Reid Hoffman | Myths About Failure

Hi, I'm Chris Yeh, the co author of Blitzscaling and I'm here with my co author and old friend Reid Hoffman, the co founder of LinkedIn and investor at Greylock Partners. We're here today to talk about failure. It's a tough topic, but it's one of great interest to entrepreneurs. So Reid, let's just start with a basic one. Why do startups fail?

Well, one of the metaphors that I use for startups is that you throw yourself off a cliff and you assemble an airplane on the way down. And the reason I use this metaphor in part is because the default start state to almost all startups, matter of fact, every single one I'm familiar with. I can imagine some cases where this doesn't happen, it's a spin off or something else. But is that you're essentially dead. You're not a going concern if people don't continue their cardiac emergency room trying to get the patient back to life. The default is the venture, the company, the organization, the effort is dead. You're trying to get it to a place where it changes from default dead to default alive. Where default alive is, we have revenue that covers our costs, the future projection and the organization. And we don't see anything that come into Canada and that we can continue to invest in the business. And we're going down the road, as it were. And that's the reason I use this metaphor. Because you jump off a cliff, you're like, okay, by default you hit the ground, you're dead, right? And then you can build in other kinds of elements to it, like, well, what's a fundraising round? It's a thermal draft because you still have to get the plane running. If you don't get the plane running and the plane can't run and you can't actually essentially be getting some ascension in revenue and revenue that covers your expenses, then the whole thing doesn't work and you have to triage this incredibly difficult thing of putting a bunch of different pieces together, getting the engine going and all the rest, you know, and assembling the team for that as you're going. So that's the reason I use that metaphor. Now the truth of the matter is depending on how you do the denominator of exactly when it counts as a startup starting. But even if you count it as the person's quit their job in order to do this, the vast majority, and that's the like, not before, because people have ideas before they work on things, before they abandon things before. But you say quit your Job, go start. It's still the case that the vast majority of startups fail. And obviously, by the way, we're mostly talking here about technology startups, the kind that get venture capital funded, but obviously there's a lot of SMBs and restaurants and everything else. And it's not just the pandemic, but the normal default is actually in fact failure. And that's part of the reason why the kind of advice that you give people, like when Ben Kasnocha and I wrote our first book, the Startup View, which is the parallel of kind of what advice you give entrepreneurs to what advice you give individuals, but that's also advice book for entrepreneurs, just fractured in individuals in their own lives, their own careers, who may never start a business. Is the thing about ABZ planning, and I think about how you measure whether or not you're on track in order to get to your lifeboat, Plan Z and other kinds of things is because the default is these things fail. Now, one of the things, of course, that's necessary is entrepreneurs all think, oh, yeah, I get a lot of other people fail, but this one and me, I'm gonna win. It's a little bit like 85% of Americans believe they're above average. It's a similar kind of thing to saying, look, that kind of optimism, that kind of belief is important because otherwise these amazing big things don't get created. But it's still worth having the, okay, are we on track? Should we pivot? Should we try to do something else as part of this? Because that's obviously part of across the portfolio of your life and of your efforts having good outcomes.

So if we think about the startup world, then it is such a risky thing. And one of the things you can try to do, presumably, is to figure out, okay, well, what are the biggest causes of failure? What are the things that really cause companies to fail? So what kind of failure do you see most often? What are you looking to avoid?

So there's a few things that are the most common ones. Now there's a bunch of more sophisticated ones. Because another metaphor I've sometimes used for startups is you're running across uneven ground with a minefield in the fog at night, so lots of different ways that it can blow up. And one is obviously, you never get financed. You never get the capital, the financial human talent, et cetera, to pull together, to make an effort to test the theory. Another one is you may get some capital, but you never get enough to test something interesting in your hypothesis. And the product market fit or Something that kind of gets you into a real test and, you know, what are the things that can get you there in order to make it happen. Then a lot of it is even if you've kind of got a bunch of capital and you made it out there frequently. This is again, one of the reasons why another expression I'm known for for the consumer Internet products is if you're not embarrassed by your first product you release too late is a question of learning. So another really common view is I've got this great theory, I have the network and persuasive and the team that I raise the money for it. And then I go spend way too long essentially hiding from the market to prove my theory and not taking that epistemological humility of, well, action factors. A bunch of things I'm going to need to learn by engagement with the market, which is what that expression is meant to emphasize learning and speed as a way of operating. And so those kinds of failures are the most common. And it's also, by the way, that kind of leads to a classic dictum for founders that is frequently misunderstood, not only by founders, but the world at large, which is that it kind of leads to this fail fast thing. And people go, oh my God, fail fast. You know, why do you want to fail? Or oh, we celebrate failure. And you're like, no, no, no. What you do is you tackle the biggest thing that you can tackle, that you can try to prove or not prove in your, in your investment thesis, in the set of theses about where the world's going or what kind of product, market, service or what could be delivered or what has the competitive edge, what's the things that on the capital and quick time and that you can most test that would most disprove your theory as fast as possible. You know, there's obviously echoes of, you know, Eric Rees's lean startup here as well, that if you can do that, then that gives you the greatest intelligence in order to change what you're going on. So like, for example, you say, look, if I can't raise money for this, then I have no ability. So what can I pull together that could potentially raise money? Now that I've raised some money, what's the things that I can pull together that show the most data towards what the product service could be that would raise the next money? And you're not jumping from fundraising to fundraising as much as the fundraisings are gates as you're heading towards your polestar. And so you want to take these typical failure cases and you want to try to essentially get evidence. It doesn't mean like proof, but evidence that you've de risked them as much as possible while you're running towards it. Now, one of the things that is so challenging about startups is that usually just like having jumped off cliff on the way down, there's multiple ways you can fail all the time. And you're doing this triage and even as you're working on this first one, the other seven fires are burning as well. You know, whether it's competitive, competition, talent, recruiting, proof of product market fit that scales, or is the right product market fit, pandemic volatility in the markets, like all of these things. And so you have to be triaging as you're going through it. And that's again, of course one of the reasons why there's a high fatality rate.

And it really sounds like, and I love the fact that you brought in the echoes of letting fires burn from the counterintuitive rules of blitzscaling. It sounds like it's this constant process and those two factors, one is identifying and prioritizing the most proximate threat or the biggest risk to the plans that you've made. And the other is relentlessly seeking the truth about that you're not trying to hide from the market. And when you're going after these proof points, yes, you're not thinking about just in terms of I'm going to prove it to investors. Even more important is I'm going to prove it to myself. I'm going to demonstrate this thesis so that I believe that it's worth me investing my time. And if it's not worth me investing my time, it's certainly not a good idea to go out and raise money for it.

Absolutely. And the thing to put a cap on that is that the fail fast is hit your failure points as soon as possible so you can correct and change. Because if you delay it too long, this is actual real failure point. And then you're doing it once you're overly committed and all the rest, then you just all blows up or more likely all blows up. And so, you know, try to get as many of the evidentiary tests. That's one of the reasons why holding your idea secret is usually a bad idea. Go and talk to the smartest people you know and ask them a question about what's wrong with this idea so you can be identifying what the potential failure points are and trying to address them up front.

Now, it's interesting we're talking about failure because very few People associate you with failure. You've succeeded at many, many different things. But I think a lot of people forget that your first startup, SocialNet failed. So what happened there? What lessons did you learn from the experience and how did that failure, the failure of SocialNet help set you up for your future success?

Well, a bunch of the entrepreneurial lessons that I kind of advertise come from a combination of SocialNet, PayPal and LinkedIn as they kind of as an arc. Now obviously I've been involved as a board member and investor in a lot of other companies and those add to the knowledge store. But when you're giving color with personal examples, those tend to be the ones that I can use because I can, those are mine and I can use that information as opposed to things when I you know, work with other amazing founders on the journeys they have. You know, you're careful about kind of you, you both attribute but also like not sharing things that you know that is theirs to share versus yours. Now in Social net like I made a huge number of mistakes. One of the ones I just mentioned was that I'm going to unveil this perfect product that everyone's gonna love. And so we took months too long in the development of it. Cause I had an overly strong theory that I was right about the structure of it. I was right about the zone of a product need. But the product market fit the understanding of it. The ability to engage. That was 1, 2 frequently with consumer Internet I'd say you have to co design your go to market strategy with actually I think it's true in most businesses. But co design your go to market strategy along with the product and not just go oh, I'll build a product that I think is really good and then I'll pick off whatever generic go to market strategies are oh I'll buy advertising or oh I'll try to add some virality to it or oh I'll whatever that particular stress is. You actually in fact try to say with this product this is the appropriately designed go to market strategy. You may use some of the tools like I'll use a telesales force versus a field sales or whatever it is but you are co designing those two things because if you don't have a go to market strategy it doesn't matter if your product's great or bad. You won't have the learning, you won't have the data, won't actually go anywhere and won't improve. And so I made those mistakes. I also part of work kind of helping out paypal I made the mistakes of I said, look, the whole thing when you're doing a startup is to hire people who had 10 plus years doing this particular job, which is usually in a large company what you're hiring for because it's kind of pretty stable and you're looking for a no failure rate within a well understood job description. Here you're twisting and turning and pivoting your go to market with your product, your services, et cetera. And so you want people who are more like, okay, I get it, I knew what I was doing there. But we're changing here and we're relearning something here. So I don't just stay with this is what I know, this is what I learned. This is what truth is. Because success imprints more strongly than failure. Failure people know they need to learn success. They go, I've learned it already. And that's when I've learned it already. Is frequently when you're doing the twists and turns of establishing a new startup, a new product or service, a new thing where you're trying to get to scale, that's frequently you drive the bus over the cliff because you're like, no, no, I know this already, I'm already proven. And that relearning curve. And again, part of the reason why infinite learners. And so I made all of those mistakes along many others. I guess I'll put the capstone on the last one, which is one of the things that's really key is to seek investors who will be with you on both the upside and the downside. And that doesn't mean that they won't push you, they won't challenge you, maybe in some cases unfortunately, repeat, remove you from the position if it's not working out well. But someone who believes in the mission deeply, believes in you, and doesn't think it's going to be a cakewalk where you just kind of like, hey, this is just a cheap and easy, like I buy this at a dollar, it's going to become $10 and it's all easy. But someone who's going to work with you in both of those. And getting that sense is really important because almost always you're going to hit some valley of the shadows moments where you essentially went, oh my God, this isn't working. Why did I think this would work? And you want to be working together on it. And as you kind of someone who challenges and pushes you to be better, enables you to be better, but is also kind of playing ball with you. And one of the big mistakes we made in the social net financing is we essentially got financed by some very smart people, but smart people who thought they were smarter than us and thought that they fundamentally knew how to run the business better than we did. Which, by the way, I was young, my first startup, bunch of mistakes, right? Didn't have, like, they were super accomplished, smart people. But the problem is they basically went, we know this better than you. And when I kind of went to them and said, look, now I realized the mistakes I made and I learned I want to do X. They go, no, no, we just need to do television advertising. Let's go do television advertising. And I'm like, I'm sure that's not going to work. And that's when I essentially left Socialnet for PayPal.

Oh, my goodness. They wanted you to do television advertising. That was their solution. That's astonishing. Well, it's funny, it reflects a piece of advice that I find myself giving to entrepreneurs seemingly on a weekly basis, which is when they say, well, how do I know if somebody is going to be the kind of investor I want to work with? I tell them, go look at their previous portfolio companies, find a couple of the ones that failed, and go talk to those CEOs, because that's the only way you'll learn what they're like during those tough times, during that valley of the shadow of death.

Yep, exactly. And by the way, a good partner will be pushing and will be, like, challenging and so forth. So it shouldn't just be the, oh, you shouldn't be looking for. Oh, they were just, oh, great, good luck. Oh, it's rough. They should be, like, trying to help and make it happen, which could include pushing you. But the question is, is it maintaining a constructive stance to maximizing the possibility of a good outcome?

The other thing that I thought was really interesting about the socialnet story you told is it sounded like, and you can confirm this, that the lessons were actively being applied while you were running SocialNet and also as a PayPal board member. So you were actually taking the lessons you were learning as an entrepreneur and funneling them over to Peter Thiel as you were going through.

Yeah, actually, that was part of how I ended up on the PayPal board, because I had been sharing my learnings with Peter as we were talking about a bunch of things. Then when he and Max Co founded PayPal, they each brought on their most experienced friend who had been doing startups for it was Scott Bannister and myself because of that, like, oh, I learned this, I learned this, I learned this. I learned this because usually the speed at which you're learning, especially in your first startup, but on all startups is like literally on Fridays of weeks. There were things that I wish I knew on Monday and it weren't like state of the market or so and so would be a good person to try to recruit or not crystal ball stuff, just literally like, oh, this is the way this works. This is the kind of way that we should be developing a product, testing, kind of going to market, conceptualizing how to build the organization, which kind of investors to be talking to. I mean all that stuff. There were just like general principles being learned between Monday and Friday.

The other thing that's remarkable about that is I'm picturing this PayPal board where it's you, Peter Thiel, Max Levchin and Scott Bannister and that's really an all star team. Did you guys know at the time that it was going to be as special as it was?

Well, we're all smart and ambitious and all knew that the other folks were super smart and capable, but we also all shared a paranoia because what you want is this combination of absolute confidence and ambition together with paranoia about failure and that combo together it's kind of this constant yin and yang. So set of balanced principles within entrepreneurship that was really key. So yes, in principle and absolutely realized how risky it was.

In fact, as the great Andy Grove said, only the paranoid survive. And that is especially true in a default dead situation. So now that we've gone through the SocialNet story, you've told us a few of these rules already, the do's and don'ts for managing failure. Are there any other ones that we should cover? Any other things that we have forgotten to mention?

So we covered the most important one, which is be really clear eyed about what are the ways you might feel and be trying to answer them to see if you should make any changes. Now some of that's individual, some of that's group think. Part of the problem when you get to groupthink is you also need to maintain the confidence of the team. So if like for example, it's very hard to build a even a 10 person or 20 person team, let alone 50 or 100, where you're going, oh, here's all the ways we can fail, here's what we're measuring. So you usually have to be maintaining a here's why this is a game we really can win, this is why we think we can win it, we're on path to winning it. There are things you can do while Also doing that. And so this is one more of the yin and yang kind of by valences that you need to balance in doing it. Now, I think the other kind of classic thing is to really think about which things do I need to test now, even though I know that there's other things that may get to failure. Right. Like I go, okay, I can answer that question later. Right. And by the way, this question will get to it. I guess the last one is in terms of, because of some general principles that we haven't gotten to yet. So while you have these entrepreneurs who are these irrationally optimistic, irrationally self confident, which you need to have in order to do this, because you're playing this game where 60 to 90% of these efforts fail and yet you believe that you're going to be in the ones that are going to succeed. And that's absolutely important as part of that and assembling the team around it and being honest with them and all the rest as you're going to. The key things that these sorts of people tend to also have, myself included, is you tend to think, well, I know it. Part of the reason I have a chance that other people don't is because I have a unique talent here, I have a unique insight. You know, I'm either great or I'm great at this or that kind of stuff. And they don't follow the thing of actually, in fact, there's many more smart and informed people around you than you. You know, if you think I am the lone genius, in the vast majority of cases, you're crazy, right? There are exceptions, but in the vast majority of cases you are crazy. And so what you should do is seek to get as much network intelligence on the stuff you're doing, perspective from smart people, perspective from knowledgeable people, and it'll be factoring in that into your decisioning. And so, for example, one of the things that I think would have been useful for me when I was prepping for my first startup, SocialNet, and would have done it is, well, what if I had gone to other people doing startups and say, well, like what were your lessons for how you assembled a team who you started with, what are the key people to do or not do? And went and spent some time learning that like literally any big question that you're trying to tackle, you say, okay, how do I add in two or three good catalytic data points that can potentially make me aware if there's things that I'm seriously lacking and unknown in, in terms of how I'm playing this game so that I can go, oh, gosh, I need to get up this learning curve really quickly. And you're never going to be perfect. You're always going to be constantly learning. But that, like, okay, at least I have some of the basics is one of the things that can avoid catastrophic failure.

And even if you're somebody who doesn't happen to live in a major startup hub like Silicon Valley, the great thing is, so many people are now accessible online, whether through Zoom. If you're able to connect with them, or through their podcasts or blog posts, there's so much more information available about these big questions. There's no need to go into them without asking them.

Exactly. And, you know, the Masters of Scale episode with Toby Lutka was a very good example of how do you both learn and invent your own new things.

Yes, I listened to that episode and it was excellent. And it also told me so much more about Shopify. I'd known about Shopify before, but actually hearing the story from Toby was remarkable. And I never would have guessed it all began with snowboarding.

Exactly.

So to paraphrase the late, great Kenny Rogers and his song the Gambler, how do you know when to hold them, when to fold them, when to walk away, and when to pivot to a new model?

So the general framework that I use can I share with my entrepreneurs and colleagues and everyone else, is a kind of an investment thesis framework. Whereas you have an investment thesis where, as much as you can, you explicitly write down, essentially the success of your project, your startup, your product depends upon, and obviously it could be a huge long list. If you say, well, I just make sure I don't do catastrophic hiring and so forth, but presume within the kind of a good, competent play, what are the things that need to be true? True of the market, true of your customers, true of how the product works, true of your iteration speed, true of competition, true of revenue models, true of, you know, da, da, da, da. And you kind of go, okay, here's a set of things. And it may evolve and pivot over time. Your investment thesis is not locked in the beginning. It's actually, in fact, constantly being refactored, you know, reinvented as you're doing it. But when you have it and you say, okay, here's my investment thesis, and with changes in it, you go, okay, so is my confidence in my investment thesis going up or down? And naturally, most people think going up or down based on data. Like, I go, oh, and ran an advertising campaign and a bunch of the people who I thought were the relevant people all saw it. No one bought it. Or I had a Salesforce and the salesforce has terrible conversion rate or, you know, da, da, da, da. Yes, data is very, very important in figuring out if your investment thesis needs modification, etc. But also, by the way, sometimes you just learn things. Like, one of the things that was part of the PayPal story was that the way that we got to email payments was that, you know, I had been playing kind of role of interrogator on the board. And they said, well, we got this great idea. It's encryption technology in mobile phones. Max, a huge awesome technologist knows how to build this really hard technology and encryption will be great. And I said, well, the problem with platforms is that you usually need to have some kind of app that adopts it. People won't go build the app unless they have a really good reason to build an app within your platform. So they said, okay, well, let's build a key app. Let's do cache then. And we'll use the encryption technology with Cash on Mobile platform as the key app and say, okay, well, how long will that take you to deploy? And the answer is, well, three to five years. Like, oh, that's outside the time window, which financings and competition, all the rest work. You'll never actually get that to work. Said, okay, we can do it on the Palm Pilot. And so I was like, all right, so we're going to go get mobile encryption for being able to hold cash and other kinds of things on the Palm Pilot. What's the canonical use case? It's splitting the dinner tab at a restaurant as an example. Right. You know, obviously you're always open to a bunch of other things. So I went away and I thought about that and I said, all right. I came back, I said, okay, here we are in the Silicon Valley, which is Palm Pilot ground zero. We don't even need to run this experiment. But I bet you if we walked, because we're at the office in Palo Alto, if we walked every restaurant nearby and walked to every single table and asked how many people had, the entire table had Palm Pilots, the answer would be between 0 and 1 per restaurant. Which means that even with perfect delivery and perfect desire for the use case, both of which are huge ifs and could be completely blown out, that still means it won't work. Means that we're dead in the water already. And so thinking through and talking to smart people and other kind of things can still provide you the evidence to change your Thesis. Now, this is where Max Levchin and there's many people say, oh, I created the email payments thing. That's Max. I was in the room. He said, oh, that's easy. We can sync payments through email. And then, you know, Scott and I turned to him and said, oh, that's a good idea. Right? And that turned out to be the idea where the Palm Pilot was quickly dropped a year after due to some very smart triaging and decisioning from Peter on the things to happen. That's an instance where you could say your instance of thinking through your investment thesis. Just thinking through yourself, talking to other people can cause you to go down in confidence. And if your confidence continues to go down and you can't figure a way to increase your confidence in your investment thesis, that's when it's time to pivot or, or to change your game. Now, what you pivot to depends on. You say, okay, if I recalc from where I am and do I recalc small thing, like a small pivot? So like, well, you know, maybe it's still payments. Well, this is not a small pivot, but it's like it's email payments, not mobile payments. That's a kind of a big pivot, but not a, oh, now we're doing something totally different, right? But you look at and say, what size of pivot do we need to have? Is that the pivot we should do with the market opportunity, with the competition, with the team, with the assets, what's the thing to do? And that's part of the reason sometimes pivot is sell the company. Or sometimes in terms of the Kenny Rogers comment, you kind of say, look, I actually have had invested in a couple of smart, smarter teams, said, look, we tried it, we're handing back half the capital, we're going on things. This basically doesn't work and we don't have a better thing to do from here. And that isn't to say that's the right outcome, but the outcome is to say this goes back to we were talking earlier is fail fast so you can succeed later. Like for those teams say, okay, this path doesn't have. There isn't a good path from here. It's better to shut down this path and move to this other path and really try from there. And then let's just kind of restart from that point. And that's the kind of thing like making those decisions around your investment thesis, around your intelligent confidence in it. And then what size of pivot or what's. Because, you know, to some Degree like a walk away or a fold. Them are the really, really big pivots.

And it does strike me that oftentimes people don't realize that folding them is perfectly appropriate. Handing money back to investors is perfectly appropriate. And they say, well, wait, we could do something else. To which my response would be, well, okay, but that assumes that it is this exact team and this exact group of investors that are best suited to take on this new opportunity. Why not instead just hand back the money and then reform a new team? It may be slightly different. Bring back the investors that you want and start with a fresh clean slate. It just seems to make a lot more sense.

No, exactly. And part of the thing to think about is, you know, people say, well, I got this capital now and I want to play it through. And you're like, well look, to some degree you can, but you play that through and then that doesn't succeed. Then with those investors, not only have you kind of failed twice on this, but you failed twice in a way that you weren't kind of really respecting the integrity of the project that you were really signing up to go do.

The other really interesting thing that you said, and you'll have to tell me if you think that this is an appropriate analogy, but was the fact that you don't necessarily require data to validate or think through your investment thesis. And to me it really seems like this is the difference between theoretical physics and experimental physics. Both of them are very important. But Einstein did most of his work theoretically. He did thought experiments in his mind, he reasoned it out. And then of course later on, experimental physicists came along and ran experiments that proved proved Einstein's various theories. But you need to do both. Just sticking purely with experimental physics is not necessarily the optimal approach.

Well, it's even a little bit more complex than that which most philosophers of science realize, which is there isn't actually untheory laden experimentation. Right? Because to put it in a startup context, like, well, our sales process isn't working. Well, you know, our sales process isn't working. Is that because the product's wrong? Because the product needs a new feature? Is it because of the salespeople are misexecuting? Is it because the salespeople have the wrong pitch? It's because the salespeople have talked to the wrong people. So you say, well, the sales process isn't working. It's not that straightforward. It's like, what are these things? And so you have an active theory of the case now you try to measure those within the can you Say, okay, do I think, like, do I go seek some expertise and say, look, is this a. Are we selling it the right way? Do we try to go get it? Like, we say, well, we think X is our ideal customer. We go in front of them, we get someone, we build a bridge where they tell us the honest feedback and the truth of what it is. Are we listening to them? And by the way, the sales case is a simple number to go and measure and even has those degrees of complexity. So, you know, part of the thing that makes startups intense is you're forming these judgments very fast, where it's always kind of through a glass, darkly, through the fog, because you don't really get to. Even with data, you don't get to the. Well, the data just proves it. What you're doing is making good judgment. And that's part of the reason why part of what I try to help entrepreneurs when I'm working with them is to actually have this good barometer of what the confidence in the investment thesis is. Because another thing that can be slippery is say, nope, it's the same. It's like, well, actually, in fact, it's down now from where it was before because we really thought that would work and that really didn't work. And we thought we really did try it and it was our best ideas. Because another way you could measure the ideas not working as well is, okay, are the new ideas we have to try to make this work less good than the old ideas, like, oh, our new ideas for how to go to market or how to add the extra feature that makes a big difference or to win against the competition? Well, our new ideas are less good than the old ones. The old ones didn't work, and now our new ones are, to our mind, less good. That's when you really go, okay, we need to change the game.

Exactly. And you just always have to keep in mind that the ability to walk away is ultimately one of the most important abilities you can exercise. There is no glory in continuing and pushing on something that you don't believe in.

Absolutely.

So that gets us to the question of managing failure. Let's say you get to the point where something happens, maybe it's something that's out of your control, let's say a global pandemic. I can only imagine what it's like to be someone who provides, you know, for example, technology to restaurants for. In restaurant dining right now, at least in the United States. So what do you do when these factors come up if a threat emerges? And Amazon, for example, starts to do exactly what you do. What should a startup do in those cases?

Well, this gets back to those, you know, startups are a bunch of hard judgment calls. That is part of, again, reason why network intelligence is good, because you're trying to factor into the hard judgment calls. This is part of the reason why there's always serendipity and luck. Because even if you said, look, now is really the right time for this product and I have some of the team and I've got some of the capital, I'm going, well, what happens with competition? What happens with, like, there's a stack of things that are just beyond your ability to fully control. And there are great ones, like the asteroid of the pandemic hitting the society, the economy, public health, you're working your operations, your customers, the whole thing. And so just like everything else, part of the thing that you need to be doing as a startup, and one of the things that makes startups nimble is that they realize they are, as per our opening conversation, by default dead. So they are scrambling and paying attention and moving fast because it's like, well, this doesn't work. We need to move on to that much more than kind of existing traditional companies that have established their place and have all these advantages of capital and scale and talent and customers and all the rest of it. What you need to do is you need to frequently work towards a functional decision fast, right? And so it goes back to some of the decisioning thing that we were talking about in a few podcasts ago. Maybe it was the last one or a couple one before, which is frequently it's like, okay, here's this thing. By default, what's my decision? Should I alter it at all? Because if you make a decision early, you usually have a lot more maneuverability room than if you make it late. And sometimes, by the way, the question is to say, well, we got to completely change. We got to batten down the hatches and try to survive the hurricane that we're in and just try to get to the other side of it. Sometimes it's, we need to raise capital, right, at whatever price to give us the fuel to get through it. Sometimes it's like, look, this isn't going to work. You know, we're going to fold them or do whatever, and you have to make those decisions early. Now, the one of the kind of examples you're talking about that I tend to be, tend to think is the one that the world over dramatizes is the large company competitor. And the reason is, of course, These large companies, Amazon, Microsoft, Google, Facebook, Netflix, et cetera, are all awesome companies, fierce competitors, great product, great capital, very smart people working there. And they didn't go, well, shit, if that's turning towards me. And they've announced that they're doing a product, they've launched a product and so forth. Ultimately, part of the thing is most companies have a limited number of strategic priorities that they're really on. That doesn't mean that one of these big companies may not be doing 1000 different things and there may be not some group there that's competing with you, but unless you're in the short list for the overall company. So like, oh, I'm competing in search with Google, or I'm trying to make an everything store against Amazon, right? Or I'm trying to make a new productivity suite, right? You know, et cetera, et cetera. And I'm trying to do it especially in a way that's kind of like doesn't leverage some unique new ability, but just kind of go straight from behind. Like the way they built their product 10 years ago, that's the way I'm doing mine. Those areas are super dangerous and you should pay attention to what the competition is. But it was like, look, there's a group there that's competing with me and they're working on this project that I'm working on. Well, there's still a real chance as a startup that you can outmaneuver them. And what's more, if like, for example, as per your question, like Amazon's coming for you, well, Amazon's competitors then have some more interest in seeing you might succeed, right? And so the large companies tend to be the least threatening of all the external ones. Now a really great moving startup that's doing very well. Those kinds of things you need to pay attention to.

So let's imagine now that you're an entrepreneur. And the scary thing is, even if you have been able to find product market fit, even if you've raised money, even if you've been able to fend off the competition, you could still fail. There are still an additional set of common failure modes that happen even when things are going well. Things like founder burnout or dysfunctional board. Let's dive into some of them. What are some of the ways you can fail that are aside from those core business issues?

Again, myriad lots. Founder burnout does happen, and depending on which stage of the business you're on, whether or not you've gotten to Escape Velocity and now built the plane and you're flying versus other things. If it's usually before, then you usually have to sell the company. Most often, occasionally you can recruit the right people in dysfunctional board dynamics is one of the reasons why I really recommend people to select their board and select their investors. Because if your board starts pulling against your operation, your thesis starts undermining confidence, will project bad confidence to new investors, will not partner with you well on stuff and partner well. That all creates really, really bad dynamics. And frequently a lot of investors think that they're. I'm just kind of stunned by the number of people who've never built a company, never been the CEO, never been the founder. And they go, well, I'm a pattern matcher. I'm much better than this. And it's like, well, okay, that's like a coach who's never played go well, I could play that game, Michael Jordan. I could play like you. Here, listen to me. And it's like, look, it doesn't say that there aren't great roles and some really smart people who've been great partners to founders without having done it themselves by being super smart, adding in different additional areas of expertise that aren't there. But a board can really break a company in various ways. And so that's one of the reasons to be key on it. Founding teams breaking up depends a lot on centrality. Like if it's a more problematic founder who wasn't as essential kind of leaving because they didn't feel like they were as key and the other founder keeps going, that tends to be, okay, that's easier. But if it's a lot of feuding and everything else and that's a problem, I'd say the principal thing, not surprising that leads to all these things is that founders need to be realizing that they are on a constant learning curve. Because just like in blitzscaling, we kind of go through these different levels. The nature of the problems that you're confronting, that even if you succeeded in the first two years, it's new problems. It's new problems, new problems, new problems with organization, new problems with go to market, new problems with product, new problems with competitors. You know, there's all these things and you need to be learning them. And so you need to be tracking that you're learning effectively and really trying to adapt to it. Because even the folks who don't seek outside counsel that much, the ones who do succeed are learning constantly, even if they're basically learning by doing and by driving and kind of seeing what the results are. So that not viewing that it's a constant learning curve. Like, you know, like, okay, how well am I doing at up leveling my executives as we get to the new problem? Like, is this executive team the right team? Is there anyone who needs to trade out? Am I, am I doing the trade sufficiently on time, which means early, and am I doing it in a way that respects our culture and hopefully preserves all of the talent that we have in the company and you know, da da da, all of that kind of stuff. That's the most common thing where the founders think, look, I've had this great idea so I have the natural right. And then not focusing on the game and the learning changes constantly. And so once the founder goes, I don't need to learn, they may not say this themselves, but if they're acting like I don't need to learn anymore, most often than not, that's the beginning of the end. Or somewhere towards the end.

Exactly. Once people decide to stop learning, they've decided to stop adapting. And the world never stops changing. You always have to learn, you always have to adapt. But that's also part of what makes things so stressful. And failure is just incredibly stressful. It's stressful under normal circumstances. It's even more stressful during a pandemic. How did you deal with the stress of failure and how do you help the entrepreneurs in your life deal with its possibility and fallout today?

Well, first is that everyone goes into it needs to kind of acknowledge there's a real failure as a possibility so that they don't break. This is kind of like what happens in like army training camp. It's like you don't break when you get under stress, like the bullets are flying and so forth. And you try to minimize the fact you just freeze up and break. So make sure that you know that failure is a possibility so you never have sharply degraded performance. Right. And so that one, learn it, adapt, work in a startup beforehand, whatever the right things are. Next thing is to say track that even though it's a whole bunch of sprints, it's also a marathon. And so you know, what are the things you need to do to manage your stress to be highly performant but not severely degraded in competence. And by the way, that's just for you, but for your team. And you know, frequently people tend to go to, well, let's see, stress reduction is a three day weekend at the spa. You're like, okay, that may work for some people and all the rest of the. But if you really look at what a lot of the courses of stress Are they can be the I just fried myself like I was working until midnight or 2am Too many times getting up early in the morning and so a little bit of the like for example in the very early days of LinkedIn we had a bunch of people had families, we said look, we're gonna be a have dinners with your kids startup culture. So everyone goes home, has dinner with their family, has dinner with their kids. So you see your kids and you see them on a daily basis and then everybody gets on their laptop. Right. And is available to you know slack wasn't then but to IRC and other kinds of things that so we continue to be working together, you know in the rest of the evening. And so it's what are the things that you can do to mitigate like what are the really key stresses? One major stress I'm not seeing my kids, you know, one major stress is I'm losing confidence in the game we're playing. And so proactively addressing all of those things in smart ways and treat the addressing the same kind of way which is the what's a good enough not perfect, quick, easy thing to do. Those are the things to really pay attention to and to be navigating. And that's of course also all the things I was mentioning as part of a founder in management is also true of self care.

Yes. Because as the founder I've always said that in many ways you're the emotional dynamo for the organization and so not only do you need to be looking out for everyone else's level of stress, you also need to be looking out for your own. Now, during the time when SocialNet was reaching the point where you lost confidence of the thesis, or rather in this case, you believed you had the answer, but the board refused to see it. Did you feel any stress at that time or did you just. Were you able to say, you know, I've set aside the set of principles, I understand what's going on here, I'm okay with it.

That no, it was definitely intensely stressful. All kinds Stress of oh shit, it's a fail. It could be, it's likely to be a failure. Stress of well there could be something here that could really work, but it's not going to. I'd say the principal stress that I was really finding and this is probably the most often in these games, the stress I most often feel is look, I've a bunch of people have joined me on this journey and everything from employees and investors and all the rest and I kind of don't want to let them down, even though we all knew that we were getting into this risky journey, that we have done that and then how to manage that. And so that was the primary thing that I felt stressful at. So one of the things that I was pretty clear about when I went around and kind of talked to people and was kind of transitioning out of the organization is, look, I just don't have control here anymore, right? Like, you know, you signed up and I wasn't trying to undermine the organization. I was like, look, we've hired these great people and all the rest, and. But I think here's the theory of the case that the company's going. Here's the argument for that theory right here at work, you maximally try to help the organization in terms of what's happening. But because I don't really have, and it sounded a little egotistical perhaps, but I don't really have much in the way of control anymore. This really isn't the right gig for me. My path is a different path. And so that's probably the principle. Stress was the feeling of responsibility for people. And you have to hit the balance, right? Which is you say, I have zero responsibility. They joined. It's their own fault. It's like, no, well, actually, you were a leader. You persuaded them into it. You obviously were making a very vigorous case for why your company has a good chance to succeed. Right? You have some responsibility. And on the other hand, they're adults and they're making a decision too. So taking some partial responsibility is the right thing and appropriately felt, that is stressful.

Now, if I were facing a really stressful situation, and again, I have given up being a principal founder, so this is never going to happen. Thank goodness. But if I were facing a really stressful situation, I'd reach out to friends like you and I'd say, reid, oh my God, this is what's going on. Help me think this through. And of course, you would provide some wise and sage counsel. When you were there, in that moment, were there people that you were able to reach out to who could do that for you?

Not yet. That was part of the thing. As that was, as per earlier, I think my principal, like, there was this whole set of mistakes and your startup, you're always doing it. But my principal mistake wasn't trying to build enough network intelligence around, you know, what are the kind of principles that work and didn't work. I was more like had this confidence in myself and said, oh, I'll learn it as I go. And yes, confidence Learn as you go. That's correct. But also get as much network intelligence as you can.

Ah, the arrogance of youth. We were all that way once. But obviously this is one of the reasons why network intelligence is so important. Not only are you gaining insights and learning about the different things that are going to power your investment thesis, but you're also just in the process of talking to the important smart people in your life, building up essentially a tribe that will be able to help support you even if times get tough, even if you need to come to them for advice on dealing with extremely stressful situation. Is today's environment more forgiving or less forgiving in comparison to other times we've lived through, like the dot com era or the web two point era?

Well, forgiving has a lot to do with your parameters of motion, right? So of course, within our lifetimes there have been much less forgiving errors than now. Because if capital is extremely hard to come by, you only gets it in small dribbles, then that's very unforgiving. Right? And modern young entrepreneurs may find it astonishing, but entrepreneurs within Chris's in my lifetime, like the former generation or two, frequently had to go and max out their credit card debt and do all other kinds of things in order to get going and then get a little bit of capital in order to make it work. And it's kind of very difficult versus the look, I've got an idea and I can get enough capital to pay myself a salary, you know, while I'm trying to do this thing, which is. That wasn't even true when I started, right? Like, yes, you could get a little bit of capital for a salary, but like you'd really only get there after you'd already quit your job, had been personally paying a bunch of money to make it work, et cetera, as a way of making it work. So I'd say that's not an unusually terrible time for entrepreneurship. There's obviously a bunch of challenges, challenges of assembling a team, challenges of the intense volatility and variability that will continue from the current catastrophic mishandling of the pandemic within the US by the Trump administration, certainly, and other places. So all those things will be real. And entrepreneurship's always kind of stressful on that. But I'd say it's roughly speaking, volatile entrepreneurship as usual, with some unusual problems, but not like you can raise capital, you can assemble teams. People are investing in technology companies in the future. The usual roller coaster of entrepreneurship.

Yes. And it is quite a ride. Now, the other side of that forgiving nature of entrepreneurship are the cases where failure truly is a real issue, potentially even career ending? Are there ways that you fail that will actually cause people to say, you know what, we're not going to back that person again or you know what, you don't get another chance.

Yes, the principal thing that is really important is that like for example, I personally really like investing in entrepreneurs that have failed and learned and show that they're learning because that it's usually in fact have a much higher, like I understand the nature of the game and risk management and I'm going for it. And actually most investors have some version of that which is like if the person has got a good idea, has experience in startups, has learned how to do startups generally, this particular market, this particular technology, has a good network around them, all that kind of thing tends to be the failure can be a positive, call it resume attribute for the next play. Now the primary way to look at that is would the people you've built in network, would they recommend you more or would they recommend you less? And they'd recommend you more because you were smart, you tried smart things, you were learning. Right. You acted with integrity and long term and how you interacted with them. Right. And that tends to make them go, oh, like made a really good effort at this or really smart, maybe they'll succeed at the next thing and so forth. And that's the way looking now, the career breaking ones. And the weirdness is there's so much money and everyone else to some degree, it's surprising that the things I want to mention don't necessarily break it. But like for example, you embezzle, you lie, they kind of look at the jury on the Theranos case, right. You know, these kinds of things, those are generally the definition on career breaking and career ending. Right. And so pissing someone off isn't because you go, oh well, you know, I pissed so and so off. Like they told me you should do X and it's your responsibility, you didn't do what I told you to do. Well, that is what it is. You got a person who's pissed off with you and your network. It's a collective judgment of the people you're working with, your network. But if you're doing something that is catastrophically dangerous, bad, dishonest, then those kinds of things tend to be the things that kind of drive you out of town.

Yeah, there's a red line that basically says if you act unethically, that's crossing the line. That's the thing that is unforgivable, losing money, making wrong decisions. Those are not necessarily great, but those are recoverable. Lack of ethics is not.

Yep.

I still remember my first angel investor for my very first startup who lost about half a million dollars investing in me, then asked me to help him start his next company. I always thought that that was a sign of failing in the right way.

Exactly. Because the way to think about it is how do you work with people in a way that they would want to work with you for the rest of the two of your professional lives and careers? And if you're doing that part of what LinkedIn's designed around, if you're doing that, then you're actually building a really strong and robust network and you're making your best efforts at doing the right things.

I will also say that I'm pretty sure the venture capitalists who invested in failed social net entrepreneur Reed Hoffman ended up doing pretty well for themselves.

Yes. Later ones.

So are there other examples of when failure worked in a founder, a company, a team's best interest? Are there places where failure is a springboard to success?

Yes, actually, you know, frequently, if you kind of fail fast, learn from it, and then move on to other things. I mean, to some degree, my own career, as we mentioned, kind of socialnet to PayPal to LinkedIn is a perfect example of that. Now, I also went into SocialNet knowing that there was a healthy chance of failure and that I may need to play and replay. But many entrepreneurs are actually serial entrepreneurs and learn and get better as they go. Some never fail. Some have one great success and continue to learn and adapt and do those. And those are some of our iconic folks. But that kind of learning curve is, I think, really key. I think there's even companies that. One of the things that Stuart Butterfield is kind of like his story of is start a game company and then create something else. That's really interesting. So start a game company and then he and Katarina create Flickr, start a game company and then create Slack, Right? And that's like, oh, the game is failing. Oh, but we have this thing pivot towards that. Right? So that's just one example of a number where failure can lead to success. If you're playing it with kind of the how do I learn? How do I adjust? How do I pivot? What are those things can very well work.

Now, one last question, because while we hope this never is experienced by any entrepreneur, the fact is it does happen. It's not that your company fails, but your board decides to replace you, you are turfed out of your own company. You've felt some of that yourself over at SocialNet. If you're an entrepreneur and you find yourself in that situation, what should you do? How should you behave with the team, with the board members? How do you manage that process and make it so that you are able to walk away with your reputation intact, position for that next thing?

Well, we're all servants of the mission. We're all servants of the company. The thing that you want to do is you want to say, okay, presume it happens. What's the way that I can act with the best function for the company, the integrity, the relationships with people in order to make that happen. And so that tends to be the, okay, I facilitate kind of a change of command. I articulate to the board members why I might think that there's something different. So I've been clear with them, even if they disagree. And then I try to give the organization its best possible chance, even though since the organization, through the board, is divorcing me, that doesn't mean I don't owe it the same. You know, I'm with you until the ship either goes under the waves or get to port obligation that founders have. So I no longer have that obligation, But I try as best I can to set it up for a possible success or a possible kind of intermediate outcome. And so, you know, for me, that was helping raise a round of financing, bringing a CEO and a head of product, you know, working through the organization on the departure, doing all that kind of stuff to say, hey, this is part of doing right by the investors, doing right by the. Well, doing right by the company, doing right by the employees, doing right by the investors, kind of the ordering. That's right. But all of them are doing it. And that's, I think, important to do. And obviously it's very difficult because the ego with this, I was pretty convinced that that was the wrong choice, and I was removed from the decisioning of the wrong choice. And by the way, I had made wrong choices before. Right. So this was not like it was. It was like I had made some bad decisions and. And they had not worked out. I just happened to be learning from my bad decisions, which is one of the things that I recommend board members be frequently measuring. And are you learning? Are you learning fast enough? You know, et cetera, as part of this, part of how you're doing this? You know, I think that's the thing now, frequently, you know, founders go, well, I have to go out and make a big public statement of like they're wrong, I'm right, etc. I think that's. I'm always a little suspicious when I see that, because it's extremely rare, not zero, but it's extremely rare when a founder is being turfed out of a company that's doing well because it's hugely in the investor's interest to whatever magic, whatever's laying the golden eggs, to keep laying the golden eggs, it's very strongly in their interest not to do that. Now occasionally it can happen ego, other kinds of purposes. It's one of the things where board members can really destroy a lot of value. More often. The company has been in a kind of a troubled state longer than like kind of a gray area is longer, or has run into some troubles which the founder doesn't seem to be adjusting to. And the board decides the founder is really not the right person to try to do that and is trying to navigate it. And they may be right, they may be wrong, but it's usually a much more messy circumstance. And one of the things to recognize is smart people on the outside realize that's the case. And so you want to show that what you are there is a learning person, that you're still a good partner, that you act well with people in the downsides as well as upsides. And that's kind of the advice that I would give, you know, founders in these circumstances.

And thinking back across this entire conversation, what I'm taking away is that while failure is the default state for startups, it is neither inevitable nor is it necessarily the end of the story. And if you are able to bring yourself to look failure in the eye and take the steps to maximize your chance of success, and if the failure does come to behave in a way where you demonstrate that you have behaved ethically and you have learned the lessons of the mistakes you might have made along the way. Failure is definitely not the end, and in fact it may be the beginning.

And one thing to remember is the title of an excellent book on the early days of Nintendo, which also like we're playing these startup games, the games parallel is relevant. It's game over, press start to continue.

Well, I could not think of a better way to end this podcast. So 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 you can follow Greylock on Twitter reylockvc. I'm Chris Yeh and on behalf of Reid Hoffman. Thank you for listening.