Reid Hoffman | The Startup Pivot

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. In a recent Grey Matter podcast, we discussed some of the myths of failure. And as a part of that episode, we touched on the topic of pivots. Let's take this as an opportunity to dive deeper into pivots with a special focus on on the many pivots it took to make PayPal a success. So let's just lay it out there. Why are pivots so important to entrepreneurship? And what is the general framework that causes people to need to pivot? What leads to these pivots?

Well, I think a good way of looking at the general framework is something that Mark Pincus has brought my attention to. And it's one of the things that he and I have been working on together in terms of thinking about the fact that technology companies are not part of this myth where you have this original idea, that idea has got the right technologist. You have an idea for a product market fit. You have a product idea for go to market and they just execute like crazy. And that kind of works or doesn't. It's kind of like this one shot where you happen to be at the right place and you know, if you're hunting, you know your thing is there and it all works and then used to execute like crazy. And that, that actually in fact is not the way that any of these highly successful tech companies work. They all actually in fact work through a cycle of invention and reinvention. An invention is when you add a new product or add a new go to market or a new industry to how you're operating. A reinvention is when you change something. Like you change how you go to market, you change your business model, you re platform, your product or services, possibly changing it. And the reinvention is that kind of rebuild character. And basically all of the successful tech companies have done this right. You've got Apple going from Apple IIS to Macintoshes and then obviously Macintoshes to iOS, kind of a big one. You've got Microsoft, which has got so many. But you start with Ms. DOS to Windows to Office, but now cloud and gaming and all the rest. You've got Netflix DVDs to streaming Facebook, you've got desktop to mobile. And all of these things are either inventions when you're adding something new or reinvention, like for example, changing from desktop to mobile because that reinvention changes how you engage your customer, what you go to market is, what your engagement looks like, what your economics look like. All of those things have some components on that. And so you end up with reinvention. And part of the reason why pivots has become such a substantive part of the entrepreneurial lexicon is because frequently the pivots or the reinventions that entrepreneurs are facing is trying to find the first early product market fit. Like, does this actually work for a sizable group of customers? Is this something I should actually really base it around? And of course, when you get to scale product market fit, part of where there's pivots and reinventions is, oh, wait, this only carries me so far. Maybe in order to get to sufficient size or to a much larger size, I still need to pivot and reinvent. Now, an invention is usually not a pivot because an invention is usually an addition, an additional product, an addition of go to market, motion a market, but it's not the rebuilding of it.

So what I'm hearing from you, and this is actually very interesting, is that we have this myth about pivots. We think about pivots as an exception, something that happens because stuff went wrong and now we have to change, and hopefully we never have to pivot. And what I'm really hearing from you is that whether you call it pivoting or reinvention, this is an integral part of the entrepreneurial process. And, and whether you're pivoting in the early days because you haven't yet found product market fit, or whether you're pivoting by reinventing yourself later on, all companies, if they're going to be successful, are going to have to pivot.

And the path to continuing scale always involves these cycles of invention and reinvention. And it's a kind of category of reinvention that is some of these things, that's pivots.

Now, given the importance of pivots, it's probably a good idea to. To define our terms. So what is a pivot and what isn't a pivot? When I am asked about pivots, I usually give an analogy from sports because I'm a noted fan of basketball. And in basketball, there's the notion of a pivot foot. You're not supposed to just run around on the court, you're supposed to dribble, but you have the opportunity to pivot. You establish a pivot foot. Let's say it's your left foot, and then you can move your right foot as much as you want, as long as that left foot stays connected to the ground. That's really how I think of pivots. Pivots are where the company changes a lot of different things, but there is some anchor point around which it is rotating. So it's not like you're a pet food company and all of a sudden you're an enterprise security software company. You're a pet food company and then you begin to deliver your pet food on demand or your pet food is synthesized in a 3D printer. But it's not a complete abandonment of what you started off with before. What do you say about pivots?

I don't think there's something crisp like this is an elephant and that's not an elephant, you know, kind of definition. You know, one of the things in my very first book with our mutual friend Ben Kasnoca, I went through the what I framework that I use for entrepreneurs, which is ABZ planning. Because that book, the Startup of youf was taking advice that I give entrepreneurs and refactoring it for individuals and their life paths. But. But it also of course applies to companies as well because that's the entrepreneurial journey. And ABC planning as a framework is you have a plan A. Plan A has a goal, has an investment thesis, has how you're going to get there. One myth is that there's plan B versus Plans B because part of what you end up doing is you say, okay, well this is what my investment thesis is and this is what I think has to work out for me to get there. What if each of those don't work? Well, you might have multiple things that you try which are kind of small jigs and jags. They may be slightly different goals, different tool, different path, etc. And then plan Z is none of that's working. And you need to throw out this entire sector of plan. And plan Z is essentially your lifeboat plan. It's like you're re correcting to an entirely new plan A and set of plans B around it. And obviously that's just a saying. There's not one clear definition. Now, some of the specifics you were mentioning, Chris, actually, in fact, I've seen pivots that go from I'm consumer Internet to enterprise or I'm. And we're going to talk about a few of them kind of here. So there are major, major pivots. Now usually the pivots that are the, hey, we're restarting the fundamental competencies of the organization. So like for example, consumer entered enterprise, still software, still servers, you know, et Cetera, it's like, okay, that still works, but like, when you're really kind of changing the fundamental competencies of the organization, that kind of ends up being more like a restart. Like, I don't know the pattern by which Sony, which started out as a hot water bottle manufacturer, ended up becoming an electronics giant. But obviously lots of different org competences and changes on that path. And so I tend to look at it as a pivot, as kind of fundamentally we are changing the mechanics of what our product is in a way that goes. That changes something substantive enough about how we're engaging with our customers that there's a risk in the transition. Sometimes it might be new customers, sometimes it might be a different way of reaching them, sometimes maybe solving a different need, Sometimes it might be a different platform, sometimes it may be a different business model. Like, there's a number of different things that kind of go into it. But when you're making one of those changes, such that your business may fail or at least cost you a lot, that's essentially what's a pivot.

And I think one of the things that comes out of what you've been saying is that it may be that the pivot takes more than one step. And that may be what accounts for the fact that a company can pivot from hot water bottles to consumer electronics. I was working with an entrepreneur earlier this year who built a company pre Covid that was based entirely around the notion of how do I help taxicab companies compete with Lyft and Uber? A tough challenge, to be sure, but made even tougher when nobody leaves their home. And so this was a company that had adopted the name Ride on. And he wasn't sure what to do. And he said, well, what if I use taxicab drivers to deliver groceries? Because groceries are a big thing right now. Everyone needs groceries. It's an essential service. And so he began doing that and then eventually realized, actually it makes no sense to do the instacart model. It makes more sense to have my own warehouse and, and instead of using taxicab drivers, have my own refrigerated trucks. Now that is a multi step pivot, because having a warehouse and multiple trucks and things like that, that has nothing to do with being a taxicab company. But at each point you could see the foot that was being kept in place.

Yeah, very rarely is a pivot one kind of simple thing, because there's a bunch of different things that go into that kind of change. And that's part of the reason why pivots became such a central part of Silicon Valley entrepreneurial vocabulary because it's expected that you may actually in fact need to really retool. Oh, we thought we were going to be doing virality, but actually in fact we're going to be doing marketing. Oh, we thought we were going to be doing telesales, actually we're going to doing field sales. We thought it was going to be on premise software. Actually it's going to be in the cloud. Right, just. And that there's a set of different things and frequently like that one major change may also have business model changes or platform changes or, you know, go to market changes or things in the competition. So it's like usually when you go this major shift has some other shifts that are an integral part of a successful entrepreneurial effort with that.

And it's very much like launching a product when as you famously said, if you launch your product and you're not embarrassed by it, you've launched too late. Similarly, if you pivot and there aren't some issues that arise, there aren't some implications you haven't thought through, you've probably taken too long to pivot.

Yes, exactly. The general theory that I give people about pivoting, which obviously also plays into reinvention, is you should have an investment thesis about what your case is, what your theory of the game is in how you're going forward. And that should be able to be articulated in kind of a list of bullets. Hopefully not a huge super long list, but a list of bullets. And then the question is, is your confidence in your investment thesis going up or down? Now, people most often think that the only thing that causes you to pivot is data like, oh, I took the product and I went to market and it wasn't really working and I did it and now I have to pivot. By the way, that does happen. It is a classic entrepreneurial encounter and pivot. But actually, in fact, it's anything that leads to a kind of irrational reduction of belief of confidence in your investment thesis. Because you could, you know, as we're going to go through in some detail with a PayPal thing, you could make decisions, say, well, this is our original idea and we've thought it through and we've talked to some smart people and based on digging it through and talking to some more sort of people, we now have less confidence. And so we're changing. And so you'd say oxygen. In fact, here's the things we're counting on, here's the things that we are presuming that are true or can be made true by our actions. Right. And the thing that cause us to win the game. And when that list is changing most often, well, you sometimes learning just things about the market, but it's also you're changing your strategy, you're changing your what your entrepreneurial invention and innovation idea is.

So it sounds like it's really critical to have that explicit investment thesis, because if you haven't crisply stated it, you're not going to be able to tell when you're losing confidence. It's this is not something you want to do just on vague feel. This is something where you want to be able to rigorously say, my investment thesis is no longer appears to be valid, whether it's due to data or due to some sort of reasoning that I've gone through. And therefore we need to make a change.

Yep. And that part of that is, in terms of rigor, is not necessarily always numbers, but it's clarity of thought in terms of what your theory of game is. And that's actually one of the things that's actually really useful. Part of the reason I tell entrepreneurs to talk to everyone who's smart about it, because sometimes that clarity of thought can be someone who is from an entirely different field or industry can still help you with the okay, do I understand the crispness of what you're doing? Because that clarity of thought can then drive to okrs or drive to am I thinking through? Am I measuring? Does my investment thesis work?

And this sounds like another one of those cases where your master's in philosophy is coming in handy. In fact, people don't think about philosophy as being something that's relevant to entrepreneurship. But in this case, philosophy is precisely what's given you the rigor of thinking to do this.

Exactly. It's one of the things where when people say, well, what's been essential to my entrepreneurship? And they're thinking, I'm going to say mba and I say the philosophy background. It's a combination of this clarity of thought in the investment thesis and also frequently in the consumer Internet, thinking about human nature and having a crisp theory about how human nature plays into what you're doing.

Now, we've talked about some of the reasons why a pivot might become necessary. COVID 19. And a pandemic being one of them. But what are some of the other main reasons why people end up having to pivot? What are the things people should be looking out for?

Well, so one key thing, which is the classic reason why it's pivot is product market fit, right? So that initial like what can you do? And one of the things that Silicon Valley has done a good job of is how do you measure that as quickly as possible. And so this is frequently goes into the fail fast mantra, which sometimes people misunderstand because failure is not the goal, learning is the goal, and let's learn and then potentially change your investment thesis and potentially pivot. And so for example, the kinds of things that Silicon Valley entrepreneurs have learned to do is say, hey, I've got an idea. Okay, I'll create a faux website and then I'll advertise it on Facebook and I'll see what the response to the advertising looks like or in Google and I'll see what the response to the advertising looks like. And then I'll see if whether or not my concepts of product market fit work or not. And it's the cheapest ways to measure it. Because the person whose learning curve, their clock is going faster and is adjusting then actually has a massive advantage on the folks who aren't. And it's another reason why speed is so essential entrepreneurship as well, because it's the speed of the learning clock, the speed of the adjustment, the reinvention, the pivot, and the speed to execution as you move forward, as you're pivoting and reinventing. So the kinds of things that are in addition to that kind of product market fit are also scale product market fit. Because sometimes your early product market fit, you know, has illusions in it or caps. Sometimes it's changes to what's going on with competition. When you look at competition, where do their advantages, what are your advantages? What do you need to be able to do there? Sometimes it's pivots because your go to market product works, but your go to market is kind of stalls out in its concept and what you need to do. Sometimes it's technology platform changes, like for example in enterprise, or it's like moving from on premise to cloud. But there's all kinds of platform changes. It's changes to mobile, it's changes in artificial intelligence. There's a lot of different kinds of platform changes. You know, changes of service architecture, sometimes for mobility, of iteration and creation, sometimes it's change of business model. Like one of the things that's probably the most central inside sport to entrepreneurship is understanding which business models work for startups, which ones you might start with, how you might evolve or change them. Frequently the disruption changes are changes of business model. I can offer that product for free, right? The one that you're Charging for and then make money in some other way. That's usually how something massive kind of changes. And so sometimes, by the way, there's the change in your organization, although most often the organization change reflects what you need to be doing in your scale, product, market fit or your business model. And then sometimes it's kind of the scope of where you're offering your product. Like, am I global, am I multi regional? Those can also lead to cycles of invention and reinvention.

And therefore pivots are all pivots created equal. Or there are a couple of different clusters or categories of pivots that we should be concerned about.

Well, as I mentioned earlier, there's at least a very simple framework which is the ABZ framework, which is, you know, A, that's invention, B, those are light pivots to heavy pivots, right? Sometimes so light they're not even really pivots, but like if it involves a substantial reorganizations pivot. And then there's Z which is like the just restart right of the effort. So there's that category. But just like the areas that we're going through, which is kind of product market, fit, scale, product market, fit, competition, go to market platforms. Each of these are different kinds of pivots and each of these have then a different set of actions that need to happen in order to do them. There's questions about can you test them, do you just have to go into them?

Do you have.

Usually in the entrepreneurial environment, you just go into them and then you pivot again. And you know, part of when startups die is they just can't get to the next pivot. And the set of pivots hasn't really worked. In addition, obviously things like not having raised capital, although once you raise capital that gives you a certain amount of Runway, but not infinite in terms of reinvention and pivots. And so all of those are kind of the scope of it. But it's a very broad, like you could teach probably a year long class on all of this because there's so much there. And it's one of the things that tends to distinguish experienced entrepreneurs from others because they've actually built up this tool chest. They built up the tool chest of thinking about business models, thinking about go to market motion, thinking about pivots as a way of making it happen. And so some of the seriously successful entrepreneurs that I've worked with have all developed a deep tool set here.

Got it. In other words, they are expert reinventors. They have done it multiple times. Maybe Even at the same organization. But an organization has evolved greatly over the years, and that builds up that tool chest that makes it easier for them and allows them to do so more effectively.

Exactly.

Surely pivoting, of course, is risky. What are some of the risks of pivoting? What are the things that can go wrong?

So there are substantial risks and pivots. It's one of the reasons why it's such a central part of the entrepreneurship learning network in Silicon Valley. And part of how that plays is that, you know, in a startup, when you're pivoting to try to find product market fit, you know, your pivots, you don't succeed within the envelope of capital, both financial and human, to make it happen. That's when your startup fails. It also can be that case when you don't get to enough scale or you flatten out in size. And your reinventions and your pivots in order to get to the next level of size don't actually, in fact, really work that well. And the risks are, like, fundamental to the infrastructure of a business. Like, how do you acquire customers? How do you keep the customers engaged? What does your business model look like? What do you look like as differential to other kinds of products? And so those things are really, really key in terms of, you know, how do you make the product work or the company work in these kinds of things. And that's part of the reason why, like, it isn't a pivot if it doesn't involve substantial risk. Right. Just like, you know, Reed Hastings, you know, line, it's not a strategy if failing in it doesn't actually cost you something real, even only in serious opportunity cost. And so those are the things that kind of go into why pivots are not easy. And they're high cost, but they're also high cost with just like entrepreneurship potential, high reward.

So when it comes to pivoting, obviously pivoting is more than just a matter of declaring, hey, we're pivoting. This is a major change of direction. It's going to require some major operational changes. What are some of these changes, and how should the pivoter navigate them?

So usually you start with the pivot based on what is your company's position with its product or service relative to competitors, relative to the current market, relative to an anticipated market and signals you're getting, and how do you make those changes. And most often, of course, Silicon Valley talks about new entrepreneurial vistas opening up because you have platform changes, because those platforms change, product services change, and they change it in a way that an established organizational set of competencies doesn't work on the new area. Now, the challenge is, is that when you get to delivering this, this is fundamental changes in the shape of your organizational competence. It's changes in, well, do you have a salesforce or not? How do you deliver your product service? What's the way that you operationalize that, how do you support it? What is the iterations of that look like? Which business model is it? You know, like, are you paying for the object itself? Are you paying a subscription, Are you being supported by advertising or other kinds of things? Like all of these things go into that. And so that leads to changes. Now some of the pivots are easier. Like for example, if your mission stays the same, your culture, like what is the big thing and that your competency is largely the same. So for example, you say, well, it's a software product that we're familiar with and fundamentally developing, but we're now changing to this other thing. Those tend to be the more often the success cases because a lot of the org is the same. And when you change things around your operational cadence, like how your product development process works or what your dashboards, your okrs look like, they may be different, but they still look very similar to the kind of thing that you had before. And so therefore that organizational competence that you have and which kind of people you're hiring, it may change some. You may say, oh, we're, we're, we're shifting 20 to 30% of our organization, even 40%, but that's okay, because the fundamental genetics. Whereas other times, like, oh, we used to be doing a bunch of hardware, now we're not doing hardware, or now we're adding in hardware fundamentally to that. And that's only within technology. And then it leads to a new set of learnings and landscape. One of the most key and subtle things in this is which of your former learnings. Because part of what happens around an organization and a culture analysis, these are things we know that only experts in our industry know. These are things we know that our competitors don't know. These are things we've learned about product market fit. And you have to be very intentional about which of those things you keep and which you throw overboard because success imprints more strongly than failure. People know like, oh, that failed. I need to change. This is the thing we learned through our blood, sweat and tears. This is the thing we have to hold onto. And so throwing over old lessons that were true then, that now have to change, are really key to that successful reinvention, that successful pivot, and what that means in terms of organization, how the organization operates, who's in charge, what we presume to be true as we're executing, all of those things change. And so what is our corpus of common knowledge and what is the expectation as we're driving forward? You know, what are we measuring? All of that is a key part of reinvention and pivots.

Now, one of the companies that you were involved in early in your career, of course, is PayPal. And I want you to read you a few facts about PayPal that I think are quite astonishing. So PayPal, of course, is the online payments company. It processes nearly $1 trillion in payments every year. It has a market capitalization of $240 billion, 19 billion in annual revenue, 3 billion in annual profits. 23,000 employees, 87.5% of online shoppers use PayPal. This is a company that you're a founding board member of and one of the key executives during its early days. And one of the things you've told me about is the fact that PayPal actually had to pivot over and over and over again to succeed. I think you've said that there were six different major pivots or magic acts that PayPal had to pull off to succeed. What were these?

So let's start with Peter Thiel, Max Levchin, who met at a talk that Peter was giving that Max attended at Stanford campus. And what kind of got them into it was that Max, who is, you know, super smart, had this idea for how to do encryption with a low amount of compute cycles. Because the typical thing for those people who don't know is that the way that you make encryption work is you put a lot of compute behind it and you do this in depth computing, you know, together with a bunch of math and all the rest. But the intensity of compute is a factor. And he's like, oh, I know how to do really good encryption on a much lower amount of compute cycle, which means it's more viable for mobile, which has, you know, constrained compute and battery limitations. So that's where it kind of started. And I was part of the initial company that Max had going. Fieldlink is the first name that's not. Not a name that most people know in the PayPal circumstances. Then it became confinity, right? And then almost later, PayPal. It's one of the times where actually hiring a branding firm and having them throw ideas at you ended up with something very positive. But so anyway, the first idea was encryption on mobile. So that pulled together, put the angel investing in, you know, had me join the board, had Scott Bannister, because you know, part of Peter and Max said, hey, let's have our close friend who knows startups the best be on the board. We'll each put one on. Scott was Max's, I was Peter's. And so we started the dialogue around the investment thesis because each of these things are parts of investment thesis. You're going to have an encryption as a platform on mobile. You know, one of the problems with these platforms is that people don't like, you need a killer app. People don't just go adopt a platform. So we're very nervous that just going and building the platform, you will successfully make that happen. So they said, okay, well look, we were thinking about things that were very valuable on mobile, so let's think about cash on mobile. So that's the first pivot. So, so the pivot came in just the discussion about the shift from like platforms adoption needs a killer app and are you going to depend on someone else to the killer app or are you going to try to build the killer app yourself? There's by the way, arguments both ways. There are some very smart people who think that you cannot do your own killer app and have the platform. You have to just do the platform as genetics of the company and so forth. There's people who go the other way sometimes it's dynamic, it evolves over time, all the rest of that. So that was the very first one. So now we're at cash on mobile devices. So then we're also at this point, by the way, we're doing some software development, but we're still in a tiny number of people and we're talking about like what is our effort. I think we had raised the first round from what was then Nokia Ventures is now Blue Round Ventures, John Malloy. And we're saying, okay, so how long will it take you? Because and you know, obviously Nokia deeply involved with mobile. How long will it take you to do this cache? I was like, well at least three years. I'm like, oh, that's outside the window of most startups, you know, ability to move capital to. Let's start having proof points for raising more money. This is partially because Peter and Max were first time entrepreneurs. Sometimes serial entrepreneurs or some like very hot zones can change that dynamic. But generally speaking, three years is kind of the outside envelope. Not from necessarily proven but from proof points from evidence. So he said, look, that's going to take too long. We're not going to succeed in getting the kind of the rounds of capital we'll need in order to do that. That's too high of a risk. We need to deliver something more soon. So that's when the company came back and said, okay, we'll do Palm Pilot. It was a, you know, a personal information manager. Some people listening to this podcast may remember it. Silicon Valley, obviously ground zero for that. It was easier to develop on, quicker to get, kind of to make it happen. Palm had an interest in supporting new kinds of applications that were beyond just the hey, here's all my contact manager and here's a way of taking notes and here's a way of doing some communications and email and so forth. So we'll do that. And so kind of moved into that. We can do this within a X months time frame. So no longer three years. It was like something like six months. We could do this. It's like, great. Now we're at least in the iterative learning cycle. Like a lot of these pivots were, you know, one or two board meetings between pivots because this was discussion at the board. I came back, next board meeting, I said, look, I thought about your canonical use case, which is splitting the meal tab at a restaurant. You know, now in our Covid times, this is kind of a quaint metaphor, but I thought about the splitting the tab and I said, look, even here in Silicon Valley we have this ground central of Palm Pilots. Massive ownership, knowledge of it, use of it. My guess is if we went around to all the restaurants in downtown Palo Alto, which is where the PayPal was headquartered, where the board meeting was happening, we would find maximum one per restaurant of where everybody at the dining table had a Palm Pilot. So, you know, just by reasoning that your use case won't work. And so now lots of people claim the idea for the email payments idea, but it was actually Max Levchin because Max said, hey, that's easy. We can just do an email sync so we can have email payments as well. And you know, Scott and I said, okay, that's a good idea. And that's, that's useful anyway. And so that then pivoted the organization to now cash on Palm Pilots and an email payment sync process. And this is actually one of the things where you get to our earlier general discussion because there was a lot of things where the org was very committed to the PalmPilot we'd had specialists in it is where we had this unique tech. It's where we had raised our Series A by Saying this is the hard tech to reproduce. So we have this unique asset. We had good relationships with the Palm organization, which was going to help us in a go to market and a bunch of other things. And so even though kind of all of us were kind of thinking, oh, this email payments thing actually may be more useful, we're like, well, but it's lightweight and anyone can do it. And maybe this doesn't really end up in something, but okay, let's try the Palm Pilot. So we launched still, even though we kind of more attracted to the email payments with both Palm and with the email payment system. Now the next pivot came about because of the cash on Palm with an email system is the fourth one. The fifth one was moving into just email payments came because our actual customer adoption was primarily from ebay sellers and then the buyers that they were bringing in. We had had this whole idea with email payments of like, hey, let's circumvent the advertising system that was all part of Web 1.0 by handing out cash. Like we'd give you $10 and we'd give the $10 to the person you were bringing in the system and that would demonstrate the cash movement. And everyone said, oh, that's crazy, you're giving out money. It's like, well, actually, in fact, during the Internet boom, the average like customer acquisition cost for advertising on Yahoo or Netscape or anything else was well over 40 bucks. And so if you had a 20 buck or call, it usually was kind of called somewhat like averaging into 12. Because one person would demonstrate, would go to a lot of people as a way of doing customer acquisition. You were actually much cheaper than the advertising in terms of cost of customer acquisition. And what's more, you were acquiring them based upon like the movement of money. And so we had this whole vision of like people would be doing this as a general cash movement system and how to do that now. And this was a slow, there were slow consequences of the pivot. But what happened is suddenly in the first couple weeks we started getting all these ebay sellers on because the ebay sellers recognize this and went, hey, I'm selling something for like 10 bucks. You can get it for free if it's the first time that you come on and use PayPal. So not only you get it for free, if you, if you come on and use it or you get $10 off. And so, so they started using our Bounty system to incent a whole bunch of buyers to come on and use PayPal to buy from them. And the first couple Weeks of the organization was, okay, who are these ebay people? Maybe we should get them off the system, because this isn't the system as intended. Oh, my God. This is the only place we're growing these ebay people. These are our customers. All of this other previous thinking and changes to the way that was all going to work, that's not going to work. So we pivoted. And part of pivoting, by the way, is and Peter made this really excellent hard call. We just dropped the Palm product because again, organization, what you're focusing on, there was. There was organizational dissent in it. It was differentiating, it was key. It's how we announced our Series B by transferring $500,000 from Palm 1 to Palm 2. Just get rid of it. Peter was right. I was one of the ones who was like, well, but it's an asset. Shouldn't we try to sell it or something? And Peter's like, you play on where your growth market is like, we're not going to get enough money for it. Just close it down. Like, okay, Peter was right. One of the lessons I learned from Peter and so we shifted to email payments and then we grew very fast. Now, one of the places where we were young entrepreneurs, didn't understand pivots is we should have just pivoted like the whole bounty system to it. And we kind of backed our way into it. We kind of started incrementing the hurdles that you needed to get in order to get the bounty to be things that were useful within the payments infrastructure within ebay. It wasn't only ebay, but like it was a set of things where you really only got the bounty if it was because you were buying something. You'd validated it, you'd put in a bank account so you could potentially pay at a cheaper rate than the card infrastructure. So then we got to email payments. Now the sixth and final of the major pivots, although I'm sure there were more cycles of invention and reinvention since I left. But was the, okay, we got email payments, but we don't have a business model going. We had committed to being always free because we're kind of this email payments thing with all the different individuals. And we had thought maybe we were going to become a bank. And that's part of why we had merged with X.com, brought on Elon as a co founder, because Elon had been thinking a lot about banking infrastructure and banking business models. And we thought, well, maybe loans and other kinds of things. And we realized we didn't have time to build that out. We needed to have our fundamental OS. Even though, you know, PayPal's later acquired a bank and does a bunch of banking services and a bunch. And it's grown in that. Speaking of invention reinvention, we need to have our business model work on our fundamental payment system. And so what we did is we said, okay, well, what we'll do is say, look, the emailing payments, like balance transfer is still always free, but we're now going to say you have a limited amount of credit card acceptance before you have to become essentially a merchant in our master merchant enterprise. And so once you flipped your account over, and I don't know where these limits are now, but over $100 and you've accepted $100 of credit card payments, now you can't accept that next payment. And this is one of the, again, the clever kinds of things we did is, as entrepreneurs is we said, okay. Oh, when you got to the hundred dollar and one cent, you say, okay, well, to accept this payment, you need to convert your account. You cannot accept this payment and send the money back. Right. But most people said, okay, even though they didn't want to pay fees. And I was like, well, I'll take this payment. I'll change my account. And so part of what we did in the sixth pivot is we converted 88% of the payments, because it was heavily on ebay, into these master merchant payments within six weeks without changing our growth curve. And that was the thing that fundamentally put PayPal on the trajectory to where it is today. All of these pivots, absolutely essential, all of them you can die by. But that was the last major one to say, okay, we now have what our business model is. We now have how people get into the system for free, and then they convert in the business model, and we have the way that it operationalizes. Now, there was a bunch of still inventions and reinventions underneath it, like how did you use balance payments? And how did you underwrite instant transfer? And a bunch of different other kinds of things that went into that, but as a kind of a. This last major pivot, that was the last one, which then had some concomitant reinventions to really make it work. But that was the kind of the. The PayPal story as a story of pivots.

Now, a couple of remarkable things come to mind when you tell that story. The first is, what was the time frame over which these six different pivots occurred?

The first five were within 10 months. Wow. Usually within a month each. And the sixth was we had gotten a scale product market fit through ebay, but we didn't have the business model. And what happened is Peter, Max, Luke Nozick and I went to do an off site at my grandparents house in Gualala, California to figure this out and we said, okay, this is what the play has to be. And then we went back to the organization and said, here's how we're playing this through. It was early September 2000 and then that playing through was what made PayPal able to be put in a place where it was a go public company. And then part of the reason why ebay felt it needed to pay even though all of business on ebay pay a good price for it. And so that last one was probably another six months on top of it to get to that pivot. But the execution of it was weeks.

The fact that you basically converted everyone to a new business model in six weeks is truly astonishing. Were there people who were palm specialists who said hey, you know, I'm out. This is not interesting to any me anymore. How did you guys navigate that hard pivot?

Well the first is all of the pivots were hard and I'll just run through them a little bit and then I'll answer that one too. First you've got kind of like you start with encryption on mobile, it's unique, it's hard to build technology. It'll have a distinct asset, people pay for it various ways. You, your products that you're delivering via will be different. But then all of a sudden you go oh well now we actually have to make cash work. Well, cash. Well why does cash work? Cash works because people buy things. Cash works like, oh shit. Now you have to be integrated into merchants or figuring out what are the use cases. That's part of the use cases of making the cash work. Then you shift to Palm Pilot because you go, well it's easy to develop but by the way, you're only then your universe of Palm pilots. You know, you can't just live on Palm Pilots if you're just a PalmPilot app company. It doesn't really work. Even if it worked there. Then it's like oh shit, even our use case doesn't work because our use cases on the Palm Pilot won't even work. And so you go, okay, you knew you need to change, but what do you change to is part of the big thing. And then you say okay, well the email payments say okay, that looks large, that looks like something you would do. That looks like you could pivot to. But, you know, you were thinking that this was going to be kind of universal side of it. And actually, in fact, it actually is only the ebay store. Now, on one hand, getting rid of the palm was easy. Cause they're like, well, there's no traction, there's no numbers on it. The hard thing about it was we'd put all this energy and we built this valuable. Well, we built this hard to build well designed piece of technology. Now, this is one of the kind of maxims that came out of paypal with is hard does not equal valuable, right? So we built this really interesting piece of technology. Doesn't mean it's valuable. So what's valuable technology? It's like, no, it's only, look, value is what someone else will pay for it. And if they go, oh, that's really clever. You really did. It's a nice little art project. I'll pay you a buck for it. That does not mean it's valuable. And actually, in fact, there's more value for us in just pruning it and stopping it than trying to take that asset and selling it. And that part of the discipline about what not to do is really important in entrepreneurship. And that was one of the things where I was like, well, wait, we've invested all this money, we could realize some value from it. And the answer is, well, who? And what process and what distraction, what opportunity cost. And you go, oh, right, done. Just shut it down. Be done with it. And then of course, with the online master merchant pivot, it's easy. Cause you're forced. Otherwise you don't have a business model. Your company goes out of business. On the other hand, like, well, shit, you're doing something very specific that the ebay sellers say that they will stop using PayPal if you start charging them. And your entire business may go away because of the thing you're doing, because of the new thing that you do. And then it's like, well, it died. It's like, look, it isn't. The person just died naturally. Organizations died naturally. It died because you put your hands on it, right? And so that also makes it hard. And so it's hard the whole way through.

Got it. And I'm just thinking to myself on dropping the palm, the logical person for Peter to turn to, if he had said, you know what, this may be valuable, let's try to sell it, is he'd probably put you on that project. And then you might have spent two or three months trying to sell this technology to Palm. And that's two or three months that you wouldn't have been doing some very other important things. And so that was the effective loss. It was like, oh, am I going to put Reid Hoffman on this thing for two to three months to try to get a million bucks back, or are we going to focus on building the business?

Exactly. Another one of the very big successful pivots was Bill Gates was building an online service codenamed Blackbird, to compete with America Online Computer, so forth. He saw the Internet and he went, oh, God, we have to pivot towards this. So he literally had all of the engineers hard drives erased so that they would start working on the new code base. Because he knew engineers, they know, oh, we put all this energy into solving these interesting problems, and a high percentage of them would be tempted to continue to tinker with it in order to finish it. And he's like, no, no, no. This is the burn the boats moment. And part of pivoting is having these burn the boats moments.

And because you've put so much work into building those boats, you've polished that mahogany and you really enjoyed the process of assem. And now you're just going to set them on fire. But it's the right thing to do.

Exactly.

Now, you've accomplished a lot since the PayPal days. We don't need to go through all of that. But I do think about LinkedIn. I don't remember LinkedIn ever needing to pivot. Was there any major pivot at LinkedIn?

We've done some reinventions, and this is a little bit over reinvention pivots, a specific thing of reinvention is more of a reinvention than a pivot. For example, shifting to a mobile first company. Right. So we realize in order to really scale, even though obviously a lot of professionals use desktops, have a preference for desktop within a working environment. So there's a lot of LinkedIn usage within desktops, not just within our paying customers, but also, of course, a lot of individual professionals, but a lot of individual professionals also like mobile. So you shift on the prosumer basis to being mobile first, but also desktop. And so that reinvention has been there. There have been a lot of inventions, you know, additional LinkedIn news, additional LinkedIn influencers, LinkedIn learning, you know, been adding in sales. But the primary reinvention was a shift to mobile.

And that really does have some echoes of blitzscaling when you think about it. When we talk about ignoring your customers, it's not, hey, hey, completely ignore your customers. It's focus on your future customers. In the case of LinkedIn, you recognized the new customers we want to be bringing in, the new free users we want on this platform are going to be going on mobile. And our existing users, yeah, they love desktop, but they're not our future. So we got to stop listening to them. We got to focus on the customers we don't have yet.

Exactly.

And this is such an important nuance when it comes to the pivots, because I think it's very easy to. To just set out and say, you know, what's the least we could change? Because changing things like people changing things like culture is difficult. But what you're saying is sometimes it's actually important to intentionally say, these are the things we're throwing out. Right. There is a new day, there is a big change we're making, and we have to be intentional about the things we're not taking with us.

It's actually, in fact, super helpful because then people go, great, I now know what I stopped doing. I now know what I previously had thought was part of the OKR mission, and I now know not that. And that's actually a very important part of being able to be successful at it. And by the way, like, one of the ones we're probably not going to go in that much detail in, but is how these reinventions work at large organizations. Amazon did the fire phone didn't really work. And part of one of the things Amazon is very strong at is they said, okay, so we're going to get rid of the phone that doesn't work, but we still want to do a device here, so we're going to now do the echo. And so the folks who really just want to do telephony, okay, they're off. But all the people who are doing speakers and voice rack and hardware and all that, they actually then all pivoted into that. And that's like, we're not doing that. We are doing this.

Being able to know exactly what you're not doing is one of the prerequisites for being able to know exactly what you are doing.

Yep.

Now, it must be difficult if you're taking a bunch of cherished ideas and saying, we may need to get rid of these. It must be difficult to get your team on board for a major pivot. So how do you, as a founder, get people to buy into one of these hard pivots?

It's always hard to do. It's easy to do when you're a small organization. It's again, part of the reason why, you know, pivots is a central part of kind of entrepreneurial tool set. And then it just gradation. So for example, previously we were thinking we were going to go, we were going to market it and you know, buy ads and now we're going to actually have a telesales force distribute it. Generally speaking, those are easier pivots. Now all of those major things that I just mentioned is as those become part of the pivot, like, well actually in fact this competency we have, we no longer need that competency and we're now moving to something else. You know, this go to market motion is fundamentally changes the genetics of what we're doing or what our product or service is. You know, previously we were doing this and now we're doing that. And that kind of really big shift can cause organizational disruption. And it's one of the things you actually have to then really drive through because you have to have people go, look, if I joined this company because I just really want to make an amazing game and I don't really care about this pivot because one of the more interesting set of pivots comes from people doing a game to something else. Just as you're building coherence, as you scale an entrepreneurial organization, you're going to have to refactor. And almost always when you're doing some of these pivots, if it's big and it doesn't change some of the organizations, if you're at scale, then you're miss doing it. If you're a small organization, then it's pretty easy. And people frequently are like, okay, we'll try something else entrepreneurial too, especially if we like the team and we like working together. And part of entrepreneurship is learning new skills, learning new go to market as you're doing it. And so you might say, great, we're all going to learn that together. And that's okay too.

Yeah. And this is a reflection of the gradual transition from generalists to specialists that we talk about in blitzscaling. Early on you have a team full of generalists and the pivot doesn't seem quite as daunting as if you have a team with many, many specialists and all of a sudden you're pivoting away from their area of specialty.

Exactly.

Now getting the team on board is one thing, but what about the board of directors? How do you get the board to commit to a new direction?

Well, one of the reasons why again as part of the playbook that is for these giant world changing companies, is to get one or more competent, powerful venture capitalists on your board. And I'm not saying this because I'm trying to pump the venture capital industry. This is also my learning as an entrepreneur and to partner well with them. Because typically what happens is if it's a committee decision, you're going to have a lot of thrashing. So typically, as an entrepreneur, you want to go to, you know, this one or two VCs, and then talk with, you know, her or him and get that agreement to, okay, this is why pivoting is important. This is what the kind of thing is. And then that board member can go and help persuade the rest of the board that this is the right thing to happen. Because what happens is the general board is they're all like, well, what does this mean? Or are we taking new risks? And is this entrepreneur being, you know, necessarily entrepreneurial?

Or.

A lot of entrepreneurs tend to like to put all their chips on the table and roll the dice. Are we doing that? And as you succeed as an entrepreneur, you should do less and less of that. That's more portfolio management. And so there's always these uncertainties that when you get into a committee discussion can be, you know, kind of slow. Fubar, too much risk preservation and not enough intelligent risk taking. And so the way that you slice through all of that is you go to your, you know, essentially strong, you know, venture capitalist, board member, and then say, okay, here is the pivot I need to make. Here's the reinvention I need to make. And when that's the right person, the other board members go, great. You, we know that you're representing the board's interest. We know that you're not the entrepreneur, you're not the CEO. And so when you've come to this point of view, too, that's highly informative for our own judgment information and for moving fast in the decisions. And so that's the fundamental strategy for doing that.

Now, you're a board member of a number of organizations. Has this ever happened to you? Have you had an entrepreneur come to you and say, reid, we need to talk. I think we need to pivot?

I'd say the majority of the companies that I've invested in have had some component of that.

What are some of the other examples of established companies that have been able to pull off a major pivot? What are some of the ones that you've seen or observed and learned from?

So look, the classic ones, which we covered a little bit before, you know, there's Apple has done this, Amazon has done this, right? The bookstore to everything store to AWS to Kindle to et cetera, et cetera, et cetera. Echo Facebook, you know, from desktop to mobile, including messaging. Google started as Enterprise search, right. Then went to Consumer Search and then took a couple years getting AdWords right. Microsoft, we've already covered, you know, in depth other companies like this priceline by buying bookings.com and going through it. But also of course like take the gaming companies that I was mentioning before. So Slack, it keeps trying to do this game and then the game keeps pivoting to other things. The first one was Flickr, right? Game ever ending to Flickr and then now of course a game to the Slack communications protocol, Netflix DVDs to streaming. Now part of the thing about this is these are all instances of success by the way. There's tons of failures on this. Most recently like Nokia was making very hard efforts at reinvention and pivoting and, and hasn't really, you know, has at least managed to do some good asset reshuffling and you know, returns shareholders on it. So that was, you know, very good. But the ongoing franchise value of the business more challenged. Yahoo, you know, Marissa was trying to make this and to say, look, there's space for this new content player, integrated content player, new kind of media company that was much more native and smart across a set of different content types. And in part because investors really wanted to get their hands on the Alibaba shares, didn't really have the patience to kind of drive that through as an instance. BlackBerry is another one. But then Obviously there's like IBM's pivot, somewhat from a deep tech company to a services and integration company. Obviously technology is still there, like aol, the dial up service still exists. But these things that if you don't make the curves, that's what keeps these technology companies thriving and going is their success at the invention and reinvention. And the number of fall offs is quite serious.

Yeah, and the cadence of change that technology drives that inexorable Moore's Law where the power of computers doubles every 18 months. That has made the technology industry, the industry that has to reinvent itself the most.

Exactly.

Now you've also been involved as a board member and investor. I'm thinking about companies, very famous ones, Airbnb, Discord, Nextdoor, all of these have gone through various pivots and reinventions as well. What did you learn from these experiences?

Well, one of the things that is key to the cycle of invention and reinvention and pivoting is to actually have really good venture capital board members, because that helps drive the coherence. Because part of what a board does, one of the fundamental things the board does is hire, fire and compensate the CEO. Part of your judgment of the CEO is how well is it working when you're doing pivots? That's a, that's usually a pivot is a change from working less well to working better. Sometimes it's working not at all to working. Sometimes it's. This is how we get to the next level of scale. So having those board partnerships really matters. Right. You know, Jason Citrone and Discord, it's another one of the gaming companies that's, you know, from the Fates Forever game to a communications tool that's now used, you know, broadly as the kind of the modern communications tool by a lot of young people. Not just games, but actually how you do homework together, how you watch television together, how you share other experiences together. So Discord has all of that nextdoor. Most people don't realize that General Link didn't start its fan base. So it was one of those direct, like, okay, we were doing a consumer Internet company thinking about sports as a social network. We're not getting that, but we have a specific set of ideas about how neighborhoods can be made more neighborly and safe and warm and connected. And so we'll shift to that. And then Airbnb, not just starting with kind of, obviously the name, essentially kind of an air mattress, but also renting castles and apartments and, you know, all the rest, like going the entire range is kind of this, and then not just renting space, but having experiences and other parts of the travel thing as part of it. And those are inventions and reinventions as it goes through. And one of the things that's, that's really helpful because, you know, having done this not just as an entrepreneur but as an investor and as a board member, is having the, the right kind of board members to go with you on these journeys?

Now, one of the things that I know you talk about and ask as a question on Masters of Scale is what would you do if you had a magic phone that you could use to call your past self? Now, I'm going to pose that same question to you. Have you ever wished that you had a magic time traveling phone that you could call yourself in the past to talk about a pivot? Are there any pivots that you wish you made but didn't, or, or wish that you didn't make?

Well, the answer is lots on both and so more or less on any entrepreneurial project, there is phone in earlier time to change. Now, most of the time that I kind of pose this question, it's like you can't say what the success of it is because that doesn't count as a learning. This is actually as a question, is more a general framework for how you make decisions, how you operate, etc. And it's a way of being an explicit learner. It's a way of how you teach yourself lessons in ways that you can teach other people lessons. And your org can learn that because not only do you want learners in your org, you want explicit learners who are learning the lessons in ways that they can share with the rest of the organization. The organization overall can increase its learning competence, its pivoting competence. It's model of the world. And so there's all of these calls back that go back to facts of the matter. Now, part of the reason why I write and I speak in entrepreneurship is because these lessons that I'm sharing are the lessons that I would call back on. So, for example, calling back on pivots, like I already mentioned the one on PayPal, which is say, hey, when you're pivoting, don't back into the pivot. Make the whole pivot intentionally. So you go, okay, the general emailing value idea isn't really working. Maybe we'll still get to it and we're going to really focus on ebay. We're already doing that a little bit with like, how we work with the sellers and all this. But let's make it everything. Let's make it the balances and the bounties. Let's make it some of the marketing. Let's make it, you know, some of the features of what we're doing, and let's just own that in terms of what we're doing. So when you pivot, pivot, like make the full, coherent bet, some things you won't think of and you'll still have to tune, but like, as kind of full as possible. That's like one of the lessons in pivoting, to expect pivots as part of what you're going to be doing. Like, one of the phrases that I'm well known for within the consumer Internet world is if you're not embarrassed by your first product release, you've released too late. Well, the point of that is the point of learning and speed, not, oh my gosh, embarrassment is the thing we should relish. Embarrassment is the bread and butter of entrepreneurship. No, of course not. You'd love to have products that everyone loved and all the rest, but valuing learning and speed of motion over that. And so part of that is to get to market, learn that. What are the ways that you test the various things of your investment thesis? And that's part of why pivoting is central to what you do. Because the expectation is you will need to do some pivots. So don't try to like pre think everything and need no pivots. Now some pivots are very expensive, so you try to avoid like to have gotten those things right. And like, for example, people say, well, but if you're embarrassed by your first product release and it's a hardware product, you're dead. You're absolutely right. Like what the level of what things you need to be right about. One of the benefits of consumer Internet software, it's very light, very easy to change. That changes all these things around. Well, you, you only get branded on your first impression. Well, that's true for high value purchase decisions. Not as true. It's much less true for free services that you happen to encounter. So there's this whole stack of things. All of these things that I just share out there to the whole world of entrepreneurship are things that I was learning that are essentially in this metaphor, phone calls to my younger entrepreneurial self.

If I were to extract one or two lessons from what you've said today, probably the most important thing is this. Pivoting is the rule, not the exception. You have to expect the pivot. You have to expect reinvention. Any company that's going to be successful is going to need to reinvent itself and pivot multiple times. You've got to commit to that pivot. And that means making a wholesale change to what you're doing to orient everything around that pivot. And also making a very clear break with the past, deciding what you're not going to do, burning the ships, as you say, to make sure that everyone understands what they're looking forward to. And I hear echoes of blitzscaling itself in the discussion today. Because if you think about it, we've talked about blitzscaling as being the pursuit of speed and prioritizing it ahead of efficiency despite the environment of uncertainty. When you set out to pivot, you never know if the pivot is going to work exactly. And yet if you have the boldness to identify the need to pivot, to understand that it's going to be necessary to get your people on board and oriented, to really clearly burn those ships and commit to the pivot. That's how these great companies are built.

Exactly.

Well, 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. On behalf of Reid Hoffman, thank you for listening.

SA.