have a choice, you know, historically, you know, don't launch your product October 31st. Right. Launch it, you know, November 21st. Right. Or October 10th, or, you know, like that kind of thing. Like, you'll be out of the window some because, like, for example, a classic tool for an entrepreneurial product launch is a press strategy. You know, you don't usually have the capital for doing a marketing spend. And so a lot of what you're doing is trying to get influencers and everyone else to, to pay attention to your product, write about it. But if they're all paying attention to the election and they don't have as much time and so forth, it's much harder to get that kind of attention. You may not be on the front page of the business section. You may be, you know, in the newspaper metaphor, you may be well buried. There's variants of that for online as well. And so it tends to be the just shift a little bit now today because of the pandemic, because of the public health crisis, because of the economic impact that is at the very least a deep recession, because of the strain on the system which has kind of revealed kind of the systemic racial injustice that needs to be corrected. Should have been corrected decades ago, but there's always like, okay, now then because of all that, it's even much more deep and turbulent. And so, you know, some of the similar lessons apply which is if you can play on your press side of it to one side or the other of the, of the storm that's going to be going around within the media side, you know, it's good to do, not critical, but good to do. I also think that it's worth going this will be volatility that is unusual. Just like our earlier discussion about the difference between a the 2008 crisis and the today crisis is, you know, the 2008 crisis, you had a government that knew what it was doing, immediately solved it within a few months, put everything in place. And in the pandemic you have a government that was saying, hey, I've got a really good feeling about this. It's just going to go away. You know, there is nothing here. It's all a democratic hoax, you know, et cetera, et cetera, et cetera. And so we essentially, the state governors who were not really equipped for this, had to take over to do it, but they could only do it on a per state basis. It became this politicized thing. All of this essentially means too is the pandemic and its crises and its impact is going to continue well into next year. We might get lucky and maybe there is a saturation point by which just as the pandemic spreads and everything else, that the asymptote to a place where we're not. I wouldn't count on that. We may get lucky in a vaccine or therapeutic. I'm pretty sure we'll see some of that in 2021. But when does it get there in scale is a unknown question. The Short answer on the political question is presume intense volatility and plan around volatility, not just because of the election, but because of the circumstances that we are in as a country and as a world.

Yes, and I think that you really made a good point around the difficulties in basically having press oxygen, if you will, during the middle of an election, which is consuming the attention of everyone in the country, if not around the world. The one corollary, or one way to play it is if there is a way that you're actually tapping into the election. If, for example, you were providing the platform for Joe Biden to deliver daily addresses to the nation or something like that, then I think that there is an opportunity there. But for most people, it really is an additional challenge that they have to navigate 100%. Now, one of the things that we've talked about is there are many different risk factors that are out there, some of them more obvious than others. What are some of those hidden risk factors that entrepreneurs tend to overlook and underestimate that then come back to bite them?

One of my favorite expressions is in theory, there is no difference between theory and practice. And it's from this actually French kind of science philosopher from the 1800s. But the point of this is to say be very clear when what you have is a theory versus a model based on some data, some results, something happening. Because the most often mistake I think entrepreneurs make is they have a clever plan, a really good idea for a product or service, they have a really good idea for a go to market motion, they have a really good idea for what the product market fit or the service market fit might be either individually or at scale. And they just presume that it's going to work. Now sometimes they by moving really fast, they can make up for it because they just, they presume it's going to work. They crash into the market. It's the Sun Tzu. No battle plan survives contact with the enemy, no business plan survives contact with the market. And then they adjust really quickly. It's part of the speed of entrepreneurship as a pattern for how this works. But it actually is in fact good to have clearly in mind which parts of this are your working theory, which may be a great theory, and which parts of this are actually in fact have some solidity to data points that you can rely on and then make sure that you've thought at least a little about your plans. B, like, well, this isn't really working out. Maybe you could try A, B and C. If this isn't working out, you can try X, Y and Z. You know, like that kind of thing is a way of doing it and you don't have to spend a lot of time with it. And people frequently mistake plan B to be like the military plan B. Well, I have this entirely different thing. It's like, no, no, no. A lot of it is moderate adjustments could be a moderate adjustment in goal, moderate adjustment in tactic, modern adjustment in priority, modern adjustment in go to market. You know all those things and you kind of, you're working through those as you're testing your investment thesis and refining it for product market fit and scale. Product market fit and speed is important. Now one of the other risks that entrepreneurs tend to discount is the time frames in hiring. Because you have, okay, now we're really, now it's really going and we need to hire these people. It's like hiring the right person who is really good, fits through the company culture, et cetera, usually takes time. And that's one of the reasons why the piece of advice I tend to give entrepreneurs is kind of a different version of the Glengarry Glen Ross thing, which is always be hiring because you want to at least be in the long term conversations with people who either could be the referral of great talent or the great talent themselves. Because when you start moving towards the hiring, usually you almost always have a super compressed time window. And there's a lot of good reasons for it. One is identifying really good talent, having them trust you and know you, having them be aware of the business even before you've been hiring. It's occupying their mind and what's going on. But also some other really key and important things about hiring, like for example, taking the time for diversity inclusion, making sure you're reaching out to networks like people of color and women, leveraging networks that you're venture capitalists, like stuff that we're doing at Greylock. To actually in fact have places where you can go and recruit and have an inclusive environment in your company and be utilizing those resources so that you can shape your company and your culture from the very beginning. And that's part of the reason why they always be hiring, always be. Developing your network even before you have the position immediately on hand is a very good thing to do that is frequently undercounted.

And I do think that it's very rare that I've ever heard any entrepreneur come to me and say this major change or this person we need to add right away. Thank goodness we knew about it for months in advance and had plenty of time to plan the fact is these things arise quickly. Everyone is so busy, they never anticipate this happening. Life occurs. Spouses, relatives, there's all sorts of issues that could come up and it could take a person out. And the only way to protect yourself against something like that is, as you point it, to always be hiring. And that is an excellent way to mitigate some of these risk factors. And that's a great transition into my next question.

Actually, right before we get to that question, the other part of that, just as a tactical tip for entrepreneurs, is you don't have to go, I'm hiring as a way of networking. From hiring. You could just say, look, I'm looking for what great looks like in a front end engineer, in a UI designer, in a business development person, in a corporate development person, in a marketing person, in a communications person. While you're thinking, I may be hiring here, that may be really important. But because if it's like if you're only coming to talk to me because you're trying to hire me, I may feel like it's false pretenses in order to have the conversation. So the tactic is to go to your network, to go to people, and to do it as a. I'm trying to learn what great looks like, what the lessons of great are. And that's why I want to talk to you. And by the way, of course that's the right way to start developing a good relationship with great talent because they go, oh great, you want to learn this stuff, you want to know it, you think it's important Here, let me talk to you. Anyway, you can go on to the next question. I just wanted to make sure the entrepreneurs listening had that point.

Well, absolutely. Every time we can give them a little more wisdom, I think we should always do that. But that wisdom really does tie in with the next point, which is what are some of those canonical ways to plan for and mitigate those major risks? And you've mentioned some of them already, such as financing and the network. What are some of those other ways and maybe what are some of the details around how you can use these tools to, to mitigate your risks.

So as you said, Chris, you know, and what we talked about, baseline, always capital is fungible, useful, gets you through a lot of volatility, gives you opportunity for upside, downside, allows you to hire, et cetera, network of advice, resources, connections. You may need to succeed in what your plan is for building, supplying, delivering your product or service now. And that works for hiring as well. Of course, now part of the key Thing that I find is really hyper important is to think about what are your real competitive advantages, what are your real competitive edges, what is the thing that you know that other people don't know in terms of playing this out? And too often people think, oh, it's because I have this brilliant idea that I'm being really secretive about. Usually that's not the case. There's occasionally where it's really important to be secretive about the idea, but. But usually it's not that you're being secretive about the idea. It's usually that you're assembling the network around your idea. You're in motion, you've got the capital, you've got the team, you're making it happen. That's usually much more important than being secret. But frequently the thing is, well, I've got this idea on the go to market thing. So, for example, one of the things that took a lot of time for people to figure out as to why PayPal was being successful in the early days is that we generated this idea saying, look, what's the. By looking very carefully. And we knew there were a bunch of sellers who wanted to use PayPal. We said, what's the greatest impediment by which we could get to use PayPal? And the answer is if an ebay seller gave us their login credential, we could automatically add pay by PayPal to all of their other items. He said, well, but it's against the rules, ebay's rules to give them the credentials. He said, yeah, but that's an acceptable risk to take because then they just give us the credentials once and then The Pay by PayPal is there and all things. And it took a long time for everyone else, including ebay to figure out that that was the thing that was making it so easily and available to have PayPal across the whole system. And that's an example of a competitive edge. Now, that one would be one you say, don't want to talk to people about that. Right. Another one that was again in the. Not talk to people. Usually it's these micro things, not the macro thing. Like we have a payment system that could be used on ebay that's not really a secret or whatnot. But for example, we realized that the actual payments platform wasn't the ebay website. It was the email that you were being sent. And so frequently the email to the buyer saying you'd won the auction, would get there from PayPal before it would get there from ebay because it was like, and here's how you can pay with PayPal, right? Because here it is. And so knowledge that that was the actual place that the default option was being chosen. So those are the kinds of things that you want to be very disciplined about what your competitive edges are and how do you play those edges into product market, fit into fast and blitzscale. And to do that, the very earliest stages, like when you don't have data and awareness, like the PayPal product being live on ebay is, that's part of the reason it's so important to put together kind of co founders and a founding team, because that ability to think creatively and in different directions and then to synthesize them to understanding what the real nature of the problem is, what the real way to solve it is, that's frequently how you navigate those very early kind of risks things when you really don't have data, really, you're just kind of thinking about it. And so I'll give one more kind of PayPal example. So Peter Thiel and Max Levchin each had kind of their close friend who had startup experience on the board. And at one point in the PayPal history was the idea that it was going to be a mobile device that was going to be the primary use case was going to be splitting the dinner tab and the Palm Pilot. For those who remember, it was the device that was in mind. And so as part of the network, I came into a board meeting and I said, look, I've thought about this and I've realized your plan is never going to work, right? That it sounds clever, sounds sexy, the press release sounds great. But the problem is, even here in Silicon Valley, which was ground zero for the Palm Pilot, you walk around to dinner tables and we could go to any of the local restaurants here and say, how many dinner tables does everybody have a Palm Pilot? And my guess is somewhere between 0 and 1. Which means that every night when you walk around all the tables, we have zero to one opportunities for use case. And that's if they have it and they want to use it. So that's a problem. And it was Max Levchin who came up with the email payment idea. Lots of people now claim, oh, it was my idea, but it was actually Max Levchin who said, oh, that's easy, we can sync by email, right? And that's part of how a founding team, a team around you can help you navigate risk even before you've had any contact with the market or any data.

I remember Those days when PayPal was about beaming money from Palm Pilot to PalmPilot, because you're right, it was something that the press loved to cover. And I think they even covered how the original angel financing for the company was beamed via PalmPilot to PalmPilot. So great press. 0worth is a use case.

Yes, exactly.

But that mention of the founding team is an important one because most people are not solo founders. They have a group of co founders. And the possibility exists they may have different points of view on risk. You just mentioned one where the team at PayPal had different points of view around what a use case might mean or what a use case might not be. What about risk? And can you think of any examples from your career where risk assessment and mitigation was critical, but that the people around the table disagreed on how to think about it? What ended up happening in those situations?

Well, there's tons and it's all the time. And part of the reason why you want a co founder is why you want a founding team, is you want people who will look at the different analyses of the problem, different analyses of risk, different solutions. But then work can cohere towards a common point of view through reasoning very quickly and sharing very quickly and being willing to come on board with a risk try. Right. Sometimes it may be a risk try that doesn't work and then you pivot and so that pattern. And so I'll share another one from a personal example, which is LinkedIn, which is when we were launching the product, we had an elementary search, we had elementary profile, we had an elementary invite people and be network and connected and we had an elementary signup cold and everyone went well, but we don't have a use case. If Susan or Bob signs up and uses the product, there's nothing for them to do. I mean, if the network's not there yet. And we felt we had to get to a million people. And so we had this lengthy debate around this feature that was a good feature that the team wanted to build called Contact Finder, which is an ability essentially kind of paste a I'm looking for a kind of person X and then kind of forwarding it to the network and having that be a way that you're inviting people in, a way that people a specific, you know, almost like a post that people could respond to. And we said, look, this would be a good feature. This would be a use case. It could be a use case that even the very first person could use. They would be sending it out to their address book to have people to sign up for LinkedIn in so doing. And, you know, so it was a smart, coherent thought. And I was the one that vetoed it being part of the launch plan because I looked at it and I said, look, we can launch and we can get that feedback and then we can build this feature and we can build it in and then we'll have the awareness and detail from launching that will then inform this risk decision. And what are the really key things to do that we wouldn't have until then? And as LinkedIn still hasn't built Contact Finder, this is 17 years later. And the reason is what we learned. We said, look, that would still be a really helpful feature if we had it for zero. But we realized that a lot of people were like, well actually, in fact, we're having difficulty figuring out exactly what to put in the profile. We're willing to invite people. We don't need the Contact Finder to do it, but we need to make it easy to do. And so we ended up solving all those problems first. And then as we were solving those problems, the network already got to a size that the much easier way to do a Contact Finder was simply to do search and then use search to say. And because, you know, like in the first year, which, you know, we started in Silicon Valley, we were even getting searches like, okay, I'm looking for meatpacking experts in China. Right? So people are already kind of looking for that and they had a higher belief in just looking to see who was there in the network and then how having the compounding loop of who was there in the network. And that's an example of that.

It's almost like the corollary to your famous principle of if you're not embarrassed by your first product launch, you've launched too late. Part of it is that sometimes you just choose never to launch because you can always launch if the necessity arises.

In the future or to relaunch or anything else. And part of that quote is to emphasize speed and learning over the ego of let me launch this product and have everyone tell me that it's so wonderful. Now, the asterisk I say to it is, it's much more true for software products. On a hardware product, you better have a good product because otherwise you just die and other products like it.

Yes, if you launch a car that doesn't have an engine, you're probably not going to get a lot of satisfied customers.

Yeah, the so called Chevy Nova.

So in terms of risk, we talk about risk in our book Blitzscaling. And it's really a key part of being a responsible Blitzscaler, someone who contributes to the good of society instead of harming it. And in the book we discuss what we call sort of the three S's of risk, the severity, the scope and whether something is systemic or not. Can you talk about why those three S's are so important?

You know, one of the central things obviously in the current time people are like, oh, is blitzscaling over because you can't do it responsibly. And part of our point about doing a book was to have a chapter on responsibility and should know to do it. As you blitzscale, you move to a multi threaded organization, one or more of those threads should be on identifying serious risks and mitigating before they happen and developing plans to how to adjust them quickly if and when they do. Right. And, and you know, everything around it. And then the question is, what are serious risks? So severity, depth of impact, for example, loss of life, scope, a big impact across a large number of people. Right. So okay, that can add up to a lot of impact. And then systemicness, which is collapsing a system, collapsing a system that people depend on or a business depends on or an ecosystem depends on can be really bad. And so we use those as kind of the three S's to say, okay, as I'm growing, whatever my specific business is and I think about what are the major risks? Those are at least three areas. To ask the question, is there anything that I'm doing here that could have this kind of real severity, could have broad scope of real impact, or could have a systemic risk, in which case how do I monitor it, how do I see it, how do I prevent it, how do I respond if it starts happening? It's good to make those things someone's full time job to be navigating those risks.

Now to really make some of these lessons concrete, I thought it might be a good idea to talk about how you thought about the risks that were involved in one of your recent investments at Greylock. So I know one of your investments is Aurora, which is run by Chris Urmson, a person you've called the Henry Ford of autonomous vehicles. Now Aurora has to manage a lot of risks associated with driverless cars and trucks. How does Aurora think about these risks? And has the present moment changed your perspective on these risks?

It hasn't. And one of the good things about Chris Urmson is that he both focuses on building a company speed. It's how do you completely fresh start from what he did at Waymo, but learning all that stuff, what's the thing that you would want to build as your fundamental platform. And he himself thinks intensely about all three of these. Because you have a severity issue in transport. You got human life, you have a scope, which is, okay, what's happening on the entire road system and transport system, what's happening? And then you have systematicity, because our economy and our lives depend upon transport systems. We acquire food and we, you know, we move different places even when we're sheltering in place, and we're depending upon the largess of the delivery people or anything else. You still have. You still have a transport system that's really critical for the continuance of the functioning of society and human life and work and so forth. So he really looks at all of these areas in depth, and it's not changed because of anything that's happening during the pandemic.

And as we think about risk, we've talked about a lot of different topics today. I think that the pandemic is a great way of bringing it full circle, because one of the things that we certainly want to encourage people to do is to minimize the risks that they take to mitigate the risk of COVID 19 by wearing masks, by washing their hands, by social distancing, by. By doing things like we're doing, like recording our podcast via Zoom instead of sneaking off to someplace together. And I think that that is a fantastic note to leave people on. Any other thoughts on risk you'd like to share with entrepreneurs before we go?

The key thing, like, we got to competitive edges, and your intelligent play on our risk could be really your competitive edge. So the real way to think about it is not how you reduce risk to zero. Sometimes you want to avoid certain, you know, unnecessary risk is a very bad idea, but how you're playing a risk smartly, why you have some idea about this that other people don't have. And again, it's one of the reasons why it's smart to talk to other people around you, because you may think you have a unique thing, but unless you go talk to smart people, you don't actually know you have a unique thing. And I guess I'll close with this, which is frequently you say, oh, I have a smart idea. What do you think? They'll go, oh, you have a smart idea. It's better to ask that question of, look, I think I have an idea that might work. What would be your challenges of it? Do you think other people have this idea, et cetera, as a way of measuring? Like, do I have a unique idea on measuring this risk?

And I love that. Because what your last statement reveals is that when we think about risk, we're not just thinking about mitigating risk. We're not just thinking about limiting downside. In fact, the way that we recognize, plan for, and mitigate risk can be our competitive edge can be the thing that helps entrepreneurs succeed.

Indeed.

Well, Reid, thank you so much for taking the time. That concludes this episode of Gray Matter. You can subscribe to gray matter on soundcloud.com greylock partners. You can also find new episodes and blog posts on greylock.com and you can follow Greylock on Twitter at greylockvc. I'm Chris Yeh, and thank you for listening.